CHINA HABIT LTD v. HEALTH LINKS DEVELOPMENT LTD AND ANOTHER

HCCW 152/2013 and
HCA 1384/2013
(Heard Together)
[2018] HKCFI 1703

HCCW 152/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 152 OF 2013

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AND

HCA 1384/2013

ACTION NO 1384 OF 2013

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(Heard Together)

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JUDGMENT

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1.  This is the trial of two actions tried together pursuant to an order of Harris J made on 28 March 2014 of disputes relating to the ownership of a Hong Kong company known as Health Links Development Limited (the “Company”).

2.  The Company has carried on business under the name of the Hong Kong Society of Professional Medical Care (“HKSPMC”), and is, or was formerly at various times, in the business of:

(1) the provision of training to prospective nurses, health care assistants and phlebotomists under the name of the “Hong Kong College of Professional Medical Care”;

(2) the running of a Chinese medical clinic; and

(3) the running of a medical laboratory under the name of “HKSPMC Medical Laboratory”.

3.  Adopting the same definitions as are used by the parties, the actions, and the parties to the actions, are as follows:

(1) HCCW 152/2013, which is a winding up petition (“the Petition”) presented on 10 June 2013:

(a) The petitioner is China Habit Limited (“CHL”), a shareholder in the company.

(b) CHL is owned by Yeung Lai Ching (“Madam Yeung”), and its directors are herself, and latterly herself and her husband Li Lok Chun (“Mr Li”), together the “Li parties”.

(c) CHL seeks an order that the Company (which is the 1^st respondent) be wound up by the Court on the “just and equitable” ground under section 177(1)(f) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) on the basis of unfairly prejudicial conduct and/or a complete breakdown of trust and confidence in the parties’ quasi partnership.

(d) Alternatively, CHL seeks an order that Madam Tong Yuen Man (who is the 2^nd respondent, see below) purchase its shares in the Company at a fair market value to be determined in such ways as the Court sees fit. 

(2) HCA 1384/2013, which is an action (“the Ownership Action”) commenced on 26 July 2013:

(a) The 1^st and 2^nd plaintiffs are Tong Yuen Man (“Madam Tong”) and her husband Ng Kwok Wai (“Mr Ng”), together the “Ng parties”, and the defendant is CHL.

(b) The Ng parties seek a declaration that the shares held by CHL in the Company are held on trust for them absolutely. 

4.  These cases are therefore essentially a dispute between the Ng parties and the Li parties (through CHL) as to the ownership and future disposition of the Company.  The Ng parties maintain that the CHL shareholding in the Company is held on trust for them and seek a declaration to that effect, whereas the Li parties maintain that CHL is the beneficial owner of its shares and is entitled to bring the winding up petition on various grounds (including that the trust necessary to conduct the “quasi-partnership”has broken down).

5.  There were earlier proceedings between the same parties.

(1) In HCA 1291/2012 which was issued on 25 July 2012, CHL and Madam Yeung sued the Company, Madam Tong and Mr Ng for a declaration that a resolution of the Board of Directors of the Company of 12 July 2012 removing Madam Yeung as a director was of no legal effect (this is also a key issue in the present proceedings).

(2) CHL and Madam Yeung also sought an interlocutory injunction, but that was not granted at the hearing of the first return date before Chung J on 3 August 2012, and the application for an injunction was not pursued to a further hearing.

(3) Thereafter there were some attempts at settlement, but although this 2012 action proceeded as far as a Reply, and is still technically extant, it has been overtaken by the more recent actions issued in 2013.  It is common ground that the result of these proceedings will also settle the earlier action.

THE TRIAL

6.  The trial took nine days.  As required by an order of Harris J dated 8 February 2018, there was an agreed chronology, but it was too brief to be of much assistance.

7.  The parties produced written opening submissions, and at the court’s request, the parties produced written closing submissions.  Junior counsel for the Li parties provided a copy of his informal note of the evidence.  I am grateful for the assistance I have received, and have taken into account all submissions written and oral made to me by counsel, even if not expressly referred to in this judgment.

8.  CHL (i.e. the Li parties) called the following witnesses:

(1) Mr Li;

(2) Madam Yeung;

(3) Dr Kwong Wai Yan, Wayne; and

(4) Mr Poon Ho Tak.

9.  Mr Ng and Madam Tong called the following witnesses:

(1) Mr Ng;

(2) Madam Tong; and

(3) Mr Leung Kwong Ming, Simon.

10.  Each witness suffered from the difficulty of recalling often undocumented events that went back to 2004 and in some cases earlier.  Their written testimony in the case goes back to 2013, 2014 and 2016.  Not surprisingly, there were a considerable number of inconsistencies in their evidence, but in my view limited reliance can be placed on those inconsistencies as such.

11.  The main witnesses on each side were Mr Li and Mr Ng.  Madam Yeung and Madam Li also gave evidence, but were not directly involved in the relevant discussions between their husbands, and had considerably less participation in the business.

12.  Mr Li and Madam Yeung on the one hand, and Mr Ng and Madam Tong on the other, are honest and diligent people who strongly believe in their respective cases.  They each did their best to assist the Court, and I am respectful of their evidence given under heavy cross-examination over a number of days.  However I am asked to, and must, choose between their evidence.

13.  Mr Li in particular, and Madam Yeung, gave very detailed witness statements, over which much care had been taken, and their oral evidence was generally in accord with the statements.  However, neither canbe described as good witnesses.  In particular, their oral evidence tended not to engage with the questions being put to them, their answers tending to go over the ground as they saw it, sometimes at length.  Their evidence ended up being of less assistance to the Court than it might have been.

14.  Neither Mr Ng nor Madam Tong were good witnesses either.  Madam Tong stuck to her version of the facts regardless, whilst Mr Ng seemed exhausted by the proceedings and was sometimes confused.  His answers in cross-examination have to be seen in that light.  Each tended to belittle the contribution which Mr Li made to the running of the business, and put in evidence some unrepresentative student complaints about Mr Li which shed no light on his ability as a trainer and which does them no credit. 

15.  I have not accepted the evidence of any of these four witnesses in its totality.  On balance, however, and overall, I prefer the evidence of Mr Ng and Madam Tong to that of Mr Li and Madam Yeung.

16.  Mr Li tended to exaggerate his qualifications, and the part he played in the formation of the business.  Mr Ng seemed at least to be prepared in cross-examination to depart from the case set out in his written testimony and pleaded case where it was put to him that it must be wrong.  An example was his willingness to accept that CHL was entitled to make a reasonable profit from the supply of uniforms etc to the Company, which is a significant concession in the history of this dispute.  Madam Tong also seemed to engage with the questions being put in a way that Madam Yeung did not.

17.  Turning to the others, Dr Kwong was a good witness, but his position was honorary, and he had relatively little participation in the operations of the company.  The fact that he may have regarded Mr Li as a partner is of limited value in determining that aspect of the dispute.

18.  Whilst he departed materially in cross-examination from his witness statement, I reject the Li parties’ criticism of the evidence of Mr Leung Kwong Ming (“Simon Leung”) as fabrication.  He is very experienced in the affairs of small companies, and has direct knowledge of some of the factual background.  I generally accept his oral evidence (save as explained below as to his re-examination).

19.  Mr Poon’s evidence was of less direct relevance.

THE ISSUES FOR DECISION AT TRIAL

20.  A list of issues for decision at the trial has been agreed pursuant to the order of Harris J dated 8 February 2018 as follows:

The Ownership Action

1. Whether the shares of the Company registered in the name of CHL are held by it on trust for Tong and Ng absolutely;

The Petition

If the answer to Paragraph 1 is in the negative, then:

2. Whether the Company was formed and operated upon the basis of a quasi-partnership/personal relationship with the common understanding that it was a 50/50 joint business venture involving mutual confidence and equal rights of participation, which is evidenced from eg (1) the Shareholders’ Agreement; and (2) equal shareholding in the Company.

3. Whether CHL had suffered any unfair prejudice by reasons of Ng and/or Tong’s alleged wrongful conducts, including:

(1) Denial of CHL’s status and rights as shareholder of the Company;

(2) Exclusion of Yeung/CHL from the management of the Company;

(3) Dilution of CHL’s shareholding in the Company;

(4) Misuse of Company funds for personal benefit; and/or

(5) Diversion of Company’s business and receivable.

