RE CHINA INTERNATIONAL BUSINESS DEVELOPMENT (HONG KONG) LTD

HCCW 603/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 603 OF 2001

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J U D G M E N T

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1.  This is a petition presented by two minority shareholders of China International Business Development (Hong Kong) Limited (“the Company”) on 15 June 2001, seeking an order that the Company be wound up on just and equitable grounds, alternatively for relief under section 168A of the Companies Ordinance, Cap. 32.  The petitioners are Hui Ming Yeung (“Mr Hui”) and Chong Chi Yeung (“Mr Chong junior”).  They each hold 2,000 shares of the 10,000 issued shares in the Company, and Mr Chong junior holds his shares as nominee for his father Chong Wing Chung (“Mr Chong senior”).  The remaining 6,000 shares are held by the 1^st respondent herein, Like Grand Holdings Limited (“Like Grand Holdings”), which was and is controlled by Lee Wing Kee (“Mr Lee”).  The Company is the 2^nd respondent in these proceedings.

The background

2.  The Company was incorporated on 30 January 1992.  The total authorised share capital of HK$10,000.00 was all paid up by Mr Lee.  The purpose of setting up the Company was to invest in any project in Mainland China that Mr Lee might be interested.  Of the 10,000 issued shares, he kept only 2,000 for himself and caused 5,000 shares to be transferred to Tung Wai, 1,500 shares to Lim Leong Cheow, and 1,500 shares to Lam Ki.  Mr Lee caused the other three shareholders to be appointed as directors of the Company with him.  Later Tung Wai transferred his 5,000 shares back to Mr Lee but remained a director of the Company for a time.  Mr Lee did not elaborate on the relationship of the other three to him; only Lam Ki had featured prominently in the subsequent events and was a witness for Like Grand Holdings in these proceedings.  According to the annual return of Like Grand Holdings made up to December 1996, Lam Ki and Lim Leong Cheow each held 5% of the issued shares of this company.  Mr Lee has various interests in other companies in Hong Kong and in the Mainland, including Like Grand Holdings, Like Grand Development Limited (“Like Grand Development”) and Dragon Travel Service Limited; the last mentioned was engaged in tourism business in the Mainland.

3.  Mr Hui and Mr Chong senior had worked in the China Travel Service Hong Kong Limited (“China Travel Service”) for many years and held senior management positions.  They both came from Fujian province.  Mr Chong senior is a native of Gulangyu, a scenic island close to the port city of Xiamen in Fujian.  They had accumulated experience, expertise and connections in the course of their work.  Mr Hui retired from China Travel Service in 1993 and Mr Chong senior retired in 1998.  In 1995, Qiu Yi Yong, who was then the Vice President of China Travel Service, introduced Mr Hui and Mr Chong senior to Mr Lee.  Mr Lee offered them consultancy positions in his companies.  Mr Hui was immediately engaged at a monthly salary of HK$10,000.00.  As Mr Chong senior had not then retired from China Travel Service, there was no arrangement of a post for him at that time.

4.  The Company was dormant for about three years until 1995.  In October 1995, out of the 7,000 shares held by Mr Lee, he transferred 6,000 shares to Like Grand Holdings, 500 shares to Mr Hui, and 500 shares to Mr Chong junior as representative for his father who was still working in China Travel Service.  Mr Lee caused Lim Leong Cheow to transfer all his 1,500 shares to Mr Hui and Lam Ki to transfer all his 1,500 shares to Mr Chong junior.  Thus, the 10,000 shares were held by Like Grand Holdings as to 60% and by Mr Hui and Mr Chong junior together as to 40%, and this has remained the position to today.  There is dispute as to why 40% of the shares were transferred to the petitioners and whether they had paid for their shares.  Mr Hui and Mr Chong junior were also appointed directors of the Company.  Until additional directors were appointed in 2000, there were five directors of the Company, the other three being Mr Lee, Lam Ki and Lim Leong Cheow, except for the year 1998 during which Like Grand Holdings and the petitioners were the directors.  Lim Leong Cheow resided in Canada and apparently took little part in the affairs of the Company.

5.  On 8 February 1996, Mr Hui signed on behalf of the Company a joint venture agreement with a Mainland entity, Xiamen City Gulangyu Scenic District Development Company (“the Chinese Partner”), to set up a joint venture known as Xiamen Yongshun Sightseeing Car Limited (“Yongshun”) for a term of thirty years, with a registered capital of RMB 7 million.  The business licence of Yongshun was issued in April 1996 and it started operations in October 1996.  The business of Yongshun is to provide electric buggies on the ring road on Gulangyu.  There is dispute as to the part played by Mr Hui and Mr Chong senior in bringing about this project, which proved to be very successful and generated much revenue for Yongshun.  The business of Yongshun has been the only business activity undertaken by the Company.

6.  Under the joint venture agreement, the Company was responsible for providing all the capital and operating expenses and for the day-to-day administration of Yongshun.  Of the five members on the board of directors of Yongshun, the Company was entitled to nominate three, one of whom was the principal director or the chairman of the board.  The Company nominated Mr Hui, Lam Ki and Ko Yi (the husband of a sister of Mr Lee) to serve on the board of Yongshun.  Lam Ki was appointed the general manager of Yongshun and Ko Yi the deputy general manager.  Although Mr Hui was nominated as the chairman of the board by the Company, he had authorised Mr Lee to carry out his duties for him soon after.  There is dispute as to why he had done so, but there is no dispute that from October 1996 to May 1999, Mr Lee was in charge of Yongshun.

7.  During the period when Mr Lee was in charge, Yongshun had printed and sold unauthorised or counterfeit tickets for the buggies.  This resulted in the under-reporting of the revenue of Yongshun to the tax authorities in Xiamen.  There is dispute as to how and when this was discovered by Mr Hui and Mr Chong senior and there is discrepancy in Mr Hui’s own evidence on this.  In any event, this led to Mr Hui resuming control and management over Yongshun and he took charge from May 1999 to November 2000.

