CHOI CHI WAI v. CHENG KA SHING AND OTHERS

HCMP 729/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 729 OF 2012

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ACTION NO 1441 OF 2012

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(By Original Action)

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(By Counterclaim)

ACTION NO 126 OF 2013

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ACTION NO 2147 OF 2013

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(Heard Together)

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JUDGMENT

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A. INTRODUCTION

1.  The dispute between the parties in these 4 proceedings arose out of the affairs of a company, Hong Kong Agriculture Special Zone Limited (香港農業專區有限公司) (“Company”), which engages in importing pigs from the Mainland and selling them by public auction in Hong Kong in return for commission. The Company has always been owned by 3 shareholders, who are Mr Choi Chi Wai (蔡志偉) (“Mr Choi”), Mr Cheng Ka Shing (鄭嘉誠) (“Mr Cheng”) and Mr Lee Pak Kee (李伯驥) (“Mr Lee”) (collectively “Shareholders”), and their shareholding is equal.  Since 8 March 2008 when Mr Choi was removed as a director, Mr Cheng and Mr Lee have been the only directors of the Company.

2.  HCMP 729/2012 is an “unfair prejudice” petition presented by Mr Choi on 16 April 2012 on the basis that the affairs of the Company have been conducted by Mr Cheng and Mr Lee in an unfairly prejudicial manner (“Petition”). The primary relief sought is an order that Mr Cheng and Mr Lee do sell their shares in the Company to Mr Choi, alternatively, Mr Cheng and Mr Lee do purchase his shares in the Company.  Pursuant to the order of Harris J made on 24 February 2016, this trial is only concerned with “liability” including issues as to the date of valuation and whether there should be a minority discount.  

3.  HCA 1441/2012 (“1^st Company’s Action”) is an action commenced on 14 August 2012 in the name of the Company against Mr Choi for breach of fiduciary duties and breach of trust qua director.  The alleged breaches included Mr Choi’s acts in (a) diverting the profits generated during the first 34 days of the Company’s operation (“34 Days’ Profits”), (b) making a donation of $500,000 on 21 February 2008, (c) refusing to hand over the business to Mr Cheng and Mr Lee after he had been removed as a director on 8 March 2008, (d) applying for a branch office for the Company on 13 March 2008, and (e) failing to make proper declaration of the pigs imported which led to a fine imposed against the Company.  Extensive relief in the form of declarations, account of profits and equitable compensation is sought against Mr Choi, and the aggregate amount claimed is $3,381,411.66.

4.  HCA 126/2013 (“Derivative Action”) was commenced by Mr Choi on 21 January 2013 against Mr Cheng and Mr Lee (with the Company as a nominal defendant) for breach of an agreement made on 20 December 2007 whereby the Shareholders agreed “to substantiate the Company’s share capital” by paying a “reasonable sum as price for so many new shares so as to properly capitalise the Company to ensure that it operated its business on a sound financial footing without resort to borrowing” (“Capitalisation Agreement”).  This action is described in §§1 and 2 of the statement of claim as a “derivative claim” brought by Mr Choi for the benefit of the Company and a “personal claim” brought by Mr Choi against Mr Cheng and Mr Lee for breach of the Capitalisation Agreement and breach of fiduciary duties as directors.  The primary relief sought is a mandatory injunction to compel Mr Cheng and Mr Lee to accept the payment tendered by Mr Choi for the shares allotted by the Company to him and a prohibitory injunction to restrain the Company from borrowing any monies which carry interest.  

5.  HCA 2147/2013 (“2^nd Company’s Action”) was commenced in the name of the Company on 8 November 2013 against Madam Chan Oi Kuen, the wife of Mr Choi (“Mrs Choi”), for repayment or account of the 34 Days’ Profits received by her on the bases of breach of fiduciary duties qua employee of the Company and dishonest assistance in assisting Mr Choi to act in breach of his fiduciary duties owed to the Company.

6.  At trial, Mr Choi and Mrs Choi are represented by Mr Albert Yau who appear with Mr Chan Chun Sang in all the proceedings.  Mr Bernard Mak appears for Mr Cheng and Mr Lee.  The Company is represented by Mr Dixon Co.

7.  Upon enquiry by the Court as to his role in this trial, Mr Co acknowledges that the Company is only a nominal defendant in the Petition and the Derivative Action and, as such, he will not take any stance in such proceedings.  He says that his presence at trial is to pursue the claims made by the Company against Mr Choi and Mrs Choi in the 1^st and 2^nd Company’s Actions and his involvement will be limited as such. Nevertheless, it is clear that throughout the trial, Mr Co has been assisting Mr Mak, both when he is addressing the court and in cross-examining Mr Choi and his witnesses.  This is not surprising, given that the stance adopted by the Company in these proceedings is based the instructions of Mr Cheng and Mr Lee who are the only directors of the Company.

