KLH INVESTMENT LTD. v. YEUNG WEI SUNG and Another

1996, No.MP1537

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

(MISCELLANEOUS PROCEEDINGS No. 1537 of 1996)

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J U D G M E N T

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1. On 10 May 1996, KLH Investment Limited ("the Petitioner") presented a Petition seeking an order under section 168A of the Companies Ordinance Cap.32 that it be granted a prior option to purchase the Respondents' shareholdings in the Forecast Nominee Limited ("the Company") because of allegedly unfairly prejudicial conduct on the part of the Respondents since May 1994. It did not seek a winding-up order under s.177(1)(f) as an alternative relief as it is the Petitioner's view that the Company which carries on business as the Lung Mun Seafood Restaurant ("Lung Mun") in Lei Yue Mun is a profitable and going concern and that it would not be in the interest of the Company and its shareholders to incur liquidation costs that a winding-up would inevitably entail.

2. Four applications came on for hearing on 16 and 17 December :

(i) the Petitioner's inter partes summons dated 9 May 1996 that directions be given to protect the Restaurant business pending the hearing of the Petition;

(ii) the Respondents' inter partes summons dated 8 July 1996 to strike out the Petition;

(iii) the Petitioner's inter partes summons dated 29 November 1996 that the 1st Respondent be directed to sign the Company's accounts for the year ended 31 December 1995, cause the profit tax returns for the year of assessment 95/96 to be filed with the Inland Revenue Department and for the payment by the Respondents out of the Company's funds of all outstanding accounting and auditing fees due to the Company's accountants and auditors; and

(iv) the Petitioner's inter partes summons dated 13 December 1996 relating to the appointment of an expert valuer to prepare a common valuation report of the share price of the Company and Fairwood Investment Limited ("Fairwood"), the latter being owned by the same shareholders as the Company and which in turn owns the land on which Lung Mun is situated.

3. At the conclusion of the hearing, I refused the application to strike out the Petition and made orders in respect of the other three summonses. The reasons are set out below.

Factual background

4. The Company was incorporated on 17 February 1981. At all the material times, its issued and paid-up share capital of HK$1,250,000 was held as to 50% by the Petitioner, a company owned and controlled by members of the family of the late Mr Yeung Kam Kong. Of the remaining 50%, 316,666 shares or 25.33% of the Company was held by the 1st Respondent and 308,335 shares or 24.67%, by the 2nd Respondent which is essentially an investment holding company owned and controlled by the 1st Respondent.

5. In his affirmation in support of the Respondents' application to strike out the Petition, the 1st Respondent gave an account of how the Company was run and how its business was conducted prior to the closure of the Restaurant in April 1994 for renovation. Lung Mun has existed since the 1960s. In 1981, the 1st Respondent and the late Mr Yeung Kam Kong acquired and operated the business through the medium of the Company. Neither the 1st Respondent nor the late Mr Yeung Kam Kong was actively in charge of Lung Mun. This was taken care of by an employed senior manager, a Mr Ho Yin. This state of affairs continued for about a decade until the late Mr Yeung Kam Kong passed away in 1990. After his death and until the renovation of Lung Mun in April 1994, the same arrangements continued with Mrs Yeung Kam Kong taking the place of her late husband as representing the interests of the Petitioner. Even on the Respondents' evidence, prior to its renovation in 1994, the management of Lung Mun was the joint responsibility of the Petitioner and the Respondents.

6. A shareholders' meeting took place in April 1994 ("the Shareholders' Meeting"). It was attended by Mrs Yeung representing the Petitioner and the 1st Respondent representing himself and the 2nd Respondent. The meeting was also attended by Mr Yeung Yee Hing, the son of Mrs Yeung, Mr Yeung Po Kei, a nephew of the 1st Respondent, and a Miss Yeung Po Yin, also a relative of the 1st Respondent. There are written minutes of that meeting dated 12 May 1994 ("the Minutes") signed by Mrs Yeung and the 1st Respondent as directors of the Company. The Minutes recorded the passing of the following two resolutions at the meeting :

(i) the first resolved that Mr Yeung Po Kei "take full responsibility for the management of Lung Mun after its renovation" and that Mr Yeung Yee Hing be responsible for its accounts and finance;

(ii) the second dealt with Mr Yeung Po Kei's remuneration.

