KAM LEUNG SUI KWAN, PERSONAL REPRESENTATIVE OF THE ESTATE OF KAM KWAN SING,THE DECEASED v. KAM KWAN LAI AND OTHERS

CACV 266/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 266 OF 2012

(ON APPEAL FROM HCCW NO. 154 OF 2010)

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J U D G M E N T

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Hon Lam VP, Kwan JA and Barma JA:

Introduction

1. This is the judgment of the court, to which each of its members has contributed.

2. This was an appeal by the petitioner, the personal representative of the estate of the late Kam Kwan Sing, against the judgment of Harris J dated 31 October 2012, by which he dismissed the Amended Petition in respect of Yung Kee Holdings Limited (“the Company”) brought by the deceased against his brother, Kam Kwan Lai (“Kwan Lai”), his nephew, Carrel Kam Lin Wang, and two companies (Legco Inc and Everway Holdings Limited (both owned, or said to be owned, by Kwan Lai) which held shares in the Company.  The Company is the ultimate holding company of a group of companies incorporated in the British Virgin Islands (“BVI”).  The group operate the well known Yung Kee Restaurant and other businesses from the Yung Kee Building in Wellington Street, Central, one of several properties owned by companies in the group.  As the deceased died shortly before judgment was handed down by Harris J, this appeal was brought by his estate.

3. The petition is brought under sections 168A and 327(3)(c) of the Companies Ordinance, Cap. 32.  At the trial, the primary relief sought was an order for the respondents to buy out the petitioner’s shareholding in the Company pursuant to section 168A, it being alleged that the affairs of the Company had been carried on in a manner that was unfairly prejudicial towards the petitioner in a number of different respects.  As an alternative, it was contended that, relying on substantially the same matters, it would be just and equitable to wind up the Company.  Before us, however, Mr Jat SC, appearing with Ms Chan SC for the petitioner, indicated that the primary relief that would be sought, in the event that the appeal proved successful, was an order for the Company to be wound up.

4. As the Company was not incorporated in Hong Kong, it was necessary for the judge to consider first whether or not the court had jurisdiction to grant either or both of the reliefs sought.  Only if the court had such jurisdiction, and should exercise it, would it be necessary to consider whether or not the complaints were made out, and what (if any) relief should appropriately be granted.  In the result, for the reasons explained in his judgment, Harris J concluded that the court did not have jurisdiction under section 168A, and should not exercise its discretion under section 327(3)(c). Nonetheless, having heard evidence and argument on the substantive merits of the petition, Harris J went on to express the view that, if he was wrong as to jurisdiction, the affairs of the Company had been carried on in a manner that was unfairly prejudicial to the petitioner in certain respects, and that it would be appropriate to make an order for the petitioner’s shareholding to be bought out by the respondents.  Harris J went on to make certain determinations as to the basis on which such shareholding should be valued, although he did not carry out the actual valuation exercise.

5. By this appeal, the petitioner’s estate contends:-

(1)  that the court has, and should exercise, jurisdiction under either section 327(3)(c) or section 168A (although the preference now is for a winding-up order under section 327(3)(c));

(2)  that in addition to the respects in which Harris J found that there had been unfairly prejudicial conduct, he should additionally have found that there had been such conduct arising out of the failure of the Company to declare dividends to its shareholders, notwithstanding that it had ample reserves and cash out of which to do so; and

(3)  that, in respect of the basis of valuation, the judge had erred in one respect, namely by concluding that the Yung Kee Building, which housed the restaurant and other businesses and offices, should be valued on the basis of its existing use, rather than its open market value with vacant possession.

6. The respondents contend that the judge was right in respect of the jurisdiction issue, that although he expressed no view, and made no findings, as to the dividends point, the failure to declare dividends was not unfairly prejudicial conduct, and that the judge was right to direct that the Yung Kee Building should be valued on the basis that he stated. Additionally, by their respondents’ notice, the respondents contend that the judge was in error in concluding that there had been unfairly prejudicial conduct so as to justify the making of a buy-out order if the court had jurisdiction to do so.

7. In the sections of this judgment which follow, we deal first with the jurisdiction issues, then with the question of whether or not the judge should have found that there had been unfairly prejudicial conduct (dealing at the end of that section with the issue of the non-declaration of dividends) and finally with the valuation issue.  At the end of our judgment, we set out our conclusions and the orders that we think should be made, together with an order nisi dealing with the costs of this appeal.

The jurisdiction issues

8. This petition was presented under sections 168A and 327(3)(c) of the Companies Ordinance.  The principal relief sought at the trial was an order under section 168A for Kwan Lai to purchase all the petitioner’s shares in the Company, alternatively for the petitioner to purchase the shares held by Kwan Lai through various entities.  In the alternative, the petitioner sought to wind up the Company on the just and equitable ground under section 327(3)(c).  The judge dismissed the petition under both provisions for want of jurisdiction.

9. Section 168A applies to a “specified corporation”, which is defined in section 2 to mean “a company or a non-Hong Kong company”.  The Company, being a BVI company, does not fall within a “company” as defined in section 2.  A “non-Hong Kong company” is defined in section 2 to have the meaning assigned to it by section 332.  In the present context, the meaning assigned by section 332 which the Company must fall within to found jurisdiction is a company “incorporated outside Hong Kong which … [establishes] a place of business in Hong Kong”.  The judge held that the Company had not established a “place of business” in Hong Kong.

10. Section 327 applies to the winding up of unregistered companies, which would include an unregistered foreign company such as the Company.  Section 327(3) provides that “the circumstances in which an unregistered company may be wound up are as follows - … (c) if the court is of opinion that it is just and equitable that the company should be wound up.”  The court’s power to wind up a foreign company under this provision is discretionary.  The judge declined to exercise this power on the ground that there is insufficient connection between the Company and Hong Kong.

11. The main issues on appeal regarding jurisdiction are whether he was right in holding that there was insufficient connection between the Company and Hong Kong to justify the exercise of the winding-up jurisdiction, and in holding that the Company had not established a place of business in Hong Kong to found jurisdiction under section 168A.  Mr Jat placed greater emphasis on the discretionary jurisdiction to wind up the Company and dealt with this as his first line of attack.  We will therefore consider the jurisdiction issue on winding up before we turn to the other jurisdiction issue for section 168A.

12. It is convenient to lay out first the relevant facts as found by the judge. Many of these facts are common to both jurisdiction issues.  Unless otherwise indicated, the relevant facts set out below are taken largely from the judgment below or from non-controversial evidence.

The corporate history and structure

13. In 1973, the business of the Yung Kee Restaurant (“the Restaurant”) and its assets were transferred to Yung Kee Restaurant Ltd, a company incorporated in Hong Kong.  From 1974 to 1990, Kam Senior held 70% of the shares.  The remaining shares were held by his sons.

14. In 1982, Kam Shui Fai Investment Co Ltd was incorporated in Hong Kong to hold the Yung Kee Building.

15. In August 1990, Long Yau Ltd (“Long Yau”) was incorporated in the BVI as an investment holding company.  Its shareholders on incorporation were Holly Join Ltd (“Holly Join”) and Capital Adex Ltd (“Capital Adex”), and both were companies incorporated in the BVI.  In October 1990, Kam Senior set up the Long Yau Unit Trust (“the Unit Trust”) on the advice of his financial adviser, Mrs Teresa Tong, for estate planning as Hong Kong still had estate duty at the time.  Long Yau was set up to be the trustee of the Unit Trust, which was to hold the majority of the issued shares in all the companies within the group.  In November 1990, Kam Senior transferred 80% of the shares in Yung Kee Restaurant Ltd to Long Yau.

16. In December 1994, the Company was incorporated in the BVI as an international business company limited by shares, with its registered office in Tortola.  It was established as an investment holding company.  The two issued shares in Long Yau were transferred by Holly Join and Capital Adex to the Company.  The sole asset of the Company was and is its 100% shareholding in Long Yau.  Until November 2006, its sole shareholder was Madam Mak Siu Chun (“Madam Mak”), the 4^th wife of Kam Senior and the mother of the petitioner, Kwan Lai, Kwan Ki and Kelly.  Madam Mak held the Company’s sole share as the nominee of Kam Senior.

17. Yung Kee Restaurant Ltd became dormant from December 1994 and was succeeded as the restaurant operating company by Yung Kee Restaurant Group Ltd (“YKR Group”), a company incorporated in Hong Kong.  The shares in YKR Group were held as to 80% by Long Yau, 10% by Holly Join and 10% by Capital Adex.

18. In 1995, Yung Kee Building was transferred from Kam Shui Fai Investment Co Ltd to Long Yau Properties Ltd, a company incorporated in Hong Kong and an indirect subsidiary of Long Yau.

19. Kam Senior passed away in December 2004.  In February 2006, estate duty was abolished in Hong Kong.  In mid 2006, Mrs Tong distributed the Unit Trust to the family members in the following proportions:

(1)  An Lui Ltd (beneficially owned by Madam Mak): 10%;

(2)  Holly Join: 35%;

(3)  Capital Adex: 35%;

(4)  Legco Inc (“Legco”; beneficially owned by Kwan Ki): 10%; and

(5)  Everway Holdings Ltd (“Everway”; legally owned by Kelly): 10%.

20. In November 2006, Holly Join and Capital Adex, which until that point in time had been wholly owned subsidiaries of the Company, were transferred to the petitioner and Kwan Lai respectively.

21. Also in November 2006, the register of stockholders of the Company showed that the following shares were issued: the petitioner (7 shares); Kwan Lai (7 shares); Legco (2 shares); Everway (2 shares) and Madam Mak (2 shares).

22. When Kwan Ki passed away in 2007, he bequeathed Legco to Kwan Lai.

23. The Unit Trust was terminated in April 2009 and the restructuring was completed.  Long Yau became the majority shareholder of all the companies in the group in its own right including YKR Group.  The minority interests of the other group companies such as Holly Join, Capital Adex and Legco continued. As the sole shareholder in Long Yau, the Company became the ultimate holding company.

24. On 21 May 2009, Madam Mak transferred her interest in 10% of the shares in the Company to the petitioner to balance out Kwan Ki’s bequest of Legco to Kwan Lai.

25. Up to April 2010 (when Kelly revoked her declaration of trust and Kwan Lai became the legal and beneficial owner of Everway), there had been a dispute about the beneficial ownership of Everway.  Kelly claimed she had gifted away Everway to Kwan Lai, but the petitioner maintained that Kelly remained the beneficial owner.  But as a result of Kelly’s position, Kwan Lai has had in practice control over 55% of the Company’s issued shares and had been able to cause the Company to resolve matters in general meeting that can be dealt with by ordinary resolution.

26. Madam Mak was the Company’s first and sole director.  She resigned in June 2000.  From June 2000 to April 2003, the directors were the petitioner and his wife Madam Kam Leung Sui Kwan.  In April 2003, the petitioner’s wife resigned and was replaced by Capital Adex.  From November 2006, when the shares of Capital Adex were transferred to Kwan Lai, the petitioner and Kwan Lai had been the only two directors of the Company, until the disputed resolution of 7 July 2009 by which Kwan Lai’s son Carrel was appointed a director.

27. A chart showing the present structure of the Company, its nine direct and indirect subsidiaries is annexed to this judgment for ease of reference.  As mentioned earlier, YKR Group operated the Restaurant.  Life is not Limited, which is an indirect subsidiary of Long Yau and a joint venture with a third party, operated the Kee Club located at the Yung Kee Building.  Other subsidiaries are property or investment holding companies.  None of the BVI companies in the group were registered under Part XI of the Companies Ordinance.