8.  Although extensive pleadings were filed in the 3 actions, very little, if any, submissions have been made by counsel on these actions.  In the Agreed List of Issues submitted by counsel at Day 9 of the trial, it is clear that the issues in the 3 actions completely overlap with the issues raised by the parties in the Petition.  In my view, it is wholly unnecessary for the parties to have commenced the 3 actions, which do not assist the parties to resolve their dispute and only serve to escalate costs.

9.  I will deal with the following matters in this order:

     (1)  Section B — Assessment of Witnesses

     (2)  Section C — Undisputed Facts and Relevant Findings

     (3)  Section D — Complaints in the Petition

     (4)  Section E — 3 Actions

     (5)  Section F — Conclusion and Remedies

B.  ASSESSMENT OF WITNESSES

B1.  Mr Choi and his witnesses

10.  In the Petition, the Derivative Action and the 1^st Company’s Action, Mr Choi gives evidence for himself.  In addition, he adduces witness statements from 5 factual witnesses, who are Mrs Choi, Mr Mak Kwong Yuen (麥廣源) (“Mr KY Mak”), Mr Wong Wing Nam (黃詠楠) (“Mr Wong”), Mr Lam Yu Cheung (“Mr Lam”) and Madam Yeung Yuk Ling.  Mrs Choi also gives evidence for herself in the 2^nd Company's Action.  At trial, Madam Yeung is not called to testify, after this court indicates to Mr Yau that the matters set out in her witness statement are hearsay evidence and, therefore, not admissible as her evidence-in-chief.

11.  Mr Choi is an honest witness.  Although he received little formal education, it is clear from his demeanour that he tries his utmost to answer all the questions put to him during cross-examination, even though when the questions are put in an offensive or condescending tone or are put on a wrong factual premise.  His answers are clear, straight forward and candid, as the following examples show:

(1)  His evidence about the business and operation of the Company including the period when the Company was managed by him alone is consistent with the evidence given by the independent witnesses namely, Mr KY Mak, Mr Wong, Mr Lam, Mr Fok and Mr Chan.

(2)  He readily admits the matters put to him even if they are not in his favour.  An obvious example is when he is asked about the meeting on 30 December 2007, he frankly admits that the meeting was not a Board meeting and the matters discussed at the meeting were not put to vote and consequently, no resolution was passed.

(3)  Despite being subject to extensive cross-examination, which lasts for more than 2 ½ days (without interpretation), his answers remain unshaken and are consistent with the documentation.

12.  Indeed, Mr Choi’s evidence is consistent throughout his cross-examination, which lead to Mr Mak trying to stop him from completing some of the answers on the basis that they are well rehearsed.  With respect to Mr Mak, I do not think it is fair to criticise Mr Choi for giving consistent answers or to state what he has said in his witness statements.  Overall, I find Mr Choi’s evidence to be credible and I prefer his evidence to the extent that it is inconsistent with the evidence of Mr Cheng.  

13.  Mrs Choi is also a candid and straight forward witness. She provides clear answers on matters which she has personal knowledge.  When it comes to matters which she does not have personal knowledge, she readily says so.  Her evidence mainly relate to the operational matters of the Company which are largely not in dispute.  In fact, her witness statements have not been subject to much cross-examination, and her answers are mostly unchallenged.  I accept the evidence of Mrs Choi.

14.  Mr Lam is a director and founder of Sam Ran China–Hong Kong Transportation Limited (三然中港運輸有限公司) (“Sam Ran”) and thus an independent witness.  His witness statements have not been subject to much cross-examination and are largely unchallenged.  For the few questions put to him during cross-examination, Mr Lam provides his answers in a direct manner and I accept his evidence.

15.  Mr Wong is also a director and founder of Sam Ran and is an independent witness.  The matters stated in his witness statement have not been challenged in cross-examination.  Mr Wong is mainly asked about his involvement in assisting Mr Choi to obtain the agency business, what happened at the meeting on 30 December 2007 and the reason for Mr Choi to engage his family members to assist in the operation, and his answers have not been challenged.  I accept his evidence.