7. The Minutes were written in Chinese. The English translation was not a certified translation and Miss Eu, QC, leading counsel for the Petitioner, invited attention to the fact that the Chinese text of the first resolution used the words "聘任" in relation to Mr Yeung Po Kei. These two characters connote both an appointment to an office and employment or engagement of a person. The English translation does not reflect any such connotation.

8. The Petitioner through Mr Yeung Yee Hing complained about various practices put in place by the late Yeung Po Kei but such complaints were ignored. The Respondents took the view that the Shareholders' Meeting gave the Respondents exclusive management. Matters came to a head in February 1995 when the Petitioner threatened to exercise negative financial control by not issuing cheques. This prompted a response on 22 March 1995 from the 1st Respondent in the form of a "Without prejudice" offer to buy out the Petitioner's shares or for a franchise to operate the Restaurant as an alternative. Negotiations continued spasmodically until the end of 1995. In early 1996, the Respondents commenced proceedings, namely HCMP No.438 of 1996 ("the prior proceedings") for a declaration that there was a binding franchise agreement on the Petitioner reached on 5 December 1996 and sought specific performance. This Petition was issued shortly before the prior proceedings came on for hearing before me in May 1996. Those proceedings were dismissed on 5 June 1996. The appeal was dismissed by the Court of Appeal on 9 October 1996.

The striking out application

9. Counsel for the Respondents submitted that the Petition should be struck out because :

(i) it discloses no reasonable cause of action; and

(ii) it is an abuse of the process of the courts because the Respondents have made fair and reasonable offers on several occasions to purchase the Petitioner's interest at a valuation which were rejected.

Section 168A provides as follows :

"168A. Alternative remedy to winding up in cases of unfair prejudice

(1) Any member of a company who complains that the affairs of the company are being or have been conducted in a manner unfairly prejudicial to the interest of the members generally or of some part of the members (including himself) ... may make an application to the court by petition for an order under this section.

(2) If on any petition under this section the court is of opinion that the company's affairs are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of some part of the members, whether or not such conduct consists of an isolated act or a series of acts, the court may, with a view to bringing to an end the matters complained of -

(a) make an order restraining the commission of any such act or the continuance of such conduct;

(b) order that such proceedings as the court may think fit shall be brought in the name of the company against such person and on such terms as the court may so order;

(ba) appoint a receiver or manager of the whole or a part of a company's property or business and may specify the powers and duties of the receiver or manager and fix his remuneration;

(c) make such other order as it thinks fit, whether for regulating the conduct of the company's affairs in future, or for the purchase of the shares of any members of the company by other members of the company or by the company and, in the case of a purchase by the company, for the reduction accordingly of the company's capital, or otherwise. ..."

10. The parallel English provision which is in identical terms was considered in Re Ringtower Holdings plc (1989) 5 BCC 82. Four points on the wording of the section were noted by Peter Gibson J. (at p.90E-G) :

(1) the relevant conduct (of commission or omission) must relate to the affairs of the company of which the petitioners are members;

(2) the conduct must be both prejudicial (in the sense of causing prejudice or harm) to the relevant interests and also unfairly so: conduct may be unfair without being prejudicial or prejudicial without being unfair and in neither case would the section be satisfied;

(3) the test is of unfair prejudice, not of unlawfulness, and conduct may be lawful but unfairly prejudicial;

(4) the relevant interests are the interests of members (including the petitioners) as members, but such interests are not necessarily limited to strict legal rights under the company's constitution, and the court may take into account wider equitable considerations such as any legitimate expectation which a member has which go beyond his legal rights.

The applicable principles

11. It is common ground that for the purposes of an application to strike out, all the facts alleged in the Petition and in the affidavits in support are assumed to be true.

12. The burden is on the applicant to show that it is "Plain and obvious" that the Petition is bound to fail. This is so because the exercise of the power to strike out would summarily drive the Petitioner from the judgment seat when otherwise it would be entitled to have a full hearing after discovery of documents and with oral evidence : see Ringtower (supra) at 84F. The fact that the court might consider the case weak is not sufficient nor would it be appropriate to strike out a petition based on pleading points if such deficiencies are capable of being cured by amendment.

Does the Petition disclose a cause of action?