4. Whether there was a complete breakdown of mutual trust and confidence between the parties (on either party’s case) so that the quasi-partnership between the parties could no longer be sustained, which further justify CHL’s entitlement for the relief(s) as prayed, inter alia, an order that the Company be wound up / order compelling Tong to purchase CHL’s shares at a fair market value to be assessed.

THE PARTIES’ CASES

CHL’s (i.e. the Li parties’) case

CHL is not holding the Company’s shares on trust for Tong and Ng

21.  There is a legal presumption that the beneficial interest goes with the legal interest unless is proven otherwise, the burden being on Tong and Ng.

22.  There was always the common understanding between the couples that the Company was formed and continued to be a 50/50 joint venture of the HKSPMC business between them on the basis of a personal relationship involving mutual confidence, with equal rights and powers of participation in its business and share in the proceeds, as evidenced from, inter alia, the equal shareholding in the Company and a shareholders’ agreement.

23.  This shareholders’ agreement was to the effect that the parties would cooperate to run the HKSPMC business first through CHL and then through the Company, while sharing workload and profits equally.

24.  The factual matrix is supportive of CHL’s case. Tong/Ng’s assertion of an express trust seems to have been raised solely for the purpose of these proceedings.

25.  As far as consideration for the shares is concerned, the HKSPMC business which turned out to be the major business of the Company must have constituted a valuable consideration by CHL.

26.  As for the 245,000 shares subsequently allotted, the subscription has been paid and/or settled by writing off/reducing the sums owed by the Company to Li, Yeung and/or CHL.

27.  On Ng’s own case, Tong was employing the same off-setting in paying for her 245,000 shares, and the same practice was repeated in the later dilution exercise.

28.  If the shares were held on trust by CHL for Tong/Ng as alleged, there was no reason to appoint Yeung as a director rather than employing her as staff.

The Company was formed and operated upon the basis of a quasi-‌partnership/‌personal relationship

29.  The Company is a quasi-partnership by reason of the personal relationship between Li and Ng in the conduct of the HKSPMC business.  It was formed and operated upon the basis of a quasi-partnership/personal relationship with the common understanding that it was a 50/50 joint business venture involving mutual confidence and equal rights of participation.

30.  The conduct of the Company’s affairs and the behaviour of other members are subject to equitable constraints which go beyond legal rules and regulations.

CHL suffered unfair prejudice by reasons of Ng and/or Tong’s wrongful conduct

31.  The affairs of the Company have been mismanaged by Tong and Ng in an unfair manner and CHL’s interest as shareholder and that of the Company have been prejudiced.  This is further in breach of both (1) equitable constraints; and (2) the Articles of Association.

Breach of equitable constraints

32.  Tong and Ng operated the Company in defiance of the constraints imposed on them by the quasi-partnership nature of the Company, their wrongful conduct including:

(1) Denial of CHL’s status and rights as a shareholder of the Company.

(2) Exclusion of Yeung/CHL from the management of the Company by excluding Yeung, being the representative of the other cooperating partner CHL, from the Company.

(3) Dilution of CHL’s shareholding in the Company from 50% to 33.33% after the unlawful removal of Yeung from the directorship.

(4) Misuse of Company funds for personal benefit, ie Tong and Ng misused the Company funds for their personal benefit, including: 

(a) the payment of their children’s school fees from the Company’s account to Anfield International Kindergarten in the sum of HK$129,000 when such payments have never been consented to by CHL/approved by any resolution of the Company;

(b) similar unjustified transfers were also made to bank accounts of Tong, Ng and Caretech Medical Services Limited in the sum of HK$1,900,000;

(c) Tong and/or Ng also caused the Company to issue chequesfor their personal expenses in the amount of HK$400,000 which was not related to the operation of the Company;

(d) When Li discovered Ng’s embezzlement of Company’s funds, instead of making it right, Tong and Ng strategically removed Li from the Company so as to keep him from further investigating.

(5) Diversion of Company’s business and receivable: Tong and/or Ng caused the payments of the service provided by HKSPMC to be made to Prime Health (a company owned by Tong’s sister). 

33.  Tong and Ng effectively used the Company as a convenient “cash machine” showing no respect to CHL, Li and/or Yeung.

34.  Furthermore, taking a rough view, it is not difficult to conclude that the money allegedly injected into the Company by Tong and Ng was substantially less than the amount they diverted out therefrom.

Breach of Articles of Association

35.  Tong and Ng operated the Company in violation of the Articles when they unilaterally removed Yeung from her directorship by a purported board meeting on 12 July 2012.  Yeung could only be effectively removed through the convening of a shareholder meeting.  The removal of Yeung is null and void under the Articles of Association.

Complete breakdown of trust and confidence

36.  In the circumstances, there is a complete breakdown of trust and confidence between parties which makes the quasi-partnership not able to be sustained.

Tong and Ng’s (i.e. the Ng parties’) case

CHL is holding the Company’s shares on trust for Tong and Ng

37.  Tong and Ng’s primary defence is that the 250,000 shares held by CHL have always been held by CHL on trust for Tong and Ng.

38.  Prior to the incorporation of the Company, Tong and Ng were already in the business of providing training to health care personnel and phlebotomists.  Ng’s laboratory was used as the premises for operating the business.

39.  Li was an undischarged bankrupt and was offered a job as a freelance messenger.

40.  In about June 2004, Li suggested to Tong and Ng that the business should be operated through a limited company.  As the business was still in its infancy, in order to save the expense of setting up a new company, Li proposed that the business could be operated through CHL.

41.  From June 2004 to 7 March 2005, the business was operated through CHL.  In about February 2005, Tong and Ng decided that they would set up a company of their own to operate the business, helped by Simon Leung.

42.  It was agreed that Li would continue to help out in the businessas an employee.  In a meeting between Li, Ng and Leung, Li requested that some shares in the Company should be given to him, but refused to inject any money into the Company.

43.  Li stated, in the presence of Ng and Leung, that he (or his nominee, being CHL) would only hold the shares as a nominee shareholder.

44.  The idea of signing a declaration of trust was raised during the meeting.  But upon Li’s persuasion, Ng agreed not to have the trust arrangement recorded in writing.

45.  Li or CHL never paid for the 5,000 shares.  All the share capital of the Company was paid up by Tong and Ng.  Further, neither CHL,Li nor Yeung injected any money into the Company or paid for the expenses of the business.

46.  245,000 shares were allotted to CHL in November 2007 simply for the purpose of maintaining the status quo of the shareholding structure of the Company.  CHL, Yeung or Li did not pay for the shares nor did they inject any money into the Company or pay for any expenses of the business.  The shares were paid up by Tong and Ng, and held on trust by CHL for Tong and Ng.

47.  On 12 July 2012, Yeung was removed as a director and Tong was appointed in her stead.  The reason for her removal was the discovery that she was earning secret profits without the approval and authorisation of the Company by selling materials to the Company through CHL at inflated prices, thereby breaching her fiduciary duties owed to the Company.

48.  On 12 July 2012, the board of directors resolved to increase the issued share capital of the Company and further allotted 500,000 shares at $1 each on a pro rata basis to the existing shareholders, that is Tong and CHL.  Tong applied for the allotment of a further 250,000 shares, while CHL did not.  

49.  As Li was complicit in Yeung’s misconduct, Li’s employment with the Company was terminated on 13 July 2012.

50.  All the share capital of the Company was fully paid by Tong andNg.  On this basis, the presumption of resulting trust applies.  It is then for CHL to adduce evidence to rebut the presumption.

51.  Tong and Ng’s case is supported by (1) advances made by themto the Company as and when it needed money, (2) a letter of financial support signed by Tong undertaking to provide sufficient funds to the Company, (3) the trademark of Hong Kong College of Professional Medical Care and HKSPMC were registered in the name of Ng.

CHL has not suffered any unfair prejudice by reason of Ng and/or Tong’s alleged wrongful conduct

Alleged wrongful denial of CHL’s status and rights as shareholder

52.  The dispute as to whether the shares held by CHL are held on trust for Tong and Ng is a dispute between the parties as shareholders, which does not relate to the affairs of the Company.

53.  Yeung and Li never requested and were never provided with monthly financial statements by Tong and Ng.  This is consistent with CHL merely holding the shares in the Company on trust for Ng and Tong.