16.  Mr KY Mak is the proprietor of Fairview Accountancy Services Ltd (確達會計事務有限公司) (“Fairview”), which was the company secretary of the Company from its inception to 13 February 2008.  He is an independent witness. He comes across as a truthful witness.  He gives direct and clear answers to all the questions put to him. He has been cross-examined on his involvement in assisting Mr Choi and Mr Cheng in preparing documentation for the Company, his participation at the various meetings leading to the 1^st to 3^rd Proposals as well as his response to the request made by Mr Cheng and Mr Lee for inspection of the documents of the Company.  His evidence is consistent with contemporaneous documents. I accept Mr KY Mak’s evidence, and I prefer his evidence to the extent that it is inconsistent with the evidence of Mr Cheng.   

B2.  The Company’s witnesses

17.  The Company calls 3 factual witnesses in the 1^st and 2^nd Company’s Actions, namely Mr Cheng, Mr Fok Hei Yuen (“Mr Fok”) and Mr Chan Man Fai (“Mr Chan”).  In addition, Mr Cheng gives evidence for himself in the Petition and the Derivative Action.

18.  Mr Fok is a partner of Messrs Tang & Fok, which was (and still is) the auditor of the Company.  He is an independent witness.  Mr Fok gives his evidence in a careful and candid manner.  His evidence mainly relates to the general process of auditing the Company’s accounts as he did not carry out the actual audit work.  Despite the assertion in his witness statement that he has never been provided with any documents pertaining to the income of the Company before 1 January 2008, he confirms in his oral evidence that in fact all the daily sales records prepared by the auction agent (Hop Kee) were provided to the auditor.  Mr Fok also confirms that he did not give advice to the Company to the effect that it could not declare dividend unless and until its issued shares have been paid-up.  I accept Mr Fok’s evidence.

19.  Mr Chan is a partner of Hop Kee Sam Yick Laan (合記三益生豬欄)[1] (“Hop Kee”).  He is an independent witness.  His evidence relates to the amount of the 34 Days’ Profits which he confirms to be $2,778,678.66.  He is asked by the court about the actual operation of the agency business and he gives direct answers on how it works on a daily basis.  He confirms that the involvement of the Company is minimal, especially when Hop Kee implemented an automation system a few months after it had been appointed as the Company’s agent in carrying out the auction.  I accept Mr Chan’s evidence.

B3.  Mr Cheng

20.  Mr Cheng comes across as a sophisticated businessman who has ample experience on matters concerning management and proper governance of unincorporated association and company.  He strikes me as a meticulous person who is alert to details.  He has been subject to extensive cross examination on his dealings with Mr Choi and the matters complained of by Mr Choi in the Petition.  While Mr Cheng appears to be willing to answer the questions put to him, it is obvious that when he is asked to explain or justify his actions or decisions which are the subject matters of Mr Choi’s complaints, he often gives vague and general answers apparently to avoid having to commit to a particular stance or fact.  It is only when the questions are put by the court that Mr Cheng gives direct answers.  In his oral evidence, Mr Cheng has a tendency to put the blame on others, including Mr Choi, the members of the Association and China Liaison Office[2] (“CLA”) even though his assertions have never been mentioned at any meetings of the Shareholders or in correspondence.  In particular, I find his evidence on the reasons for reneging on the various agreements reached with Mr Choi on 20 December 2007 and the agreement made with a strategic investor (a subsidiary of Wens) to be wholly incredible, as they fly against the documents signed by the parties and the evidence of the independent witness, Mr KY Mak.  I also find his evidence on the reasons for removing Mr Choi as director to be untrue and disingenuous, for the reasons discussed in section D1 below.  Overall, I consider Mr Cheng’s evidence to be unreliable and I do not accept it to the extent that it is inconsistent with the evidence of Mr Choi or the evidence of the independent witnesses.

B4.  Mr Lee

21.  Mr Lee did not file any witness statement.  Nor does he testify at trial.  There is no suggestion that Mr Lee is unable to give evidence.  Indeed, Mr Lee is present in court during the trial.  Upon the court’s enquiry, Mr Mak confirms that Mr Lee elects not to give evidence on his defences filed in opposition to the Petition and the Derivative Action.  He submits that Mr Lee is entitled to rely on the evidence of Mr Cheng as his stance is identical to that of Mr Cheng and “his case stands or falls together with that of [Mr Cheng]”.  I disagree.