The business of the Company and its activities

28. To recap, the Company’s sole asset is its shares in another BVI company, Long Yau, and Long Yau in turn held shares in companies which carried on business in Hong Kong.  As stated by the petitioner in his 2^nd affirmation at §8 and confirmed by him in cross-examination: “It is not in dispute that the Company is an investment holding company and has not conducted any business in its own right.”  The judge described the Company as “a passive investor in another BVI company” (judgment of Harris J §64; “the Judgment”).  There is no evidence of the directors undertaking, as directors of the Company, any role in directing the activities of the subsidiaries (§59 of the Judgment).

29. We have considered Mr Jat’s submission to the contrary in the light of the minutes of the relevant board meetings of the Company, Long Yau and YKR Group, which took place one after another in the afternoon of 30 November 2009.  We do not think these board minutes provided evidence that the directors of the Company were undertaking any role in directing the activities of the subsidiaries in their capacity as directors of the Company.  Pertinently, in the board minutes of the Company under the heading of “recruitment of administration, accounting and human resources staff”, it was noted that “the Company was functioning [it is common ground that the word “not” which appeared before “functioning” was a clerical error] as a holding company and did not have any active operation and that a similar agenda would be discussed at the directors’ meeting of [YKG Group] to be held later on the same day.”  We do not think the judge’s description of the Company as “a passive investor in another BVI company” is in any way inaccurate.

30. Prior to April 2009, there appeared to have been no board or general meetings of the Company in that all resolutions were paper resolutions.  Between April 2009 and April 2010, a written shareholders’ resolution and two written resolutions of the board were passed and five board meetings were held at which resolutions were passed.  There is no evidence of any other board meetings at which other business took place.

31. The written resolution of the Company dated 7 July 2009 stated that it was proposed “in order to facilitate the management and administration of the Company”.  By this resolution, the articles of association were amended to change the quorum of directors’ meeting from all directors to no less than half of the total number of directors and Carrel was appointed as an additional director of the Company, and of Long Yau and YKR Group.  Kwan Lai accepted in cross-examination that the Company had business and affairs to manage and that it was part of the Company’s affairs to pass resolutions directing Long Yau and YKR Group to appoint Carrel as a director.  The written resolutions of the shareholders and directors of the Company were probably considered and signed at the Yung Kee Building, where the petitioner, Kwan Lai and Carrel had their own offices and from which they managed the operating companies.

32. As for the five board meetings, all were held on the 8^th floor of Yung Kee Building, which had a suitable meeting room.  The first one, on 3 August 2009, was convened by Kwan Lai and a resolution was passed to appoint Kwan Lai as the authorised representative of the Company in its capacity as the sole shareholder of Long Yau.  The second meeting, on 11 September 2009, was to discuss the petitioner’s proposed resolution to appoint Madam Mak as a director.  This was rejected by Kwan Lai and Carrel.  The third meeting was convened by Carrel and held on 30 November 2009, to discuss proper channels of obtaining copies of financial information/bank statements of the Company and new recruitments of administration, accounting and human resources staff to cope with the operation of the group and that the recruitment plan be discussed at the board meeting of YKR Group.  The fourth board meeting was also convened by Carrel and held on 29 April 2010, after the petition was presented, to consider the appointment of solicitors “as corporate lawyer to deal with legal matters of the Company”.  The last board meeting was held on 30 June 2010, to consider the petitioner’s request for copies of documents of the Company and the publicity arising out of the present proceedings.

33. A senior administrator of the group called by the respondents to testify, Ms Sunday Tse, described the Yung Kee Building as “the ‘headquarters’ of the Yung Kee Restaurant group” and stated that “all of the principal functions and roles connected with the operations of the business operate from the premises.”  The main office area was located on the 5^th floor of the Yung Kee Building.  All the directors and staff working in the group lived in Hong Kong and worked predominantly at the Yung Kee Building.  And the majority of the books and records of the group were kept in the Yung Kee Building.

34. The corporate secretarial service providers of the Company, Proserve Ltd (“Proserve”) and Tricor Services Ltd (“Tricor”), sent their fee notes to the Company at the 5^th floor of Yung Kee Building.  The fees the Company had to pay Proserve and Tricor were paid by YKR Group, as the Company had no bank account.  Proserve liaised with the Company’s registered agent in the BVI who administered its BVI corporate matters as required under BVI law.  And as required by that law, the register of members of the Company was kept in the BVI and was completed there.  Proserve kept a copy in Hong Kong.

35. The declaration and payment of dividends were considered and decided by the petitioner, Kwan Lai and Carrel via emails at yungkee.com.hk and signed by them in Hong Kong.  Long Yau was the immediate holding company of the operating subsidiaries and any dividend it declared was payable to the Company.  And as the Company did not have a bank account, the dividends were in fact paid to the Company’s shareholders by Long Yau and did not pass through the Company.

36. The Company maintained no financial records or accounts and there is no evidence of the directors discussing its financial situation (§59 of the Judgment).  Mr Jat referred us to the minutes of the board meeting of the Company on 30 November 2009 and submitted that this was an occasion on which there was discussion of the financial affairs of the Company.  We do not agree with this.  The mere fact that the directors of the Company were in agreement it would be desirable to lay down some policies for handling the Company’s financial information by a designated person in a strict confidential manner (this was in light of the petitioner’s request for financial information) could hardly be regarded as a real discussion of the financial affairs of the Company.

37. The Company had no agreement which allowed it to occupy any part of the Yung Kee Building.

Winding up a foreign company – a discretionary jurisdiction

38. We are concerned with a discretionary jurisdiction.  The court does not regard section 327 as giving it carte blanche to wind up a foreign company.  Judge-made conditions have been laid down on the principles to be observed whether the court should exercise its discretion to wind up a foreign company.  The three principles or core requirements, laid down by Knox J in Re Real Estate Development Co [1991] BCLC 210 and approved by the English Court of Appeal in Stocznia Gdanska SA v Latreefers Inc (No 2) [2001] 2 BCLC 116 have been applied in Hong Kong (Securities and Futures Commission v MKI Corp Ltd [1995] 2 HKC 79 at 84D to G; Re Zhu Kuan Group Co Ltd, HCCW 874/2003, 2 August 2004, §26 ; and Re Beauty China Holdings Ltd [2009] 6 HKC 351 §§22 and 23).  They are as follows:

(1)  there must be a sufficient connection with Hong Kong, but this does not necessarily have to consist in the presence of assets within the jurisdiction;

(2)  there must be a reasonable possibility that the winding-up order would benefit those applying for it; and

(3)  one or more persons interested in the distribution of the company’s assets must be persons over whom the court is able to exercise jurisdiction.

39. Our focus is on the first requirement, as there is no dispute that the other two requirements are satisfied in this instance (the Judgment §79).

40. It is pertinent to note a few matters at the outset.

41. First, the assertion of a jurisdiction to wind up a company by means of proceedings taking place outside the state of its incorporation runs counter to the maxim by which Hong Kong law regards the domiciliary law of a company (i.e. the law of its state of incorporation) as supplying the proper legal regime to control the vital questions of the company’s legal personality, status and continued existence as a legal person (Fletcher, The Law of Insolvency (4^th ed, 2009), §§30-007 & 30-009).  The jurisdiction conferred by section 327 is therefore exorbitant, because all other things being equal, the appropriate forum for the winding up of a company is the court having jurisdiction in its place of incorporation (Re Rodenstock Gmbh [2012] BCC 459 §21).

42. Second, the purpose of the first requirement is to ensure that the court would decline to exercise a prima facie exorbitant jurisdiction save where it is appropriate to do so (Re Rodenstock Gmbh §21).  A connection “sufficient to justify the court setting in motion its winding-up procedures over a body which prima facie is beyond the limits of territoriality” must be shown (Re Real Estate Development Co, 217d to e; Re Gottinghen Trading Ltd [2012] 3 HKLRD 453 §23).  No single criterion, nor any prescribed combination of criteria, is to be considered as supplying an essential precondition for meeting this requirement: it is a matter of judgment to be made in the light of the evidence presented to the court in a particular case.  It is clear that the court should not exercise its jurisdiction in respect of a foreign company where there is no connection whatever between the foreign company and this jurisdiction, other than the decision of the petitioner to present a winding-up petition here (Fletcher, The Law of Insolvency, §30-013; Stocznia Gdanska SA v Latreefers Inc (No 2) §29).

43. Third, the just and equitable ground to wind up a foreign company under section 327(3)(c), although expressed in terms identical to section 177(1)(f) which applies to the winding up of a company formed and registered under the Companies Ordinance, has seldom been employed in isolation as a ground to wind up a foreign company.  The apparently sparing use of section 327(3)(c) is due to the principle mentioned above – that the court would not assume jurisdiction to wind up a foreign company unless it is satisfied this is defensible in terms of justice and expediency (Fletcher, The Law of Insolvency, §30-027).

44. Fourth, nearly all the authorities on the winding up of foreign companies were concerned with creditors’ petitions to wind up on the insolvency ground.  Other than Re Gottinghen Trading Ltd, also decided by Harris J and the judgment of which was handed down after the trial of the present case, no decided case in any common law jurisdiction was cited to this court dealing with the winding up of a foreign company in a shareholders’ dispute on the just and equitable ground (the Judgment §70)[1].  In the case of solvent companies sought to be wound up by an aggrieved shareholder, it would have to be a “very exceptional case” for the court to exercise its jurisdiction to wind it up.  An example is where the parties have concluded a shareholders’ agreement with a choice-of-law and jurisdiction clause in favour of the local court (Hollington on Shareholders’ Rights (7^th ed, 2013), §12-05).

45. Fifth, a distinction may be drawn between a creditors’ winding-up petition on the insolvency ground and a shareholder’s petition on the just and equitable ground such that more stringent requirements are required for the court to assume jurisdiction to wind up a foreign company in the case of the latter.  Creditors are not personally attached to the state of incorporation of a foreign company.  They might suffer prejudice if their fate were subjected exclusively to the law and processes of the state of incorporation.  If there are assets within the local jurisdiction, creditors may justifiably seek assistance from the local court to safeguard their legitimate interests within the jurisdiction (Fletcher, The Law of Insolvency, §30-010; the Judgment §§75 and 78).  In contrast, the shareholders of a foreign company must have voluntarily adopted and approved the law of the state of incorporation as governing the company’s legal status.  There is much less justification for a shareholder to seek to circumvent the law of the state of incorporation and resort to another jurisdiction to wind up the company, especially where its assets are located in the place of incorporation and the law of the state of incorporation is able to provide the same remedy.

The broad grounds of appeal on winding-up jurisdiction

46. The judge’s reasoning in declining to assume winding-up jurisdiction was encapsulated in the Judgment at §80:

“The Petitioner argues that the Company has very strong connections with Hong Kong. This argument has an immediate, superficial appeal. The Petitioner and Kwan Lai live here and the Group’s business involves operating a well known restaurant from a building in Wellington Street, which one of its companies owns. However, the argument requires one to ignore the principle that a company is an independent legal person. With limited exceptions the affairs of a holding company’s subsidiaries are not the affairs of the holding company. In this case the Company does not own directly the operating subsidiaries. It owns shares in another BVI company. I have decided that the Company has not established a place of business here. Indeed it does not seem to me that properly analysed it operates a business in Hong Kong at all. As I have explained its directors did not deliberate upon and direct, as directors of the Company, the business of the operating subsidiaries. In my view there is insufficient connection between the Company and Hong Kong to justify the Hong Kong Companies Court exercising its discretion and accepting jurisdiction over a dispute between the Company’s shareholders. They are shareholders in a BVI company and they can take their dispute to the courts of the jurisdiction in which the Company is incorporated which provides remedies, which are for all practical purposes the same as those available here under sections 168A and 327(3)(c) of the Companies Ordinance …”.

