WONG SIU YING JOYCE v. KAYWON LTD AND ANOTHER

HCCW 104/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 104 OF 2013

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J U D G M E N T

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Introduction

1.  The Company which is the subject of this Petition, Kaywon Limited, was incorporated in 1994.  It was established by 2 sisters, Wong Kei Tong and Wong Ki Yee, who were spinsters.  Wong Kei Tong was 79 at the time and Wong Ki Yee was 65.  Wong Kei Tong had retired as a nurse in 1974.  They had a number of other sisters.  Only Wong Kei Tong had worked significantly and she had been in the habit of helping her siblings financially and in particular Wong Ki Yee.  It is not in dispute that a principal purpose of establishing the Company was to hold real property and securities which would produce income of which the 2 sisters would be able to live during their remaining years, which were many: Wong Ki Yee died on 1 July 2011 at the age of 87 and Wong Kei Tong lived even longer dying on 7 October 2012 at the age of 97.  Wong Kei Tong and Wong Ki Yee were directors of the Company as were the daughters of 2 of their sisters: Joyce Wong, who is the Petitioner, and Ho Wai Ling May, who is the 2^nd Respondent.  Wong Kei Tong left her share in the Company to Ms. Wong and Wong Ki Yee left her share to Ms. Ho.

2.  In 1995 Wong Kei Tong and Wong Ki Yee sold 2 properties which were held by them as joint tenants to the Company, which have been referred to during the trial as property A and property B.  In addition Wong Kei Tong transferred securities to the Company.  In 2004 a third property, property C, was transferred by Wong Ki Yee and Ms. Ho to the Company.  It is Ms. Ho’s case that this was on the basis that property C was held on trust for her cousin, and Wong Ki Yee’s nephew, Lee Siu Kwan Willy. This is not an issue in the trial.

3.  The Company did not pay the sisters the purchase price for properties A and B.  Instead when the Company instructed accountants, Leung Kar Pui & Co, to prepare audited financial statements in late 1995 or early 1996 the accounts clerk, Sunny Ip, at the firm who dealt with the sisters prepared a directors current account ledger in which he recorded the outstanding consideration of $7,243,642 as an amount owed to a director.  Mr. Ip gave evidence at the trial.  He gave evidence that he understood the entry in the ledger to be a liability to a director.  He was of the view that this was a correct entry.  The qualified accountant who then audited the ledgers which Mr. Ip had compiled, recorded this as a current liability in the Company’s balance sheet.  The next audited financial statement to be prepared was for the year ending 31 March 2000.  It was prepared by another firm whom Mr. Ip had joined, Albert Wong & Co.  This also recorded the sum as a current liability, although it had increased to $10,423,120, but the notes refer to it as an amount due to directors rather than a single director.  The same was recorded in the next year’s account, although the relevant note, note 9, states that “the amounts due to directors are unsecured, interest free and repayable on demand”.  This is repeated in 2002.  There was then a gap and P.L. Au & Co, to whom Mr. Ip had moved, prepared accounts for 2006 and 2007.  The accounts for 2006 recorded $10,382,276.23 as a current liability in the “director’s current account” and in note 4 expressly state that this sum is due to Wong Kei Tong as does the Company’s ledger for that year.  Although the figure is slightly different the same entry appears in the accounts for the year ending 31 March 2007.  In the accounts for the year ending 31 March 2008, the last year for which audited accounts are available, an amount of $8,370,503.01 is recorded as a current liability owed to Wong Kei Tong and the note says “The advances are unsecured, interest free and have no fixed term of payment”.  Ms. Wong says that she believes that the reason why the accounts dealt with the consideration for properties A and B in this way was this.  Wong Kei Tong had purchased the properties and they had been registered as held by her and her sister as joint tenants in order to provide that if Wong Kei Tong, the elder sister, died first Wong Kei Tong’s interest in the properties would automatically pass to her younger sister.  However, when the properties were transferred, as only Wong Kei Tong had paid for them, at least from 2006 onwards the audited accounts recorded only an amount due to Wong Kei Tong reflecting the fact that she had paid for the properties and the securities transferred to the Company.