22.  Leaving aside the Derivative Action, which I consider to be demurrable and wholly unnecessary for the reasons explained in section E2 below, unless it can be said that the matters complained of by Mr Choi in the Petition do not raise a prima facie case of unfair prejudice (no such suggestion has been made), Mr Lee’s election not to give evidence has the effect of depriving the court of the evidence which is relevant to the complaints and the reliability of the evidence of Mr Cheng.  It is well established that where, as here, a defendant elects not to adduce evidence which is material to the issue, the court is entitled to draw from the facts which have been disclosed all reasonable inferences as to what are the facts which the defendant has chosen to withhold.  The principles were stated by Lord Diplock in British Railways Board v Herrington [1972] AC 877 at 930G – 931B as follows:

“ The appellants, who are a public corporation, elected to call no witnesses, thus depriving the court of any positive evidence as to whether the condition of the fence and the adjacent terrain had been noticed by any particular servant of theirs or as to what he or any other of their servants either thought or did about it. This is a legitimate tactical move under our adversarial system of litigation. But a defendant who adopts it cannot complain if the court draws from the facts which have been disclosed all reasonable inferences as to what are the facts which the defendant has chosen to withhold.” (emphasis added)

23.  The inference to be drawn must be grounded on the primary facts proved.  This was explained by Ribeiro PJ in Nina Kung v Wong Din Shin (2005) 8 HKCFAR 387 at §§185 – 187:

“ 185. … Where, as in the present case, the court is invited to reach a conclusion of forgery as an inference to be drawn on the basis of circumstantial evidence, any such inference must be properly grounded in the primary facts found. The court guards against indulging in conjecture under the guise of drawing an inference where the primary evidence does not logically and reasonably justify the particular inference in question. …

186. The High Court returned a few years later in Jones v Dunkel & Another (1958–1959) 101 CLR 298 at p.305, to stress the need for a proper foundation for the inference. It is not permissible merely to choose what may be considered to be the more likely of two guesses if neither is properly justified by the primary facts found. While the court was divided as to its application to the facts of that case, it was agreed as to the nature of the principle. Dixon CJ (who was in the minority), referring to the abovementioned passage from Bradshaw v McEwans Pty Ltd (unrep., High Court of Australia, 27 April 1951), stated:

But the law which this passage attempts to explain does not authorise a court to choose between guesses, where the possibilities are not unlimited, on the ground that one guess seems more likely than another or the others. The facts proved must form a reasonable basis for a definite conclusion affirmatively drawn of the truth of which the tribunal of fact may reasonably be satisfied. (at p.305)

And Kitto J (for the majority) cautioned:

One does not pass from the realm of conjecture into the realm of inference until some fact is found which positively suggests, that is to say provides a reason, special to the particular case under consideration, for thinking it likely that in that actual case a specific event happened or a specific state of affairs existed. (at p.305)

187. In HKSAR v Lee Ming Tee & Securities and Futures Commission (2003) 6 HKCFAR 336, Sir Anthony Mason NPJ acknowledged the need for such a disciplined approach to the drawing of inferences and in particular for inferences of fraud or serious misconduct to be drawn only where such inferences are compelling. … his Lordship stated:

….that conclusion was not to be reached by conjecture nor, as the respondent submitted, on a mere balance of probabilities. It was to be plainly established as a matter of inference from proved facts. (at §72)

…” (emphases added)

24.  Where the evidence is incomplete and obscure in critical aspects, the silent party’s failure to give evidence may convert that evidence into proof on the matters which are within his knowledge.  As stated by Lord Sumption JSC in Prest v Petrodel Resources Ltd and others [2013] 2 AC 415 at §44:

“ … There must be a reasonable basis for some hypothesis in the evidence or the inherent probabilities, before a court can draw useful inferences from a party’s failure to rebut it. For my part I would adopt, with a modification which I shall come to, the more balanced view expressed by Lord Lowry with the support of the rest of the committee in R v Inland Revenue Comrs, Ex p TC Coombs & Co [1991] 2 AC 283, 300:

‘In our legal system generally, the silence of one party in face of the other party’s evidence may convert that evidence into proof in relation to matters which are, or are likely to be, within the knowledge of the silent party and about which that party could be expected to give evidence. Thus, depending on the circumstances, a prima facie case may become a strong or even an overwhelming case. But, if the silent party’s failure to give evidence (or to give the necessary evidence) can be credibly explained, even if not entirely justified, the effect of his silence in favour of the other party, may be either reduced or nullified.’ ” (emphasis added)

25.  Mr Mak does not dispute the above principles.  He cites Wisniewski v Central Manchester Health Authority [1998] PIQR 324 at 340 and Tjang Siu Thu v Profield Construction Engineering Ltd & anor [2015] 5 HKC 22 at §33 for statements of principles to the same effect.