47. The various grounds of appeal advanced on behalf of the petitioner in respect of the winding-up jurisdiction may be grouped under two broad headings.

48. First, it is contended that the judge was wrong in holding that the affairs of the subsidiaries were not the affairs of the Company in ascertaining if the Company had sufficient connection with Hong Kong.  On the facts, the Company was able to exercise control over the affairs of the group and all its subsidiaries through resolutions passed at the shareholders’ and board meetings of the Company.  Some or all of the directors of the subsidiaries were the directors of the Company.  The financial affairs of the subsidiaries clearly had an impact on the Company.  All the sub-subsidiaries were substantially connected to Hong Kong. Justice and common sense would require the court to focus on the business realities and the economic entity of the whole group rather than to be strictly bound by the separate legal entities of the companies within the group.

49. Second, even assuming the affairs of the subsidiaries were not to be treated as the affairs of the Company for present purpose, the judge failed to consider adequately or at all the internal corporate activities of the Company in the context of an investment holding company.  Mr Jat relied on a list of 12 factors as demonstrating the Company’s connection with Hong Kong. By and large, they were among the matters we have summarised earlier in relation to the Company’s business and its activities.

50. We will consider the grounds of appeal under the two broad headings as described above.

The affairs of the subsidiaries and the business interests of the group

51. Mr Jat referred the court to a number of authorities decided under the unfair prejudice provision equivalent to our section 168A in support of his argument that the affairs of a company should be construed liberally and that the court should look at the business realities of the situation instead of taking a narrow legalistic view.  In a case where de facto control is exercised by one company over the affairs of another company, it was held that the conduct of a wholly owned subsidiary may be regarded as part of the conduct of the affairs of the parent company for the purpose of establishing unfair prejudice under the statutory provision (Scottish Cooperative Wholesale Society Ltd v Meyer [1959] AC 324 at 342 to 343; In re Dernacourt Investments Pty Ltd (1990) 20 NSWLR 588 at §§8 and 9; Nicholas v Soundcraft Electronics Ltd [1993] BCLC 360 at 364g to h; Rackind v Gross [2005] 1 WLR 3505 at §§21 to 29; Re Sun Hung International Ltd [2009] 2 HKLRD 418 at §§24 to 27).

52. Mr Jat also referred to other authorities not in the context of section 168A to make the point that the general tendency in modern authorities is that the courts would focus on the economic entity of a group of companies and ignore the separate legal entities of various companies within a group where justice and common sense so require – Harold Holdsworth & Co (Wakefield) Ltd v Caddies [1955] 1 WLR 352 at 367 (an action of damages for breach of contract); DHN Food Distributors Ltd v Tower Hamlets London Borough Council [1976] 1 WLR 852 at 860 and 861 (statutory compensation under a compulsory purchase order).

53. Lastly, Mr Jat relied on two local authorities in which the court exercised its jurisdiction on a creditor’s petition to wind up a foreign holding company whose business and interests were carried on and held through subsidiaries in Hong Kong – Re Zhu Kuan Group Co Ltd and Re Beauty China Holdings Ltd.  He submitted on these authorities that the court would take into account the interests of a group of companies in Hong Kong for the purpose of establishing sufficient connection of the holding company with Hong Kong to exercise the winding-up jurisdiction.  He criticised the judge’s approach at §80 of the Judgment as overly technical, artificial and inimical to the economic realities of the Company and the group.  He contended it is wrong to disregard the existence of the group’s substantial assets and business in Hong Kong simply because an intermediate holding company in the BVI, Long Yau, had been interposed between the Company and the sub-subsidiaries, when the sub-subsidiaries are substantially connected to Hong Kong.

54. We do not think it right to pray in aid the cases decided under the statutory provision equivalent to our section 168A in establishing unfair prejudice.  The broad and liberal construction given to the “affairs of a company” in that context is not apposite in the very different context of the exercise of a winding-up jurisdiction that is prima facie exorbitant, and which the court will not exercise unless this is defensible in terms of justice and expediency.  In giving a particular construction to the words of a statute, the context of that statutory provision must be borne in mind.  Thus, in approving the judgment of the lower court in Scottish Cooperative Wholesale Society Ltd v Meyer at 343, Viscount Simonds emphasised that “the section [i.e. section 210 of the Companies Act 1948, equivalent to our section 168A] warrants the court in looking at the business realities of the situation and does not confine them to a narrow legalistic view.”  As Mr Bleach SC has submitted, it would not be right to transplant wording from section 168A which relates to the substantive question of unfair prejudice to a wholly different statutory context dealing with the discretionary jurisdiction to wind up a foreign company.

55. It is pertinent to bear in mind the fundamental principle that each company in a group of companies is a separate legal entity and it is expected that the court would apply the principle of Salomon v A Salomon & Co Ltd [1897] AC 22 in the ordinary way (Adams v Cape Industries Plc [1990] 1 Ch 433 at 532D and 544F).  The English Court of Appeal in Adams v Cape Industries Plc analysed a number of cases, which included the cases relied on by Mr Jat – Scottish Cooperative Wholesale Society Ltd v Meyer, Harold Holdsworth & Co (Wakefield) Ltd v Caddies and DHN Food Distributors Ltd v Tower Hamlets – and rejected the argument that the members of a group of companies constituted a single commercial unit and that for jurisdictional purposes, the presence of an Illinois subsidiary in the USA should be treated as the presence of an English company and its English subsidiary.  The court had this to say at 536D to G and 537C:

“It is not surprising that in many cases such as Holdsworth [1955] 1 WLR 352, Scottish Co-operative [1959] AC 324, Revlon [1980] FSR 85 and Commercial Solvents [1974] ECR 223, the wording of a particular statute or contract has been held to justify the treatment of parent and subsidiary as one unit, at least for some purposes. The relevant parts of the judgments in the DHN case [1976] 1 WLR 852 must, we think, likewise be regarded as decisions on the relevant statutory provisions for compensation, even though these parts were somewhat broadly expressed, and the correctness of the decision was doubted by the House of Lords in Woolfson v Strathclyde Regional Council, 1978 SLT 159 …

Mr Morison described the theme of all these cases as being that where legal technicalities would produce injustice in cases involving members of a group of companies, such technicalities should not be allowed to prevail. We do not think that the cases relied on go nearly so far as this. As Sir Godfray submitted, save in cases which turn on the wording of particular statutes or contracts, the court is not free to disregard the principle of Salomon v A Salomon & Co Ltd [1897] AC 22 merely because it considers that justice so requires. Our law, for better or worse, recognises the creation of subsidiary companies, which though in one sense the creatures of their parent companies, will nevertheless under the general law fall to be treated as separate legal entities with all the rights and liabilities which would normally attach to separate legal entities. …

If a company chooses to arrange the affairs of its group in such a way that the business carried on in a particular foreign country is the business of its subsidiary and not its own, it is, in our judgment, entitled to do so. Neither in this class of case nor in any other class of case is it open to this court to disregard the principle of Salomon v A Salomon & Co Ltd [1897] AC 22 merely because it considers it just so to do.”

56. And at 538G, the court agreed with these observations of Robert Goff LJ in Bank of Tokyo Ltd v Karoon (Note) [1987] AC 45 at 64:

“[Counsel] suggested beguilingly that it would be technical for us to distinguish between parent and subsidiary in this context; economically, he said, they were one. But we are concerned not with economics but with law. The distinction between the two is, in law, fundamental and cannot here be bridged.”

57. The same passage in Bank of Tokyo Ltd v Karoon (Note) was cited with approval in Prest v Petrodel Resources Ltd [2013] 3 WLR 1 at §8 in which the Supreme Court re-affirmed the principle that “subject to very limited exceptions, most of which are statutory, a company is a legal entity distinct from its shareholders” and that “the separate personality and property of a company is sometimes described as a fiction, and in a sense it is.  But the fiction is the whole foundation of English company and insolvency law.”

58. The complex corporate structure of the group, as shown in the chart annexed to this judgment, was the result of professional advice adopted by Kam Senior, to consciously distance the ultimate ownership of his assets from Hong Kong with a view to avoid paying estate duty.  For this reason, a BVI company, Long Yau, was interposed between the Company and the sub-subsidiaries operating or holding properties in Hong Kong.  The Company holds no assets in Hong Kong.  None of the BVI companies, in the intermediate layer, were registered under Part XI of the Companies Ordinance.  No attempt was made by the petitioner and Kwan Lai to change the corporate structure in 2006 or 2009.  It was accepted by Mr Jat that until the restructuring was completed in April 2009, the Company probably did not have a place of business in Hong Kong.  Having consciously distanced the ultimate holding company from Hong Kong, it would be difficult to adopt a contrary position that for the exercise of the winding-up jurisdiction, the Company should be regarded as having sufficient connection with Hong Kong.

59. As was said by Lewison J in Reeves v Sprecher [2008] BCC 49 at §19 (this was in the context of assuming jurisdiction to continue a derivative claim in relation to a foreign company):

“There is one further matter which seems to me to be relevant. Not only is Mr Reeves a shareholder in a corporation incorporated in Nevis, he participated in the choice of the place of incorporation. At any rate it was always part of the plan that at least one entity would be an offshore corporation. No doubt that choice was made for reasons that seemed good at the time. One of the reasons for choosing the place of incorporation of a company is that it will be governed by the law of that place. But having made the choice of the place of incorporation, it does not seem to me to be right to repudiate that choice when things go wrong.”

60. As for Re Zhu Kuan Group Co Ltd and Re Beauty China Holdings Ltd, in which it was held there was sufficient connection of the foreign holding company with Hong Kong to justify the exercise of the discretionary winding-up jurisdiction, on the facts of these cases an adequate connection was clearly and substantially established.

61. In Re Zhu Kuan Group Co Ltd, although the subject company was an investment holding company and did not operate any business in its own right but conducted its business through a number of subsidiaries (§3 of the judgment), the holding company and one of its Hong Kong subsidiaries had borrowed substantial funds from a number of local banks to finance their operations and those of their subsidiaries, so in that sense the holding company had carried on business in Hong Kong (§§4 and 27(2) of the judgment).  Further, the holding company directly held subsidiaries in Hong Kong and some of these directly held subsidiaries in turn held shares in other companies incorporated in Hong Kong or shares in a company incorporated abroad but listed in Hong Kong (§§27(1) and 32 of the judgment).  In respect of the indirect interests of the holding company in the sub-subsidiaries, Barma J (as he then was) said at §34 of the judgment that he did not consider that “these add anything further” to the connection which he considered to exist by virtue of the ultimate holding company’s interests in the directly held subsidiaries, as he had already taken these indirect interests into account in assessing the strength of that connection.

62. As for Re Beauty China Holdings Ltd, the subject company was again an investment holding company and through some of its subsidiaries carried out the manufacturing and trading of cosmetic products (§26 of the judgment).  It was found on the evidence that the holding company had maintained an office in Hong Kong and had carried on business at such office (§§27 to 35 of the judgment).  The holding company had two wholly owned subsidiaries incorporated in Hong Kong (§36 of the judgment), one of them was indirectly held by the subject company (§49 of the judgment) and it is unclear from the judgment if the other Hong Kong subsidiary was directly or indirectly owned.

63. The facts in these two cases should be looked at as a whole.  As mentioned earlier, no single criterion is to be considered as supplying an essential condition for meeting the requirement of sufficient connection.  These two cases do not provide support for the contention that an investment holding company would have a sufficient degree of connection with Hong Kong solely on the basis of indirectly held interest in Hong Kong no matter how tenuous other connecting factors may be.