4.  Ms. Ho takes a different view, and this was one of the principal sources of the disagreements that have arisen between them and led to the presentation of this Petition.  Ms. Ho says that she understands from what she had been told by her cousins that when the Company was established it was the intention of the sisters that the Company be used to provide not just for them, but over time also for their nephews and nieces.  It was never intended that either sister was actually owed money by the Company and could ask for its repayment.  This would be to undermine the whole purpose of the Company she believes because if Ms. Wong is entitled, as executor of Wong Kei Tong’s estate, to demand repayment, as she has, this would require the sale of at least some of the Company’s assets and reduce the amount available to provide for their cousins.  Up until trial it was Ms. Ho’s case that in fact both she and Ms. Wong held the shares on trust for their cousins.  However, Mr. Osman Lam, who appeared for Ms. Ho at the trial, recognised that the evidence that had been filed did not support a finding of the creation of such an express trust and abandoned this case at trial, although Ms. Ho maintains that the Company was in fact set up to provide for both the sisters and their nephew and nieces and even if this remained no more than an intention with no legal affect it still informs the determination of this unfair prejudice Petition.

5.  The relationship between Ms. Wong and Ms. Ho began to deteriorate after the death of Wong Ki Yee.  Ms. Wong and Ms. Ho have rather different backgrounds.  Ms. Wong is highly educated having 2 post graduate degrees and works at a relatively senior level at the Monetary Authority.  Ms. Ho is less educated and has never worked.  Up until 2011 it was Ms. Ho who had helped the sisters with the administration of the Company’s affairs.  Ms. Wong says that in the middle of 2011 she began to look more closely at the Company’s affairs.  It appears that up until that time she was only involved in monitoring the securities’ performance. The catalyst was the death of Wong Ki Yee and a concern that Wong Kei Tong, who remained healthy, might live for some time and given the fact that she was aware that there were notices from the Government for building works to be carried out on some of the properties, which are very old, that there was enough cash to maintain Wong Kei Tong.  She asked Ms Ho to provide her with accounts records, but they were not forthcoming.  She then instructed solicitors to write on her behalf seeking the records with the predictable result that Ms. Ho found herself receiving officious requests for documents and became offended at what she saw as Mr. Wong behaving inconsistently with the way in which the Company had been managed over the years and insinuating that Ms. Ho had misused the Company’s funds.  Ms. Ho in turn began to view Ms. Wong’s conduct suspiciously. In 2007 Ms. Wong had suggested to Ms. Ho that the Company’s securities should be transferred into a joint account opened in their names which would allow her to trade more efficiently.  Ms. Ho had no objection.  In 2011 Mr. Wong transferred them into an account in her own name.  Ms. Ho came to view this as inappropriate and has asked for their return to the Company and Ms. Wong has not complied.  It is Ms. Ho’s case that Ms. Wong has misappropriated them.

6.  It is not in dispute that the relationship between Ms. Wong and Ms. Ho has broken down.  It seems to me that it is a pity that it was not recognised at the outset of these proceedings that the suggestion that the shares in the Company were held on trust was hopeless and that whatever Ms. Ho’s views about the intention of her aunts the Company should be wound up and each of the new shareholders able to use their proportion of the Company’s assets as they thought appropriate. Unfortunately this did not happen.

7.  The Petition was issued with a view to winding up the Company.  There is no suggestion that either party should buy the other out.  The first ground on which a winding up is sought is insolvency and was intended to avoid complicated argument about the parties’ conduct.  On 17 January 2013 a statutory demand was served for the amount recorded in the last audited financial statements, namely, for the year ending 31 March 2008, as due to Wong Kei Tong of $8,370,503.01.  This has not been paid.  The fact that the Company could if it wished repay this sum is not of itself relevant.  It is well established that a creditor with an undisputed debt exceeding the minimum provided for by statute, $10,000, is entitled to seek a winding up order[1], although the court retains a discretion to refuse to grant one if the circumstances justify some other course.  It is also well established that a dispute over part of the sum claimed does not defeat a petition if there is an amount exceeding $10,000 which the court concludes is payable[2]. In the present case it does not matter whether the amount recorded as due to Wong Kei Tong in the most recently audited accounts was due to both sisters as even if Wong Kei Tong was owed half, that sum is very substantially in excess of $10,000. The live issue is whether or not the Company is entitled to refuse payment of anything.

