MAXGOOD INTERNATIONAL LTD. v. HYRAN HOLDINGS LTD. AND ANOTHER

HCCL286/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMMERCIAL ACTION NO.286 OF 1998

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J U D G M E N T

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1. On its face this case appears to be a company dispute. In reality, however, it represents a prolonged argument between two individuals and former business partners, Dr Tan Tiong Hong, a Malaysian national and a director of the plaintiff and the 2nd defendant, and one Mr Jackson Liao, a Taiwanese citizen and a director of the 1st and 2nd defendants. And that which lies at the heart of this argument, and hence this litigation, is Dr Tan's perception that in their joint business dealings Mr Liao has acted illegitimately, and has been unjustly enriched at Dr Tan's expense as a result of the purchase by Mr Liao's company, Hyran Holdings Limited, of the shares in a failed Chinese joint venture known as Changshu Hong Leong Motorcycle Company Limited. How did this arise?

THE BACKGROUND FACTS

2. Few of the background facts are in contention. The plaintiff, Maxgood, is a Hong Kong company. It is Dr Tan's company. The 1st defendant, Hyran Holdings Limited, is also a Hong Kong company. It is owned by Mr Liao, and prior to the events giving rise to this case, was involved in manufacturing polyester fibre near Changshu, China.

3. Dr Tan and Mr Liao met in 1992 in Hong Kong and decided to do some business together. Accordingly, they set up the 2nd defendant, First Won, on 4 June 1992. Then, as now, the directors of First Won were Dr Tan and Mr Liao, and the two 50% shareholders were their respective companies, Maxgood and Hyran Holdings. It is not, I think, disputed that the management of First Won throughout has been in the hands of Mr Liao, assisted by his secretary, Miss Meena Chao.

4. In 1993 First Won had the opportunity to participate in a joint venture project in China. This had come about through the introduction of Mr Liao. In addition to First Won, three other companies participated in this joint venture, which was to be called Changshu Hong Leong Motorcycle Company Limited. It was planned that the joint venture would manufacture motorcycles, both for domestic and export sales. First Won took 19% of the share capital of this joint venture, the Malaysian companies Hong Leong Industries and Guoco Investment (China) Ltd. took 51% and 20% respectively, and a local partner, Changshu Light Motorcycle Factory, 10%.

5. After the agreement to set up this joint venture, First Won passed a resolution in March 1994 whereby Maxgood and Hyran Holdings each contributed a sum of US$570,000 (that is US$1,140,000 in total) for the purchase of First Won's 19% interest in that joint venture.

6. The Chinese joint venture commenced business in 1994, but it was unsuccessful, and losses were incurred. The reasons for this do not much matter, although it appears that one of the main problems was that it had not been possible to obtain the necessary licensing for domestic sales, which are centrally controlled, from the Chinese authorities. In due course, therefore, in 1996 and 1997 the joint venture partners began to turn their minds to the possibility of winding-up the joint venture and dissolving the company. Amongst the shareholders there appears to have been a pronounced difference of view. For example, Mr Liao, who was part owner of 19% of the joint venture share capital through Hyran Holdings' shareholding in First Won, apparently felt that further effort should be put into the business, whilst during a special meeting of the joint venture partners on 20 January 1997 Guoco, which held 20%, expressed the view through Dr Tan (whom at the time was also a director of Guoco and in charge of Guoco's China investments) that the joint venture should be wound up.

7. After this meeting, which appears to have produced no conclusion, it is not disputed that Dr Tan contacted a Mr Kwek Leng Sen, the representative of Hong Leong Industries, the majority shareholder and the manager of the joint venture company, and suggested that First Won should sell its shares and pull out of the joint venture on the basis that First Won was refunded the full cost of its shareholding, that is, US$1,140,000. It is further common ground that the response to this was that Hong Leong were prepared to pay only the sum of US$500,000. Dr Tan took the view that this proposed sale was acceptable to Maxgood at this price, albeit this was not a view shared by Mr Liao, who opposed this proposed transaction, insisting that the full sum of US$1,140,000 should be recovered by First Won upon the sale of its joint venture shares. I pause at this stage to note that this refusal to accept this sum of US$500,000 - and hence the potential refund to his company Maxgood of US$250,000 - represents one of Dr Tan's grievances in this case.

8. This, then, was the state of play until about mid-1997. However, in September 1997 Mr Liao, on behalf of Hyran Holdings Ltd., which was named as 'the purchaser', entered into an agreement with Hong Leong and Guoco, 'the vendors', to purchase their combined 71% shareholding in the joint venture for the sum of US$450,000. A 'Transfer of Interest Agreement' detailing this transaction has been discovered, and is dated 3 September 1997. This is the transaction which has caused Dr Tan concern, and which has led to the commencement of the present litigation.