(1)	two sets of accounts were prepared for Yongshun during this period, an “internal” set of accounts which recorded the takings from the counterfeit tickets, and an “external” set of accounts which recorded the takings from the authorised tickets;
(2)	three separate personal bank accounts were opened, in the individual names of Mr Lee, Ko Yi and in the joint names of Lam Ki and Ko Yi, into which the takings or some of the takings from the counterfeit tickets were deposited; the amounts involved were RMB 2.2 million on the admission of Mr Lee and Lam Ki, but according to the bank books obtained by the petitioners the total figure was in the region of RMB 2.6 million; and
(3)	only the takings as recorded in the “external” set of accounts were reported to the tax authorities in Xiamen as the earnings of Yongshun.

21.  The findings as to the “internal” and “external” accounts were taken from a notification of the penalty imposed issued by the tax authorities in Xiamen on 18 August 2000.  I note that in Mr Lee’s evidence, he claimed that the “external” account was used to record the takings from the counterfeit tickets.  He had probably confused the “external” account with the “internal” account.  It does not matter greatly whether it was the “internal” account or the “external” account that was concealed, as it was admitted by Mr Lee that one set of accounts which recorded the receipts from the counterfeit tickets was not disclosed to the Chinese Partner or to the tax authorities.

22.  There was explanation provided by Mr Lee and Lam Ki as to why the above measures were taken, and that was due to the apprehension that the business of Yongshun might be forced to close down any time because of strong opposition from local people to electric buggies being introduced on the island.  No cars are allowed on the island apart from the buggies, for environmental reasons.  It was alleged that the personal bank accounts were opened to avoid the risk of the freezing of the assets of Yongshun in case it had to close down and that the measures taken were meant to be temporary, a proper report would be made to the tax authorities once the business had become stable and the risk of closure was gone.  This explanation is wholly incredible, considering that no report was made to the tax authorities for more than three years after operation.

23.  I also reject Mr Lee’s allegation that Mr Hui or Mr Chong senior had known about the separate bank accounts and the ledgers which recorded the takings from the counterfeit tickets well before 1999, or that the two sets of ledgers were readily available for inspection at all times by the officers of Yongshun, including Mr Hui.  Mr Lee’s own evidence in these matters is conflicting and simply not worthy of credence.

24.  It is not necessary to make any finding as to the complicity of Lam Ki in the counterfeit tickets, whether he was fully involved from the beginning or whether he was kept in the dark by Mr Lee and others, as alleged in the letters and declarations made by him, which he has since disavowed.

25.  Mr Lee has not properly accounted for the monies received from the counterfeit tickets, whether in any of his affirmations filed in these proceedings or in his evidence in court.  The amount involved was initially estimated by the tax authorities in February 2000 to be in the region of RMB 2.2 million, on the basis of the information then made available by Mr Lee, and revised in September 2000 to about RMB 2.87 million, when further documents were turned in.  Mr Lee’s assertion in his oral evidence that the revision was due to a miscalculation of the tax authorities is implausible, to say the least.

26.  Mr Lee claimed in one of his affirmations he had told the directors’ meetings of the Company on 6 to 12 May 1999 that he did not take away the money “but just applied the money to repay the creditors which included mainly Like Grand [Holdings] and [him].”  However, in another of his affirmations and in his evidence in court, he claimed that of the receipts of RMB 2.87 million odd, only RMB 2.02 million odd was used to repay himself or Like Grand Holdings and the balance was spent on entertainment expenses, sales commission, and directors’ remuneration.  The alleged explanation he gave to the meeting did not appear in the record of the meetings dated 13 May 1999, or in the hand-written minutes apparently written by Lam Ki.  It does not assist his case when Mr Lee gave oral evidence to the effect that at the meetings aforesaid he had even shown the others the figures of the separate bank accounts and told them how much he had collected from the counterfeit tickets, there was just no reason why he had not mentioned such obviously important matters in any of his affirmations.

27.  Mr Lee merely asserted that “substantial parts” of the money lent by him came from bank loans to him or to Like Grand Holdings from Chekiang First Bank Limited.  He and Like Grand Holdings did not disclose any source documents showing the bank loan transactions (which should be readily available), the amount of the loans allegedly advanced to the Company and the extent of repayment made, despite repeated demands for documentary proof by the petitioners before and after the commencement of these proceedings.

28.  It is immaterial if Mr Hui and Mr Chong senior had made use of the wrongful acts of Mr Lee in the counterfeit tickets to put pressure on him to give the control of Yongshun back to them, as alleged by Mr Lee.  This might well be the case, despite the denial by Mr Hui.

29.  I also attach no importance to the fact that on 6 December 1999 Mr Lee had written to the tax authorities on behalf of the Company, not Yongshun, reporting that counterfeit tickets were issued, leading to the “mistake” of concealing part of the receipts and that less tax was paid as a result.  This report was made half a year after Mr Hui had discovered the counterfeit tickets, as alleged by Mr Lee.  This could well have been a move taken by Mr Lee in trying to regain control of Yongshun from Mr Hui and Mr Chong senior, as after Mr Hui had learned of this and the penalty imposed by the tax authorities in February 2000, he pressed for further measures to be taken by the authorities.  On 9 March 2000 and on 31 August 2000, Mr Hui caused Yongshun to write to the tax authorities stating that the extent of the under-reporting of revenue should have been greater and that a penalty should be imposed on Mr Lee instead of Yongshun.  On 20 April 2000, he convened a meeting of the directors of Yongshun and passed a resolution that Yongshun should ask the authorities to investigate the counterfeit tickets thoroughly and that there should be no change in the composition of the board of directors during the investigation. 