64. We find these words of Peter Gibson LJ in Re Titan International Inc [1998] 1 BCLC 102 at 108i to 109a particularly instructive:

“The petition against the company makes no allegation of any activity by the company in this country nor as to the presence of any assets within the jurisdiction. The fact of the matter is that the company has done nothing whatever in the jurisdiction. To arrogate to the English court jurisdiction to wind up a foreign company merely because of its association as an investment vehicle outside the jurisdiction with another foreign company that has been active within the jurisdiction would be in my view to make a giant, impermissible and unjustified extension of the jurisdiction of the English court. No authority has been drawn to our attention which supports any such extension of jurisdiction.”

65. For the above reasons, we reject the first broad ground of appeal that the affairs of the sub-subsidiaries in Hong Kong should be regarded as establishing a sufficient degree of connection to found jurisdiction to wind up the Company.

The internal corporate activities of an investment holding company

66. We turn to the internal corporate activities of the Company, which have been summarised earlier.

67. Mr Jat submitted that in the context of an investment holding company, its business is the management of its affairs and the affairs of its subsidiaries and it would be contrary to commercial reality to expect that the Company would have done anything beyond the directors making management decisions for the Company and the group, as the principal business activities were undertaken through the indirectly held subsidiaries.  On the facts, the Company was able to and did exercise control over the affairs of the group and all its indirectly held subsidiaries through resolutions passed at the shareholders’ and board meetings of the Company.  Upon securing control of the Company’s board, Kwan Lai was able to override all objections of the petitioner and appointed his son Carrel as an additional director of Long Yau and YKR Group.  And once Kwan Lai and Carrel had taken control over the boards of the Company, Long Yau and YKR Group, the petitioner was effectively side-lined in the management of the business of all the companies within the group.  Mr Jat termed the decisions made by the board of the Company in the board meetings and written resolutions “executive decisions”.  He emphasised that they were filtered down to the subsidiaries directly or indirectly held by the Company and that they were made at the Yung Kee Building in Hong Kong.

68. It is pertinent to note that most, if not all, of the decisions and resolutions of the Company relied upon to establish sufficient connection – whether of the shareholders or the directors – flowed from the pre-emptive strike of Kwan Lai in reconstituting the boards of the Company, Long Yau and YKR Group by adding his son, which marked the onset of the breakdown of the relationship between the petitioner and Kwan Lai.  Such decisions of the Company could hardly be considered as the normal or regular business of the Company.  The Company was all along a passive investor in a BVI company, Long Yau, with its shareholding in Long Yau its only asset.  But for the discord between the petitioner and Kwan Lai, the board meetings and resolutions of the Company would not have taken place.  It does not appear to us that such decisions and resolutions could be used to establish the requisite degree of connection for the court to exercise its jurisdiction to wind up a foreign company.  The mere presence of all shareholders and directors making internal administrative decisions in Hong Kong, such as changing the constitution of the board and declaring dividends, is not of itself sufficient to establish substantial connection between the company and Hong Kong.

69. We reject also the second broad ground of appeal of the petitioner.

Conclusion on jurisdiction under section 327(3)(c)

70. For the reasons given above, we see no reason to disturb the exercise of discretion of the judge in declining to exercise the winding-up jurisdiction under section 327(3)(c).  There is nothing to find fault with his reasoning in §80 of the Judgment.

71. When the judge discussed the difference between a creditor’s petition on the ground of insolvency and a petition on the just and equitable ground arising out of a shareholders’ dispute, he mentioned in §78 of the Judgment (and in his decision in Re Gottinghen Trading Ltd §25) that in the latter case, relevant factors to establish connection with Hong Kong are likely to include: the location at which the company primarily carries on business; the shareholders’ connection, if any, with Hong Kong; and where the matters giving rise to the dispute occurred.  The first of these factors is not controversial.

72. As we are of the view that the reasons given by the judge in §80 of the Judgment are sufficient for him to exercise his discretion to decline jurisdiction it is not strictly necessary for us to consider the factors of shareholders’ connection with Hong Kong and the place in which the matters giving rise to the dispute occurred.  What we say about these factors would be obiter.

73. The relevance of the shareholders’ connection could, we think, be understood in the context of the third core requirement, namely, that there must be one or more persons interested in the distribution of the company’s assets over whom the court is able to exercise jurisdiction.  Otherwise, we do not think it is right to blur the distinction between the shareholders and the company, that it is sufficient connection between the company and the jurisdiction that must be established.

74. Mr Jat submitted on the basis of another decision of Harris J in Re Pioneer Iron and Steel Group Co Ltd, HCCW 322/2010, 6 March 2013 at §38 that the presence of a company’s controlling mind in Hong Kong can provide substantial connection with Hong Kong.  But as the judge rightly recognised at §38, the controlling mind in that case was of a commercially active company.  That is a far cry from the present situation in which the Company is a passive investor and its directors did not make business decisions for the Company.

75. As for the place in which the matters giving rise to the dispute occurred, we are inclined to agree with Mr Bleach that this factor in itself is unlikely to give rise to sufficient connection between the company and the jurisdiction.  It seems to us that this factor may be of greater relevance when the issue of forum non conveniens is considered, after the three core requirements being the basis for the exercise of jurisdiction have been established.

76. In any event, when the judge came to consider the various factors in §80 of the Judgment whether he should assume the winding-up jurisdiction, he did not (rightly, in our view) attach weight to the connection of the shareholders and directors (the petitioner and Kwan Lai) with Hong Kong, as this would require one to “ignore the principle that a company is an independent legal person”.  As regards the place where the matters giving rise to the dispute occurred, the judge rightly declined to give weight to this in view of his finding that the Company did not operate a business in Hong Kong at all and its directors “did not deliberate upon and direct, as directors of the Company, the business of the operating subsidiaries”.

77. Mr Jat submitted that nothing of significance to the Company happened in the BVI.  The judge was right to reject this and to hold that the Company’s connection with the BVI is very real (§62 of the Judgment).  The law of the state of incorporation governs the status and continued existence of the company.  As mentioned earlier, all other things being equal, the court in the place of incorporation is the appropriate forum to wind up the company.

78. The judge pointed out in the concluding part of §80 of the Judgment that the shareholders of the Company can take their dispute to the BVI courts and that the law of the place of incorporation provides the same remedies to wind up the Company.  The availability of winding-up relief in the country of incorporation is a relevant consideration (Re OJSC Ank Yugraneft [2010] BCC 475 §18).  The assets of the Company, being its shares in Long Yau, are located in the BVI.  Mr Jat has not maintained his submission that any winding-up order made by the BVI courts would not be recognised or enforceable in Hong Kong.  The principle is that the court of the country of domicile will act as the principal court to govern the liquidation, and courts in other jurisdictions will act as ancillary to the principal liquidation (Re English, Scottish and Australian Chartered Bank [1893] 3 Ch 385 at 394).

79. We affirm the judge’s exercise of his discretion not to assume an exorbitant jurisdiction to wind up the Company.  It has not been demonstrated to the satisfaction of the court that in the particular circumstances of this case, it would accord with justice and expediency to deal with the winding up of the Company in this shareholders’ dispute.  We see no justification for the petitioner not to take the dispute to the courts of the place of incorporation.

Establishing a place of business in Hong Kong

80. We turn to consider the requirement for the exercise of jurisdiction under section 168A, namely, whether the Company has established a place of business in Hong Kong.  The factual findings on the business and activities of the Company will not be repeated.

81. We will first set out those legal propositions that do not appear to be in dispute.

82. First, “establishing a place of business” is not the same as carrying on business in the jurisdiction.  The expression “establishing a place of business” points to the company having “a local habitation of its own” (§29 of the Judgment, citing Singamas Management Services Ltd v Axis Intermodal (UK) Ltd [2011] 5 HKLRD 145 at §33, and Lord Advocate v Huron and Erie Loan and Savings Co 1911 SC 612 (1^st Division) at 616).

83. Second, the word “established” connotes not only the setting up of a place of business at a specific location, but a degree of permanence or recognisability as being a location of the company’s business.  The concept is of some more or less permanent location, not necessarily owned or even leased by the company, but at least associated with the company and from which habitually or with some degree of regularity business is conducted (Re Oriel Ltd [1985] BCLC 343 at 347f to g; §30 of the Judgment).

84. Third, “business” in the inclusive definition of “place of business” in section 341 (which defines “place of business” to include a share transfer or share registration office, to close the loophole in Badcock v Cumberland Gap Park Co [1893] 1 Ch 362) should be interpreted in the general sense to mean activities, and not be confined to the narrow sense of commercial transactions (Elsinct (Asia-Pacific) Ltd v Commercial Bank of Korea Ltd [1994] 3 HKC 365 at 372F to I).  The deletion of the words “but does not include a place not used by the company to transact any business which creates legal obligations” in section 341 by the Companies (Amendment) Ordinance 2004 (which came into effect on 14 December 2007) indicates that it is not necessary that the place of business is used to transact business which creates legal obligations (§§25 and 26 of the Judgment).

85. Fourth, the “business” carried on in the present context must be activities connected with the company’s paramount or subsidiary objects. As stated in Elsinct at 371A to B, after considering Actiesselskabet Dampskib ‘Hercules’ v Grand Trunk Pacific Railway Co [1912] 1 KB 222 at 227 to 228 and South India Shipping Corporation  Ltd v Export-Import Bank of Korea [1985] 1 WLR 585 at 592: “The establishment of an office within the jurisdiction where activities connected with its subsidiary object and incidental to the main business are conducted would be sufficient to constitute the office a ‘place of business’ within that provision.”  And at 373C, it is necessary to consider the office’s main activities in the light of the company’s paramount and subsidiary objects, in order to ascertain if these activities would bring the office within the meaning of a “place of business” in section 341.  These observations in Elsinct, though made in respect of section 341 which was worded differently at the time, are still relevant and applicable to the present provision as amended (§§31 and 32 of the Judgment).

The petitioner’s arguments on establishing a place of business in Hong

Kong

86. It is the petitioner’s contention that since at least April 2009 (when the restructuring was completed), the Company had established a place of business at the 5^th floor of Yung Kee Building.  The petitioner relied on the following matters:

(1)  As Ms Sunday Tse had testified, the Yung Kee Building was “the ‘headquarters’ of the Yung Kee Restaurant group”, and “all of the principal functions and roles connected with the operations of the business operate from the premises”.  The 5^th and 9^th floors and parts of the 10^th floor had been used as offices by the operating sub-subsidiaries in the group.

(2)  The petitioner and Kwan Lai had their own offices on the 5^th floor, where they managed and dealt with the affairs of the group.

(3)  The majority of the books and records of the group were kept in the Yung Kee Building.

(4)  About 20 staff members working in the Yung Kee Building were involved in the management, administrative or clerical roles of the group.

(5)  The petitioner’s requests for inspection of the documents of the group were made and dealt with at the offices at the Yung Kee Building.

87. Sabatier v The Trading Co [1927] 1 Ch 495 at 503 was cited by Mr Jat in support of the proposition that administrative activities – as opposed to trading activities – would be sufficient to constitute “business” for this purpose.

88. Mr Jat made submissions similar to his argument on the winding-up jurisdiction that the judge had failed to appreciate that the Company’s business was investment holding and that the internal corporate activities were precisely the kind of business that such a holding company would carry out.  The judge was wrong to hold that the activities that the Company engaged in were not sufficient to constitute “business” for present purpose.  He relied on the shareholders’ and board resolutions of the Company mentioned earlier and made the point that the decisions were made at the Yung Kee Building.  As for the fact that the board meetings were held on the 8^th floor not the 5^th floor, he submitted that was purely for reasons of convenience and space, not because the 5^th floor was not intended to be a place of business.

