WONG KWOK SUN, ERNEST v. TONG YING YUNG, JAMES AND ANOTHER

CACV 1564/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 1564 OF 2001

(ON APPEAL FROM HCMP 1538 OF 2000)

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REASONS FOR JUDGMENT

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Hon Rogers VP:

1. This is an appeal from a judgment of Yuen J (as she then was) given on 24 April 2001. The matter before the judge was a petition seeking an order under section 168A of the Companies Ordinance, Cap. 32. The judge made an order that the 1st and 2nd respondents should purchase the petitioner's shares in the 3rd respondent in the same proportion as their existing shareholding. In the absence of agreement between the parties as to the value of the shares, they were to be valued by a professional accountant to be agreed by the parties or in default to be nominated by the court. The shares were to be valued as at the date of the order. The valuation was to be made on the footing that the conduct complained of had not occurred.

2. At the hearing of this appeal, this court dismissed the appeal and made an order that petitioner should have his costs of the appeal to be taxed if not agreed.

Background

3. The petitioner and the 1st respondent knew each other from the time when they were at school in the mid-1970's. The petitioner later became an insurance agent and in 1986 he started his own company, Sparkle Life Limited ("SLL"). SLL carried on business as agents in life assurance and general insurance. Later in 1992, the petitioner started another insurance agency Sparkle Underwriting Management Limited ("SUML"). It was not until January 1998 that SUML was awarded a "long-term" agency by Royal and Sun Alliance International Financial Services Limited. This introduced a new business in the nature of financial planning, which had hitherto not been conducted by either SLL or SUML.

4. Meanwhile the 1st respondent had been an investment service manager in C.A. Portfolio Management Limited. As such he was involved in financial planning. In January 1998, the C.A. Pacific Group collapsed.

5. The petitioner and the 1st respondent then conceived the idea of joining their resources and creating a "one-stop" business which would provide clients with both insurance and financial planning. Naturally, the petitioner and 1st respondent would bring their own expertise into the business. The first step in that process was that the petitioner's wife transferred her 30% shareholding in SUML to the 1st respondent on 17 March 1998. The 1st respondent became a director of the company together with the petitioner. As part of the arrangement, SUML took a tenancy in new offices and moved out of the offices which it had previously occupied together with SLL.

6. That arrangement of using SUML as the corporate vehicle was, for purposes which are irrelevant to these proceedings, inappropriate and the 3rd respondent was then incorporated on 30 March 1998. Again, the petitioner held 70% of the shares, and the 1st respondent, 30%. Likewise, they were the only two directors. The petitioner became the company's chief executive and the CIB approved his application on 14 April 1998. As part of the arrangement, SUML transferred all its business to the 3rd respondent. On the other hand SLL, transferred the pensions business placed with Prudential Assurance Co. Ltd. to the 3rd respondent, but it retained its other business.

7. The 2nd respondent had already worked for some years for SUML. In May 1998, he became a principal consultant. He signed a service contract with the 3rd respondent on 15 May 1998. This provided that he would be entitled to 80% of the commissions which were received by the 3rd respondent on account of the business for which he was responsible.

Commissions

8. The 3rd respondent naturally received commission from both the financial planning companies and the insurance companies with which it arranged business. The particular employee or director who was responsible for that business would be paid a proportion of the commission which was received. In addition to the commissions, the 3rd respondent would also receive what was termed "market allowances" or "overrides". The judge recorded that these were quite sizeable bonuses which the financial planning companies and the insurance companies would pay the 3rd respondent if it placed business which reached a prescribed target amount.

The October agreement

9. Probably the most important document in relation to this action, was the document which has been referred to as the October agreement. Apparently, in the summer of 1998, the 2nd respondent was approached to join the company as a shareholder. Prior to the 2nd respondent becoming a shareholder the October agreement was executed. It is headed "Sparkle Consultants (Hong Kong) Limited" and underneath "Minutes of Directors Meeting held on 21 October 1998." It is clear that this agreement was based upon a draft which was termed shareholders' agreement.