30.  Irrespective of the use made by each side upon discovery of the issuance of counterfeit tickets to gain control of Yongshun, the fact remains that serious fraud was perpetrated in the scheme devised for the counterfeit tickets.  The receipts were kept secret from the minority shareholders of the Company, the Chinese Partner of Yongshun and the tax authorities of Xiamen.  It is no answer to say that the proceeds from the counterfeit tickets had been appropriately utilised to repay the amounts advanced by Mr Lee or Like Grand Holdings towards the capital investment in Yongshun, quite apart from the question whether the alleged loans and repayments have been properly accounted for.  The lack of probity of Mr Lee in the matter of the counterfeit tickets was ample justification for the petitioners to lose trust and confidence in the majority in the management of the affairs of the Company.  The concealment of the profits made by Yongshun, which was the only business activity undertaken by the Company, was conduct unfairly prejudicial to the minority shareholders of the Company.

31.  Lack of confidence in the conduct and management of a company's affairs as a ground for winding up is not confined to the situation of a quasi-partnership.  The winding-up jurisdiction is not confined to such circumstances as have affected, or would affect, a person in his capacity as a shareholder (Ebrahimi v Westbourne Galleries Ltd. [1973] AC 360 at 375A).  As stated by Lord Wilberforce in that case, it would be impossible, and wholly undesirable, to define the circumstances in which equitable considerations of a personal character may arise between individuals, which may make it unjust or inequitable to insist on legal rights, or to exercise them in a particular way (at 379E).  It is not necessary that the person against whom complaints are made as giving rise to a loss of confidence must be a shareholder, nor is it necessary for there to be a partnership-like relationship between shareholders to give rise to trust and confidence being reposed in the individual charged with the management of the company.  A winding-up order may be made if the lack of confidence is based upon sufficiently grave misconduct by those in control of the company, and in particular, if it foreshadows grave misconduct in the future (Re San Imperial Corporation Ltd [1980] HKLR 649 at 653 to 654).  I find this to be the situation here.

Misappropriation of the funds of Yongshun

32.  On the allegation of misappropriation of the funds of Yongshun by Mr Lee and/or Like Grand Holdings, Mr Lee admitted in his 1^st affirmation that a total sum of HK$1,822,296.00 (equivalent to RMB 2,022,749.50) was paid to Like Grand Holdings during the period when he was in charge of Yongshun.  He said this total figure would include the sums alleged in the petition to have been misappropriated, save for the amount of RMB 340,000, which was paid to Xiamen City Construction Engineering Company Limited.  The figures in the petition, less the sum of RMB 340,000, came up to RMB 2,059,985.57.  The admitted figure in Hong Kong dollars, being HK$1,822,296.00, would appear to have come from the minutes of a directors’ meeting of the Company held on 12 January 2001, which the petitioners declined to attend.

33.  At the meeting on 12 January 2001, the directors had resolved to confirm the following: the accounts of Yongshun during the period that Mr Lee was in charge, from October 1996 to May 1999; the amount of indebtedness owed by the Company to Like Grand Holdings up to April 1999 (being HK$4,930,587.85) with interest of 1.25% per month (giving a total sum of HK$5,777,670.68); the repayments to Like Grand Holdings up to April 1999 (being RMB 2,022,749.50, equivalent to HK$1,822,296.85); and the amount still owing to Like Grand Holdings (being HK$3,393,651.38), after setting off  the amounts paid for the benefit of Xiamen Yongshun Marine Recreation Company Limited and Wang Hai Lou Restaurant (RMB 444,358.08 and RMB 173,536.64, equivalent to HK$561,722.45).  There is thus a difference of RMB 37,236.07 (RMB 2,059,985.57 less RMB 2,022,749.50) between the amount alleged to have been misappropriated and the amount admitted to have been received by Like Grand Holdings.

34.  I should also mention that in the auditors’ report to the financial statements of the Company for the year ended March 2001, the auditors referred to the repayment of HK$1,822,296.85 to Mr Lee which was made by credit to the amount due to Yongshun, and noted that no documents were available for their inspection on the existence and validity of the amount paid to Mr Lee and the amount due to Yongshun, and this was one of the reasons why the auditors rendered a qualified opinion with a disclaimer.

35.  Leaving aside the relatively small difference in the figures of RMB 37,236.07, which is not necessary to resolve for present purpose, I turn to consider if the payments were improperly made.  There would appear to be no dispute as to the purpose or nature of the payments.

36.  The first item is an amount of RMB 785,211.71, which was paid to Mr Lee or Like Grand Holdings purportedly as interest for advances made.  I note also that in a one-page document headed profit and loss account of Yongshun from October 1997 to September 1998, there was an item for expenditure on interest for this period in the sum of RMB 788,427.71.  There is no dispute that the amount purportedly paid as interest was calculated at 15% per annum or 1.25% per month.  What is in dispute is the actual amount advanced by Mr Lee or Like Grand Holdings to the Company to invest in Yongshun and the liability to pay interest on the loans.  Again, for present purpose, I do not think it necessary to resolve the dispute as to the former.  As for the latter, the only documentary support for this was the minutes of a directors’ meeting of the Company on 10 June 2000.  That meeting was not attended by the petitioners.  In a letter to the company secretary dated 10 June 2000, Mr Hui objected to the items on the agenda stating that the proposed resolutions were not appropriate as the counterfeit tickets were still being investigated by the authorities and expressly reserved his right to challenge any matter resolved by the other directors at that meeting.