8.  Mr. Nip, who appeared for Ms. Wong, argues that the accounts are clear and that whatever Ms. Ho’s personal feelings on the matter Ms. Wong is entitled to require at least half of this sum to be paid.  I agree that on the basis of the documents this does appear to be the case and I understood Mr. Lam to accept that if one only has regard to the conveyancing documents and the accounts this would appear to be so.  However, says Mr. Lam, the matter does not stop there.  He argues that even if neither Ms. Wong nor Ms. Ho have firsthand knowledge of what, if anything, the sisters agreed between themselves about the purchase price at the time the Company was formed Mr. Ip does because it was he that they consulted and instructed to form the Company.  Mr. Ip says in his witness statement that they told him that it was their intention that the Company would hold property, stocks and cash on trust to be divided between their nieces and nephews after they died.  He says that he advised them to get legal advice on estate planning.  All that we know they did in this regard was to execute wills in August 2007 leaving their respective estates to Ms. Wong and Ms. Ho.  They did not create a trust.

9.  Mr. Lam also argued that whatever the accounts may record it cannot have been the intention of either sister that they could at any time demand that the Company repay them the amount recorded in its books as due to them.  This would have been to defeat the undisputed purpose of setting up the Company, namely, to provide for both of them jointly.  I accept that if I was hearing a petition in 1996 issued by Wong Kei Tong seeking repayment of the purchase price of the properties and had the benefit of evidence from her and her sister as well, perhaps, as other evidence bearing on the issue that is no longer available, I might well come to the conclusion that there was some restriction on her ability to demand repayment, but that is not the position.  Mr. Ip did not discuss this question with them and neither niece has firsthand knowledge of what their aunts intended.  As I have already noted it is not, for example, Ms. Ho’s case that she was told by either of her aunts that the Company was to be held on trust for the aunts and their nephews and nieces; she was told this by some of her nephews and nieces. It seems to me that in these circumstances I should proceed on the basis that the position is as set out in the contemporaneous documents and they records amounts payable to the directors and that, as is common, those amounts are repayable on demand.  It follows that the Petitioner has established her first ground for winding up the Company.

10.  Mr. Lam submitted in his closing submissions that even if I so found the court should not exercise its discretion to wind up the Company, because it could, if it sold assets, repay the debt and that it would be inconsistent at least with the substance of what the sisters must have intended.  I disagree.  It seems to me that given the fact that the trust claim has been abandoned and the relationship between Ms. Wong and Ms. Ho has broken down winding up the Company immediately is entirely sensible.  It also seems to me that it would be wrong for me to take the alternative view because it appears possible that this is not what the sisters may have wanted.  I emphasise “may”.  The fact is that not only did they not create a trust but in neither of their wills did they leave anything to any of their nephews and nieces other than Ms. Wong and Ms. Ho.  Although I accept that Ms. Ho genuinely believes that her aunts intended to leave things for the benefit of all her cousins the fact is that they did not take any of the obvious steps to achieve that result.  Concluding that they intended something other than that recorded in their wills would, in my view, involve the court speculating and this seems to me to both an unreliable and impermissible approach.  I will therefore make the normal winding up order.

11.  I would add this.  In the alternative a winding-up order is sought in the Petition on the grounds that Ms. Ho’s conduct has led to a breakdown in the relationship between the parties.  The complaint focuses on matters which are headed in the Petition as “Failure of Proper Book‑Keeping”.  It is said that between July and August 2011 Ms. Wong had on many occasions asked Ms. Ho to provide her with access to the books and records of the Company.  In mid-September Ms. Ho provided Ms. Wong with a bundle of accounts and other documents including bank statements, but this was, it is not in dispute, incomplete.  Further requests about documents and particular items of expense were made by Ms. Wong. She was unhappy at what she saw as Ms. Ho’s unsatisfactory response and on 11 October 2011 her solicitors started to write on her behalf; which was I expect the beginning of the end of their relationship.  In the Petition Ms. Wong goes onto suggest that the Company’s funds may have been misused (a complaint she backed away from under cross-examination) and that Ms. Ho failed to cooperate in relation to the running of the Company in particular in failing to attend an extraordinary general meeting to resolve the appointment of auditors.  I note here that in about September 2011 Ms. Ho had sent the books of the Company to Mr. Ip at Albert Wong & Co. for auditing but after he was approached by Ms. Wong and his firm received a letter from her solicitors saying they were not properly instructed he returned the books to Ms. Ho.