26.  Moreover, to the extent that Mr Lee has raised positive defences to the complaints raised in the Petition, he bears the evidential burden of proving such defences.  The principle was stated in Phipson on Evidence, 18^th ed, §6–06 thus:

“ So far as persuasive burden[3] is concerned, the burden of proof lies upon the party who substantially asserts the affirmative of the issue. If, when all the evidence is adduced by all parties, the party who has this burden has not discharged it, the decision must be against him. It is an ancient rule founded on considerations of good sense and should not be departed from without strong reasons.

This rule is adopted principally because it is just that he who invokes the aid of the law should be the first to prove his case; and partly because, in the nature of things, a negative is more difficult to establish than an affirmative. …

In deciding which party asserts the affirmative, regard must be had to the substance of the issue and not merely to its grammatical form; the latter the pleader can frequently vary at will. Moreover, a negative allegation must not be confused with the mere traverse of an affirmative one. The true meaning of the rule is that where a given allegation, whether affirmative or negative, forms an essential part of a party’s case, the proof of such allegation rests on him. An alternative test, in this connection, is to strike out of the record of the particular allegation in question, the onus lying upon the party who would fail if such a course were pursued.” (emphases added)

27.  Further, where the directors are sued for breach of fiduciary duties in conducting the affairs of the Company, the burden falls on each of them to demonstrate the propriety of their actions or decisions as the liability of the directors participating in breaches of fiduciary duties is joint and several. It is no excuse that a director blindly followed the lead of another director (Bishopsgate Investment Management Ltd [1993] BCC 120, at 140C–G, per Hoffmann LJ (as he then was) and at 143D–H per Ralph Gibson LJ).

28.  Following the above principles, I will not treat the evidence of Mr Cheng as evidence in support of the defences advanced by Mr Lee unless such evidence is not in dispute or is corroborated by other credible evidence.  Where I find that the primary facts are sufficient to raise a prima facie case of the matters complained of against Mr Lee and the matters were or likely to be within his knowledge, I will draw reasonable inferences against Mr Lee as to the facts which he has chosen to withhold from the court.

B5.  Importance of contemporaneous documents

29.  Mr Mak submits that as most of the material events took place almost 10 years ago, it is not surprising that the witnesses from both sides have occasionally appeared to be confused about the sequence of events or failed to recall certain details.  It seems to me that this observation only applies to the oral evidence of Mr Cheng but not the other witnesses whose testimony is, as discussed above, clear and largely consistent.

30.  Mr Mak submits that where, as here, there was a long passage of time between the events and the trial, the court should place special importance to contemporaneous documentation, citing the judgment of Stock JA in Esquire (Electronics) Ltd v Hong Kong and Shanghai Banking Corp Ltd [2007] 3 HKLRD 439 at §135:

“ … Comparison with contemporaneous documentation is always an aid to reliability of oral testimony, unless there is reason to believe that the documentation is contrived or materially incomplete; but where the passage of time between events and trial is as long as it was in the present case, and where there is such a host of contemporaneous documentation, as there was in this case, the documentation must, I would have thought, assume a special importance. …

That documentation, as well as conflicts within the evidence, inherent probabilities, and a study of how matters were originally pleaded and asserted in witness statements — these are the factors which in a trial such as this, so long removed from the time of events in question, were likely to be of particular use in assessing the facts; ….”

31.  I agree that in assessing the evidence and making fact finding in these proceedings, the court should place special importance on contemporaneous documentation in particular those which were signed by the Shareholders.

C.  UNDISPUTED FACTS AND RELEVANT FINDINGS

32.  I first set out the facts which I understand to be not in dispute based on the submissions of counsel, the documents disclosed by the parties, the evidence of the witnesses and the lines of cross-examination.  Where there are matters in dispute, the respective contentions and my findings (if appropriate) will be stated.

 C1.  Relationship between the parties

33.  Mr Choi, Mr Cheng and Mr Lee are experienced businessmen engaging in farming business in Hong Kong.  Until 1997 when there was an outbreak of bird flu in Hong Kong, Mr Choi ran a chicken farm in Kam Tin with about 100,000 square feet (“Farm”).  He switched to pig farming and subsequently resumed chicken farming until 2005 when the bird flu broke out again.  Mr Lee was a chicken farmer, and was known to Mr Choi for many years and the two had been in regular contact.  Mr Cheng has since 1980 been engaging in pig farming business and is familiar with the business.  Through his involvement in public services relating to agricultural sector, Mr Cheng came to know Mr Lee.