37.  According to the minutes of that meeting, Mr Lee informed the meeting that before Yongshun was put into operation, he, Mr Hui and Mr Chong (presumably Mr Chong senior) had agreed “many times in business meetings” that as the working capital of Yongshun was financed by bank loans, the Company should pay interest of 15% per annum to “the creditor”, calculated from the time the investments were made by the Company in Yongshun.  It was then resolved by the directors that the Company should pay interest of 15% per annum to “the creditor” from September 1997.

38.  As I have mentioned earlier, despite repeated demands of the petitioners, no documents were ever disclosed of any bank loan, which was the justification to charge interest at the said rate (I note that in respect of a loan due from Yongshun to the Company at HK$1,351,351.35 as at 31 March 2000, the loan was stated to be interest free).  In all the auditors’ reports of the Company for the financial years from March 1995 onwards, the Company’s auditors have made a disclaimer that because of the limited information made available to them on various matters, including the existence and validity of the interest liability aforesaid, they are unable to form an opinion whether the financial statements gave a true and fair view of the state of the Company’s affairs.

39.  I do not accept the allegation that there was agreement to pay interest at 15% per annum before or even at the time the liability was incurred.  Although it was agreed in principle by Mr Hui and Mr Chong senior with Mr Lee that the Company could obtain loans to invest in Yongshun, it did not mean Mr Lee would have carte blanche to raise funds on whatever terms he saw fit, this was a matter emphasised in the directors’ meeting of the Company on 2 December 1999, a record of which was signed by Mr Lee.  Not only was there no contemporaneous record of the alleged agreement to pay interest, I regard it as significant that in the minutes of the meetings attended by Mr Hui and Mr Chong senior in May and December 1999, there was no record of any agreement to pay interest mentioned by any one in these meetings, when the parties had discussed the amount for which Like Grand Holdings had been repaid in respect of the capital investment in Yongshun.  On the contrary, in the hand-written minutes of the directors’ meetings of the Company on 6 to 12 May 1999, it was recorded that on the basis that Like Grand Holdings would not charge interest on the amount advanced for the capital invested in Yongshun, it was agreed that Like Grand Holdings would be permitted to recover out of the profits of Yongshun the capital investment in priority to other distributions.

40.  At the directors’ meeting on 10 June 2000, the directors could of course resolve to pay interest retrospectively at a specified rate to a shareholder for an advance to the Company, or to ratify any repayment made to a creditor, or to vary a previous resolution that no interest should be paid, if only they had done so on the basis of truthful and proper information placed before the board.  That did not happen here.

41.  The next items of payments made to Like Grand Holdings or Mr Lee are the profits of Yongshun from October 1996 to September 1998, in the sums of RMB 276,400 and RMB 380,478.14.  As I understand it, these payments were made to reduce in part the advances made by Mr Lee and/or Like Grand Holdings to the Company for its capital investment in Yongshun.  I reject Mr Lee’s allegation that he had shown Mr Hui or Mr Chong senior the ledgers of Yongshun when the same were prepared, to inform them of the true financial position of Yongshun.  The financial position of Yongshun was not looked into by Mr Hui and Mr Chong senior until the counterfeit tickets were discovered in 1999.  Prior to that, Mr Lee had a completely free hand as to how the revenue from Yongshun should be deployed.  The criticism here is not so much as using the funds to repay a shareholder’s loan to the Company, but in not seeking proper authority at the time when the repayment was made, and in not providing adequate information to the petitioners subsequently, even when requested, of the amount allegedly advanced and the extent of the repayment made.  It seems to me that the complaint is justified.

42.  The remaining items are payments made for the benefit of entities in the Mainland controlled by Mr Lee, in the sums of RMB 444,358.08, RMB 173,536.64 and RMB 340,000.  It would appear from the resolutions of the directors’ meeting on 12 January 2001 mentioned earlier that in respect of the first two amounts, there was an attempt to ratify these payments by set-off against the indebtedness of the Company to Like Grand Holdings.  For the RMB 340,000, Mr Lee had only mentioned for the first time in his oral evidence that RMB 190,000 was incurred for the benefit of his own businesses in Xiamen Yongshun Marine Recreation Company Limited and Wang Hai Lou Restaurant and the balance of RMB 150,000 was incurred for the benefit of Yongshun; no documents in relation to these expenses were ever disclosed.  I have grave reservations as to his belated assertion.  In any event, I think there was failure to provide proper information to the board when Mr Lee sought ratification of the payments in January 2001.

43.  I also find for the petitioners on the complaint of misappropriation of funds that there was conduct in the affairs of the Company unfairly prejudicial to the minority and that the misconduct of Mr Lee, which was to cover up his tracks or to explain away the unaccounted for proceeds in the fraud perpetrated in the counterfeit tickets, was sufficiently grave to warrant a winding-up order on the just and equitable ground.

Managing the Company to the detriment of the minority

44.  I have set out in the earlier part of this judgment the complaints made by the petitioners in this regard and shall not enumerate them again.

45.  I do not think the complaint that the petitioners did not receive notice of shareholders’ meetings or directors’ meetings is made out.  Nor do I think the complaint of there being no regular board meetings or shareholders’ meetings is justified.  The petitioners were directors up to 3 May 2001.  There is nothing to suggest that the other directors or the majority shareholder had blocked any attempt on their part to call board meetings or shareholders’ meetings at any time.  The first board meeting called by petitioners was in May 1999 and it was held in Xiamen from 6 to 12 May 1999.  Thereafter, other board meetings were called by the petitioners or by the other directors, with minutes recorded of such meetings, on 16 November 1999, 2 and 3 December 1999, 25 and 30 December 1999, 6 May 2000, 10 June 2000, 12 January 2001, 26 February 2001 and 3 May 2001.