13. The conduct about which the Petitioner complains is summarised in paragraph 11 of the Petition, viz. :

(a) the appointment of the late Yeung Po Kei as General Manager of the Restaurant from May 1994 as a means of excluding the Petitioner's authorised representative from participating in the management of the business of the Company;

(b) mismanagement of the affairs of the Company and self-enriching business practices;

(c) continuous efforts to exclude the Petitioner's authorised representative from taking part in the management of the business of the Restaurant after the death of the late Yeung Po Kei in August 1995; and

(d) unauthorised use of Evermost Investment Limited ("Evermost") to operate the business of the Restaurant.

14. These are considered below :

(a) and (c) Exclusion from management participation

15. First, the Respondents submitted that there was no exclusion because it was Mr Yeung Yee Hing acting on behalf of the Petitioner who had voluntarily relinquished his role in the business which was that of "financial controller". Reference was made to Re R. A. Noble (Clothing) Ltd. [1983] BCLC 273 where the exclusion about which complaint was made was brought about by the complainant's own disinterest. Suffice to say that the facts of that case are not analogous to the present.

16. The Respondents' submission was premised on the Respondents' account of what was agreed at the Shareholders' Meeting which is markedly different from the Petitioner's account. In brief, at issue is whether there was any agreement that the Respondents were thereafter to assume total responsibility for the day-to-day management of Lung Mun whilst the Petitioner's role was to be confined to that of financial controller. The Respondents contended that the rights and expectations of the parties derive solely from that agreement and nothing else and that the division of labour agreed to was to continue forever more, regardless of Mr Yeung Po Kei's tenure as general manager and precluded the Petitioner from interfering with management at "shop" level.

17. But the Respondents' premise was precisely what the Petitioner challenged as wrong and unreasonable : the Petitioner submitted that the resolution passed at the Shareholders' Meeting is not capable of being construed as an irrevocable appointment of Mr Yeung Po Kei as general manager, and, in any event, after Mr Yeung Po Kei's death in August 1995, that appointment could not conceivably operate as an indefinite mandate to the Respondents to manage the business on a day-to-day basis to the exclusion of the Petitioner.

18. Second, the Respondents submitted that the Petition was demurrable insofar as the Petitioner wished to allege that exclusion from management was on the basis of there being a quasi-partnership because particulars of how such legitimate expectation taking part in management arose were a pre-requisite but were not pleaded. The Respondents relied on Re A Company No.007936 of 1994 [1995] BCC 705 for the proposition that the "something more" over and above rights and expectations shareholders expected from the company's constitution and the fact of their association in the company to raise such expectations had to be pleaded.

19. It is to be noted that the facts of that case are a far cry from the present. In that case, the petitioning contributories were the trustees of a family settlement. They did not hold 50% of the shares. In fact, they had acquired their shareholding from E who, prior to becoming a shareholder, was an employee of the company. By virtue of his shareholding, E became a director and later he was appointed managing director. At the core was a complaint by the petitioning contributories that E had been excluded from the management of the company. But there was nothing to suggest that after the transfer of his shareholding, E could continue to be in control. That case is accordingly distinguishable on the facts.

20. The Petitioner submitted that, on any view, assuming that there is a requirement of "something more", it is satisfied in the present case. Here, the Petitioner and the Respondents each own 50% of the Company and were represented at board level, exercising equal control. Para .10 of the Petition referred to their joint control through experienced managers on the understanding that both parties would have equal rights of management and control. This has been the state of affairs since inception and continued for 14 years or so until the present dispute erupted in late 1994/early 1995.

21. Given these facts and the history of the Company's management since 1981 (referred to above), I accept the Petitioner's submission that it is at least arguable that the present case is an example of the shareholders exercising joint control by jointly appointing the late Mr Yeung Po Kei as general manager rather than the grant of any permanent mandate in favour of the Respondents such that the position of general manager was inherritable by another member of the Respondents' family. Significantly, the Minutes do not refer to any permanent mandate giving the Respondents sole responsibility for the day-to-day management of Lung Mun. On the Petitioner's case as pleaded, exclusion from management is arguably a valid complaint. Whether it can prevail at trial is of course another matter.

(b) Mismanagement and self-enriching practices

22. Before setting out the submissions, I will briefly summarise the two categories into which the conduct complained of fall. The more serious relates to "self-enriching practices". It is alleged in the Petition that Hoi Pang Seafood ("Hoi Pang") and Hon Kee are neighbouring businesses owned by the late Mr Yeung Po Kei's family and that the 1st Respondent is a director and shareholder of Hon Kee. Whilst the late Mr Yeung Po Kei was in charge as general manager, a sushi bar was set up in the Restaurant which sold sushi and sashimi supplied by Hoi Pang.