Quasi-partnership / the alleged 2015 oral shareholders’ agreement

54.  The existence of the alleged shareholders’ agreement is in conflict with the fact that (1) Ng was appointed as an additional director of the Company, (2) Caretech was appointed as a director of the Company to replace Tong, both pursuant to resolutions signed by Yeung.  This gave Tong and Ng control over the board of directors.  Further, the pleaded terms of the alleged shareholders’ agreement differ.

Alleged wrongful removal of Yeung as director

55.  The length of the notice was sufficient.  The business was run on an informal basis and there was never any question of a lengthy notice period.

56.  In any event, a letter from Tong and Ng’s solicitors dated 22 August 2012 offered to re-appoint Yeung as a director of the Company well before the Petition was taken out on 10 June 2013.  Therefore, the conduct viewed as a whole, is not unfairly prejudicial.

CHL, Li and Yeung were earning secret profits

57.  The removal was prompted by the discovery that Yeung had been earning secret profits.  There was a genuine and immediate need to redress the wrong and to prevent Yeung from continuing the wrongful conduct.  Whether the removal is “unfairly prejudicial” must also be considered with this good intention in mind.

58.  CHL earning a profit from the Company is not in dispute.  Yeung, by arranging for CHL to sell materials to the Company at inflated prices, has clearly acted in conflict with the interests of the Company.

59.  Ng and Tong did not know about CHL earning profits at the expense of the Company.  It was brought to their attention in July 2012, and led to the decision to remove Yeung as a director.  If such profits had been authorised, proper written minutes recording the authorisation would have been signed.

Li’s unauthorised taking away the Company’s cheque books

60.  Following the removal of Yeung as a director, Li sneaked into the Company’s office at night and took away a number of items including the cheque book, the Company chop and payment records and receipts.

61.  On 13 July 2012, Li drew two cash cheques in the sum of $13,860 and $ 9,800 to settle two invoices issued by CHL to the Company.  He kept a blank cheque for his future use.

62.  Because of his conduct, Li was removed as the Company’s bank signatory on 13 July 2012.  The conduct of the Li camp as a whole must be considered by the Court.

Alleged wrongful dilution of CHL’s shareholding in the Company

63.  The 2012 Allotment was made on a pro rata basis, meaning that if CHL had been prepared to apply for the shares of the Company and inject capital into the Company, there would have been no dilution of CHL’s shareholding.

64.  Li’s assertion that the Ng parties knew that the Li parties were not in a position to raise funds to subscribe for the new shares at such short notice is wrong.

Alleged misuse of Company funds for personal benefit

65.  As to the allegation that Ng and/or Tong caused funds of the Company to be used for their personal benefit or for purposes unrelated to the Company, (1) they were entitled to draw directors’ remuneration for their services rendered as directors of the Company over the years, and (2) they had previously advanced sums to the Company by way of shareholders’ loansand were entitled to withdraw sums in repayment of the loans.  Furthermore, some payments were for the repair of the Company’s vehicles.

66.  In respect of the payments to Caretech, the Company and Caretech entered into an agreement dated 22 October 2006 by which Caretech would design courses for the Company’s operations and license fees could be received by Caretech from the Company.

67.  Substantial sums were diverted to CHL under the guise of “management fees”: (1) $290,000 in 2008; (2) $480,000 in 2009; (3) $660,000 in 2010; (4) $340,000 in 2011; (5) $660,000 in 2012.

Alleged diversion of Company’s business and receivable

68.  It has never been part of the Company’s business to provide cervical cancer vaccine injection services and, as such, there is no question that such business was diverted to Prime Health.

Complete breakdown of mutual trust and confidence

69.  If there has been a breakdown of mutual trust and confidence, it was caused by the conduct of CHL, Yeung and Li.  The profits admittedly earned by CHL at the expense of the Company are an example of such conduct.

70.  Section 177(1)(f) of Cap. 32 involves the Court’s equitable jurisdiction and the conduct of the petitioner is relevant.  The Court will decline to grant a winding up order if the petitioner’s misconduct is causative of the breakdown in relationship.

Relief

71.  No relief should be granted and the Petition should be dismissed.  In any event, the conduct of the petitioner could affect the relief which the court thinks fit to grant.  Depending on the seriousness of the matter and the degree of its relevance, such conduct could be capable of leading a court to deny the petitioner any relief at all, even though the conditions under section 724(1) of the Companies Ordinance (Cap. 622) are made out.

72.  Although CHL is seeking an alternative share purchase order, no valuation evidence has been adduced.

THE LAW

73.  There has been no dispute as to the applicable legal principles.

74.  As to the Ng parties’ case that CHL holds its shares in trust for Ng and Tong, the starting point is that the legal owner of property also has beneficial ownership of the property, unless the contrary is shown.  In this case, the Ng parties assert an oral trust arrangement.

75.  Alternatively, the Ng parties argue that a resulting trust arose on the basis that they paid the purchase price of the CHL shares.  A resulting trust may arise in such circumstances in response to the absence of any intention on the part of the paying party to benefit the recipient, or from the presumed common intention of the parties (see Primecredit Ltd v Yeung Chun Pang Barry [2017] 4 HKLRD 327 at §§2.6 – 2.8, Cheung JA, in this respect).

76.  It is common ground that if the court finds that such trust exists, the Petition must be dismissed.

77.  If not, it becomes necessary to determine whether (as the Li parties contend in the Petition) the Court should order that the Company be wound up, or alternatively make an order compelling Madam Tong to acquire CHL’s shares in the Company at a fair market value to be assessed, on the basis that the affairs of the Company are being or have been conducted in a manner which is unfairly prejudicial to the interests of CHL (section 724(1) of the Companies Ordinance (Cap 622), and section 168A(1) of the predecessor Cap 32).

78.  The principles are again well settled, and have been summarised recently in Re Asia Television Ltd [2015] 1 HKLRD 607 at §§51–58, Harris J, and Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501 at §§41 – 46, Ma CJ and Lord Millett NPJ).

79.  As to the terms on which the parties agreed that the affairs of the Company should be conducted, the Li parties contend that the company is a quasi-partnership founded on the terms of an oral shareholders’ agreement agreed between Mr Ng and Mr Li in about 2005.  Reliance is placed on Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at 379, Lord Wilberforce, and following authorities, as applicable to the situation.

80.  The principles were summarised in Re Hercules Holdings Ltd, unreported, HCCW 152/2008 (17 November 2010), at §68, To J, who said thatthe expression “quasi-partnership” “is a shorthand expression for a company in which the exercise of membership rights by members of a company may, by reason of its particular circumstances, be subjected to equitable considerations of a personal character arising between the individual members which might make it inequitable for them to insist on their legal rights or to exercise them in a particular way.”

81.  As it is put in Loh Siew Cheang, William M F Wong, Kerby Lau, Company Law: Powers and Accountability, 2^nd edn (2017), LexisNexis (where the authorities are comprehensively reviewed), “The common thread running through the cases where equitable considerations were applied is that the conduct complained of had breached some common intentions or understandings”.

82.  The conduct of the member presenting the petition is a relevant consideration because misconduct on his part may result in a finding that the conduct of which he complains is not unfair (Victor Joffe and others, Minority Shareholders: Law, Practice and Procedure, 5^th edn (2015) at §6.158).  

83.  In approaching these questions, it is necessary to have regard tothe pleaded case, to the evidence, and to the inferences that may properly be drawn from the evidence.

THE FACTS

84.  Many factual points in this case are in dispute.  I make my findings of fact upon the totality of the evidence as follows.

The forming of HKSPMC

85.  Mr Ng and Mr Li were both corporals in the Royal Army Medical Corps, and were friends.  Mr Ng’s experience was more focused on medical work than that of Mr Li.  They left the service in 1997 with good references.

86.  Both had to find new work.  Mr Li became an insurance salesman, but he became bankrupt in 2003 (coming out of bankruptcy in 2007). 

87.  CHL was incorporated on 26 March 2003, and through it Mr Li and Madam Yeung carried on a small garment business.  The company had no premises as such, the work mainly being carried out from the Li’s home.

88.  After discharge from the army, Mr Ng sought to develop his medical skills.  Over the years, he has undertaken various studies in that regard both at HKU, and later at the University of the West of England.

89.  In around 2003, Mr Ng established a laboratory in Wan Chai under the name Caretech (which was later incorporated as a company in 2006).  Mr Li helped out by collecting samples and bringing them to the lab for testing.  I find, though Mr Li did not accept this in cross-examination, that this was relatively menial work.

90.  Simon Leung who was known to both men.  He had (and has) a business management company called Creation Business Consultants Ltd.  He gave professional assistance with accounting services etc to CHL.