89. Mr Jat pointed to the fact that fee notes of the secretarial service providers of the Company were sent to the Company at the 5^th floor of Yung Kee Building, and submitted that to the minds of third parties, the Company’s place of business was the 5^th floor.

90. To some extent, his arguments in respect of jurisdiction under section 168A overlap with his arguments on the winding-up jurisdiction.

Internal corporate activities in the context of establishing a place of

business

91. The judge had posed these relevant questions at §32 of the Judgment: “What exactly does the Company do in Hong Kong?  How is it relevant to the Company’s activities more generally?  Can the activities undertaken in Hong Kong be sensibly characterised as carrying on business activities of the Company?”  After analysing the evidence in detail at§§47 to 62 , he came to the view at §63 that the matters relied on by the petitioner are not of themselves sufficient to support an inference that the Company had established a place of business in Hong Kong some time after April 2009 and before the petition was presented.

92. We agree with the judge’s reasoning and conclusion.

93. The internal corporate activities of the Company (for example, changing the membership of the board, declaring dividends) do not fall within the paramount or subsidiary objects of the Company.  As explained in Elsinct, such limited activities conducted in a Hong Kong office would not bring the office within the meaning of a “place of business” in section 341.  We reject Mr Jat’s submission that in respect of an investment holding company, the paramount and subsidiary objects would include the declaration of dividends and other internal activities.

94. We are inclined to think that Sabatier v The Trading Co was decided on its own special facts and cannot support a general proposition that the conduct of administrative activities alone would be sufficient to establish a place of business within the meaning of the statutory provision.  As explained in Buckley on Companies Acts (14^th ed, 1981), p 863, it was held in that case that where a foreign company, which had formerly carried on business in England, but had long since ceased to do so, still continued to have an office in England at which certain administrative business was transacted, such office was a place of business within the meaning of the statutory definition, in the absence of evidence that it was actively carrying on business in any other country.

95. The other authority mentioned in this connection by Mr Jat, Ho Tai Kwan v Global Innovative Systems Inc [2008] 1 HKLRD 399 at §§15 to 27, was rightly rejected by the judge as an authority in support of the proposition that a company’s acts of internal administration were held to be sufficient to establish a place of business (§40 of the Judgment).  The activities of the defendant company in that case included raising finance for the acquisition of a manufacturing business (§5), issuing convertible bonds (§22), and negotiating and transacting business with the plaintiff at its Mongkok address, which was given as its corporate headquarters on the company’s website (§§20 and 25).

96. The judge was right to come to the view it cannot sensibly be said that the Company established a “more or less permanent location at the 5^th floor of the Yung Kee Building at which it habitually, or with at least some degree of regularity, conducted business affairs” and that the 5^th floor would seem to have been largely a correspondence address of the Company (§58 of the Judgment).

97. Insofar as reliance was placed on the activities of the sub-subsidiaries in the group as establishing a place of business within Hong Kong, we reject this submission for the reasons we gave in respect of sufficient connection with Hong Kong for the exercise of the winding-up jurisdiction.

Conclusion on jurisdiction under section 168A

98. The judge has reviewed thoroughly the Company’s activities on the totality of the evidence to determine whether an inference can properly be drawn that a place of business was established in Hong Kong at the time of the petition.  A list of matters pointing to the absence of a place of business in Hong Kong was set out in §64 of the Judgment.  We do not agree with Mr Jat that the matters set out in §64 are factually wrong, irrelevant, or misleading. In particular, we affirm §64(10) that the Company has never played any role or function of substance in the business or operations of the two operating sub-subsidiaries in the group.  It has all along been a passive investor in Long Yau, as correctly described by the judge.

99. We are satisfied on the facts as found, the judge has reached the right conclusion that the Company has not established a place of business in Hong Kong and hence the court has no jurisdiction to hear the petition under section 168A.

The cross-appeal

100. Although the judge held that the court in Hong Kong has no jurisdiction to entertain the petition, he also found that the affairs of the Company have been conducted in a manner unfairly prejudicial to the interests of the petitioner.  The judge further indicated at §128 of his judgment that had he concluded that the court had jurisdiction, he would have ordered Kwan Lai to purchase the petitioner’s shares in the Company.

101. For reasons given above, we agree with the judge’s conclusion on jurisdiction.  Since the respondents’ cross-appeal is only premised on this court’s reversal of the judge’s decision on jurisdiction (see the Respondents’ Supplemental Notice of 17 December 2013), strictly speaking we do not need to deal with the cross-appeal.  However, as we have heard submissions on the cross-appeal, we would succinctly deal with some of the arguments advanced against the judge’s findings on unfair prejudice, mindful of the fact that whatever we say would be obiter.

102. In the Supplemental Respondents’ Notice, the respondents advanced 14 grounds to the challenge the judge’s findings in this respect.  In their skeleton submissions, Mr Bleach and Mr Joffe advanced their arguments under the following headings,

(a) defective pleading;

(b) not all shareholders consented to the alleged quasi-partnership;

(c) no pre-existing understanding giving rise to equitable constraints;

(d) no evidence of established practice in the Company;

(e) effect of quasi-partnership;

(f) no unfair prejudice.

103. As submitted by Mr Jat, apart from the pleading points, some of the grounds are points of law whilst some are primarily challenges to the factual findings by the judge.  There are also grounds attacking the application of the law to the facts as found by the judge.

104. For reasons elaborated below, we are of the view that if it is necessary to determine this cross-appeal, the crucial issues should revolve around the application of the law to the facts of the case.

105. We would start by examining the law on unfair prejudice.  There is no disagreement between counsel on the broad principles to be applied and we can take the law from Hollington on Shareholders’ Rights, 7^th ed, §7-01,

“7-01

(1) To establish a claim under s.994, the aggrieved shareholder must demonstrate that (a) the affairs of the company in question have been conducted (b) in a manner which is unfairly (c) prejudicial to the interests of the petitioner or the shareholders generally.

(2) Both element (b), i.e. unfairness, and element (c), i.e. prejudice, have to be established. Conduct may be unfair without being prejudicial, and vice versa.

(3) As to (b), i.e. the requirement of unfairness:

(i) the concept of unfairness, although objective in its focus, is not to be considered in a vacuum. An assessment that conduct is unfair has to be made against the legal back-ground of the corporate structure under consideration. This will usually take the form of the articles of association and any collateral agreements and understandings between shareholders which identify their rights and obligations as members of the company;

(ii) these are the terms upon which the parties agreed to do business together, which include applicable rights conferred by statute. The starting point therefore is to ask whether the exercise of the power or rights in question would involve a breach of these terms;

(iii) these terms include, by implication, an agreement that any party who is a director will perform his duties as a director;

(iv) these terms are subject to established equitable principles which may moderate the exercise of strict legal rights when insistence on the enforcement of such rights would be unconscionable;

(v) agreements and understandings do not have to be contractually binding in order to be enforceable in equity;

(vi) it follows that it will not ordinarily be unfair for the affairs of a company to be conducted in accordance with the provisions of its articles or any other relevant and legally enforceable agreement, unless it would be inequitable for those agreements to be enforced in the particular circumstances under consideration. Unfairness may, to use Lord Hoffmann’s words, “consist in a breach of the rules or in using rules in a manner which equity would regard as contrary to good faith”: see O’Neill v Phillips [1999] 1 WLR 1092 at 1099A; the conduct need not therefore be unlawful, but it must be inequitable. Although it is impossible to provide an exhaustive definition of the circumstances in which the application of equitable principles would render it unjust for a party to insist on his strict legal rights, those principles are to be applied according to settled and established equitable rules and not by reference to some indefinite notion of fairness;

(vii) to be unfair, the conduct complained of need not be such as would have justified the making of a winding-up order on just and equitable grounds as formerly required under s.210 of the Companies Act 1948;

(viii) it is not enough merely to show that the relationship between the parties has irretrievably broken down. There is no right of unilateral withdrawal for a shareholder when trust and confidence between shareholders no longer exist. It is, however, different if that breakdown in relations then causes the majority to exclude the petitioner from the management of the company or otherwise to cause him prejudice in his capacity as a shareholder.

(4)  The court has a wide discretion with regard to the relief to be granted if unfair prejudice is made out, fashioning the remedy to the unfair prejudice which has been made out.”

106. Those principles were taken from the leading cases in England, in particular O’Neill v Phillips [1999] 1 WLR 1092.  As held by the Court of Final Appeal in Wong Man Yin v Ricacorp Properties Ltd [2003] 3 HKLRD 75, O’Neill v Phillips also represents the law in Hong Kong in the context of section 168A of our Companies Ordinance.  On the one hand, one must recognize that the parties have adopted a corporate structure with the rights and obligations between them being governed by the articles of association.  On the other hand, the law also provides for cases where the exercise of strict legal rights under the articles of association have to be subject to established equitable constraints stemming from agreement or understanding between the parties (by words or by conduct) on how they would do business together.  In the recent judgment of Arden LJ in Maidment v Attwood [2012] EWCA Civ 998; [2013] BCC 98, the concept of fairness was examined by reference to the terms upon which the parties agreed to do business, see §§21 and 22,

“21. The key phrase in section 994(1), “unfairly prejudicial”, comprises two elements, unfairness and prejudice but both of these must be understood in the context of company law. The concept of fairness inherent in this phrase is flexible and open-textured but it is not unbounded. The courts must act on a principled basis even though the concept is to be approached flexibly. They cannot decide whether to grant or refuse relief from unfair prejudice on the basis of palm-tree justice. The impact of the context was explained by Lord Hoffmann in O’Neill v Phillips [1999] 2 BCLC 1. The editors of Pettet’s Company Law : Company Law & Corporate Finance (Longman 4^th ed 2012) have described his speech as “state-of-the-art account of the rationale of this area of law”. So far as material to this case, Lord Hoffmann held:

‘Although fairness is a notion which can be applied to all kinds of activities, its content will depend upon the context in which it is being used. Conduct which is perfectly fair between competing businessmen may not be fair between members of a family. In some sports it may require, at best, observance of the rules, in others (‘it’s not cricket’) it may be unfair in some circumstances to take advantage of them. All is said to be fair in love and war. So context and background are very important.

In the case of s 459 [predecessor of section 994 in the Companies Act 1985], the background has the following two features. First, a company is an association of persons for an economic purpose, usually entered into with legal advice and some degree of formality. The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholders. Thus the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed. Secondly, company law has developed seamlessly from the law of partnership, which was treated by equity, like the Roman societas, as a contract of good faith. One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith. These principles have, with appropriate modification, been carried over into company law.

The first of these two features leads to the conclusion that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. But the second leads to the conclusion that there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith.’

22.  One of the most important matters to which the courts will have regard is thus the terms on which the parties agreed to do business together.  These are commonly found in the company’s articles.  They also include any applicable rights conferred by statute.  In addition, the terms on which the parties agreed to do business together include by implication an agreement that any party who is a director will perform his duties as a director.  Primary among these duties are the seven duties now codified in sections 171 to 177 of the Companies Act 2006. Under these duties, a director must act in the way which he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.  There is also the well-known duty to avoid conflicts of interest and duty: a director must avoid a situation in which he has an interest which conflicts with that of the company.  Six out of seven of these duties are fiduciary duties, that is, duties imposed by law on persons who exercise power for the benefit of others.  Non-compliance by the respondent shareholders with their duties will generally indicate that unfair prejudice has occurred.”