23. The effect of the arrangement with Hoi Pang was that apart from 10% of the takings from this bar which was distributed as tips to the staff, all of the balance went to Hoi Pang (see para.19) and no part of this stream of revenue (amounting to approximately $100,000 a month) ever went to the Company. In addition, fruit juices and fruit platters sold at the Restaurant were also supplied by Hoi Pang, with the latter charging substantially more than other suppliers and rebating only a modest amount to the Company (at para.20). According to the Petitioner, the Company was perfectly capable of supplying these items. There was also the allegation that cash takings which were substantial, were not banked on a daily basis. Rather, until the Petitioner complained by letter dated 15 February 1995, cash was banked at very infrequent intervals : for example, after a deposit made on 1 July 1994, no further deposits were made until 3 September 1994. It was further alleged (at para.28) that Hon Kee and Hoi Pang were tapping the electricity supply of the Restaurant.

24. The second category relates to conduct which would at the very least amount to inefficient management. Examples include high vegetable wastage, refusal to use a cash register and dubious staff loans.

25. As regards mismanagement, it was submitted that the courts are not suited to assessing the commercial judgment of business people and would ordinarily be very reluctant to accept that managerial decisions could amount to unfairly prejudicial conduct : see Re Sam Weller Limited [1990] Ch.811 at 817D and Re Elgindata Limited [1991] BCLC 959 at 993L. Further, in the absence of clear evidence that the value of the Company was adversely affected, the court is not entitled to consider mismanagement as constituting unfairly prejudicial conduct.

26. The nub of the Respondents' submissions was that mismanagement itself cannot be entertained as constituting unfairly prejudicial conduct and further because misappropriation has not been alleged, the self-enriching practices pleaded were, of themselves, inadequate and demurrable.

27. The submission that short of actually alleging misappropriation, allegations of self-enriching practices are insufficient appear to me to be wholly misconceived. The categories of conduct which may amount to unfairly prejudicial conduct are not closed : see Re BSB Holdings Ltd. (No.2) [1996] 1 BCLC 155. Even an isolated act is capable of constituting such misconduct.

28. As to the meaning of unfairly prejudicial conduct, the following passage in the judgment of Fuad J. in Taiwa Land Investment Company Limited (1981) HKLR 297 at p.304 cited by leading counsel for the Petitioner is of assistance :

"There is no statutory guidance to the meaning of 'unfairly prejudicial' in s.168A and so the expression must be applied in its ordinary sense. The Shorter Oxford English Dictionary tells us, if we need to look up the word 'unfair', that it means 'not fair or equitable; unjust'. 'Prejudice' is defined as 'injury, detriment, or damage, caused to a person by judgment or action in which his rights are disregarded; hence, injury to a person or thing likely to be the consequence of some action' and generally 'injury, damage or loss.' The verb is defined thus: 'to affect injuriously or unfavourably; to injure or impair the validity of (a right, claim, statement etc.).' The definition given of 'prejudicial' is 'causing prejudice; detrimental, damaging (to rights interests etc.).'

Although there has yet to be a judicial pronouncement on the meaning of 'unfairly prejudicial' either as used in s.168A of the Hong Kong Ordinance or in s.75 of the United Kingdom Companies Act of 1980, that expression occurs in s.252 of the Companies Act of South Africa and there have been decisions interpreting that section. One such was Donaldson Investments v. Anglo-Transvaal Collieries [1979] 3 S.A.713 where Preiss, J. referred to a number of South African authorities which had construed s.252 as contrasted with a provision in a previous Act that had required oppressive conduct to be established. It is necessary, perhaps, to note that South Africa's section speaks of an act or omission which is 'unfairly prejudicial, unjust or inequitable' and as regards the additional words which do not appear in the Hong Kong section, Preiss, J. held that the word 'unfairly' qualified only the word 'prejudicial', for it would be tautologous to speak of any act or omission as being unfairly unjust or unfairly inequitable. In a sense, therefore, it can be said that the s.168A is not so wide, in that conduct which is unjust or inequitable, without being prejudicial, will not suffice to found a claim for relief. Preiss, J., in discussing local authorities on the predecessor to s.252 noted, at page 720, that the courts had from time to time given differing opinions as to the meaning of 'oppressive conduct'. In some of the cases the view had been expressed that oppressive conduct meant tyrannical conduct or a tyrannical abuse of power, while in other cases, a less stringent test had been applied, it being held that oppressive conduct involved no more than a visible departure from the standards of fair dealing, or a violation of the conditions of fair play, on which every shareholder who entrusted his money to a company was entitled to reply. He held that this less stringent level was appropriate for the application of the new section and said at page 722 -