91.  Simon Leung also provided (and provides) services to both the Company after it was formed, and to Caretech.

92.  In 2003, he gave Mr Li a desk in his office, which like Mr Ng’s laboratory, was also in Wan Chai.

93.  At some point in early 2004, Mr Ng and Madam Tong decided to go into the business of training health care assistants and phlebotomists (that is, people trained in the taking of blood samples by venipuncture).  I am satisfied that this was essentially their decision, and not a joint one with Mr Li.

94.  Ng raised the idea with Li, and I find that the two men talked about the idea over a period of time.  Mr Li speaks in his witness statement of the parties reaching an “Initial Agreement” that the business was to be run between them on a 50/50 basis with the equal sharing of profits, but (as explained below) I do not accept that there was any agreement reached at this stage, nor any agreement as to 50/50 participation, nor is an “Initial Agreement” pleaded as such in the Amended Petition.

95.  At Mr Li’s suggestion, it was agreed that, for convenience, the business would initially be carried on under the corporate name of CHL.  At that time, the sole director and shareholder was Madam Yeung, presumably because of Mr Li’s status as a bankrupt.

96.  The business was called the Hong Kong Society of Professional Medical Care, that is, HKSPMC, (香港專業護理學會).  The agreed chronology shows the business commencing on 1 April 2004.  Dr Kwong, amedical doctor who was introduced by Mr Li, became the honorary President.   

97.  On 5 May 2004, CHL mandated Li and Ng as signatories of its Bank of China (Hong Kong) Ltd bank account known as “China Habit Limited T/A Hong Kong Society of Professional Medical Care”.  In practice, however, Mr Li rarely signed cheques.

98.  In December 2004, HKSPMC opened its first office premises at Unit B, 10/F, Breakthrough Centre, 191 Woosung Street, Jordan, Kowloon.

The incorporation of the Company

99.  The business seems to have got off to a good start, and I find that about the beginning of 2005, Mr Ng decided to incorporate it.

100.  The Company (that is, Health Links Development Ltd) was incorporated on 7 March 2005, 10,000 shares of HK$1 each being issued, and held by Madam Tong and CHL as to 5,000 shares each.  The directors were Madam Tong and Madam Yeung.

The agreement between the parties

101.  The crucial question is as to the terms that Mr Ng and Mr Li agreed in respect of the business.

1.   The Li parties’ case

102.  As set out above, the Li parties’ case is that it was orally agreedthat the incorporated business would be continued on the same basis as before,which Mr Li says was on a 50/50 basis.  He says that the parties reached a shareholders’ agreement to that effect.  This is denied by the Ng parties.

103.  It is necessary to see how this shareholders’ agreement has been pleaded.  CHL’s Petition was presented on 10 June 2013.  In it, the Li parties plead that in or about 2005, Madam Yeung and Mr Ng orally agreed a “Shareholders’ Agreement”.  It is pleaded that the terms were that each family would own 50% of the shareholding in the Company, each family would appoint only one director to the Board, each family would receive similar monthly remuneration from the Company, Mr Ng would be responsible for daily finance, Mr Li would be responsible for daily operations, and Mr Ng would provide monthly statements to Li and Yeung.

104.  On this basis, it is pleaded that “It has always been the common understanding between Li and Yeung on one part, and Ng and Tong on the other part, that the Company was formed and continued to be a 50/50 joint business venture between the two couples on the basis of a personal relationship between the two couples involving mutual confidence, with equal rights and powers of participation in its business and share in the proceeds” and that the Company was “founded and formed and operating upon the basis of a quasi-partnership”.

105.  This case is in substance the same as that pleaded in the Statement of Claim dated 25 September 2012 in HCA 1291/2012 which began on 25 July 2012, so only a few weeks after the dispute erupted.

106.  Thus the “Shareholders’ Agreement” is said to have been entered into by Madame Yeung and Mr Ng.  There is no mention of any “Initial Agreement”. 

107.  Madam Yeung explained in her witness statement of 4 March 2014 that it was in fact her husband who entered into the agreement with Mr Ng.  On 22 August 2016, the Petition was amended to plead that the Shareholders Agreement was entered into by Mr Li on behalf of the Li family, not by Madam Yeung.

108.  The amendments further added a term which had not been there before to the effect that the parties agreed to continue running the business on the same basis as it was previously run by the parties through CHL, and that the business would be transferred from CHL to the Company upon incorporation.

109.  In closing submissions, the Li parties submit that the court should accept the evidence of Mr Li and Madam Yeung and hold that the 50/50 shareholding structure in the Company was a result of the “partnership and shareholder agreement” reached between Li and Ng.

110.  In closing submissions, the Li parties place particular reliance on a submission that the evidence of Mr Li was confirmed in Mr Ng’s oral evidence to the effect that the terms agreed were substantially the same as the agreement pleaded in the Petition, except that CHL’s shares were held on trust, and that there was no agreement that the Li’s/CHL would be provided with the financial statements of the business.

2.   The Ng parties’ case

111.  As set out above, the Ng parties’ case is that it was orally agreed that Mr Li’s shares would be held in trust for Mr Ng and Madam Tong.  This is denied by the Li parties.

112.  Again, the pleadings are important.  It is pleaded in the Points of Defence to the Petition dated 12 September 2013 that shortly prior to the incorporation of the Company, Li expressly agreed with Tong and Ng that CHL would hold its 5,000 shares in the Company on trust for Tong and Ng as follows:

(1) In or about February 2005, Tong and Ng decided to set up the Company and were helped by Simon Leung.  It was decided thatLi would assist in the business of the Company as an employee. 

(2) Li made a request to Ng, in the presence of Leung, that some shares in the Company should be given to him so that he could have a better image to present to outsiders such as prospective landlords and material suppliers.

(3) Li however refused to inject any money into the Company claiming that he did not have the money to do so because he was an un-discharged bankrupt.

(4) Li declared, in the presence of Ng and Leung, that he or his nominee would hold the shares only as a nominee shareholder.

(5) Upon such representation by Li, it was agreed between Ng (on behalf of both Tong and himself) and Li (on behalf of CHL and/or Yeung) that CHL would hold 5,000 shares of the Company on trust for Tong and Ng.

113.  The Ng parties rely on a submission that they provided the funds for setting up the business, and that various factors make it more likely than not that a trust arrangement was agreed.

114.  In the alternative, they rely upon a resulting trust in relation to the CHL shareholding, on the basis that the share capital was all paid for by the Ng parties.

3.   The source of funds

115.  The first question to be considered is as to the source of funds as regards the consideration paid for the shares and the start-up costs of the new business.

116.  To quote from the Li parties’ closing submissions:

(1) Mr Li and Madam Yeung’s oral evidence is that the initial subscription for the Company shares by CHL was paid off by the expenses due/profit/revenue/fees generated from the partnership HKSPMC business operated through CHL before the Company’s incorporation.

(2) Ng accepted in his evidence that the start-up costs were just “HK$40,000 to 50,000” and the HKSPMC business was profitable in 2005, so it is very likely, if not certain, that neither Li nor Ng party had to pay for the initial shares subscription but could rather be capitalized on the profits from HKSPMC business.  Ng claimed that he also invested his “laboratory equipment” as part of the start-up costs, but such alleged “HK$40,000 to 50,000 investment” remains nothing but bare assertion without any particulars pleaded and unsupported by any documentary evidence.

117.  The Ng parties submitted that it is impossible to reach precise findings in this respect in the absence of a proper analysis of the figures.  I agree with that submission.  I also agree that only limited conclusions can be drawn from the entries in the ledgers of CHL which were referred to in the course of cross-examination.

118.  Subject to that, my findings are as follows:

(1) In 2004–5, Mr Li was bankrupt, and Madam Yeung had only a modest income.  Neither was a likely source of funds, and I am satisfied that they did not provide any.

(2) CHL was simply a vehicle for carrying on the business, and in the circumstances, the transfer of the business from CHL to the Company does not constitute valuable consideration.

(3) It is correct that Mr Li incurred expenses, but the clear inference from the evidence is that he was reimbursed for such expenses. 

(4) Neither Mr Li nor Madam Yeung then (or subsequently) injected any money into the Company by loan or otherwise. 

(5) I accept Mr Ng’s evidence that he paid expenses for the set-up of the Company in the region of HK$40,000 to HK$50,000, and also paid for the initial advertising fees for the courses offered by the Society at the very initial stage, and that he was not fully reimbursed for his expenditure.