34.  In 2005, chicken farming and pig farming business in Hong Kong were adversely affected by the bird flu and Japanese encephalitis respectively.  This led to the Government offering financial incentives to the farmers to surrender their licences.  At that time, Mr Lee introduced Mr Cheng to Mr Choi.  The three of them came up with the idea of setting up an agricultural special zone (“ASZ”) in the Mainland which, if established, would allow the farmers to set up their farms there and importing their crop into Hong Kong.

35.  To facilitate the negotiations with the relevant authorities, Mr Cheng, Mr Lee and Mr Choi established the Hong Kong Agriculture Special Zone Development Association (香港農業專區發展協會) (“Association”), which was registered as a society on 25 February 2006.  The stated purposes of the Association included assisting the farmers to set up their farm in the ASZ and to promote the development and exchanges of farming business between Hong Kong and the Mainland.

36.  As Mr Cheng had more experience in pig farming, it was agreed between them that Mr Cheng would be the Chairman of the Association, while Mr Choi and Mr Lee would be the Vice Chairmen.  They then proceeded to recruit other members.  An executive committee of the Association (“ExCo”) was formed, whose members included Mr Wong Yung Kan (黃容根), the then representative of the Agricultural and Fisheries Constituency of the Legislative Council, and 8 individuals including Kwan Wing Kai (關永啟), Lam Chi Lun (林子倫), Wong Buk Hung (黃北洪), Lum Choi Kam, Shea Yan Shing (佘恩成), Chan Chiu Yung (陳超勇), Lam Wing Yuen (林榮源) and Lam Po Sang David (collectively the “8 Individuals”).

37.  The 8 Individuals later incorporated a company on 3 April 2008 in the name of Hong Kong Agriculture Special Zone Management Limited (香港農業專區管理有限公司) (“Management Company”) for the specific purpose of acting as the manager of the Company.  The Management Company only has nominal capital, and the 8 Individuals have been its only shareholders and directors.

C2.  Incorporation of the Company

38.  By early 2006, Mr Cheng had already set up several vegetable farms and pig farms in Shaoguan (韶關) in Guangdong Province, while Mr Lee and Mr Choi also ran some chicken farms there. In anticipation of Shaoguan becoming an ASZ, Mr Cheng, Mr Choi and Mr Lee decided to set up a company to capture the business opportunities arising from the need to transport the crop from ASZ to Hong Kong.  The other members of the Association were not interested in joining the company.

39.  Upon the instructions of Mr Choi, Mr KY Mak incorporated the Company on 19 June 2006 with an authorised capital of $10,000 divided into 10,000 shares of $1 each.  At the first meeting of the directors of the Company held on 27 June 2006 at which Mr Choi was the Chairman, it was resolved that:

(1)  Mr Cheng, Mr Choi and Me Lee were appointed as first directors and 1,800 shares were issued to each of them;

(2)  Fairview was appointed as secretary of the Company; and

(3)  the registered office of the Company was at 1806 Fortune Commercial Building, 362 Sha Tsui Road, Tsuen Wan, which was the office of Fairview (“Fairview’s Office”).

40.  Despite the issue of the 5,400 shares, none of them was paid up by the Shareholders.  Although Mr Cheng asserts in his oral evidence that the shareholders have paid $5,400 for the shares issued, this seems to be incorrect as the audited financial statements of the Company for the year ended 31 March 2008 (“2008 A/C”), which were approved by him and Mr Lee on 10 November 2008, recorded that none of the shares issued by the Company had been paid up.

41.  Amongst the Company’s documents, the certificate of incorporation, the documents relating to appointment of first directors and secretary and the minutes of directors’ meeting regarding bank account all dated 27 June 2006, the seal and chop of the Company had since 24 July 2007 been kept by Mr Choi at the Farm.  The other statutory books and records of the Company including copies of its memorandum and articles of association (“M&A”) had been kept at Fairview’s Office until they were handed over to Mr Cheng on 5 April 2008, following his request.

42.  The transport business did not materialise as it would take about 2 years to obtain the requisite approvals from the authorities in the Mainland to establish the ASZ and for the crop produced in such ASZ to be exported to Hong Kong.  In the meantime, the Company was left dormant.

C3.  Securing the agency business

43.  On 31 August 2007, the China Chamber of Commerce of Foodstuffs and Native Produce (中國食品土畜進出口商會) (“CCCFNP”) announced that it would appoint a Hong Kong company to be the third authorized agent, in addition to Ng Fung Hong (五豐行) and Guangnan Hong (廣南行), and invited companies with the relevant experience and financial capability to submit their applications before 10 September 2007.