9. It is admitted by Mr Liao that the plaintiff was not notified of the shareholders' meeting which was held in respect of this 71% share transfer. In this regard it is said that there was no reason to notify the plaintiff because Mr Liao was acting according to the rules governing the operation of the joint venture, and that the designated representative of the 2nd defendant, one Mr Gu, duly attended at this meeting. It is not disputed that Mr Gu was jointly appointed by Mr Liao and Dr Tan, and there is no allegation that at the material time Mr Gu was acting in concert with Mr Liao.

10. The evidence is that the Changshu joint venture was subsequently wound up, the assets liquidated, and the proceeds distributed to shareholders in September 1998. It is also not disputed that the amount due upon the liquidation to First Won (which had retained its 19% shareholding) was received, and the plaintiff, Maxgood, was advised of the position on or about mid-September 1998. However, no payout to Maxgood has yet been effected, albeit an auditors' report dated 14 September 1998 is said to value Maxgood's share of such liquidation dividend at US$110,297.57.

THE PLAINTIFF'S COMPLAINT

11. On the foregoing facts, the plaintiff's complaint (or, more accurately, Dr Tan's complaint) appears to be twofold :-

12. First, Dr Tan is of the view that it was wrong of Mr Liao to refuse Hong Leong's offer of US$500,000 for First Won's 19% shareholding in the joint venture. Dr Tan had wished to accept it, and it is his case that had this deal been done the sum of US$250,000 each would have been recovered from what turned out to be a notably poor investment;

13. Second, and the alternative way that the case now is put, is that the purchase by Mr Liao, via Hyran Holdings, of the combined 71% shareholding formerly held by Hong Leong and Guoco for the sum of US$450,000 was a breach of fiduciary duty and/or an improper exploitation of a business opportunity which properly belonged to First Won, namely, the opportunity so to purchase this 71% shareholding. The auditors' report on the joint venture had indicated that the joint venture had a pool of cash for distribution of US$1,470,250.12, and so, the argument goes, had First Won been the purchaser it would have been able to secure a profit of in excess of US$1.02 million (US$1,470,250 - 450,000), and thus the plaintiff, being a 50% shareholder of First Won, would have benefited to the tune of US$510,000.

14. I have attempted to set out the outline of the arguments as I have understood them because during the course of this case it was not always clear what remedy the plaintiff, Maxgood, wished to obtain; indeed, I hope it is not unfair to observe that the precise relief sought, and the basis underpinning such relief, was characterized by a certain fluidity of approach. When pressed on this aspect during his opening, counsel for the plaintiff, Mr Y.L. Cheung, handed up a handwritten document stating that the plaintiff sought an order that the 1st defendant do buy back the plaintiff's 50% shareholding in First Won for the sum of US$250,000 (the 'buy back remedy'). Thereafter, at the end of the plaintiff's case, a further document from Mr Cheung set out the contention that the 1st defendant should account for the profits made, claimed to be "at least US$1,466,033.12", consequent upon the purchase of 71% of the joint venture shareholding from the other shareholders (the 'account remedy').

15. I deal with each of these arguments in the order in which they were raised.

THE BUY BACK REMEDY

16. Dr Tan, and hence the plaintiff, his corporate vehicle, Maxgood, sought an order at the outset that the 1st defendant buy back the plaintiff's 50% shareholding in the 2nd defendant for the sum of US$250,000. The provenance of this specific figure is the perceived loss of the offer by Hong Leong to purchase the 2nd defendant's 19% shareholding for the sum of US$500,000, an offer which was rejected by the 1st defendant and Mr Liao.

17. I regret that I am unable to see how this argument begins to get off the ground, and it is probably fair to say that by the time of the closing submissions enthusiasm for this approach had waned. The short point is that one of the two equal shareholders in the 2nd defendant, which was the holding company for the shares in the joint venture, had declined to accept the price offered for that shareholding. Presumably this was a commercial decision, and indeed in light of subsequent events it may be thought not to be entirely ill-judged. But why this court should now require the 1st defendant to purchase the plaintiff's shares in the 2nd defendant at a price attributable to a third party's historic valuation of shares in the Chinese joint venture is something that, with respect, I have been unable to grasp. I see no reason why this remedy, which appears to be loosely analogous to section 168A, Cap.32 relief, should be granted, and in so far as application for this order be maintained, it is refused.