(6) Mr Ng also contributed the Caretech laboratory.  A substantial amount of value was involved (HK$607,377), and this was recorded in the ledgers as a director’s loan.

(7) I accept that the business got off to a good start, but since the Li parties have no reliable figures as to the expenses (and there probably are none), their case in this regard is little more than guesswork based on their view that the fees generated by the business were ample to meet such expenses.

(8) Overall, I am satisfied that the share capital and the costs of setting up the business came from Mr Ng.

(9) Thereafter, I find that from time to time, Mr Ng and Madam Tong advanced cash to the Company when it was needed.  I accept their evidence that only recent documents could be located in this regard, and that these show that from 2010 Mr Ng advanced sums totalling HK$408,000 up to 2012.

(10) These conclusions are consistent with the Letter of Financial Support dated 16 March 2012 described below. 

4.   Conclusion as to the trust arrangement

119.  The Ng parties cite a number of circumstantial factors in support of their case that the CHL shares are held in trust for them pursuant to an express trust.  Some of these are relevant to the question whether a “partnership and shareholder agreement” was reached between Li and Ng as the Li parties contend.  However, none of them, in my view, give much support to the trust case, the onus of proof being on the Ng parties in this regard.

120.  My findings in that regard are as follows:

(1) Although Mr Ng continued to assert a trust, neither his oral evidence nor that of Simon Leung made out the Ng parties’ case advanced in their witness statements that the trust arrangement was agreed at a lunch in a restaurant in Jordan in February 2005. 

(2) Simon Leung could not recall a specific meeting in cross-‌examination, as opposed to phone discussions with Mr Ng and Mr Li over time about the incorporation of the Company.  I accept his evidence in that regard, but I do not accept his evidence as to a specific meeting (which was prompted by questions in re-examination).

(3) I find that Mr Leung advised Mr Ng to put the CHL shares in trust by way of a written instrument, including a share transfer instrument, but that Mr Ng did not take his advice to put the shares in trust because he trusted Mr Li.

(4) Though he probably did give reassurances to Mr Ng, I accept Mr Li’s evidence that he did not declare that he or his nominee would hold the shares only as a nominee shareholder.

(5) Overall, I find that a trust was suggested, but not in fact agreed or implemented.

(6) As counsel for the Li parties pointed out, this conclusion is consistent with the fact that when the dispute broke out in July 2012, the Ng parties could have raised the trust issue then.  It was only raised later in the pleadings.

121.  There is no room for a resulting trust in the circumstances of this case, whether the issue is analysed by reference to the absence of an intention on the part of Mr Ng to benefit CHL, or by reference to the presumed common intention of the parties (see Primecredit Ltd v Yeung Chun Pang Barry [2017] 4 HKLRD 327 at §§2.6 – 2.8 as to the analysis in this respect). Mr Ng was advised to put the shares into trust, but he chose not to do so.  He cannot get in through the back door what he has failed to get in through the front.  The contrary was not argued with any force by the Ng parties.  The position is the same as regards the 245,000 shares allotted to CHL in November 2007 which simply maintained parity.

5.   Conclusion as to the shareholders’ agreement

122.  The essence of the Li parties’ case is that Mr Li agreed with Mr Ng that the Company and its business would be run on an equal basis on the terms pleaded in the Petition.

123.  In his witness statement of 4 December 2014, Mr Li gives careful evidence as to the agreements.

124.  He refers to what he calls an “Initial Agreement” leading up to the commencement of the business in April 2004. According to him, he and Mr Ng agreed that the business would be run as a joint venture with equal rights and participation on similar terms to those pleaded in the Petition as agreed in 2005, so far as applicable to an unincorporated body.

125.  As to the position when the business was incorporated, he says that he and Mr Ng “orally agreed on several occasions to continue running the company on the same basis as it was run before.  I am advised by my legal advisers and believe, that means that we agreed that the Company shall be continue to be run according to the Initial Agreement.  We specifically agreed that the shareholding would be in the ratio of 50-50 between the parties.  We also expressly agreed that CHL and [Madam Tong] would be the shareholders on behalf of the Li parties and the Ng parties respectively, due to the personal circumstances of Mr Ng and I.  Therefore, [Mr Ng] andI reached an express oral agreement (the ‘Shareholders’ Agreement’) for theHKSPMC business to be continued as a joint venture between the Li parties and the Ng parties after the establishment of the Company…”.

126.  In considering the Li parties’ case, a number of points seem to me to be of relevance.  First, I accept that over time Mr Li played an important part in the operation and development of the business, and I reject the Ng parties’ case that his contribution was limited to teaching duties.  I accept that this contribution applied at the start up stage as well.  This gives support to Mr Li’s version of the relationship.

127.  On the other hand, I find that the initial business idea for HKSPMC came from Mr Ng, not Mr Li.  It is necessary to state that Mr Ng’s health care qualifications are much superior to those of Mr Li, though Mr Li did not accept this in his evidence.

128.  Further, as described above, Mr Ng funded the initial costs of setting up the business, and he continued to provide financial support thereafter.

129.  A significant example is a Letter of Financial Support dated 16 March 2012, by which Madam Tong undertook to provide sufficient funds to the Company to meet in full all its financial obligations as they fell due and to financially support the continuous running of the Company.

130.  As stated above, I am satisfied that Mr Li, Madam Yeung and CHL never provided any financial support for the business. There is force in the submission made by the Ng parties that if the common understanding had been that Mr Li and Madam Yeung were really owners of the Company and were treated as such, one would have expected Ng to ask them to contribute similar amounts of money into the Company as and when such a need arose.

131.  As stated above, I accept the Ng parties’ case that Mr Ng contributed the equipment which came from his laboratory in Wan Chai, which was also initially the location used to receive the enrolment fees which provided much of the income for the business. 

132.  Further, and this is not in dispute, Mr Ng designed the courses, which he taught along with Mr Li.

133.  The Li parties’ case was supported by Dr Kwong and Mr Poon, but their perception that Mr Li was a partner or one of the bosses cannot affect the legal position, and may in considerable part reflect what Mr Li told them.

134.  As stated above, much emphasis was given in closing to Mr Ng’s answers in cross-examination.  But though he confirmed particular aspects of the Li parties’ case as to what was agreed, he adamantly contradicted any suggestion that there was any agreement as to equal participation.  That also was the thrust of the evidence of Simon Leung.  I accept their evidence in this respect.

135.  Finally, there is in my view force in the Ng parties’ criticism of the “evolution” in the Li parties’ pleaded case (see above), which tends to undermine its credibility.

136.  My conclusions on this part of the case are as follows.  I do not accept Mr Li’s evidence as to the “Initial Agreement” and “Shareholders Agreement”.  I find that no such agreements were reached.  I find that there was no common understanding that Mr Ng and Mr Li were equal partners. In my view, so far as there was a common understanding, it was that this was Mr Ng’s business.  I accept the evidence of Mr Ng and Simon Leung in this respect.

137.  It follows that I do not accept the Li parties’ case that it was always the common understanding between the couples that the Company was formed and continued to be a 50/50 joint venture of the HKSPMC business between them with equal rights and powers of participation in its business and shares in the proceeds.  I find that there was no such common understanding as to equal rights and powers of participation, nor was the Company formed and operated upon the basis of a quasi-partnership.

138.  Though the parties had an equal shareholding and one director each, and received similar monthly remuneration, this was simply the factual position at the outset.  There was no agreement or understanding that it would be maintained.

139.  In support of this conclusion, there is important objective evidence.  As described below, in 2007 Mr Ng was nominated as third director giving him control of the board. In 2008, Caretech was appointed as director in place of Madam Tong.  Caretech is Madam Tong’s company, so that Ng’s control was continued.  In both cases, Madam Yeung signed the minutes.  Her consent, and by inference that of Mr Li, undermines the whole basis of their case.

Events following the incorporation of the Company

140.  I find that as a matter of division of responsibilities going forward, Mr Li took primary responsibility for the operations side of the business, whilst Mr Ng took primary responsibility for the financial side, the laboratory, and planning courses.  Both men did the teaching.

141.  Mr Li says, and I accept, that he was referred to as “行動及訓練總監” and later “行動及訓練總參事” (operation and training director/‌chief staff officer).