46.  I attach little importance to the complaint that the petitioners were not provided with copies of the resolutions passed at board meetings or general meetings.  This complaint was not particularised in the petition.  I note that a complaint of this kind was raised in a letter of the petitioners to the company secretary dated 11 January 2001, stating that they had not received the records of the two board meetings in 2000, which they had declined to attend.  There might have been some delay in providing the petitioners with the minutes of the meetings, which recorded the resolutions passed.  However, Mr Hui, in his capacity of the chairman of the board of Yongshun, was notified of some of the resolutions passed in the board meetings of the Company on 6 May 2000 and 10 June 2000 by a letter of the Company dated 24 July 2000.  As for the request in the letter of the petitioners’ solicitors to the company secretary dated 9 March 2001 seeking copies of all resolutions passed in any directors’ meeting held in the past six years, which the company secretary did not entertain, there was nothing to indicate that the petitioners had not been provided with copies of the resolutions passed in the past six years, except for the instances that I have mentioned.

47.  Regarding the delay in the preparation of the directors’ reports and the audited accounts, shareholders’ resolutions were passed by the petitioners and Like Grand Holdings on 30 January 1996, 9 January 1997, 9 January 1998, 11 January 1999 and 9 January 2000 resolving to defer for approval the directors’ reports and the audited accounts for the years ended March 1995 to March 1999 which were under preparation.  The petitioners’ first complaint about the delay would appear to be their letter to the company secretary dated 11 January 2001, followed up by a letter of their solicitors to the Company dated 16 February 2001.  Mr Lee had no real answer to the delay in preparing the reports for the years of 1994 to 1999, but considering that the petitioners had agreed to defer the approval of the reports and audited accounts for five years consecutively and had made no complaint until some time after these reports and audited accounts were prepared (the audited accounts for 1994 to 1996 were prepared and approved in a board meeting on 10 June 2000, which the petitioners refused to attend) I can hardly think that such delay was of real concern to the petitioners.

48.  The complaints as to the refusal of the petitioners’ request in adjourning the annual general meeting in March 2001 to consider the approval of the reports for the years 1994 to 1999 and the resolution to declare no dividends for the year 1999, the refusal of the petitioners’ request to appoint joint auditors, and the failure of the auditors to answer queries of the audited accounts raised by the petitioners’ solicitors in March 2001, may be considered together.  There is no dispute that these matters took place, but do they constitute sufficiently serious misconduct to justify the relief sought in the petition? I do not think so.  As stated by Warner J in Re Elgindata Ltd. [1991] BCLC 959 at 994c:

“… a shareholder acquires shares in a company knowing that their value will depend in some measure on the competence of the management.  He takes the risk that that management may prove not to be of the highest quality.  Short of a breach by a director of his duty of skill and care (and no such breach … was alleged) there is prima facie no unfairness to a shareholder in the quality of the management turning out to be poor.”

49.  Notice of the annual general meeting was given on 30 January 2001 for the meeting to be held on 26 February 2001.  There was some discussion of the items on the agenda on 26 February 2001 and the meeting was adjourned to 28 March 2001.  The petitioners had caused their solicitors to write to the auditors raising questions on the audited accounts before and after the adjourned meeting.  When their request to further adjourn the meeting on 28 March 2001 was turned down, the petitioners voted against the resolutions to approve the reports and the audited accounts for the years from 1994 to 1999 and not to declare a dividend for the year ended 1999.  Their right to continue to raise questions of the audited accounts was not curtailed.  They chose to direct their questions to the auditors, but as many of the questions raised by their solicitors were in respect of matters that the auditors had not been able to obtain information of and for that reason had rendered a qualified opinion and disclaimer in all the auditors’ reports, it is difficult to see what the petitioners could have expected to achieve by pressing the auditors.  As for the petitioners’ proposal on 24 April 2001 to appoint an additional auditor at the expense of the Company, this was voted down at the general meeting on 3 May 2001.  I am unable to say this was entirely unreasonable on the part of the majority.

50.  The allegation that solicitors and counsel were unnecessarily appointed for the Company in March 2001 was canvassed in correspondence between the petitioners’ solicitors, the solicitors appointed, and the Company.  Legal advisers were appointed for the Company after the petitioners’ solicitors had written to the Company on 16 and 23 February 2001 proposing a special resolution to wind up the Company under section 228(1)(b).  Further, the petitioners had appointed a solicitor as their proxy to attend general meetings.  The directors resolved to ratify the appointment in a meeting on 3 May 2001, and solicitors were appointed to advise the Company generally and to attend the general meeting on 28 March 2001 and its adjournment.  There is no merit in this allegation.

51.  The last complaint is that at the annual general meeting on 3 May 2001, the petitioners were not re-elected as directors and the wife and brother-in-law of Mr Lee were appointed in their place.  This ground of complaint is also not made out.

52.  Firstly, this was a valid exercise of powers under the articles of association of the Company.  The petitioners have not established any basis of a right or expectation to participate in the management of the Company.  There is no express allegation of a quasi-partnership in the petition and I am not able to find on the facts any factor that would lead to the conclusion the relationship between the shareholders may be so categorised.  As I have found, the petitioners received shares in the Company in recognition for their contribution to the project of the electric buggies, which led to the establishment of Yongshun.  Although Mr Hui was nominated by the Company as the first chairman of the board of directors of Yongshun, he soon left it to Mr Lee to operate the business until he took over in May 1999.  The basis of their association was purely commercial.  There was nothing of a personal relationship between the members as would affect the conscience of the shareholder seeking to exercise the legal rights under the articles of association.

53.  Secondly, on 24 March 2001, the Company had written to the petitioners separately setting out the improper conduct alleged against each of them, some of which are the instances of misconduct relied on to preclude them from equitable relief in these proceedings and will be considered in detail below.  The improper conduct complained of related to their conduct as the representatives of the Company in the affairs of Yongshun.  I do not think it was an exercise of power in bad faith by the majority in resolving not to re-elect the petitioners as directors, with whom the majority had a serious disagreement over the management of the affairs of Yongshun.