10. The judge pointed out that there were two important sections to this document. The first relating to the shareholding structure which commenced with the words "It is resolved that no alteration of shareholding structure will be allowed without 100% consent from all shareholders." The structure set out in the document envisaged an increase in a number of shareholders with the names of the new shareholders, starting with the 2nd respondent set out in the various stages.

11. The other section of the October agreement to which the judge drew attention was section B headed "Commission Schedule for Ernest Wong and James Tong". That section set out the percentage of the commission that would be payable by the 3rd respondent to the petitioner and the 1st respondent in respect of the different types of business which they would introduce. The section concluded with a note which set the limits of entitlement of the petitioner and 1st respondent to market allowances, or overrides. They were to be allowed market allowances for financial planning and life assurance business which was written for the individual directors and their immediate family members.

12. After considering the evidence which had been given by the petitioner and 1st respondent, the judge held that the October agreement was a record of the shareholders' agreement which had formed the basis of the relationship between the petitioner and the 1st respondent, the terms of which were also incorporated into "a resolution of the board of the Company for the purpose of making the Company a party to, and hence bound by it." It is to be noted that in reaching this conclusion the judge specifically accepted the 1st respondent's evidence in relation to how the document came to be signed.

13. Shortly after the October agreement had been executed, the 2nd respondent became a shareholder of the 3rd respondent. He paid $100,000 cash for his shares. Not long after that the staff of SLL moved back to its original office. Thereafter the petitioner spent less time at the 3rd respondent's premises and, as the judge recorded, his relationship with the 1st respondent deteriorated. By the end of 1998 the petitioner wished to leave the 3rd respondent and wished to be bought out. No agreement could be reached as to the price and the petitioner then threatened to have the 3rd respondent wound up.

14. On 2 January 1999, the petitioner sent the 2nd respondent a fax which referred to the fact that no agreement had been reached as to the valuation of the 3rd respondent's shares. It was then stated that the petitioner considered that it would be unfair to the 2nd respondent that the 3rd respondent should be wound up and there were set out nine conditions upon which the petitioner was prepared to leave a company. The important conditions for the purposes of this case are as follows:

"(1) I form a new broker whose operation will be independent of the Company;

(2) The Company will transfer all the life and general insurance business I have brought into the Company to my new broker;

(3) The new management undertakes to pay me the commission that I am entitled to according to the Agreement adopted in the Directors' minute dated 21st October 1998 in respect of those business I have bought into the company;

...

(8) Maintain the existing and proposed shareholding structure as stipulated in section III of the minute (i.e. the October agreement) and;

(9) After my resignation as the licence holder, Tong will become the licence holder and you will assist him to bring up a prosperous company."

15. There was a meeting on 4 January 1999 and there was conflicting evidence in relation to it. It suffices to say that based on the evidence, in the light of the affidavit evidence which had previously been filed, the judge came to the clear conclusion at page 33 F-H:

"I find therefore that there was no such confrontation as alleged by the 1st and 2nd Respondents, and that they accepted the Petitioner's terms for his departure from the board."

There is no dispute that the petitioner resigned as a director thereafter and the 2nd respondent was appointed a director in his place.

16. On the following day, 5 January 1999, a letter was written to the 2nd respondent, signed by the 1st respondent, on the 3rd respondent's letterhead. The letter referred to the fact that the 2nd respondent was a new shareholder and director of the company and it stated that the 3rd respondent would like to offer the 2nd respondent new commission terms. The new terms included that the 2nd respondent would be entitled to the full commission paid to the 3rd respondent by financial planning companies on all financial planning products "including the bonus and/or market allowances from them". The entitlement to market allowances was not restricted to business transacted for the 2nd respondent or his family members. The letter concluded that the terms were the same as with all existing shareholders.

17. The petition was presented in November 1999. There were a number of bases upon which it was alleged that the affairs of the company had been managed in a manner which was unfairly prejudicial to the petitioner. It is unnecessary to recite those. The ground that is important for the present proceedings is that the 1st and 2nd respondents had depleted the income of the 3rd respondent by paying the market allowances to themselves instead of retaining them in the company.