142.  Though directors, Yeung and Tong had no real role as such.  From 2006, Yeung did however operate the nursing human resources function. Tong worked part time as an instructor, and assisted her husband in dealing with the Company’s paperwork.

143.  In June 2005, HKSPMC opened its own training centre, namely the Hong Kong College of Professional Medical Care, at Wing Kwok Centre, 182 Woosung Street, Jordan.

144.  On 12 July 2006, the trademark of HKSPMC was registered under the name of Mr Ng.  The trademark is very similar to that of the Royal Army Medical Corps.  Mr Li says that this was done without his consent, but in my view he had no right to object.

145.  In 2006, the Company began to get official recognition from various bodies, and its business grew.  Both Ng and Li were fully active in their respective roles.  Mr Li has produced extensive evidence to show the part he played, for example, in publicising the Company’s activities, and I accept the importance of his role, and the energy that he put into it.

146.  In September 2007, the Company established a medical laboratory under the name of “HKSPMC Medical Laboratory” in the Wing Kwok Centre in the unit next to the College.

147.  On 20 September 2007, there was a board resolution appointing Mr Ng as the third director of the Company, along with Madam Yeung and Madam Tong.  (This is referred to above.)

148.  There were never board meetings as such.  The evidence was that Mr Li took the paperwork home for his wife to sign.

149.  Madam Yeung signed the board minutes.  She says that she did not pay attention to the contents, but I do not accept that. Having seen her and her husband testify at some length, I consider that they paid close attention to all such documents. I do not accept their evidence to the effect that they understood Ng’s appointment to be by way of replacement for Tong. 

150.  This was a very significant development which, as already noted, gave Mr Ng control of the board.

151.  On 21 November 2007, board minutes record the allocation of 245,000 additional shares each to CHL and Tong, so that each had 250,000 shares.  By now, CHL had effectively dropped out of the picture.  Mr Ng’s evidence is that the Tong shareholding was paid for by the capitalisation of previous advances.

152.  On 30 August 2008, a board resolution nominated Caretech Medical Services Limited as a director in place of Madam Tong. Caretech had been incorporated on 7 September 2006 with Tong as its sole director and shareholder, so there was, as already noted, no change in Ng’s control of the board.  Again, Madam Yeung signed the board minutes.

153.  On 15 November 2010, HKSPMC commenced business at an additional training centre in Leroy Plaza, Cheung Shun Street, Lai Chi Kwok, West Kowloon.  This was a substantial space of about 8,800 square feet, and Mr Li says, and I accept, that he played a central role in setting it up.

154.  However, by now Mr Li’s relationship with Mr Ng had started to deteriorate.  I am satisfied that the cause was that Mr Li became convinced that he was not receiving a fair share of the Company’s profits.

155.  Mr Li says that from the commencement of the business Simon Leung provided him with monthly financial statements for the Company, but ceased to do so from October 2009.  However, Mr Leung denies ever having provided financial statements to either him or Madam Yeung, and I prefer the evidence of Mr Leung. 

156.  From 2010, Mr Li instructed the receptionist to record the amount of fees that were being received from students.  He accepted in his oral evidence that this was done without the knowledge of Mr Ng or Simon Leung.  According to Mr Li, this showed that HKSPMC “was receiving tens of millions of course fees and tuition fees per year”, but this assertion was not made good by reference to the accounts or other documents.

157.  Mr Ng on the other hand says (and I accept) that the company was having cash flow difficulties.  A reason he gave was that the government was by now providing similar courses without charge.

158.  Mr Li says he was having increasing quarrels with Mr Ng over the finances of the Company, and that his demands for an independent accountant to look at the accounts were received negatively.

159.  I find that things came to a head in a confrontation in July 2012.  On 8 July 2012, Mr Ng gave Mr Li a note which was said to set out the monthly expenses of the Company demonstrating the cash flow problem.  Lisaid that there should have been about $2 million left in the company’s bank accounts on the basis of the figures he had received from the receptionist.

160.  The following day, that is 9 July 2012, they met again, and in the course of these meetings, Li accused Ng of embezzling Company money.

161.  In his written evidence, Mr Ng asserted that the cause of the breakdown of their relationship was the discovery that CHL was making a secret profit on the supply of uniforms to the Company at inflated prices.  This was cited by the Company’s lawyers in letters sent a few days later.

162.  Whilst I accept Madam Tong’s evidence that she suspected overcharging, I do not accept that this was the cause of the breakdown, and Mr Ng more or less agreed in cross examination that it was the confrontation that had taken place between him and Mr Li.

163.  What happened next was as follows.  On 12 July 2012, at 11.57 am and 13.05 pm Simon Leung (whose company is the company secretary) gave email notice of a meeting of the Board of Directors to be held at 4 pm that day to discuss among other things “change of directors”.

164.  There is an issue as to the adequacy of this notice.  This has to be seen against the background that directors’ meetings did not in practice physically take place (or need to take place since this was a small company). 

165.  Madam Yeung did not attend the meeting.  It is true that she had been given very short notice, and that failure to serve due notice is not to be lightly treated as a technicality (Wong Man Yin v Ricacorp Properties Ltd (2003) 6 HKCFAR 265 at 280).  However, the circumstances were completely unusual.

166.  I am satisfied that Madam Yeung could have attended, but chose not to.  Although it is correct that the notice refers only to “change of directors”, I consider that she and Mr Li will have fully appreciated the implications and seen the notice in the light of what had happened a few days earlier destroying the relationship between the two men.

167.  The minutes record that Madam Yeung was removed as a director and replaced by Madam Tong. The minutes also record that it was resolved to allot an additional 500,000 shares at HK$1 each by way of offer to the existing members.  Had that been taken up by CHL/the Li parties, parity would have been maintained.  In the event, only Madam Tong applied for an additional 250,000 shares, with the consequence that she now holds a controlling interest.

168.  There were a number of letters from the Company’s lawyers at this time taking issue with the sales by CHL to the Company, sending notification of the change of directors and the allotment of 500,000 shares on a pro rata basis to the two shareholders, and dismissing Mr Li from the Company on the basis that he entered the company’s premises and removed among other things cheque-books and the Company’s chop.

169.  As explained above, on 25 July 2012, CHL and Madam Yeung issued proceedings against the Company, Tong and Ng for a declaration thatthe resolution of the Board of Directors removing Yeung as a director was of no legal effect.  They sought an interlocutory injunction, but that was not granted at a hearing before Chung J on 3 August 2012, and the application was not pursued to a further hearing.

170.  On 17 August 2012, the Company’s lawyers made an open offer to reinstate Madam Yeung as director.  However, no settlement was in the event reached.

171.  On 10 June 2013 the Petition was filed in the name of CHL by Li and Yeung, and on 26 July 2013 the Ownership Action was brought by Tong and Ng.

172.  As far as the Company is concerned, Mr Poon says that he was told by Simon Leung that it was in financial difficulties.  He found out that contributions were not being paid to the Mandatory Provident Fund Schemes Authority for which the Company and Mr Ng were each fined $16,000 in December 2013.

173.  Mr Ng says that since the winding up petition was taken out, the Company’s bank account was frozen, and it was unable to pay the rent or salaries.  The business has been downsized, and he and his wife have been paying the necessary expenses to support its minimum operation.  I accept that evidence.

THE CASE AS TO UNFAIRLY PREJUDICIAL CONDUCT

174.  Section 724(1) of the Companies Ordinance (Cap 622) (section 168A(1) of the predecessor Cap 32) provides that:

“ (1) The Court may exercise the power under section 725(1)(a) and (2) if, on a petition by a member of a company, it considers that—

(a) the company’s affairs are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of one or more members (including the member); or

(b) an actual or proposed act or omission of the company (including one done or made on behalf of the company)is or would be so prejudicial.”

175.  Five complaints have been made in the Petition:

(1) wrongful denial of CHL’s status and rights as shareholder;

(2) wrongful removal of Madam Yeung as director;

(3) wrongful dilution of CHL’s shareholding in the Company;

(4) misuse of Company’s funds; and

(5) diversion of Company’s business and receivables.

176.  I will now consider these complaints.

(1)   Wrongful denial of CHL’s status and rights as shareholder

177.  The Li parties submit that in the case of a quasi-partnership company, exclusion of the minority from participation in the management of the company contrary to the agreement or understanding on the basis of which the company was formed provides a clear example of conduct by the majority which equity regards as contrary to good faith: Re Guidezone Ltd [2001] BCC 692 at 719H – 720A, at para 175.  I accept this submission.