107. We agree with the judge (and there is no disagreement from counsel) that the expression of “quasi-partnership” is nothing more than a convenient label.  The use of such label should not be allowed to subvert the underlying question: whether a petitioner can pinpoint matters giving rise to an equitable consideration which makes it unfair for those conducting the affairs of the company to rely upon their strict legal powers.  The essence and the rationale of this concept had been explained by Lord Hoffmann in O’Neill v Phillips at 1098D to 1102B.

108. As observed by Arden LJ in Maidment v Attwood, ibid. at §28, it is important to recognise the adaptability of this remedy to the facts of each case.  For this reason, one should not simply refer to the judgments of other cases without regard to the facts and context of those cases.  One must also resist the temptation of reading parts of a judgment as if it laid down additional requirements to the exercise of the court’s power when the court was only applying the above well established principles to the facts of the very case before it.  As observed by Rimer LJ in Oak Investment v Boughtwood [2010] EWCA Civ 23; [2010] 2 BCLC 459 at §118,

“With respect to the judge, I would disagree that there is no such guidance. The 30 years of the jurisdiction created by s 994 and its statutory forebears has generated a considerable flow of jurisprudence on the disposal of 'unfair prejudice' petitions in the context of quasi-partnership companies, culminating in the decision of the House of Lords in O'Neill v Phillips [1999] 2 BCLC 1, [1999] 1 WLR 1092, in which the leading speech was delivered by Lord Hoffmann, a master in this field as in so many others. His speech, in particular Section 5, headed ‘Unfairly prejudicial’, provides the guidance that is required when approaching the assessment of allegations of unfairly prejudicial conduct in the affairs of a company, including one said to be of a quasi-partnership nature. There is, however, necessarily a limit to the general guidance that can be provided for the purposes of the resolution of any particular case. That is because such resolution must turn on the facts of the particular quasi-partnership relationship and the basis on which the company is established and agreed to be operated. Those facts and bases will vary from case to case.”

109. In the present case, the case of the petitioner on unfair prejudice was pleaded in the petition in the following manner,

(a) Under section B4, the petitioner pleaded the fundamental basis of cooperation. In particular, at §§33 and 36, the mutual understanding the petitioner and Kwan Lai was pleaded,

“33. It was the mutual understanding between the Petitioner and Kwan Lai that each of them would deploy their skill, expertise and business connections to expand and develop the business of the Restaurant and the Group in that:-

33.1 The Petitioner would be the General Manager of the Restaurant and in charge of its overall management including all aspects relating to administration, human resources, customer relations, sales and marketing.

33.2 Kwan Lai would be the General Manager responsible for supervising and overseeing the maintenance of the real properties owned by the Group as well as overseeing the administration and financial affairs of the Group.

…

36 Further, it was the mutual understanding between the Petitioner and Kwan Lai and certainly the expectation of the Petitioner that notwithstanding their respective roles in the Restaurant and the Group:-

36.1 The business and affairs of the Group would be jointly managed by the two of them, each has equal authority and power in directing and managing the business and affairs of the Group.

36.2  Each of them would be entitled to participate in the general management of the Group and be consulted on all major decisions concerning the affairs and business of the Groups.”

(b) In Sections D to J, different heads of conduct were pleaded as unfair prejudicial conduct.

(c) In the following paragraphs, more detailed particulars were given as to the events and matters supporting these allegations.  Section D focused on a series of resolutions passed which changed the balance of power in the boards of the Company and its subsidiaries starting from the written resolution of 7 July 2009 appointing Carrel as additional director of the Company.  The purpose and the overall effect of the resolutions were pleaded at §§63 and 95,

“D. Unilaterally Changing the fundamental Basis upon which the Group has been Managed

63 Without prior consultation or discussion with the Petitioner, from July 2009 onwards, Kwan Lai unilaterally designed and engaged in a series of acts described in sections D1 to D6 for the purposes of:-

63.1 changing the fundamental basis upon which he and the Petitioner had been managing the Group;

63.2 depriving the Petitioner’s rights to manage the business and affairs of the Company and the Group on the basis described in section B4 above; and

63.3 usurping the complete control over the Company and the Group.

…

95 Further, as a result of the 1^st to 5^th Purported Resolutions and the Further Purported Resolutions:-

95.1 the fundamental basis upon which the Petitioner and Kwan Lai had been managing the Company and the Group was materially changed, in that control and management of the Group have been effectively seized by Kwan Lai to the exclusion of the Petitioner; and

95.2  the substratum by which the Petitioner cooperated with Kwan Lai in the development and management of the Company and the Group was effectively destroyed.”

(d) Section D7 pleaded some further unfairly prejudicial conduct by reference to what were set out in the petitioner’s 3^rd Affirmation.

(e) Section E pleaded allegations on the misapplication of the group’s assets, including the unauthorised use of the godown referred by the judge in the Judgment.

(f) Section F referred to the excessive remuneration to Carrel and Yvonne.

(g) Section G referred to the failure to distribute dividends.

(h) Section H referred to denial of access to financial information.

(i) Section I referred to the exclusion from management.

(j) Section J referred to the failure to investigate certain questionable transaction concerning Ms Tse and KAFA Design & Decoration Limited.

(k) Section K referred to the developments in terms of attempts by the petitioner to sell his interests in the Company and the group.  §140 of the petition summed up the petitioner’s case as follows,

“140 In the circumstances, the Petitioner has completely lost any trust and confidence in the probity, good faith and competence on the part of Kwan Lai, who has repeatedly acted and continues to act contrary to the mutual understanding, the fundamental basis upon which the two brothers have cooperated in managing the Group in the past 40 odd years and his duties owed to the Company and the Group.”

110. In the Judgment at §96, the judge accepted that there had been a common understanding between the petitioner and Kwan Lai concerning the conduct of the Company’s affairs.  The common understanding, the judge held, could be inferred from the evidence.  In order to find out what was the common understanding as found by the judge, it is necessary to go to the preceding paragraphs in which the judge recited the submissions of the petitioner.  §§92 to 95 referred to the different areas of responsibility with the petitioner in charge of the restaurant operation and the equal rights and power between the two brothers in the overall control.  The judge’s conclusion at §108 set out what he found to be the basis of equitable constraints on the exercise of Kwan Lai’s legal rights as shareholder,

“108.  I do accept that as between the Petitioner and Kwan Lai their conduct in relation to the business since 1969, when Kwan Lai became involved in it, was such as to engage equitable constraints on the exercise of their legal rights as shareholders. That does not mean to say that there had to be unanimity in relation to all matters before any aspect of the Company’s affairs could be changed, but they had to conduct themselves in a way consistent with their long established practices.  I discuss this further in paragraph 112. The material aspect of those practices is that the Petitioner would remain in charge of those parts of the business with which he had previously been dealing, namely, the operation and promotion of the Restaurant and would have an equal say in the Company’s affairs.”

111. When he came to the question of unfair prejudice, though he referred to all the heads of allegations raised in the petition at §109 of the Judgment, the judge placed more emphasis on the change of control in terms of the reconstitution of the boards of the Company and Long Yau as a pre-emptive strike, see §§110 to 113.  At §114, the judge briefly addressed the other complaints in this way,

“114.  It does not seem to me to be necessary to go through all the Petitioner’s complaints in any detail.  It is clear from the way in which Kwan Lai took control of the Company and its principal subsidiary, interfered in the management of the Restaurant and Carrel’s behaviour that Kwan Lai had behaved in a manner which was inconsistent with the way in which he and the Petitioner had previously conducted the business and behaved towards one another.  In particular it is clear that Kwan Lai quite consciously took steps to control the Company and then exercised that control without proper regard to previous understandings. …”

112. Then he referred to the remuneration increase for Carrel and Yvonne and the use of the godown as matters demonstrating that Kwan Lai advancing his own and his immediate family’s interests at the expense of the petitioner at §§114 to 115.  In those paragraphs, the transactions were regarded by the judge to be objectionable not so much on the basis of their commercial demerits as opposed to their inimical effects on the trust and confidence between the two brothers by reason of the manner in which they were conducted due to the lack of regard for the petitioner’s reasonable expectation.

113. Thus, the judge’s decision on unfair prejudicial conducts rested primarily on his conclusions on Kwan Lai taking steps to control the Company and the lack of regard for the petitioner’s expectation.  There were allegations in the petition which were canvassed in the evidence and the submissions before the judge but on which he did not find it necessary to discuss in details.  Importantly, we note that the judge did not make findings on the allegations of exclusion from management and the mutual understanding in that regard.  He stopped at a finding of interference in the management of the Restaurant.  Further, he did not base his conclusion on unfair prejudice upon a finding that Kwan Lai should not have intermeddled in the Restaurant management at all.

114. We highlight these because there is a difference between the strengthening of control by Kwan Lai in terms of changing the composition of the boards and the exclusion of the petitioner from the management of the Company and the group altogether.  As submitted by Mr Joffe, the petitioner remained on the boards of the Company and the subsidiary companies.  Counsel submitted that in considering whether there is any equitable restraint over the exercise of Kwan Lai’s legal power in the affairs of the Company, it is necessary to examine specifically what actions are subject to equitable constraints and what are the equitable considerations that pertained to the exercise of the particular power in question.  Mr Joffe referred us to the judgment of Lord Hoffmann in O’Neill v Phillips to support his contention, in particular 1102G to 1103G where his lordship explained why it was not a question of legitimate expectation on the part of the petitioner but rather whether in fairness or equity the petitioner had the right to have the shares stemming from an agreement on the part of Mr Phillips.

115. Whilst we do not regard the fact that the petitioner remained on the boards as conclusively determinative on his complaints about exclusion from management (as there were cases where the court found exclusion from management being established even though a petitioner had not been removed from the board of directors, see by way of example Re RM Supplies (Inverkeithing) Limited [2009] CSOH 23), we agree with Mr Joffe that it is necessary to have regard to the specific acts and equitable considerations in question in assessing whether what Kwan Lai did was unfair.

116. With respect, the judge’s finding on mutual understanding as to equal say was equivocal.  On the one hand, the judge did refer to the petitioner having an equal say in the Company’s affairs at §108 of the Judgment.  On the other hand, he said at the earlier part of that paragraph that it does not mean that there had to be unanimity in relation to all matters before any aspect of the Company’s affairs could be changed.  Further, at §112, he made a specific finding that Kwan Lai could not have agreed to the petitioner having a veto on any proposal from Kwan Lai.  That seems to negate any suggestion of equal say in absolute terms.

117. The finding on lack of understanding or agreement as to a right of veto is, in our judgment, mandated by the circumstances under which the parties became shareholders of the Company, in particular the distribution of the shareholdings upon the dissolution of the Unit Trust and the acknowledged liberty on the part of Kelly, Kwan Ki and Madam Mak to deal with their shares as they wished.  The petitioner and Kwan Lai each held 35% of the shares in the Company whilst each of the other three shareholders held 10%.  The petitioner accepted under cross-examination that Kelly and Kwan Ki could exercise their votes in any manner they deemed fit.  There is no evidential basis for suggesting that the petitioner and Kwan Lai had reached a common understanding or agreement that they had to vote in unison wherever there was any difference in opinion amongst shareholders or directors.  By necessary implication, neither of them could have any right of veto if the matter were to be decided by votes.