THE ACCOUNT REMEDY

18. This appeared to be the nub of the plaintiff's case, at least by the conclusion of this trial. The argument is thus. It is said that by purchasing for US$450,000 the 71% shareholding in the joint venture formerly held by Hong Leong and Guoco, that the 1st defendant wrongly appropriated a business opportunity belonging to the 2nd defendant. So that, based on the figures appearing on the face of the auditors' report upon the financial state of the joint venture (a report which the plaintiff viewed with suspicion, and did not necessarily accept as correct), had First Won utilized such an opportunity it would have been able to obtain a benefit of US$1,020,250.12. This figure is arrived at by taking the "cash for distribution" figure in the auditors' report (US$1,470,250.12) and deducting therefrom the costs of the 71% shareholding (US$450,000). It followed from this, submitted Mr Cheung, "that the plaintiff being owner of 50% of the shareholding of the 2nd defendant should have had a benefit of US$510,125.06". In the event however, he submitted that the 1st defendant had made a profit not only of the sum of US$1,020,250.12, but in addition, and after taking into account certain joint venture accounts stated to be receivable, a further sum of US$445,783, making a figure of US$1,466,033.12. Mr Cheung put the case on the basis that "the profit should belong to the 2nd defendant", the plaintiff contending that the 1st defendant should account for the profit so made. In the premises, submitted Mr Cheung, "the plaintiff seeks to recover 50% of the profits in the sum of US$733,016.56".

19. In my view, this submission elides several concepts. It also assumes certain factual premises. I take these various matters in turn.

(a) Factual issues

(i) Knowledge of the transaction

20. Dr Tan says that he had no knowledge of the 1st defendant's plan to purchase the 71% joint venture shareholding for $450,000. To the contrary, Mr Liao says that he told him, and points to the record of a telephone call he says he made to Dr Tan in Malaysia on 6 August 1997 at 10:56 a.m. This particular Hong Kong Telecom computer print-out was produced by Mr Liao late in his evidence, and does not appear to have been discovered in normal course. Nor was this particular call put to Dr Tan in cross-examination, so that he did not have the opportunity to respond directly, albeit no application was made to recall Dr Tan to speak to the point.

21. I have no doubt that such a call did take place (the records indicate that there had been an earlier one, also, on 24 July at 12:39 p.m.) and I consider it highly likely that in the course of these calls the issue of the joint venture shares was generally discussed. I also think it likely that Dr Tan expressed the broad view to the effect that he would be disinclined to throw good money after bad, but on the probabilities I have concluded that Dr Tan was not informed, in terms, of the sale and purchase transaction with Hong Leong and Guoco which then was anticipated, nor was he invited to participate in that specific transaction.

22. With respect to both witnesses, neither of whom struck me as attempting to tell other than the truth as each perceived it, it seems highly probable that the issue of the joint venture shareholding held by First Won was generally discussed, and that as the result of Dr Tan's expression of his overall sentiment towards the joint venture (which would have been consistent with his previous wish to 'cash out' upon as favourable terms as possible), Mr Liao concluded that Dr Tan would not have been interested in participating in such sale and purchase of the 71% as ultimately was effected. It is certainly the case, in terms of such documentary evidence as exists, that it was not until 27 September 1997 that the plaintiff was formally informed about the share transfer pursuant to the Transfer Agreement dated 3 September 1997. It follows, therefore, that I do not find that Dr Tan specifically refused to participate in the transaction in the manner in which Mr Liao has alleged.

(ii) Identity of the purchaser

23. It is asserted on behalf of the plaintiff that the sale and purchase of the 71% shareholding in the joint venture was entered into by the 1st defendant on the one side and Hong Leong and Guoco on the other. In this connection, Mr Cheung submitted that there was nothing in the contemporaneous documentation to show that the purchaser was other than the 1st defendant.

24. As to the purchaser's identity, Mr Liao disagreed. He gave evidence that the buyer of this 71% was not the 1st defendant, which is a Hong Kong company, but in fact was a like-named Bermudan company which he had originally set up in February 1993, and which he had decided to employ as the vehicle for this particular transaction. Towards the end of the case, Mr Liao produced a Bermudan Certificate of Incorporation (to rebut, no doubt, the argument that this alleged offshore company was but a recent invention), which certifies that on 22 February 1993, a company known as "Hyran Limited" was registered in the Bermudan Companies Register, together with a further "Certificate of Incorporation on Change of Name", under the seal of the Bermudan Registrar of Companies dated 3 May 1996, wherein it is certified that "Hyran Limited by resolution and with the approval of the Registrar of Companies has changed its name and was registered as Hyran Holdings Limited on the 12th day of April 1996". Also produced was a further Bermudan document, entitled "Certificate of Compliance", dated 3 February 1999, which appears to certify the vires of Hyran Holdings Limited.