54.  In summary, the complaints under the broad ground that the administration and management of the Company were operated to the detriment of the minority are not such as to found a case for winding up on the just and equitable ground or for relief under section 168A.

Misconduct of the petitioners

55.  I turn to consider if the petitioners should be disentitled to the relief sought in equity on the basis of the misconduct alleged against them.  These allegations have been set out in the earlier part of this judgment.

56.  Insofar as relief is sought under section 168A, there is no independent or overriding requirement that it should be just and equitable to grant such relief or that the petitioner should come to court with clean hands, although the conduct of the petitioner may be material in other ways, for instance this may render the conduct on the other side, even if prejudicial, not unfair, or this may affect the relief which the court thinks fit to grant (Re London School of Electronics Ltd. [1985] BCLC 273 at 279c to f).

57.  Unlike section 168A, in a petition to wind up on the just and equitable ground, the equitable jurisdiction of the court is invoked.  In the present proceedings, the petition was founded on the basis of total loss of trust and confidence in the majority in the management of the affairs of the Company.  If the breakdown in trust and confidence was the result of the petitioners’ misconduct, they will not be entitled to the relief of winding up (Ebrahimi v Westbourne Galleries Ltd., supra. at 387F, per Lord Cross; Yeung Bun v Brio Technology International Ltd. [2000] 2 HKLRD 218 at 223F to 225C).  In Ng Yat Chi v Max Share Ltd. [2001] 1 HKLRD 561 at 572D to 573D, Rogers VP had put the proposition in these terms: a petitioner who has abused his position to defraud the company and thus destroyed the basis of mutual trust and confidence cannot rely upon some prior arrangement based on mutual confidence, to which he has not adhered, to found his claim.  In the judgment of the Court of Final Appeal at [2001] 3 HKLRD 299 at 302H, Ribeiro PJ agreed with the Court of Appeal that it lies ill in the mouth of a petitioner who has defrauded the company and his fellow investors to complain that he has not been accorded equitable treatment by those other investors, as he who seeks equity must do equity.

58.  Here, most of the allegations of misconduct of the petitioners had occurred after the breakdown in confidence due to the misconduct Mr Lee that I have found.  Moreover, in my judgment, none of the alleged misconduct of the petitioners was of such a serious nature as to bring about a breakdown in confidence.

59.  I reject the allegation that the petitioners had coerced Mr Lee to sign the record of the first directors’ meeting of the Company dated 13 May 1999.  I simply do not accept Mr Lee’s evidence here.  I find that he signed the record because he did not think there was anything material about it, as he admitted in cross-examination.  Coercion to sign the record was an afterthought, when he took objection in his affirmation to that part of the record which stated that the project of the electric buggies was devised by Chong senior and that 40% of the shares in the Company was transferred to the petitioners in consideration of Chong senior’s agreement to allow the Company to pursue the project.

60.  The other four allegations were all linked to or arose out of Mr Hui’s failure to relinquish his office as chairman of the board of directors of Yongshun for some months notwithstanding that the directors of the Company had resolved on 6 May 2000 to remove him from this position and replace him with Mr Lee.  I set out my findings of fact on these allegations.

61.  On 25 and 30 December 1999, board meetings of the Company were held in Xiamen.  I find the minutes of these meetings (typed from the handwritten minutes taken by Lam Chi Wai) and the record of these meetings dated 25 December 1999 (which Mr Lee had refused to sign) to be substantially accurate records of what was discussed and agreed upon by the directors who attended, being Mr Lee, Lam Ki, Mr Hui and Mr Chong senior as the authorised representative of his son, even though these records did not contain a complete account of all that was said.  I reject the evidence of Lam Ki and Mr Lee disputing some of the matters contained in these records and alleging other matters were said but not recorded.  Lam Ki had signed the record dated 25 December 1999, indicating his agreement with the contents.  With no contemporaneous record of their own, it is most unlikely that Mr Lee or Lam Ki could have recalled in such detail, when they made their affirmations in March 2003, what was said or not said at the meetings in question three years ago.

62.  According to these records, it was unanimously agreed that dividends were to be declared in respect of the profits of the Company for the six-month period from June to December 1999, when Mr Hui took over the management of Yongshun.  It was also agreed (at the very least by a majority being Mr Hui, Mr Chong senior and Lam Ki) that in respect of the dividends to which Like Grand Holdings was entitled, such dividends would be distributed in accordance with the shareholdings in that company but Mr Lee’s share would not be paid out to him pending the finalisation of the accounts of Yongshun from October 1996 to May 1999.

63.  On 1 June 2000, a notice was issued by Mr Hui as chairman of the board of directors of Yongshun stating that pursuant to the resolutions of the board of directors of the Company on 25 December 1999, dividends were declared in respect of profits for the period from June to December 1999 in the sum of HK$516,311.13 and that the said sum was to be divided in these proportions: 20% to each of the petitioners, 15% to Lam Ki and 45% to Mr Lee and others.  Mr Hui, Mr Chong senior and Lam Ki had all signed on this notice, to acknowledge the dividends payable to them.  In respect of Mr Lee and others, it was stated in the notice that the dividends were to be withheld for the time being.

64.  On 24 July 2000, the Company sent a letter to Mr Hui and Lam Ki stating that the board of directors had resolved on 6 May 2000 and 10 June 2000 to remove Mr Hui and Ko Yi as directors of Yongshun and requested them to complete the preparation for the hand over of their responsibilities once the new board of directors was formed for Yongshun.

65.  On 27 September 2000, payments were made out of the bank account of Yongshun to the petitioners and Lam Ki in respect of the amounts payable as dividends as stated in the notice dated 1 June 2000.