178.  The Li parties further submit that if the Court is minded to rule in their favour on the question of ownership, the unsuccessful allegation of trust must be itself a strong foundation of the Ng parties’ wrongful denial of CHL’s shareholder rights and status as a representative of the Li parties.

179.  In this regard, I have held in favour of the Li parties that the CHL shares were not held in trust.

180.  However, I have also ruled against the Li parties’ case as to quasi-partnership, and found against them as to the asserted shareholders’ agreement.  These form the central planks of their case, and in circumstances in which I have rejected that case, the fact that there was an unsuccessful allegation of trust by the Ng parties loses much of its force.  I am satisfied that it is not sufficient to ground a winding-up order under section 725.

181.  In those circumstances, I need not decide whether the Ng parties are correct in their submission that a dispute between shareholders as to the status of shares does not “relate to the affairs of the company concerned” and therefore does not fall within section 724(1) of the Companies Ordinance.

182.  There is a further point raised by the Li parties under this heading to the effect that they have been deprived of lawful access to the company’s books and accounts since or around 2009.

183.  The facts around the provision of financial statements to Mr Li are unclear.  Simon Leung denies ever having provided financial statements to either him or Madam Yeung, and I accept his evidence.

184.  If that is wrong, I agree with the Ng parties that in circumstances in which Li and Leung appear to have fallen out with each other, there is no satisfactory evidence showing that it was Madam Tong or Mr Ng who directed Simon Leung not to provide financial statements to Mr Li.

185.  I also accept the Ng parties’ submission that it is common ground that Mr Ng provided Mr Li with brief handwritten financial statements covering May to September 2010, and that he is unlikely to have instructed Simon Leung not to provide financial statements to Mr Li when he was prepared to do so himself.

(2)   Wrongful removal of Madam Yeung as director

186.  As to the adequacy of the notice in the extreme circumstances that had arisen, see above. 

187.  However, it is not in dispute that the removal of a director requires a shareholders’ meeting under Article 14 of the Articles of Association: it could not validly be done by way of a board meeting.   

188.  But the Ng parties rely on the fact that on 17 August 2012, that is to say some four weeks after the removal, the Company’s lawyers made an open offer to reinstate Madam Yeung as director.

189.  I consider that this offer is in principle relevant to the unfair prejudice issue on this ground.

190.  To put it into context, it seems that the offer came to nothing because the Li parties’ lawyers asked for the resolution of 12 July 2012 to be withdrawn altogether, which would have included the resolution in relation to the pro rata offer of the allotment of shares.

191.  That was not acceptable to the Ng parties.  On 23 August 2012, the Li parties’ lawyers wrote to the effect that the resolution was null and void, and “our client is of the view that a winding up pursuant to section 168A and/or section 177 of the Companies Ordinance is the only way out”.

192.  In the circumstances, this ground is best considered in conjunction with the next ground.

(3)   Wrongful dilution of CHL’s shareholding in the Company

193.  The Li parties’ case is that there was no urgency in the allotment, especially given the fact that the so-called injection of capital was a mere capitalization of the advancements already made by the Ng parties into the Company.  Given the circumstances in which the allotment was made, they submit that it was reasonable for the Li parties not to subscribe, or at least hesitate to subscribe, for extra shares in an oppressive situation, thus leavingdilution as the only possible outcome.  Even if the company was not a quasi-‌partnership, improper exercise by the directors of their power to allot sharesis capable of amounting to unfair prejudice, particularly where the allotment is in bad faith or for an ulterior purpose.

194.  The legal position is as follows.  In principle, a rights issue made to dilute the holding of a minority shareholder in circumstances wherethe company has no immediate requirement for further funding may amount to unfair prejudice: see Re Regional Airports Ltd [1999] 2 BCLC 30, Hart J.  

195.  Further, a rights issue may be unfairly prejudicial where it is known that the minority member cannot afford to take up the offer and this is a reason for making the offer: Re a company [1985] BCLC 80, Harman J. 

196.  Expanding on the same point, it was said by Hoffmann J in Re a company [1986] BCLC 362 at p 367b that the fact that the petitioner is offered shares on the same terms as other shareholders does not necessarily mean that the rights issue could not have been unfairly prejudicial to his interests if the majority know that he does not have the money to take up his rights:

“ If the majority know that the petitioner does not have the money to take up his rights and the offer is made at par when the shares are plainly worth a great deal more than par as part of a majority holding (but very little as a minority holding), it seems to me arguable that carrying through the transaction in that form could, viewed objectively, constitute unfairly prejudicial conduct.”

197.  In that case, Hoffmann J held that there was no unfair prejudice.  He said that if the petitioner lacks the resources or inclination to contribute pari passu to the company, he could protect his interests by offering to sell his existing holding to the majority: “Indeed, if the company needs funds and he does not want to pay his share, it seems to me only fair that he should offer to sell out” (at p 367c).

198.  On the facts of this case, there is some evidence that the Company was short of funds at the material time, and this is the Ng parties’ case.  I reject the Li parties’ submission that the allotment offer was in bad faith.

199.  However, I accept the Li parties’ submission that the main purpose of offering the shares pro rata to the two existing members was not to raise capital, but to dilute CHL’s 50-50 shareholding if the offer was not taken up.  It was not taken up, and the effect is that CHL now holds only 33% of the issued shares.

200.  I find that the dilution followed on from the confrontation between Mr Ng and Mr Li described above. 

201.  As to why the Li parties did not take up the offer, in cross-‌examination they said that they could not remember their exact financial condition in 2012.  Madam Yeung accepted that their financial situation was quite good.  She admitted that she knew that the allotment was on a pro rata basis, and that CHL could have applied for the allotment.

202.  I find that lack of means did not preclude the Li parties from taking up the shares (and so far as it is relevant accept the Ng parties’ submission that no particulars have been given as to the state of the Mr Ng’s knowledge in that regard).

203.  The obvious inference is that the Li parties had no wish to invest money in the Company given the breakdown of relations with Mr Ng.  Whilst understandable, that was their choice.  As the Ng parties say, if they had applied for the shares, no dilution would have been resulted.  Their decision not to apply for the allotment is consistent with the fact that they never injected any capital into the business of the Company before.

204.  Further, there appears to have been no offer on their part to selltheir existing holding (see Hoffmann J in Re a company above), the Li parties’ position apparently being that “a winding up pursuant to section 168A and/or section 177 of the Companies Ordinance is the only way out”.

205.  On examination, therefore, and seen against the finding that thiswas not a quasi-partnership as the Li parties allege, their unfair prejudice case based on wrongful removal and dilution which on the face of it is strong, loses much of its force. They had the opportunity at the time to have the status quo ante restored, with parity in the shareholdings, and Madam Yeung reinstated as director, but chose not to take it, effectively insisting on the winding up of the Company.

(4)   Misuse of Company’s funds

206.  The allegations fall under a number of heads which are set out in the Petition as issued in 2013.

207.  Head 1, the payment of the Ng parties’ children’s school fees from the Company’s account to Anfield International Kindergarten in the sumof HK$129,000.  This was over a period from August 2009 to February 2011.  These payments are admitted.

208.  Head 2, transfers from the Company’s bank accounts made to bank accounts of Tong, Ng and Caretech Medical Services Limited in the sumof HK$1,900,000.  These payments (which again are admitted) break down as to:

(1) HK$930,000 to Ng’s bank accounts between April 2009 and October 2010;

(2) HK$120,000 to Tong’s bank accounts between December 2008 and September 2009; and

(3) HK$850,000 to Caretech’s bank account between May 2008 and August 2010.

209.  Head 3, cheques issued by the Company between September 2011 and June 2012 for Ng and Tong’s personal expenses in the amount of about HK$419,967 (which again are admitted).

210.  The Li parties’ case is that these transfers cannot be justified and are the most compelling evidence of the Ng parties’ unfair and prejudicial conduct towards CHL and/or the Company itself.  The Ng parties simply used the Company’s fund to meet personal expenses without accounting andeven without any idea as to how much they were entitled to withdraw (if any). 

211.  The Ng parties’ case is that they were legally entitled to make these transfers because:

(1) they are and have always been the sole beneficial owners of the Company;

(2) they were entitled to draw directors’ remuneration for their services rendered as directors of the Company over the years (whether in their personal capacities or through Caretech); and

(3) they had previously advanced sums to the Company by way of shareholders’ loans and therefore were entitled to withdraw sums in repayment of the said loans.