25. In the face of these documents, Mr Cheung argued that it was extraordinary that there was no contemporary documentary evidence, howsoever slight, to show that the Bermudan company was the purchaser, but that if indeed it was, in the circumstances prevailing, Hyran Hong Kong "was the mastermind of the transaction". I am not sure what this last submission achieves, or was intended to achieve. Either the purchaser was the 1st defendant or Hyran Holdings Bermuda, and the fact that clearly there is a common directorship does not, it seems to me, greatly matter.

26. The issue of the identity of the purchaser has caused some concern. The discovered documentation does not assist. The 'Transfer of Interest Agreement' dated 3 September 1997 gives the address of Party C, Hyran Holdings Ltd, the purchaser, as Room 1710, Shun Tak Centre, 200 Connaught Road, which I understand is the office in Hong Kong which constitutes Mr Liao's administrative base, and which may have been chosen simply for convenience. Nor is there any other document which throws light on this issue, albeit this case as a whole has been characterized by inadequate discovery.

27. After some reflection, I have concluded that no basis exists simply to reject Mr Liao's oral evidence in this regard as, doubtless, the plaintiff would wish me to do. Mr Liao may have had valid reasons for causing the sale and purchase of the 71% joint venture shareholding to be effected via the Bermudan company, but in this regard it is no part of the function of this court to embark upon conjecture. Whilst it is evident why it is that the plaintiff thought that the 1st defendant was the purchaser, the unshaken viva voce evidence is that it was not. In the circumstances, I am disinclined to venture behind this, and after some hesitation I accept Mr Liao's evidence on the point. Nor is this particular allegation something that has come out of the blue, as it were, the case as to the identity of the purchaser being clearly pleaded at paragraph 8 of the Defence filed on 4 March 1999.

28. If this conclusion be correct, this necessarily amounts to the end of the plaintiff's case, given that there can be nothing for which the 1st defendant, the Hong Kong company, could in any event be called upon to account, even if the legal arguments mounted in this connection were held to be correct. However, if and in so far as I be wrong in this factual conclusion, I turn now to consider the legal arguments so raised.

(b) Legal issues

(i) The nature of this action

29. A constant running through the plaintiff's case is that this action is said to be a derivative action. Although Mr Cheung recognizes that factually the plaintiff is not a minority shareholder, he says that this action is "essentially a derivative action brought by a minority shareholder against the majority shareholder in the context of a deadlock (sic) company", and further that "the 1st defendant's act is a fraud on the plaintiff as it has caused a material benefit to themselves at the expense of the plaintiff and the 2nd defendant".

30. I have difficulty in accepting this submission. I do not regard this as a derivative action, a stance also taken by Mr Cheng, counsel for the defendants. Leave to commence such an action has not been obtained, and in my view this is demonstrably not an action taken by a minority shareholder for the benefit of the shareholders as a whole pursuant to the exception to the rule in Foss v. Harbottle (1843) 2 Hare 461, 67 ER 189. As the editors of Gore-Browne on Companies, 44th Ed., at para.28.8.2 point out :

"...such an [derivative] action must be brought genuinely in the interests of the company .... The distinctive characteristic of a shareholder's 'derivative' action is that 'what is recovered cannot be paid to the plaintiff representing the minority, but must go into the coffers of the company'. Hence, such an action should not be combined with a claim for a wrong done to the claimant shareholder personally..."

31. To the contrary. This case as brought appears to be, and throughout to have been, solidly focused upon the recovery by the plaintiff, Maxgood, of such monies as it was able to recoup from what was undoubtedly regarded as an unsuccessful investment in the Chinese joint venture. This is borne out by the remedies initially pleaded (both of which are referable to the initial investment of US$570,000), by the alternative remedies asserted on behalf of the plaintiff during this trial, and to a considerable extent, also, by the contemporaneous correspondence (during the period 29 September 1997 to June 1998) wherein a Mr K.K. Low, a director of the plaintiff writing on behalf of Dr Tan, variously attempted to recover for Maxgood part at least of the initial investment in Changshu Hong Leong Motorcycle Co. Ltd.

32. An action does not assume the status of a derivative action merely because counsel forcefully asserts it to be so at trial, which, with respect, seems to be the position which enures in this case. No relief is claimed for the benefit of the 2nd defendant, nor, for that matter, is any claim made against the 2nd defendant, notwithstanding that, absent leave so to do, First Won was made a defendant from the outset.