66.  What Mr Hui did in causing dividends to be paid out was improper.  No general meeting was held by the Company to pass a resolution to declare dividends in respect of profits for the period from June to December 1999.  Mr Hui candidly admitted in cross-examination that he was at the material time aware of this requirement, but as the individuals representing all the shareholders were present at the meetings on 25 and 30 December 1999, he thought there was no need to convene a separate meeting of shareholders afterwards to comply with formalities.  He also stated that things had been done in an informal manner in the past few years.  I am not prepared to infer that Mr Hui had deliberately flouted the requirement of holding a general meeting to declare dividends or that he was acting dishonestly or in total disregard of the interest of the Company.  I find that Mr Hui was merely seeking to implement what the directors had agreed upon in the board meetings, although he did not go about this in the right way.  If this was misconduct, it was not such as would have caused a breakdown of trust and confidence.

67.  On 4 September 2000, Mr Hui, Lam Ki and Ko Yi, as officers of Yongshun, held a meeting in Xiamen.  This was also attended by Mr Chong senior.  It was decided in this meeting that Yongshun was to deposit RMB 3 million of the funds of Yongshun with Xiamen International Trust and Investment Company (“the Trust and Investment Company”) for a term of one year.  According to the minutes of this meeting, this measure was taken as a protective step, to prevent unauthorised withdrawal of funds should Mr Lee become the chairman of the board of Yongshun and the legally recognised representative.  I find that this was the reason why the deposit was made.

68.  On 23 October 2000, Mr Chong senior, Lam Ki and Ko Yi signed a letter of authorisation by which they authorised the Trust and Investment Company to manage the funds deposited on behalf of Yongshun for one year on the basis of the terms set out in a fund management agreement.  The deposit was made with the knowledge of Mr Lee as Lam Ki said in cross-examination that he had reported the decision of the meeting to Mr Lee at the time and Mr Lee told him to sign the authorisation letter so that Lam Ki would know where the money went.  After Mr Lee had complied with the formalities to replace Mr Hui as the chairman of the board of Yongshun and the legally recognised representative, on 19 January 2001, he caused Yongshun to seek an early withdrawal of funds from the Trust and Investment Company.  This was agreed to by the latter and the entire sum deposited, with interest of RMB 7,095.00, was paid out to Yongshun on the same day.  I reject Mr Lee’s testimony that the withdrawal in October 2000 had left Yongshun completely without funds to pay for its daily expenses.  This allegation was not made in any of the four affirmations of Mr Lee or the two affirmations of Lam Ki, nor was this supported by any documents.

69.  Mr Hui and Mr Chong senior were aware of the board resolutions removing Mr Hui and Ko Yi as directors when they took steps to withdraw funds and deposit the same with the Trust and Investment Company.  Mr Hui claimed that they acted on the basis that as Mr Lee had not completed the formalities to replace the directors of Yongshun, he and Ko Yi could continue to act as such.  Mr Hui was not going to hand over his power readily and insisted on not doing so until the necessary procedures required under Chinese law to effect a change of directors in a joint venture had been complied with.  I do not think this is misconduct as would have destroyed the basis of mutual trust and confidence.

70.  It was only on 13 November 2000 that the Commerce Administration Bureau of Xiamen approved the joint application of the Company and the Chinese Partner, as parties to the joint venture, for a change of directors of Yongshun and the legally recognised representative and notified Yongshun accordingly.  A new certificate giving particulars of the changes in registered capital and composition of the board was issued to Yongshun by the national Commerce Administration Bureau on 21 December 2001.  The documents submitted by the Company in support of the application required attestation by a solicitor who is an appointed attesting officer.  The Chinese Partner was required to submit a report in support of the application.  It is not entirely clear from the evidence when this was done.  It would appear from the available documents that as late as 5 September 2000, the Chinese Partner had submitted a report to the district authorities recommending there should be no change in the board of directors until the tax authorities had fully investigated the counterfeit tickets and made a final determination.  At a meeting of the parties to the joint venture on 7 September 2000, it was agreed that both parties would submit an application for a change of the board of directors as soon as possible, whilst noting the reservation of the Chinese Partner in its recommendation in its report of 5 September 2000 and that the new board of directors could only exercise their powers upon the approval of the application by the Commerce Administration Bureau and other relevant authorities.

71.  The allegation concerning the wrongful approval of RMB 50,000 to Lam Chi Wai could be viewed in a similar light of Mr Hui standing on his strict legal rights of not surrendering power until all necessary procedures had been complied with.  Lam Chi Wai was employed as the assistant to the manager of Yongshun.  In December 1999, Lam Chi Wai was paid a bonus of RMB 15,000.  On 8 September 2000, Mr Hui authorised the accounts department to pay RMB 15,000 to Lam Chi Wai as half-yearly bonus for 2000.  In November 2000, Lam Chi Wai was paid RMB 20,000 as a special allowance to help him in the purchase of accommodation.

72.  For the payment of bonus in December 1999, it would appear from the minutes of the directors’ meeting of the Company on 25 December 1999 that the proposed distribution of bonus for middle ranking staff of Yongshun was discussed and confirmed, this was also admitted by Mr Lee in cross-examination.  There was no record of any board resolution of Yongshun in respect of the other two payments to Lam Chi Wai.  Mr Hui’s evidence was that after he had taken over control of Yongshun in 1999, he introduced a practice that for any payment over RMB 10,000, the cheque would need to be signed by him, Lam Ki and Ko Yi jointly.  So the payments made to Lam Chi Wai would have been done in accordance with this practice.  Mr Hui did not think it necessary to get the approval of the board to authorise payment of half-yearly bonus in 2000, as the principles for the payment of bonus were discussed and agreed at the meeting on 25 December 1999.  In the circumstances, it does not appear to me that this allegation is of a sufficiently serious nature to bring about a loss of confidence.