18. The judge held, at pages 35-36 of the judgment, that the 1st and 2nd respondents had received money which should have been retained by the company. As regards the 1st respondent he received 10% more on the commission from Transamerica, one of the insurance companies, and he received bonus or market allowances on business generated for persons outside his family. The petitioner's calculation in that respect was that the 1st respondent had received some $367,573 more under the new commission terms than under the old. In respect of the 2nd respondent the figure calculated was $624,678.

19. The judge found that the 1st and 2nd respondents' conduct was unfair and prejudiced the petitioner as a shareholder and accordingly relief was granted thereon.

20. Whereas in the court below both the petitioner and the 1st and 2nd respondents had been represented by counsel and solicitors. In this court all three parties appeared in person.

The 1st respondent's appeal

21. The 1st respondent argued three points on the appeal. In the first place, he argued that the October agreement was not binding after 4 January 1999 in the sense that the petitioner could no longer rely upon it. The basis of that argument was that after that date the petitioner ceased to be a director of the 3rd respondent and therefore could not rely upon the director's agreement. The short answer to that point is that it was the judge's finding of fact that this was both a shareholders' agreement and an agreement which bound the company because of the unanimous director's resolution. The agreement therefore continued to bind the shareholders and the company. The position is made even clearer because of the terms of the fax of 2 January 1999 which the judge accepted that the 1st and 2nd respondents had agreed to.

22. The second point taken by the 1st respondent was that he had never agreed to the nine conditions which were set out in the fax of 2 January 1999. There were two parts to the argument. The first part was that the terms of some of the nine conditions were in conflict with the October agreement and the second part was that as a matter of commercial sense the 1st respondent would never have agreed to those conditions.

23. The first, and in my view insurmountable, difficulty facing this argument is that the judge considered the matter carefully and in the light of the evidence came to the clear conclusion that the nine conditions were accepted. I see no basis for disturbing the judge's finding of fact in this respect.

24. In relation to the supposed conflicts between the nine conditions and the October agreement, they were based upon the proposition that because the petitioner was a director of the 3rd respondent the conditions which permitted him to set up his own brokerage company and to conduct business through it were in conflict with the October agreement which prevented the directors from doing that. That argument is, of course, erroneous because the nine conditions were put forward on the basis that they would take effect upon the petitioner ceasing to be a director of the 3rd respondent.

25. In relation to the other conditions although it is true that the 1st respondent might have objected to them the fact is that the judge held, for sound reasons, that the 1st respondent had agreed to them.

26. Finally, the point taken was that not only had the petitioner agreed to the terms of a letter of 5 January 1999 which the 1st respondent had sent to the 2nd respondent but that the petitioner had instructed the 1st respondent to do so. The letter commences by referring to the 2nd respondent as a new shareholder and director of the 3rd respondent. It then sets out the terms of the commission he would receive in so far as it was generated in respect of financial planning products. He was to receive all the commission paid by the principals in respect of those products including bonus and market allowances as well as overriding commission if the 2nd respondent could successfully build up his sales team. The bonuses were to be in respect of all financial planning business placed by the 2nd respondent and were not limited to products placed for himself and his immediate family members.

27. The judge considered carefully the 2nd respondent's evidence that the petitioner had promised him those terms in the summer of 1998. She rejected the 2nd respondent's evidence in this respect, but it is noteworthy that in doing so she also did not accept the petitioner's evidence that he had not approached the 2nd respondent to become a shareholder and ultimately director of the 3rd respondent. This was, again, a factual matter and I do not consider that there are any grounds for disturbing the judge's finding in this respect.