(ii) Maturing business opportunity/breach of fiduciary duty/equitable compensation

33. As ultimately formulated by the end of the plaintiff's case, the position put forward appeared to be thus : that the opportunity to purchase the 71% shareholding was a maturing business opportunity available to the 2nd defendant, First Won, that in breach of fiduciary duty the 1st defendant fraudulently misappropriated such business opportunity, and that where (as here), such breach had been the cause both of the loss to the company and a gain to other members then, as Mr Cheung put it, "the plaintiff can seek an account of the profits made by the wrongdoer in addition to seeking equitable compensation for the loss suffered by the company, provided that the company does not recover twice in respect of the same breach".

34. With respect to Mr Cheung, who attempted to weave an argument with distinctly disparate threads, in the present circumstances it is not easy to see how this approach can succeed even if (as I have found not to be the case) the presently impleaded 1st defendant in fact had been the purchaser of the 71% shareholding in the joint venture.

35. Dr Tan now complains that this particular deal should have been given to First Won and that, as a shareholder in Maxgood, which in turn is a shareholder in First Won, he has de facto been deprived of the gain that is now perceived to be available. I am bound to observe that, as now put, this approach is notably at variance with his previous stance towards this joint venture, which appeared to be to extricate Maxgood from the joint venture at the best price possible : vide the 'buy-back' remedy dealt with earlier in this judgment. In any event, I have declined to accept that this is a derivative action, as Mr Cheung has now labelled it, given that the present case appears to have been taken by the plaintiff solely in order to obtain personal relief, so that it is difficult to see how Maxgood can now seek to assert that it pursues this remedy on behalf of First Won.

36. Nor is it clear how it can be said, even on the assumed facts, that the 1st defendant caused loss to the plaintiff as alleged, albeit in this instance the 'loss' alleged is cast in terms of a failure to gain what is clearly now regarded by Dr Tan as an unexpected windfall. Whilst not directly analogous on the facts, the decision in the English Court of Appeal case of Stein v. Blake & Others (No.2) [1998] 1 BCLC 573 emphasized, as a matter of general principle, that the loss sustained by a shareholder through a diminution in the value of his shares by reason of the misappropriation of the company's assets was a loss recoverable only by the company and not by the shareholder, who had suffered no personal loss distinct from that suffered by the company : see in particular the speech of Millett LJ (as he then was), op.cit., at pages 577-579.

37. Turning now to the allegation of breach of fiduciary duty, I do not find that this is made out on the evidence. Both Maxgood and Hyran are shareholders of First Won, and it appears established that the relationship between members of a company is not of a fiduciary character, nor does a shareholder owe a fiduciary duty to the company of which it is a member. Nor is any suit advanced against Mr Liao personally, as director of First Won, for alleged breach of fiduciary duty. In fact, looking at the case in the round, I remain unable to discern, given the particular circumstances which had arisen, why the commercial transaction involving the purchase of the additional 71% shareholding should be regarded as the "fraudulent misappropriation" of such an opportunity, nor why this is characterized as a breach of fiduciary duty (or, for that matter, as the plaintiff also collaterally asserts, breach of a duty of good faith) on the part of the 1st defendant.

38. As to the quantum claimed under this head, there is no necessity to make any comment, given that in my view the issue does not arise for consideration, save to note that it is a curious inversion within this element of the case that the content of an auditor's report, obtained at the behest of Mr Liao during the winding-up of the joint venture and the veracity of which Dr Tan was loath to accept, should now form the basis of the detailed quantum assessment propounded by Mr Cheung, culminating in the claim for the sum of US$733,016.56.

39. In my judgment, therefore, the argument put forward under what I have termed the 'account remedy' also fails, even on the basis of the assumed factual underpinning. I would observe, in passing, that some at least of Dr Tan's complaints in this case appear to originate in his alleged exclusion from the operation and management of First Won, albeit I make no finding nor expression of view on the point, given that it was never a specific issue and arose incidentally to the matters the subject of this action. In this regard Mr Cheng, for the defendants, may have been near the mark in his submission that the existing action was wrongly constituted and in the wrong forum.

OTHER REMEDIES

40. Finally, I refer to the originally pleaded remedies, which request first, a declaration that the 1st defendant is liable to indemnify the plaintiff in respect of loss in the sum of US$570,000, and second, that the 1st defendant be ordered to buy the 9.5% shareholding held by the plaintiff in the joint venture in the sum of US$570,000.

41. Neither of these heads of relief has, in substance, been pursued, albeit they were not abandoned by Mr Cheung, who in his final submission placed them behind the two remedies dealt with earlier in this judgment.

42. For the avoidance of doubt, the claim under these categories of relief is also dismissed.

ORDER

43. The plaintiff's action against the 1st and 2nd defendants is dismissed. I will hear the parties as to the costs of this action at an early date to be fixed.