118. Given that the petitioner did not have any equitable right to veto, what was the substance of the mutual understanding as regards equal say?  More precisely, does such mutual understanding give rise to an equitable constraint to bar Kwan Lai from exercising his rights as 55% shareholder to appoint Carrel as an additional director of the Company despite the objection from the petitioner?  This has not been clearly explained by the judge or counsel’s submissions as set out at §§92 to 96 of the Judgment.  At §§92 to 95, the judge set out counsel’s submissions on the history of development of the group business including the Restaurant and the roles played by the two brothers in them.  He also alluded to the fact that they trusted each other and the division of responsibilities was successful.  But how does that give rise to a common understanding that they would not exercise their voting rights to effect changes in the composition of the board in the way Kwan Lai did in July 2009?

119. Apart from the history and the mode of operations in the past, the petitioner also relied on the fact that it was a family business.  That history had to be viewed in the light of the following background,

(a)  it is accepted by the judge that during the lifetime of Kam Senior he had ultimate say over the affairs of the Company and the decision as to who would hold shares in the company which operated the Restaurant was solely that of Kam Senior, see §§12, 16 and 104 of the Judgment;

(b)  the shares in the Company were distributed to the petitioner and Kwan Lai in 2006 when shares were also distributed at the same time to three other shareholders who, as mentioned, were at liberty to vote in whatever manner and to transfer their shares as they wished;

(c)   in the transcript of the explanation by Mrs Tong to the petitioner as regards the wish of Kam Senior, she mentioned the possibility of Kwan Ki and Kelly becoming directors if they so wished;

(d)  Kelly’s evidence on her understanding as to the wish of Kam Senior in giving shares to members of the family other than the petitioner and Kwan Lai and her understanding when she gave her shares to Kwan Lai.  See §107 as to the judge’s finding on Kelly’s understanding.

120. At §112 of the Judgment, the judge tried to reconcile the apparent inconsistency between his finding that Kwan Lai had not agreed to any right of veto on the part of the petitioner and the finding that the two of them had equal say in the Company’s affairs by restricting the exercise of Kwan Lai’s right to exercise his majority voting power to situations where the petitioner was intransigent to proposals sensibly and reasonably presented.  In the following paragraphs, he characterised the reconstitution of the boards as a pre-emptive strike and the various acts of Kwan Lai and his children as being done with a lack of regard for the petitioner’s reasonable expectation in terms of respect to the latter’s views and position within the group.

121. With respect, in substance, this approach involved the determination of the fairness of the conduct of Kwan Lai by reference to the legitimate expectation of the petitioner.  It is an approach disavowed by Lord Hoffmann in O’Neill v Phillips.  The correct approach requires the examination of whether the petitioner can pray in aid of any equity to restrain the exercise of Kwan Lai’s majority voting power to appoint an additional director in the board of the Company.  If such equity cannot be identified, it matters not that the petitioner’s expectation was upset and that the trust and confidence between the brothers had been destroyed.  As Lord Hoffmann also pointed out in O’Neill v Phillips at 1104 F to H, there is no right of unilateral withdrawal from a company on a “no-fault” loss of trust and confidence basis.

122. On the facts of the present case, we do not think the history of the course of dealing can support a finding of mutual understanding to the effect that Kwan Lai could not exercise his majority voting power to change the composition of the board until or unless the petitioner acted in an intransigent manner towards some proposal sensibly and reasonably presented.  In the past, there had not been any difference in the voting powers between the two brothers and Kam Senior was in the ultimate control.  With the demise of Kam Senior, and the allocation of shares to different members of the family without any restraint on how those shares were to be transferred and how voting rights pertaining to those shares were to be exercised, there were going to be inevitable changes to the ultimate control over the affairs of the Company.

123. In view of that, it could not be inferred from the past operation that there was a mutual understanding that the division of responsibility between the two brothers in the past had to be continued.  However, the course of operation in the past did give rise to a mutual understanding that the petitioner could not be excluded from the management.  This is acknowledged by Kelly when she said at §39 of her affirmation that Kam Senior had ensured that all members of the family had the opportunity to be involved in the management of the business if they wished.

124. As we have said earlier, the fact that the petitioner remained on the board did not mean that he could not have succeeded on a case of exclusion from management. However, we do not deem it appropriate for us to express any conclusion in regard to this part of the petitioner’s case because,

(a)  the judge did not decide the case on this basis and there were several heads of the petitioner’s case on which he did not make any detailed findings.  In order to be able to come to a conclusion on this limb, such findings of fact are important;

(b)  counsel have not argued the case before us along this alternative line;

(c)   having regard to our conclusion on jurisdiction, it is not essential for us to come to any conclusion on this aspect of the case;

(d)  further, if the petitioner’s personal representative wishes to pursue the matter further, he or she may have to do so in the BVI and we do not wish to pre-empt the decision of the overseas court.

125. In light of these conclusions on the fact, we do not need to dwell on the other points raised by way of cross-appeal at great length. We would briefly deal with two points of law raised in the course of submissions by Mr Joffe.

126. The first point is whether a quasi-partnership could have arisen from dealings between the petitioner and Kwan Lai during the period when Kam Senior was alive and exercising absolute control over the business.  More precisely, since we are not dealing with a dispute arisen during the lifetime of Kam Senior, the question is whether as a matter of law the course of business from 1979 to December 2004 (when Kam Senior passed away) is capable of giving rise to an understanding between the petitioner and Kwan Lai which generated an equitable consideration in respect of the exercise of the legal rights in 2009 after they had become shareholders.

127. The second point is whether the existence of third party shareholders who were not party to the mutual understanding negates the equitable consideration to restrain the exercise of legal rights in accordance with the articles of association of the Company.

128. Though these are two different questions, in our judgment the answer is the same.  In short, as a matter of law, there is no absolute bar to prevent the operation of equity in either situation and whether an equitable restraint arises depends primarily on the facts of the case.  The court must have regard to the circumstances of each case to determine whether on its factual matrix the exercise of legal rights by a respondent is in contravention of some equitable principles which a petitioner can pray in aid.

129. Though the presence of third party shareholders may present equitable considerations against the imposition of constraints over the exercise of strict legal rights (due to unfairness to the third party shareholders), it is not an absolute bar. In Ebrahimi v Westbourne Galleries [1973] AC 360 at 379F, Lord Wilberforce referred to the scenario of sleeping members.  Even in other cases, due to the wide range of power which the court can exercise under section 168A (a buy-out order is not the only form of possible relief), there could be cases where equity can operate to grant relief without impinging upon the rights of the third party shareholders.

130. Mr Joffe submitted that there could not be any quasi-partnership if some of the shareholders were not parties to the quasi-partnership.  He relied on the concept of partnership in the guise of a corporation as the basis for the equitable consideration as expounded in some Canadian authorities, notably Re Hillcrest Housing Ltd (1998) 165 Nfld & PEIR 181 in which MacDonald CJTD traced the historical development of the partnership analogy at §§31 to 42.  Counsel submitted that if a company has several majority shareholders who have managed it and several minority shareholders who have not taken part in management, the company would not be a quasi-partnership unless all those shareholders who do not take part in management also understand that the company is to be conducted by the principal shareholders on a quasi-partnership basis.  Otherwise, he submitted, the other members who have not agreed to the quasi-partnership may suffer prejudice due to the possibility of unforeseen litigation risk arising from an understanding to which they were not privy and the possibility of a new shareholding structure imposed by a buy-out order which they might disapprove.

131. We accept that the position of third party shareholders is a relevant consideration and, depending on the facts of a case, the prejudice highlighted by Mr Joffe can present real and insurmountable difficulties to the grant of a particular kind of relief under section 168A.  However, as a matter of law, we do not think the partnership analogy is the only basis on which equitable constraints could have arisen. In Ebrahimi v Westbourne Galleries [1973] AC 360 at 379H to 380B, Lord Wilberforce sounded a note of caution against taking the partnership analogy too far,

“…. To refer, as so many of the cases do, to the ‘quasi-partnerships’ or ‘in substance partnerships’ may be convenient but may also be confusing. It may be convenient because it is the law of partnership which has developed the conceptions of probity, good faith and mutual confidence, and the remedies where these are absent, which become relevant once such factors as I have mentioned are found to exist: the words ‘just and equitable’ sum these up in the law of partnership itself. And in many, but not necessarily all, cases there has been a pre-existing partnership the obligations of which it is reasonable to suppose continue to underlie the new company structure. But the expressions may be confusing if they obscure, or deny, the fact that the parties (possibly former partners) are now co-members in a company, who have accepted, in law, new obligations. A company, however small, however domestic, is a company not a partnership or even a quasi-partnership and it is through the just and equitable clause that obligations, common to partnership relations, may come in.”

132. In O’Neill v Phillips, Lord Hoffmann elaborated on the jurisprudential basis for the imposition of equitable constraints over the unfair exercise of legal rights and referred to the formulation by Jonathan Parker J in In re Astec (BSR) Plc [1998] 2 BCLC 556 at 588.  It rests on a wider basis than the concept of partnership in the guise of a corporation.  His lordship then referred to the diversity of circumstances from which the equitable consideration could arise at 1101F to 1102A,

“…I think that one useful cross-check in a case like this is to ask whether the exercise of the power in question would be contrary to what the parties by words or conduct, have actually agreed. Would it conflict with the promises which they appear to have exchanged? … In a quasi-partnership company, they will usually be found in the understandings between the members at the time they entered into association. But there may be later promises, by words or conduct, which it would be unfair to allow a member to ignore. Nor is it necessary that such promises should be independently enforceable as a matter of contract. A promise may be binding as matter of justice and equity although for one reason or another … it would be enforceable in law.

I do not suggest that exercising rights in breach of some promise or undertaking is the only form of conduct which will be regarded as unfair for the purposes of section 459. For example, there may be some event which puts an end to the basis upon which the parties entered into association with each other, making it unfair that one shareholder should insist upon the continuance of the association. … The unfairness may arise not from what the parties have positively agreed but from a majority using its legal powers to maintain the association in circumstances to which the minority can reasonably say it did not agree …”

133. Notwithstanding its historical nexus with the law of partnership, the unfair prejudice remedy is now available to companies which cannot be regarded as quasi-partnership.  The crucial question is whether there are any equitable considerations arising from the dealings between the shareholders which call for restraints over the exercise of strict legal rights on the particular facts of the case.  Thus, in Fowler v Gruber [2010] 1 BCLC 563, a case cited by Mr Joffe, relief was granted even though the court held that the company had ceased to be a quasi-partnership before the occurrence of any of the events complained of in the petition.  Further, as Kwan J (as she then was) held in Re Money Facts Ltd HCCW 880 of 2001, 2 Feb 2004 at §33,

“The circumstances in which the equitable considerations would arise would vary from case to case. The fact that the three typical elements mentioned [in Ebrahimi] are found to exist does not necessarily mean that the court would draw the inference that there are superimposed equitable obligations on the company law rights and duties, what Lord Wilberforce had said is that their existence may bring into play the equitable considerations … Conversely, the fact that not all three elements are found to exist is not necessarily fatal to the existence of a quasi-partnership … Further, it is not necessary that there should be an express assurance or understanding between the parties concerned of the rights or obligations that are not contained in the articles of association, as in an appropriate case, such rights or obligations could be implied or inferred from the conduct of the parties …”

134. As regards the relevance of a settled course of conduct prior to the parties becoming shareholders, the point taken in the Respondents’ Supplemental Notice was that there could not be any quasi-partnership during the lifetime of Kam Senior when neither the petitioner nor Kwan Lai held any shares in the Company.  That must be correct as a matter of law but it has no significance in the present case because the conduct complained of took place after they had become shareholders.  The more pertinent question is whether the course of conduct during the lifetime of Kam Senior can be taken into account in determining whether there is any mutual understanding between the petitioner and Kwan Lai with regard to how their legal rights as shareholders would be exercised and whether such mutual understanding is capable of giving rise to equitable constraints.