'Couched in another form, I agree that the applicants must establish that the majority shareholders are using their greater voting power in a manner which does not enable the minority to enjoy a fair participation in the affairs of a company. The emphasis is upon the unfairness of the conduct complained of. It must be conduct which departs from the accepted standards of fair play, or which amounts to an unfair discrimination against the minority. Of course, this little more than an enunciation of the text; the circumstances of each case must be examined in order to decide whether it is such conduct entitling the court to intervene under s.252.'

If I were to attempt a similar enunciation of the general purport of the expression 'unfairly prejudicial' in s.168A, while recognizing the slight difference in the wording of the South African statute, I would respectfully follow the approach by Preiss, J."

29. In substance, the underlying complaint is that corporate opportunities have been usurped or diverted from the Company at the expense of the complaining shareholder. In my judgment such conduct, if substantiated, is plainly unfairly prejudicial.

30. As to the acts of mismanagement complained of other than self-enriching practices, whilst in themselves they might not provide a basis for the exercise of the court's discretion under s.168A, it is too early to say that evidence relating to such conduct may not bear upon the unfairness : see Re a Company No.00477 of 1986 (1986) 2 BCC 99, 171 at 99, 175. These practices must be seen in the overall context of the case and it would not be right to strike out these allegations of the Petition at this stage.

(d) Evermost

31. In mid-March 1996, the 1st Respondent began using a new business registration certificate in the name of the Restaurant but operated by a company which they controlled by the name of Evermost Investment ("Evermost"). Evermost operated a credit card account with BOC Credit Card (International) Limited as if Evermost were the owner or operator of the Restaurant. Previously, credit card payments by customers were credited to the merchant account held by the Company with the Hong Kong Bank. So effectively, as from mid March 1996, the business has been operated in the name of Evermost. Although the 1st Respondent regarded the latter as acting as trustee for the Company, this has never been sanctioned by the Company.

32. The Respondents submitted that there was no real basis of complaint. I do not agree. The use of Evermost has been described by the auditors as irregular. The fact is that the Company (as distinct from the Respondents) has no control over Evermost which since mid-March 1996 has been in receipt of monies belonging to the Company. Whether the Respondents are entitled to manage the Company's business through Evermost because of the resolution passed at the Shareholders' Meeting and/or the Petitioner's threat to exercise negative financial control is a matter that can only be determined at the hearing of the Petition. At this stage, it is not clear and obvious that the Petitioner's complaint about Evermost is bound to fail.

Abuse of process

33. The Respondents submitted that the Petition was wholly unnecessary because various offers had been made from time to time by the Respondents to buy out the Petitioner's interest in the Company. It was submitted that the Petitioner was wholly unreasonable in not accepting any of these very reasonable offers. However, the first buy-out proposal was made on 22 March 1995 in a "Without prejudice" letter coupled with a franchise proposal which became the subject-matter of the prior proceedings. During the period up until December 1995, the parties were engaged in negotiations which did not culminate in any concluded agreement. That being the case, I do not consider it appropriate that the Petitioner be criticised for not accepting the buy-out proposal. For present purposes, the without prejudice offer of March 1995 cannot be taken into consideration. The starting point must be the Respondents' renewed offer to purchase that was made on 21 November 1996 rather than any of their earlier offers. The 1996 offer by the Respondents is to purchase the Petitioner's entire holding in the Company as well as in Fairwood, the price per share to be agreed and determined by an independent valuer.

34. Upon receipt of the renewed offer, the Petitioner sought clarification on various points and on 26 November 1996, the Respondents' solicitors replied to those queries and proposed that the valuation date should be the date of the Petition. The Petitioner took the view that the offer was unfair in as much as it was not open to the Petitioner to buy the Respondents' shares and that the valuation date (May 1996) was also unfair given the recent dramatic rise in property values. It rejected this offer on 12 December 1996 and made a counter-offer which was that it should have a first right of refusal as to who should buy out the other because of unfairly prejudicial conduct on the part of the Respondents. This counter-offer was in turn rejected by the Respondents on 14 December 1996.