73.  The last allegation related to Mr Hui wrongfully withholding the accounts and ledgers of Yongshun, and the seal and business certificate for some months before handing them over.  I accept Mr Hui’s evidence he did not physically remove the seal and business certificate from the office of Yongshun, and that the receipts signed by the Chinese Partner on 9 December 2000 and by Lam Ki on 11 December 2000 were merely to acknowledge formally the handing over of the seal and various certificates.  In keeping to himself the seal and business certificate, he might have occasioned some inconvenience to Yongshun, as he accepted in cross-examination.  I further find Mr Hui had only removed the accounts and ledgers, and that this was done on 11 November 2000, for the purpose of passing on the same to the auditors appointed by him in the Mainland to prepare a report of the financial affairs of Yongshun during the period it was under his control and management and to obtain certification of some of the documents from a notary public.  Whether there was any usual requirement in the Mainland for this kind of audit report to be prepared before the retirement from office of a person in charge of a business is neither here nor there.  Mr Hui commissioned an audit report to protect his position as he did not trust Mr Lee.  The ledgers and accounts were returned to the Company on 13 March 2001.  There is nothing to this allegation.

74.  None of the allegations of misconduct as disentitling the petitioners to relief in the petition are made out.

The appropriate relief

75.  The choice is between winding up the Company or making an order that one of the parties is to purchase the shares of the other in the Company.  The petitioners have indicated that they would be prepared to sell their shares to Like Grand Holdings or buy out the shares of the latter.  I gather Like Grand Holdings would not consider selling its shares.

76.  I am not able to form a view on the solvency or otherwise of the Company.  As mentioned earlier, all the audited accounts of the Company since the operation of business contained a disclaimer and qualified opinion of the auditors that they were unable to form an opinion if the financial statements gave a true and fair view of the Company due to the limited information made available. Mr Lee claimed that the Company was all along insolvent, that the accumulated losses in 2001 were in excess of HK$4.3 million and that up to December 2003, the Company still owed him HK$2.4 million odd.  Yongshun would appear to be profitable but no up-to-date financial statements were adduced in evidence and the parties had commissioned separate audit reports from Mainland auditors in the past, each disputing the reports furnished by the other side.

77.  Further, there are disputes as to the amounts advanced by Mr Lee, Like Grand Holdings and Like Grand Development to the Company to invest in Yongshun as working capital (whether the total amount was approximately RMB 3.7 million or RMB 5.2 million; Mr Lee claimed it was RMB 5.2 million and there was a reduction of capital to RMB 3.7 million some years later), and the amount that had been repaid out of the funds of Yongshun to Mr Lee or his companies (the petitioners contended that Mr Lee had helped himself to the funds of Yongshun and all the advances made to the Company had been repaid), quite apart from the dispute of the Company’s liability to pay interest to Mr Lee or his companies on the advances, which I have considered and resolved in favour of the petitioners.  I decline to resolve the other disputes because there was insufficient material before me, owing to inadequate discovery of documents, for these disputes to be resolved in a meaningful way.

78.  There was and is great distrust between the parties.  In view of this and the uncertainties surrounding the financial position of the Company and Yongshun, it would be extremely difficult for a valuer to obtain any consensus as to material facts that would form the basis of a valuation of the shares of the Company.  It does not appear to me appropriate to order buy-out relief in this situation.

79.  This leaves the relief of winding up.  It was submitted on behalf of Like Grand Holdings that the petitioners have not alleged and proved, to the extent of a prima facie case, that they have any tangible interest in the Company being wound up to be entitled to a winding-up order, such as a surplus available to the contributories after payment to creditors, praying in aid the rule in Re Rica Gold Washing Co. (1879) 11 Ch D 36.  See also Ng Yat Chi v Max Share Ltd., supra. at 577G to 578G, per Rogers VP.  This general rule is subject to an implied qualification, as stated by Pennycuick J in Re Newman & Howard Ltd. [1962] Ch 257 at 262:

“ … it seems to me that from the very nature of the case there must be an implied qualification to that general rule.  In the case where a petition is based on a failure to supply accounts and information, with the consequence that the petitioner is unable to tell whether or not there will be a surplus available for the contributories, it cannot really be the law that the petitioner is bound to allege and verify on oath the statement that the company has surplus assets when, by reason of the company’s own default, he is not in a position to tell whether or not that statement is true.”

80.  The above dicta were applied in Re Wessex Computer Stationers Ltd. [1992] BCLC 366 at 370a to g, where the court declined to restrain a contributory from proceeding with his petition merely because there was no averment in the petition that the petitioner would have a tangible interest on winding up.

81.  Here, there was no allegation of insolvency in the petition.  Further, it was contended by the petitioners that the Company is solvent on the basis that the advances made to the Company by Mr Lee and his companies were not as much as alleged and that the Company had fully repaid such advances.  The financial affairs of the Company would clearly require investigation.  Although the petition was not founded primarily on the complaint of a failure to supply accounts and information, I consider the present instance comparable to the situation envisaged in Re Newman & Howard Ltd and Re Wessex Computer Stationers Ltd.  The petitioners are not able to rely on the audited accounts as they all contained a disclaimer and qualified opinion of the auditors due to limited information made available by the management.  The petitioners had repeatedly requested source documents from Mr Lee on the amounts allegedly advanced to the Company and had raised questions and requested information from the auditors, without any success.  In my judgment, the rule in Re Rica Gold Washing should not apply in this situation.

The orders

82.  I order the Company to be wound up.  There will be an order nisi that the petitioners’ costs and any costs incurred by the Company in its limited participation in these proceedings are to be borne by Like Grand Holdings, to be taxed if not agreed.