135. It is not entirely clear whether Mr Joffe contended as a matter of law that the previous course of conduct whilst the two brothers had not yet become shareholders could not be taken into account in determining whether there was any quasi-partnership after they became shareholders.  When counsel addressed us on this part of the case, he placed more emphasis on the following,

(a)  the petition did not plead a case of quasi-partnership arisen after 2006 when the brothers became shareholders;

(b)  on the facts, there was no quasi-partnership between the brothers by virtue of the distribution of shares to other members of the family and their liberty to transfer the shares to others.

136. Insofar as Mr Joffe is contending that as a matter of law that the previous course of conduct is irrelevant, we must reject that submission.  The cases cited by Mr Jat show that there is no such rule of law: Fisher v Cadman [2006] 1 BCLC 499; Brownlow v GH Marshall Ltd [2000] 2 BCLC 655; Re Honeycool Refrigeration & Engineering Co Ltd [2009] 1 HKLRD 447; Re RM Supplies (Inverkeithing) Limited [2009] CSOH 23.  In our judgment, whether a previous course of dealings between two parties before they became shareholders or their predecessors in title is relevant to the subsistence of a quasi-partnership after they became shareholders must depend on the facts of the case.  Whilst Mr Joffe strived to distinguish those cases on the facts, we do not think he was able to say that those cases were wrong as a matter of law.

137. In respect of the pleading point, given our above conclusions (both on jurisdiction and on the facts) it is a matter of little moment in this appeal.  We would confine ourselves to the observation that all the material facts had been pleaded in the petition though the legal formulation of the petitioner’s case was not put in precisely the same way as it had been developed in the course of hearing.  If Mr Joffe failed on the other arguments, we do not think the pleading point can succeed.

Failure to pay dividends

138. The petitioner also contended (relying on Re a Company (No. 00370 of 1987) ex p Glossop [1988] 1 WLR 1068, Quinlan v Essex Hinge Co Ltd [1996] 2 BCLC 417 and Re Sam Weller & Sons Ltd [1990] BCLC 80) that it was unfairly prejudicial conduct for the Company not to pay reasonable amounts by way of dividends to its shareholders when it was clearly in a position to do so.  In support of this allegation, the petitioner pointed to his request, on 30 November 2009, that having regard to the very substantial cash reserves maintained by the group, Long Yau should consider paying dividends to the Company to enable it in turn to pay dividends to its own shareholders.  It was not disputed that the group had cash reserves of well over HK$800 million as at early 2010, and Kwan Lai’s own expert evidence was that Long Yau itself had net assets of over HK$620 million as at late 2010, made up of cash and amounts due from its subsidiaries.  Kwan Lai also accepted in his oral evidence that there were funds available out of which dividends could be paid.

139. The judge did not make any findings in relation to this complaint, so we do not have the benefit of his views in relation to it.  However, we are satisfied that on the basis of the available evidence, this complaint is not made out.  While the non-payment of dividends by a company which is clearly in a position to do so may constitute unfairly prejudicial conduct, as is illustrated by the cases to which Mr Jat referred, whether or not this is so will depend on the particular circumstances of the case under consideration.  Here, it is we think relevant to have regard to the following matters:-

(1)  Historically, throughout the period when Kam Senior was alive and controlled the affairs of the group, while dividends were regularly paid by YKR Group to its shareholders (resulting in the petitioner and Kwan Lai each receiving 10% of such dividends through their interests in Holly Join and Capital Adex respectively), Long Yau (which received 80% of such dividends) never itself paid any dividends.

(2)  This practice continued after Kam Senior’s death.  However, up until November 2009, by which time the relationship between the petitioner and Kwan Lai had already deteriorated, the petitioner had never suggested that Long Yau should pay dividends to its own shareholders.

(3)  When the petitioner raised the question of payment of dividends for the first time on 30 November 2009, it was unanimously resolved at directors’ meetings of both Long Yau and YKR Group held the same day that “a more considered and comprehensive dividend policy should be formulated” “as soon as a financial controller of the Group had been hired”.

(4)  Following the presentation of the petition, there have been three applications for validation orders (to which the petitioner has consented) to enable dividends to be paid by the Company to its shareholders, and dividends of HK$40 million, HK$60 million and HK$40 million respectively have been paid (the petitioner receiving 45% of those amounts on each occasion) between 2010 and 2012.

140. Against this background, we do not think that this complaint is justified.  Prior to November 2009, the petitioner had never taken issue with the failure of the Company to pay dividends to its shareholders. It was not until disputes between him and Kwan Lai had arisen that he raised the question of dividends for the first time.  When the issue was raised, the petitioner himself agreed (as is shown by the unanimous board resolutions) that the formulation of a dividend policy should await the appointment of a group financial controller.  Thereafter, despite the presentation of the petition, dividends that are not insubstantial in amount have in fact been paid.

141. Although Mr Jat sought to characterise the proposed appointment of a financial controller as an excuse to delay the formulation of a dividend policy and the payment of dividends, it should be remembered that the petitioner himself agreed on this course.  Further, it does not seem to us to be unreasonable for the proposed appointment to have been left in abeyance while these proceedings, which include an application for the winding up of the company, were in progress. Moreover, the absence of such an appointment has not prevented the Company from proceeding to declare and pay the dividends that it has done, for which validation orders have been obtained.

142. We therefore do not think that the petitioner has demonstrated any unfairly prejudicial conduct in relation to the payment of dividends, and this complaint takes matters no further.

Valuation

143. The final matter complained of by the petitioner relates to the basis on which properties owned by the property holding companies in the group (LY Properties and YK Properties) should be valued.  It was common ground that in valuing the Company, its property owning subsidiaries should be valued by reference to their net asset values, a basis which required the market values of the properties owned by them to be assessed.  This issue will only arise if we are wrong in agreeing with the judge that the court does not have (or should not exercise) jurisdiction in this case, and if we are further wrong in disagreeing with the judge by holding that he should not have found that unfair prejudice had been established.  Nonetheless, we shall deal briefly with the point, since it has been argued and the answer is, in our view, clear.

144. The judge held that the properties held by LY Properties and YK Properties should be valued on the basis of the assumptions adopted by Kwan Lai’s property valuation expert witness.  This involved valuing the Yung Kee Building on the basis of its actual use and subject to existing tenancies, with the caveat that the use of the 10^th floor should be consistent with the occupation permit.  In essence, this meant that the Yung Kee Building should be valued on the basis that it would be used for restaurant and office purposes only, and would not be put to use in some other, potentially more profitable, way, so as to maximise its value.  In particular, by restricting the use on the basis of which the building was valued to its current uses, a valuer would be directed to ignore the possibility of the property being let out to a non-restaurant tenant, such as a retailer, who would, given the location of the property, be willing to offer substantially higher levels of rental than would be offered by an operator of a restaurant.

145. It was said for the petitioner that in directing this approach to valuation to be adopted, the judge erred in two respects:-

(1)  First, it was said that this was contrary to the approach to valuation of a company for the purposes of an unfair prejudice petition set out in CVC v Demarco [2002] 2 BCLC 108, where Lord Millett indicated at §§41 to 42 and 45 of the judgment that the company should be valued on the basis of a notional sale of the business as a whole to an outside purchaser.  Here, an outside purchaser would not be constrained by the existing use of the building and so use it for restaurant and office purposes only, but would consider the alternative (more profitable) uses to which it might be put in deciding how much to pay for the Company as a whole.

(2)  Second, it was said that the judge’s direction was contrary to the general standards by which valuers in Hong Kong approach the valuation of property, namely by assessing it on the basis of a transaction between a willing buyer and willing seller at arm’s length, without taking account of special terms or characteristics, such as the particular use to which the property was actually put.

146. We do not think that these criticisms are justified.  In particular, we consider that the overriding consideration, in valuing a company for the purposes of ascertaining the price to be paid for a shareholding to be acquired by the party ordered in section 168A proceedings to acquire it from the other party, is fairness as between the parties.  This is clear from §38 of Lord Millett’s judgment in CVC v Demarco, where he said that which of the various approaches to valuation of a shareholding in a company (going concern without minority discount, going concern with minority discount and break up basis) should be adopted is to be determined by what fairness in a particular case requires.  Although Lord Millett does refer, in the passages referred to by Mr Jat, to the notion of an outside third party purchaser of the business as a whole, it is, we think, clear that this was with a view to ascertaining what fairness required in that case, and in particular in order to determine whether or not a discount should be applied to reflect the fact that the sale in that case was a sale of a minority stake in the company.

147. In this case, the judge correctly noted that both sides had expressed their intention to carry on the business of the Yung Kee Restaurant, should they end up as the owners of the Company following the making of a buy out order.  Given that this was the stated intention of both parties, it does not seem to us that it can be said to be unfair to either of them for the Company to be valued on the basis that the Restaurant would continue to operate from the Yung Kee Building, with the concomitant effect that the building should be valued on the basis that it would continue to house the restaurant business.  On the contrary, it seems to us that this would be fair to both sides, since whichever side might be ordered to buy out the other would be ordered to do so at a value reflecting their common intention.

148. Further, as Mr Joffe pointed out, the valuation of the restaurant side of the business having proceeded on the footing that it would continue to operate as at present was likely to have produced a higher valuation that would have been produced had there been real uncertainty as to whether or not the Restaurant would have had to pay, in effect, retail rents to remain in the Yung Kee Building – in such a scenario, the value of the restaurant business would be likely to be reduced having regard to the much higher costs of operating it, and there would be additional uncertainty arising from the question of whether or not it could profitably do so, or might have to seek alternative premises, which may or may not be possible.  This seems to us to be a further reason justifying the approach to valuation of the Yung Kee Building adopted by the judge.

149. Further support for the judge’s approach may, we think, be found in the fact that the petitioner’s own expert accepted that if the parties were agreed that the Yung Kee Building should be used to carry on the restaurant business, and that that business was valued on the basis of such an agreement, it would have been appropriate to make the assumptions made by the respondents’ property valuation expert witness, with which the judge agreed.

150. We do not think that the general standards for valuation referred to by the petitioner require a different approach to be taken.  Those are general guidelines, which can and should be departed from in appropriate circumstances.  For the reasons explained above, we are satisfied that fairness to both parties requires that those standards be departed from in this case, in the manner directed by the judge.

151. We therefore do not think it can be said that the judge erred in directing that the properties should be valued on the basis of their existing use, and would not interfere with his judgment in this respect either.

Conclusion and disposition

152. For the reasons explained above, we agree with the judge that the court’s jurisdiction under section 327(3)(c) should not be exercised, and that the conditions necessary for jurisdiction to arise under section 168A are not satisfied.  The petition was therefore rightly dismissed on this basis. Further, we respectfully differ from the judge in his conclusion that, had jurisdiction been established, it would have been right to make an order requiring Kwan Lai to buy out the petitioner’s shareholding on the basis that the affairs of the Company had been conducted in an unfairly prejudicial manner.  For the reasons given above, we would leave the question of unfair prejudice open.  We also conclude that there is no merit in the complaint as to the basis of valuation of properties directed by the judge.  It follows that the appeal must be dismissed.  Having dismissed the appeal on the basis of the absence of jurisdiction, it is not necessary to make any order on the respondent’s notice.  So far as costs are concerned, we would make an order nisi that the appellant petitioner should pay the costs of the respondents, both of the appeal and of the respondents’ notice (on both of which the respondents have succeeded), such costs to be taxed on the party and party basis if not agreed.