35. The Respondents rely on Ringtower (supra) for the proposition that is unreasonable to pursue a petition when, for example, it is clear that the petitioner must leave the company and a fair offer has been made for his shares. In Ringtower the petitioners held no more than 5.5% of the company's shares and it was inconceivable that the court in that case would grant the petitioners an order for the respondents to transfer their shares to the petitioners, because it was plain and obvious that the petitioners ought to go.

36. The facts in Ringtower are wholly different and the case is of little assistance here. Where, as here, the parties are equal shareholders each owing half the company, it is far from obvious which party is to go. It is certainly not at all clear and obvious that the Petitioner rather than the Respondents is the party that has to go.

37. The second point taken was that the relief sought is novel and no authority has been cited in support. In my judgment, having regard to the applicable standard in a striking out application, suffice to say that, first it cannot be said that it is plain and obvious that the Petitioner has no case for the relief it seeks. Whilst the relief can be said to be novel (probably attributable to counsel's ingenuity and resourcefulness), the apparent absence of precedent for relief in the form sought is not dispositive of the availability of such relief. In a deadlock situation and if it can be made out that the prejudice is severe and wholly one-sided, the possibility of relief sought being granted cannot be ruled out in limine.

38. In these circumstances there is no valid basis for striking out the Petition as an abuse of process.

Conclusion

39. The striking out application is dismissed with costs to the Petitioner with a certificate for two counsel.

The summons relating to the Company's accounts

40. This summons which was taken out on 29 November 1996 sought an order directing the 1st Respondent to sign the directors' report and balance sheet of the financial statements of the Company for the year ended 31 December 1995 and to cause the profits tax return to be filed with the Inland Revenue Department. It also sought a direction that the Respondents pay out of the funds of the Company under their exclusive control all outstanding accounting and auditing fees due to the Company's accountants and auditors.

41. The draft accounts were sent to the Respondents as early as September 1996. Prior to that, on 15 July and 6 August 1996, Peter Lam & Co., the Company's auditors since about 1981 were appointed by the board to handle the Company's bookkeeping from the month of November 1995 onwards. The auditors wrote management letters to the Company stating their concerns. The draft auditors' report was accordingly qualified, the auditors being unable to form an opinion as to whether the financial statements gave a true and fair view of the state of the Company's affairs as at 31 December 1995 or of its profit for the year then ended and as to whether the financial statements had been properly prepared in accordance with the Companies Ordinance. The Respondents were unhappy with this qualified opinion and in mid October 1996 sought meetings with the auditors to resolve the problem. The draft accounts were signed by the Petitioner on 29 October 1996 whilst expressly reserving its rights. The Respondents continued to refuse to sign the accounts notwithstanding a deadline of 15 November imposed by the Department for submitting the audited financial statements and the tax return. On 18 November, the Petitioner threatened to apply to the court if the accounts were not signed and submitted by 20 November. The summons was duly taken out on 29 November.

42. On 7 December 1996, the Respondents paid the auditors by a cashier's order and on 11 December shortly before the hearing, they wrote intimating an intention to sign the accounts. In fact, the 1st Respondent did sign the directors' report and the accounts on 12 December. So, by the time the summons came on for hearing, the Respondents had in fact done the acts sought by the summons. In the circumstances, the Petitioner submitted that the costs of the application ought not to be borne by the Company.

43. The Respondents disagreed with the auditors' qualification. Although the accounts were eventually signed, the Respondents specifically reserved their rights. It was submitted that the court has no power to compel directors to be compelled to do something which they considered to be contrary to their fiduciary duties, so it was contended that the summons was bound to fail and the costs should be borne by the Petitioner.

44. But what were the Respondents asked to do? The Company had an obligation to discharge failing which it would have been subjected to heavy penalties, namely the filing of audited accounts which could not be done without the 1st Respondent signing the directors' report and the balance sheet. This did not involve accepting or agreeing with the auditors' report. Thus, there was nothing to prevent the Respondents from expressly reserving their rights in that regard as they have in fact done.

45. I do not accept the submission that the court have no power to compel the 1st Respondent by way of mandatory injunction. The question is whether the facts merit the exercise of the court's discretion. In the present case, had the Respondents not in fact performed the acts sought by the summons, I would have had no hesitation in granting the relief sought. It follows that the Petitioner is entitled to the costs of and incidental to the summons of 29 November.