2nd respondent's appeal

28. Many of the points taken by the 2nd respondent on his appeal covered the same or very similar grounds to those taken by the 1st respondent. I do not propose, therefore, to cover those grounds again. In broad terms the 2nd respondent argued that the commission terms contained in the letter of 5 January 1999 were effective and binding. It was said that there was nothing to prevent the directors from fixing the commission rate in respect of business introduced and, furthermore, article 18(11) of the 3rd respondent's Articles specifically gave the directors power to give any director or other person employed by the 3rd respondent commission for any particular business or transaction. The short answer to that argument is that in view of the finding of the judge as to the effect of the October agreement the company was bound by the October agreement. That agreement clearly envisaged the 2nd respondent becoming a shareholder of the company. By changing the 2nd respondent's terms and conditions of employment to be considerably more favourable than that set out in the October agreement for any of the parties, the then directors were depriving the company of substantial benefits to the prejudice of the remaining shareholder.

29. Part of the written argument on behalf of the 2nd respondent entailed the proposition that the 2nd respondent was in a position to drive the bargain contained in the letter of 5 January 1999. In considering the terms of this letter the judge rejected the argument that the 2nd respondent was in a position to drive a hard bargain: see page 28 F-N of the judgment.

30. The second major point taken by the 2nd respondent was that nothing had been done which was unfair or prejudicial to the petitioner. In this respect the point of the argument appeared to be that the petitioner himself had siphoned off a substantial portion of the 3rd respondent's life assurance business when he had removed SLL from the 3rd respondent's premises and had carried on life assurance business other than through the 3rd respondent. This matter really concerns two aspects. In the first place, as the judge held, it was always in the contemplation of the parties that SLL would continue as a separate entity, effectively as the petitioner's company. Furthermore, the terms of the fax of 2 January 1999 were specifically held by the judge to have been agreed to by the 1st and 2nd respondents. In my view, in the light of those findings, no complaint can be made of the petitioner's conduct in this respect.

31. Finally, the point taken by the 2nd respondent was that the judge had fixed the wrong date to be taken as the date for valuation of the company for the purposes of the buy-out provision of the order. The judge took the date for the valuation as the date of the order. She did so on the basis of the decision of Nourse J in Re London School of Electronics Limited [1986] 1 CH 211 at 224. Nourse J commenced his consideration of the law with the words:

"If there were to be such a thing as a general rule, I myself would think that the date of the order or the actual valuation would be more appropriate than the date of the presentation of the petition or the unfair prejudice. Prima facie an interest in a going concern ought to be valued at the date on which it is ordered to be purchased. But whatever the general rule might be it seems very probable that the overriding requirement that the valuation should be fair on the facts of the particular case would, by exceptions, reduce it to no rule at all."

The judge then went on to consider some of the earlier decisions.

32. I would also draw attention to the decision of Mrs Justice Le Pichon JA in HCCW 425 at first instance. In that judgment at pages 21-24 consideration was given to the appropriate date to be taken for the basis of valuation. Reference was made to the case of Re Cumana Limited [1986] BCLC 430 and to the judgment of Thomas J in Rankine v Rankine [1996] 18 AC SR 725 at 731-732. In that case Thomas J referred to the order in most cases contemplating a valuation at the time of the presentation of the petition. As Le Pichon J said at page 22P:

"Prima facie, the petition date is a convenient date, that being the point in time when the Petitioner crystallised his position in claiming to be entitled to cease association with or participation in the Company."

33. Clearly the choice of an appropriate valuation date is a matter of discretion which has to be exercised in the light of the circumstances of the case and also the other aspects of the order. This would include the basis upon which the valuation is to be made. In this case, for example, the judge ordered that the valuation should be made on the footing that the conduct complained of had not occurred. I would add that in some cases where, for example, one of the shareholders has been wrongly excluded from all benefits of the company an appropriate day might be the date on which that event occurred. In the circumstances of this case I do not consider that it can be said that the judge has exercised her discretion as to the choice of date on wrong principles or has failed to take into account any relevant considerations. I therefore do not consider that it is open to this court to vary the order in that respect.

34. Finally on this aspect it is said that the judge should have given some discount for the fact that the petitioner had ceased to contribute the benefit of his services to the company after he resigned in January 1999. In my view, there is no basis for this argument. That was part of the terms upon which he ceased to be a director but remained a shareholder. He was entitled as a shareholder to the proper benefits of being a shareholder.

Hon Le Pichon JA:

35. I agree.

Hon Yeung JA:

36. I agree.