212.  My findings in this respect are as follows.

213.  As the Li parties submit, there is ample authority to the effect that the misapplication of a company’s assets for the benefit of the directors, or the use of company money to meet personal expenditure without authority and/or proper accounting and/or repayment can amount to unfair prejudice (see eg Re Elgindata Ltd [1991] BCLC 959 p 1004f–h, Re Hedgehog Golf Ltd [2010] EWHC 390 (Ch) at §§26 – 28, 55).

214.  As regards the three heads, Head 1 stands out as egregious.  There can be no excuse for using the Company’s accounts to pay out HK$129,000 for the Ng children’s kindergarten fees.

215.  As regards Head 2, the position as to these payments is less clear.  The Ng parties’ case is that the payments were proper because they were entitled to draw directors’ remuneration, and were entitled to withdraw sums to repay loans they had advanced to the Company.

216.  I accept that in principle this is correct, and certainly relevant to whether the conduct was unfairly prejudicial.  I have discussed the financial contribution of the Ng parties to the Company above and refer to the findings made there.  The question is how to ascertain the balance in the absence of any account placed before the Court by either party.

217.  In that regard, in their opening submissions, the Li parties contended that, “… taking a rough view, it is not difficult to conclude that the money allegedly injected into the Company by Tong and Ng … was substantially less than the amount they diverted out therefrom”.

218.  As to this, the Ng parties argued in their closing submissions that the total of allegedly misused funds amounts to HK$2,448,967, whereas Mr Li admits to receiving HK$2,770,000 personally or through CHL over the same period, so that Mr Li actually received more.  However, I am not satisfied that this is a valid comparison.

219.  It is however relevant, in my view, to consider the position of CHL, the Li parties’ company.  I was taken in evidence to the amounts charged by CHL to the Company for various items, mainly uniforms.  Even allowing for the costs of transporting the goods from Shenzhen to Hong Kong, the mark-up on the sales to the Company was substantial.  A fair overview of what each party was getting out of the business has to take this into account. 

220.  I find that the payments to Caretech are to be treated differently from those to Ng and Tong, because payments to Caretech were authorised by an agreement dated 22 October 2006 by which it agreed to design courses and license them to the Company in return for license fees.  This agreement was approved by the board of directors of the Company on 20 October 2006, Madam Yeung signing relevant the board minutes.

221.  As regards Head 3, I accept the Ng parties’ evidence that some payments were in respect of vehicles used for the business of the company.  Others are in the egregious category, such as HK$219,200 for a boat.

222.  Drawing the above together, therefore, there are some items which are plain such as the kindergarten fees and the boat, but these are relatively small compared to the overall allegation.  Whilst not excusing the payments, I do not think it would be right to decide this part of the case on these items.

223.  Otherwise the picture is not particularly clear.  Contrary to the Li parties’ submissions, it is not straightforward in my judgment, even taking the “rough view” for which they contend, to form any particularly reliable conclusions as to the numbers on this evidence. It is clear that there was a lack of proper accounting by the Ng parties, and this in itself is a matter of criticism.  But in terms of the allegation of misuse of funds, I do not accept that the Court can say with confidence that the Ng parties took out more than they put into the Company.

224.  The question is whether the case as to unfairly prejudicial conduct has been made out on this ground.  Overall, I do not consider that ithas been.  As I have said, Mr Li became convinced that he was not receivinga fair share of the Company’s profits, and that led to the rift between him and Mr Ng.  But he was not entitled to an equal share, for reasons explained above.  In fact, I consider that both men did very well out of the Company while it prospered prior to their falling out, a falling out which had a disastrous effect on this comparatively small business.

225.  Even if the case had been made out, I do not consider that in all the circumstances it would have been an appropriate case to make a winding up order. 

226.  There is a further matter which requires to be stated.  I accept that Mr Li (whose honesty is beyond reproach) believed that Mr Ng was embezzling the Company’s funds.  He has been driven by this belief to pursue this action long after there was any real advantage to either party in doing so.

227.  But I also accept that Mr Ng believed that he was entitled to make all these payments because it was “his company”.  This is of some importance, because although his belief was wrong, I am satisfied that his belief was honest.  I reject the allegation that he was embezzling the Company’s funds.  Embezzlement is an allegation of fraud, and insofar as it was pursued as an allegation of fraud at trial, it was not made out.

(5)   Diversion of Company’s business and receivables

228.  The Li parties’ pleaded complaint is based on the proposition that the Company provides cervical cancer vaccine injections, and Ng and/or Tong diverted the business/fees to Prime Health, which was Madam Tong’s sister’s company.

229.  I am satisfied that the Company did not offer services for such vaccine injections, and that so far as business/payment was transferred to Prime Health, this was not wrongful.  The documentary evidence does not prove the Li parties’ case, and their own witness (Mr Poon) contradicted it.

(6)   Conclusion on the case as to unfairly prejudicial conduct

230.  The Li parties’ case was powerfully argued by their counsel, Mr Lincoln Cheung.  I accept that there are many points to be made in favour of that case, but for the reasons set out above, I have not accepted the case in respect of any of the five grounds on which it is based.

231.  I also reject it in respect of the conduct considered as a whole, and here it is particularly relevant to repeat my finding that (contrary to the Li parties’ case) there was no common understanding that Mr Ng and Mr Li were equal partners, and that so far as there was a common understanding, it was that this was Mr Ng’s business.

232.  It follows that I dismiss the Li parties’ winding-up petition.

233.  Had I accepted the Li parties’ case, there would have been the question of the appropriate relief.  I should state my conclusions in this regard.  Subject to the requirement that the order is with a view to bringing an end to the matters complained of, the Court has an unfettered discretion in deciding what, if any, order it should make (Re Yung Kee Holdings Ltd [2012] 6 HKC 246 at 294, §118).

234.  I would not have made a winding up order in this case.  I do not think that this would have been a just result.  As stated above, the evidence is that since the winding up petition, the Company’s bank account was frozen, and it was unable to pay rent or salaries.  The business has been downsized, and Mr Ng and his wife have been paying the expenses necessary to supportits minimum operation.  I can see no advantage to either party that would be served in incurring the expense of a winding-up at this stage, and I consider that it would have been unfair on the Ng’s to make that order where they have effectively had to support what is left of the business for the last five years.

235.  The Li parties’ alternative case was for an order compelling Tongto acquire CHL’s shares in the Company at a fair market value to be assessed.  There were little or no submissions to the Court as to this alternative case.

236.  The Ng parties’ objected to it on the basis that no valuation evidence was adduced.  The Li parties’ response was that a valuation report is not as a matter of practice forthcoming until after the Court has ordered this relief.

237.  On the other hand, there has to be a basis on which a valuation is ordered, such as the date of valuation and so on, and because there was no argument addressed to the Court as to this, I consider that this would have required a further hearing.

238.  In any case, had I found for the Li parties as to unfairly prejudicial conduct, I would have been reluctant to make an order for valuation and purchase without at least some evidence from the Li parties (as Petitioners) as to the current state of the business so far as they could ascertain it.  My concern would have been that an order for a valuation and purchase of the Li parties’ shares would have led simply to further fruitless expense.

CONCLUSION

239.  For the reasons set out above, my findings as to the issues for decision at the trial are as follows:

(1) As to the Ownership Action, I reject the Ng parties’ case that the shares of the Company registered in the name of CHL are held by it on trust for Tong and Ng.

(2) As to the Petition, I reject the Li parties’ case that the Company was formed and operated on the basis of a quasi-partnership / personal relationship with the common understanding that it was a 50/50 joint business venture involving mutual confidence and equal rights of participation.

(3) I further reject the Li parties’ case that CHL suffered any unfair prejudice by reasons of Ng and/or Tong’s alleged wrongful conduct.

(4) I accept that there was a complete breakdown of mutual trust and confidence between the parties, but in the light of the above findings, this would not justify CHL’s entitlement to an order that the Company be wound up or an order compelling Tong to purchase CHL’s shares at a fair market value to be assessed.

240.  As to costs, each party has succeeded on the other’s case.  One possibility is that an order for costs is made in favour of each on the other’s case.  However, I consider that the overall costs in the Ownership Action and on the Petition are likely to have been much the same, and would be very difficult to disentangle given that the proceedings have been heard together. I make an order nisi that there should be no order in favour of either party as to costs.