Appointment of court expert

46. A summons was issued on 12 December for the appointment of a court expert in default of agreement between the parties. The valuation report to be carried out is of the share price of the Company and Fairwood, the valuation date being 31 December 1996 or in the event of the report not being completed on or before 28 February 1997, the valuation to be a date within 45 days of the completion of the report.

47. When the hearing commenced, the Respondents' position was that they did not object to such a valuation being prepared but neither party was prepared to agree to the firm or firms nominated by the other party to act as expert. The only agreement was that such an expert should come from one of the "big six". As three names had already been proposed by the parties, the court was left with a choice of three.

48. At that stage, apart from nominating one of the remaining three firms the only remaining question was one relating to costs. In the summons, the Petitioner had sought that the costs of the making of the report should be in the cause of the Petition but should first be disbursed out of the funds of the Company. The parties were apparently ad idem that such a valuation be obtained even if the Respondents' application to strike out the Petition were to be successful. However, the Respondents resiled from that position in the course of the hearing. Their new stance was that a valuation report should not be ordered until it is clear who is to buy out the other. In other words, contrary to their earlier position, the Respondents opposed the application for the appointment of an expert valuer until after the determination of the Petition.

49. Under O.40, r.1(1) of the Rules of the Supreme Court, on the application of any party, the court has power to appoint an expert in any cause or matter which is to be tried without a jury and in which any question for an expert witness arises. In the present case, there is no doubt that a valuation of the share price of the Company and Fairwood arises. Its availability could conceivably encourage a resolution of the present dispute. Even if no settlement is reached and the Petition were not to come on for some time, the valuation could always be updated by way of a supplemental report. In these circumstances, there is every advantage in granting the application : not to order a valuation now would only prolong the dispute. Accordingly, in exercise of the powers contained in O.40, r.1(1), I nominate Coopers & Lybrand as the court expert to render their opinion as to the share price of the Company and Fairwood. The terms of reference for the valuer so appointed are set out in the Schedule to the Order made. In brief, it is to be the fair market value of the shares of the Company and Fairwood. There is to be a right to engage a suitable expert to value the land held by Fairwood with unrestricted access to books, accounts and documents of the companies concerned which are necessary for the valuation which shall be conducted on the basis of applying the usual accounting and valuation principles and there being a willing purchaser and a willing seller of Lung Mun as a going concern and the land on which it is situated.

50. The costs of the making of the report shall be in the cause of the Petition but shall first be disbursed out of the funds of the Company.

51. I further order that the costs of this application be to the Petitioner with a certificate for two counsel.

The application for directions pending the hearing of the Petition

52. The summons for interim relief was filed on 9 May 1996, the day prior to the presentation of the Petition.

53. The following is a summary of events leading to this application.

54. The working relationship between the parties took a turn of the worse after the Petitioner wrote to the Respondents on 15 February 1995 threatening to exercise "negative financial control". All its representations were simply ignored. The Petitioner therefore refused to issue cheques. As noted above, this prompted a "without prejudice" offer from the 1st Respondent for a buy-out or alternatively a franchise for the business, culminating in the prior proceedings. Meanwhile, a new bank account was opened on 21 February 1995 in the joint names of Li Sui King Eunice and Yu Kit Leung into which the cash takings of the business were paid.

55. It is the Petitioner's case that the Respondents had conducted themselves as from 1 November 1995 as if they were the franchisee having exclusive management of the Company even though the relevant documentation had not been executed. Whilst the Respondents took the view that there was a binding and valid franchise agreement on the Petitioner, as from 5 December 1995, the Respondents held on to the management of the Restaurant business to the exclusion of the Petitioner. Pending the determination of the franchise dispute, the Petitioner proposed interim measures for co-management by letter dated 29 January 1996 which co-management proposals were rejected.

56. The relationship further deteriorated in mid March 1996 when the Respondents began using Evermost over which the Company had no control to operate the Restaurant. This seriously exacerbated the Petitioner's concerns.

57. The Petitioner accordingly sought orders directed at terminating the use of Evermost as operator of the business, namely that the Respondents cease to permit or cause Evermost to be concerned in the operation or management of the business and to cease operating any bank account or merchant account in the capacity purportedly as operator of the business of the Restaurant. The next head of relief related to the cash business takings of the Restaurant which were channelled into trust account(s) over which the Company had no control. The relief sought was to ensure that all cash business takings save for what was required to maintain an amount of petty cash consistently in the sum of $50,000 were to be deposited in the Company's account with the Hong Kong Bank. The Petitioner also sought an order that the Restaurant put into operation a current cash register for purpose of cashiering. The final head of relief related to the management of the Company and its Restaurant business by a management committee comprising two members, namely, the 1st Respondent and Mr Yeung Yee Hing.