12.  In considering whether Ms. Ho’s can fairly be said to have led to the breakdown of trust and confidence between the parties it seems to be relevant that Ms. Wong had been a director since the inception of the Company.  As a director she not only had the right pursuant to section 121 of the old Companies Ordinance Cap 32 to inspect the books of the Company, which she sought to exercise through her solicitors’ letter of 11 October 2011, she had a duty to familarise herself sufficiently with the affairs of the Company to ensure that they were being properly conducted.  It would appear that until July 2011 she made no effort to familiarise herself with the way in which the Company’s accounts were being kept and made no complaint about the Company’s failure to comply with the Companies Ordinance and have audited financial statements prepared each year and for the Company to hold annual general meeting annually.  She was of course entitled to ask for the books of the Company in 2011 and to, if she thought it desirable, begin to involve herself more actively in the book‑keeping and the preparation of accounts.  But she must have known that her aunts and Ms. Ho had managed such matters in an informal way, as illustrated by the fact that audited accounts were only prepared sporadically.  She must also have known that Ms. Ho’s grasp of what strictly was required was limited and that the Company’s affairs had been conducted on the basis of trust and family relationships.  Ms. Wong’s protestations in cross-examination that she was concerned to ensure that all the documents an auditor would require were available sounds, in my view, rather hollow.  Having tolerated the Company being run casually for over 15 years in my view a fair and appropriately calibrated approach to this matter would have involved patience and goodwill and acceptance that in the interests of maintaining good family relationships she should overlook historical shortcomings in the management of the Company.  I find it unsurprising that Ms. Ho reacted negatively to Ms. Wong’s approach and became alienated and less cooperative once she started to receive letters from Ms. Wong’s solicitors which contained requests for information which were unrealistic in the circumstances and worded in a way which demonstrates an unhelpful lack of tact.  I would not, therefore, find that Ms. Ho caused a breakdown in the relationship between the shareholders.  Ms. Ho could have dealt with the inquiries more quickly or effectively, but it does not seem to me that in the circumstances Ms. Wong’s reaction was justified on the contrary it seems to me to have contributed to the breakdown of the relationship.

13.  I will now hear the Parties on costs.

14.  (Submissions on costs.)

15.  Having obtained a winding-up order, the petitioner seeks an order that the 2^nd Respondent pays the costs of the proceedings.

16.  The 2^nd Respondent asks the court to apportion the costs to take into account the fact that the petitioner has only succeeded on the first limb of its petition, namely the ground of insolvency; it has not succeeded on the more general just and equitable ground.

17.  Mr. Chan reminded me of the modern approach to costs.  These are, most recently, explained in a useful decision of Deputy Judge Woo, as he currently is, in Mega Yield International Holdings Ltd v Fonfair Co Ltd HCA 948/2009 (unreported, 14 May 2012).  I was also referred to the Court of Appeal’s decision in Wong Man Yin v Ricacorp Properties Limited CACV 3884/2013 (unreported, 16 July 2002).  In short, the present approach of the courts to the question of costs in circumstances such as these are as follows.

18.  The court no longer automatically awards all the costs of proceedings to a party which has obtained the relief or substantially the relief it has sought.  The court will, if discrete parts of a plaintiff or petitioner’s case which have taken up a significant amount of time and been unsuccessful, where it considers it appropriate, deal with those costs independently and order that an otherwise successful plaintiff or petitioner bears those costs.

19.  In the present case, in very general terms, one can divide the issues into three parts:  the first I have already mentioned, the insolvency claim; the second was the original foundation of the 2^nd Respondent’s defence, namely the trust allegation which was abandoned at trial; and the third is the claim in the petition for an order for a winding up on the just and equitable ground on the basis that the 2^nd Respondent had contributed to the breakdown of the relationship between the current two shareholders.

20.  Mr. Chan suggested that given the petitioner’s failure on the third issue, which had taken up a considerable amount of court time, the petitioner should only have half her costs.  It does not seem to me that that is correct. A substantial amount of the preparation for the trial and the submissions and evidence at the trial would have been required to deal with the insolvency claim and the trust claim.  As Mr. Nip’s claims fairly points out, it was not until the beginning of the trial that he was told that the trust claim had been abandoned and the witnesses who were originally to be called to give evidence in support of it would not be called.  I do, however, accept that the just and equitable head was a discrete claim and it has been unsuccessful. 

21.  I think that in the circumstances the appropriate costs order is that the 2^nd Respondent pays 75 per cent of the petitioner’s costs of the proceedings.