NG YAT CHI v. MAX SHARE LTD. AND ANOTHER

FAMV No. 19 of 2001

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

MISCELLANEOUS PROCEEDINGS NO. 19 OF 2001 (CIVIL)

(ON APPLICATION FOR LEAVE TO APPEAL FROM
CACV NO. 204 OF 2000)

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DETERMINATION

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Mr Justice Ribeiro PJ:

1. The facts in this matter have been set out in detail in the judgments of Yuen J (HCCW321/96, 24 May 2000) and of Rogers VP, with whom the other members of the Court of Appeal agreed, see [2001] 1 HKLRD 561.

2. The company which is the subject of these proceedings was formed in 1986. Its capital was $200,000 divided into shares of $1 each. At the outset, the petitioner held 49% of the shares. The remaining 51% were allotted to certain individuals who held them as nominees for a company called Strong Progress Ltd. Strong Progress was in turn a 100% subsidiary of a state-owned corporation, namely, China Resources (Holdings) Ltd, the 2nd Respondent.

3. The Judge found that the petitioner, with connivance of one of the nominee shareholders, committed a series of defalcations against the company by causing it to enter into transactions with entities which they owned or controlled, thereby siphoning off company funds for their own benefit.

4. At the end of November 1990, the petitioner entered into an agreement to sell his shares in the company to Strong Progress. This required a valuation to be conducted. The factual basis of the valuation was not called into question by the Judge. It showed that the company was in a dire financial condition. As Rogers VP points out, the report revealed (i) an adjusted capital deficiency in excess of $202m, (ii) negative goodwill amounting to more than $272m, (iii) long-term external debts producing a negative gearing ratio calculated as -8.74:1, and (iv) the company's inability to meet its interest payment obligations without an injection of additional capital or further loans. The company's debts included one in excess of $174m owed to Strong Progress which could not possibly be repaid in the near future.

5. The report therefore concluded that the value of the petitioner's shares was nil and recommended that the shares should be transferred at a nominal value of HK$1. Furthermore, since the transferee of the shares was to take over the company's financial burdens proportional to the shares transferred, it recommended that the transferee ought to be compensated for the capital deficiency and for the negative goodwill.

6. The agreement for transfer of the shares by the petitioner to Strong Progress was never completed.

7. On 1 May 1992, the 2nd Respondent caused the company's share capital to be increased by 50 million shares ranking pari passu with the existing 200,000 shares.

8. Meanwhile, in separate litigation between the petitioner and a Mr Bing Choy, Mr Choy obtained a charging order on the petitioner's shares, followed by an order for their sale and Mr Choy's acquisition of such shares in August 1992. The company has however refused to register Mr Choy as owner. Previously, by June 1991, the petitioner had left the company and, by January 1992, he had left Hong Kong.

9. The petitioner evidently considers himself aggrieved by what had transpired and commenced proceedings to wind up the company on the just and equitable ground. Proceedings started by him in May 1992 proved abortive for procedural reasons. The present petition was issued in June 1996. It seeks in the alternative a just and equitable winding-up order or relief under section 168A of the Companies Ordinance. After further interim challenges and appeals, it came to trial before Yuen J in September 1999.

10. Numerous grounds were relied on by the petitioner but only one succeeded before the Judge. She found that the purpose of increasing the company's share capital in May 1992 had been to dilute Mr Ng's shareholding "at a time when he would have been unable to subscribe for more shares and to render the shares unattractive and worthless to Mr Choy". Her Ladyship considered this to be unfairly prejudicial to the interests of the petitioner as a minority shareholder. She decided that the appropriate remedy was an order winding-up the company on the just and equitable basis.

11. That decision was reversed by the Court of Appeal on two major grounds.

12. The first was that the Judge had erred in finding that a quasi-partnership existed. Rogers VP pointed out that the beneficial owner of the 51% interest in the company not owned by the petitioner was the State, through impermanent nominee shareholders and directors. Given the impersonal character of the State, his Lordship considered it "impossible for a State to exhibit the qualities of mutual trust and confidence" necessary to constitute a quasi-partnership. Furthermore, Rogers VP held that by defrauding the company, the petitioner had eliminated the required basis of mutual trust and confidence, putting beyond the petitioner's reach any equitable relief in the context of a just and equitable winding-up.

13. Secondly, the Court of Appeal disagreed with the Judge's conclusion that the new issue of shares had resulted in an unfairly prejudicial dilution of the petitioner's interest. The valuation exercise had demonstrated that the only way in which any shareholder's interest could be valued was by assessing the underlying asset value per share. Rogers VP pointed out that the judge had failed to examine the effect of the increase in capital on that underlying value. In fact, since the petitioner's shares were valueless, the injection of capital could only have increased their worth. The valuation report furthermore demonstrated that an injection of capital was essential to the continued survival of the company, calling into question the Judge's conclusion that the new issue of shares had been motivated by a desire to dilute and prejudice the interests of the petitioner.

14. The petitioner, who appears in person, seeks leave to appeal on the ground that the case is one raising questions of great general and public importance.

15. He lists a number of points in respect of which, he argues, the Court of Appeal was wrong to differ from the Judge. He contends that in doing so, it interfered with conclusions reached in the proper exercise of the Judge's discretion.

16. We entirely endorse the Court of Appeal's decision to allow the appeal on the second of its two main grounds for judgment. With respect to the learned Judge, it is clear on the evidence that the new issue of shares cannot have resulted in any unfair prejudice to the petitioner.

17. We also agree 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, characterised as members of an alleged quasi-partnership. It is a well-known principle that he who seeks equity must do equity. However, in the absence of full argument, we prefer to express no view as to the correctness of the proposition that it is impossible for a quasi-partnership to be constituted where the shares other than those held by the petitioning shareholder are beneficially owned by the State.

18. The Court of Appeal was correcting an error of law involving misapplication of the relevant legal principles by the trial Judge. It was not involved in any impermissible interference in a judicial exercise of discretion. No point of great general and public importance arises and the application for leave to appeal must accordingly be dismissed.

Mr Justice Bokhary PJ:

19. Having heard the parties, the costs of this application must be paid by the applicant to the respondents.