58. As regards this last head of interim relief, I expressed considerable misgivings as to the feasibility and desirability of forcing highly antagonistic parties to co-operate. Such relief has the hallmarks of a recipe for disaster. As a result, in the course of the hearing, the proposals relating to the constitution of a management committee were revised and replaced by the following :

(i) supplies of sushi etc. to be conducted by way of tender;

(ii) wages be paid by way of cheques in the employees' names;

(iii) preservation of all sales slips, records and cards;

(iv) alteration of sales slips and sales record cards be countersigned by Ho Yin and Yu Kit Leung as one group or Au Chi Fai and Ho Yin as another group of signatories;

(v) not to allow other merchants to use the Company's merchant credit card account;

(vi) not to use other merchant's credit card accounts towards the payments for food, and service beverage rendered and/or supplied by the Company.

59. The Petitioner submitted that the relief sought was necessary in order to preserve the Company's assets. Effectively, since March 1996, the business has been run through Evermost over which the Company does not exercise control. Moreover, cash takings have been put into a so-called "trust" account which at the year end of 1995 totalled $936,278.91. This was the confirmation provided by Lee Siu King and Yu Kit Leung being the account holders of the so-called "trust" account(s) to the auditors. However, the bank statements exhibited show that as at 29 December 1995, the account in their names at the National Commercial Bank Limited had no more than approximately $310,000. The surplus appears to have been put on fixed deposit. Again, the Petitioner's complaint is that the Company has no control over these accounts. Moreover, they militate against the Respondents' case that there are insufficient funds for the day-to-day running of the business. It would appear that the so-called "trust" account was opened on 21 February 1995, within a few days of the Petitioner's letter threatening "negative financial control".

60. Since the filing of the summons, there have been two management letters which brought to the board's attention the discrepancies and irregularities in relation to records related to turnover and salaries and wages. There were also problems with sales invoices and receipts as they were not in sequential order, missing sales receipts in the trading reports and discrepancies between credit card sales receipts and those recorded in the trading records. Further, no suppliers' invoices were available to support cash payments made. In short, these reasons caused the auditors to qualify their report for 1995. These concerns are summarised in their letter of 12 December 1996. In seeking these interim measures, the Petitioner and its authorised representative Mr Yeung Yee Hing were willing to undertake :

(1) to discharge their duties in the management of the business and affairs of the Company and/or the Restaurant diligently and in the best interest of the Company;

(2) to co-operate with the Respondents in the management of the business and affairs of the Company in particular in the signing of cheques drawn on the Company's account discharging all expenses reasonably and necessarily incurred in the course of the business of the Company and/or the Restaurant; and

(3) to keep the existing staff establishment of the Restaurant and conditions of service unchanged for six months from the date of the order and not to dismiss staff except for good cause.

61. The Respondents opposed the application on the basis that they represented final findings. As to the six new measures proposed to replace the management committee proposals contained in paras.6, 7, 8 and 9 of the summons, the first four were not opposed on the basis that they already represented the current practice of the Company.

62. The concerns expressed by the auditors are real and justify interim measures that are designed to preserve the assets of the Company pending the Petition. The proposition that a Company must be able to exercise control of its own assets is self-evident. It is not the case here since the Company does not control either the "trust" account(s) in the joint names of Li and Yu or the merchant account operated by Evermost. As an interim measure only and pending the Petition, and upon the undertakings of the Petitioner and its authorised representative Mr Yeung Yee Hing, I will make an order in terms of paragraphs 1 to 5 of the summons, and 1 to 6 of the measures proposed at the hearing, with costs to the Petitioner.

Costs

63. In respect of all the costs orders made in favour of the Petitioner, there is to be a certificate for two counsel.

Directions for the hearing of the Petition

64. As to the further conduct of the Petition, at the conclusion of the hearing, directions were given as to the filing of evidence and discovery and for the Petition to be restored for mention on 5 March 1997. The directions given and timetable setforth is to be adhered to notwithstanding any appeal from the orders made on 17 December 1996.