44.  There is some dispute on the willingness and enthusiasm on the part of Mr Cheng and Mr Lee in using the Company to pursue the application.  Nevertheless, at the meeting on 3 September 2007 at Wai King Restaurant (偉景餐廳) (“Wai King”), which was then the place where Mr Cheng, Mr Choi and Mr Lee had lunch every day, Mr Choi said he would give it a try and put in an application in the name of the Company to CCCFNP.  They signed the minutes of the extraordinary general meeting (“EGM”) held on 3 September 2007 to increase the authorized capital of the Company from $10,000 to $50 million.  No new share was issued.

45.  A few days later, at the meeting of the ExCo held on 6 September 2007 at which Mr Cheng, Mr Choi and Mr Lee were present, there were some discussions about submitting an application for the agency, but no agreement was reached.  Mr Cheng stated that Mr Choi, Mr Lee and he would use the Company to make the application and if they succeed in the application, the benefit would belong to the Association.  Mr Choi was surprised by what Mr Cheng had said but did not express any view at the meeting.

46.  At that time, Mr Choi had already been using his own resources in preparing the application.  These included enlisting the assistance of Mr KY Mak to prepare the requisite documentation, discussing and refining the proposed mode of operation with entities familiar with import, transportation and sale of live pigs from the Mainland including廣東溫氏食品集團有限公司 (“Wens”), a substantial company in the Mainland engaging in poultry and pig farming business and the largest supplier of chicken exported to Hong Kong, and lobbying and obtaining the support from 6 different associations involved in poultry farming and related business.

47.  Mr Lee had no interest or investment in the process.  Although Mr Cheng did not take an active role in the process, there is no dispute that some of the experience and connections in pig farming business stated in the Company’s application was a reference to Mr Cheng’s experience and connections, and Mr Cheng obtained support letters from 2 associations involving in the pig farming related business.

48.  The application was submitted by Mr Choi on behalf of the Company to CCCFNP on 8 September 2007.  Between 10 September and 9 October 2007, Mr Choi continued to liaise with CCCFNP on the application and provided further documents and supplementary information relating to the capital of the Company, the capacity of the proposed operation and the proposed methods to stabilise the supply of live pigs in Hong Kong.

49.  On 22 October 2007, the Ministry of Commerce announced that after considering the 8 applications submitted, the CCCFNP decided to appoint the Company as the third authorised agent, which would be given the same right as Ng Fung Hong and Guangnan Hong in acting as the authorised agent in importing and selling live pigs from the Mainland in Hong Kong.

C4.  Establishing the agency business — 22 October to 28 November 2007

50.  Mr Choi was keen to start the agency business as quickly as possible.  He took a month to negotiate and establish the business model and secured the agreements of all the parties required to start the agency business.

51.  At the same time, Mr Choi had to deal with regulatory issues including reporting to CCCFNP on the progress of the preparatory work undertaken by the Company.  By letter dated 15 November 2007, Mr Choi informed CCCFNP that the Company would be able to start the import on 24 November 2007, initially at 120 pigs per day, to be increased to 320 pigs by the beginning of December 2007.  This was equivalent to 8 lorry loads of pigs (with each lorry carrying 40 pigs).

52.  By a notice dated 15 November 2007, the Ministry of Commerce requested the 3 authorised agents to meet in Beijing on 19 November 2007 to discuss the market condition in Hong Kong, the quota system in the Mainland and the ways to ensure stable supply of live pigs in Hong Kong.  The meeting was attended by Mr Choi as the Chairman and general manager of the Company. 

53.  By letters dated 22 November 2007 to the Beijing and Guangzhou offices of the Ministry of Commerce signed by Mr Choi on behalf of the Company, the Company notified the Ministry of Commerce that as it had not applied for the daily quota in good time, it could only start importing live pigs after 24 November 2007.  It also requested the Ministry of Commerce to allocate a daily quota of 600 pigs to the Company, rather than entrusting Ng Fung Hong to handle the allocation of daily quota amongst the 3 authorised agents.

54.  At the same time, Mr Choi wrote to the Food and Environmental Hygiene Department (“FEHD”) to enlist its assistance in understanding the regulatory framework in the Mainland and increasing the number of spaces at the Slaughterhouse.

55.  Between 22 October 2007 and 28 November 2007 (when the Company started to import live pigs from the Mainland), Mr Choi with the assistance of his family members managed to establish the entire network and business model required for the agency business.  These included negotiating and securing the agreement of (1) the suppliers in the Mainland willing to appoint the Company as their agents in exporting and selling their live pigs in Hong Kong, (2) the transportation company to handle the logistics matters in the Mainland and in Hong Kong, and (3) the auction company to take charge of the sale of the pigs in Hong Kong and to account for the revenue generated from such sale.  Since then, the Company has been carrying on its agency business using the same business model established by Mr Choi.

C5.  Modus operandi of agency business

56.  The modus operandi of the agency business was (and still is) fairly simple and involved the following aspects.

57.  First, the Company signed an agency agreement (供港活大豬代理協議) with the following suppliers in the Mainland (“1^st Agency Agreement”):

(1)  廣西豐潤進出口貿易有限責任公司 (Guangxi Fungrich Import & export Company Limited) (“Guangxi Fungrich”);

(2)  湖北省粮油進出口(集團)公司 (Hubei Provincial Cereals Oils and Foodstuffs I/E (Group) Corporation) (“Hubei Cereals Oils”);

(3)  浙江省糧油食品進出口股份有限公司; and

(4)  湖南新五豐股份有限公司(Hunan New Wellful Company Limited (“Hunan New Wellful”)  (collectively “Suppliers”)

58.  The Suppliers came to the scene through the introduction of CCCFNP. They met with Mr Choi in Beijing, and after brief negotiation, agreed to enter into the 1^st Agency Agreement, which was signed by Mr Choi on behalf of the Company on 12 November 2007.  Under the 1^st Agency Agreement, the parties agreed, inter alia, as follows:

(1)  the Suppliers would entrust no less than 120 pigs per day for the Company to sell (clause 1.2);

(2)  the Suppliers would be responsible for obtaining clearance from the inspection and quarantine department in the Mainland and, thereafter, transporting the pigs to 深圳清水河倉庫 (“Shenzhen Warehouse”). The Company would be responsible transporting the pigs to Hong Kong for sale and the associated safety and quality issues (clauses 2.2, 3);

(3)  the Company would report the number and weight of the pigs sold and the results of sale, including the amount payable to the Suppliers within 48 hours (clause 5.3);

(4)  the usual commission payable to the Company would be 10% but during the trial period, the Suppliers would pay 12% commission on the amount generated by the sale of the pigs (clause 8.1);

(5)  the Company would remit the amount payable to the Suppliers within 3 to 5 days after the sale of the pigs failing which it would pay damages at 0.3% of the amount due (clause 9); and

(6)  the 1^st Agency Agreement took effect from the date it was made until 29 February 2008, which would be renewed for one year if neither party proposed to enter into a new agreement (clause 12).

59.  After Mr Cheng and Mr Lee had taken control of the Company in mid-April 2008 (as described in section C13 below), the Company continued to sign similar agency agreements (described as “供港活大豬代理經銷合同”) with the Suppliers and another new supplier, 湖北良友畜禽有限公司, on an annual basis which set out the rate of commission, the minimum quantity of pigs entrusted to the Company for sale and the payment terms.

60.  Secondly, the Company engaged Sam Ran to transport the pigs from the Shenzhen Warehouse to Sheung Shui Slaughterhouse (上水屠房) (“Slaughterhouse”).  Sam Ran was responsible for handling the clearance with the customs departments in the Mainland and in Hong Kong.  On 30 December 2007, the Company and Sam Ran entered into a 交通運輸業務委託協議 (“Transportation Agreement”) whereby the Company appointed Sam Ran to handle all transportation matters for the Company for 15 years.

61.  Thirdly, the Company appointed Hop Kee as its sole agent in handling all matters relating to the sale of the pigs delivered to the Slaughterhouse including (1) counting the number of pigs delivered, (2) conducting the auction of the pigs, (3) collecting the cash payment from the buyers (買手) for the pigs bought during the auction, (4) handing over the pigs to the buyers, and (5) keeping the pigs which are not sold and making them available for sale in the next day. Hop Kee has 7 spaces (each described as “laan” “欄”) at the Slaughterhouse to carry on its operation.

62.  The appointment was first made in the form of a handwritten undertaking dated 25 November 2007 and signed by Mr Choi on behalf of the Company.  The terms of the appointment were subsequently set out in the letter dated 21 April 2008 addressed to Mr Cheng as general manager and signed by Mr Lee on behalf of the Company (“Auction Agreement”).  The Auction Agreement provided, inter alia, that:

(1)  the appointment was for a period of 10 years, commencing on 28 November 2007;

(2)  Hop Kee would charge 2.5% of the actual amount generated by the sale of the pigs as its commission and $10 as labour charge for carrying each pig (伕力);

(3)  Hop Kee would handle the entire auction process and would provide the information on the auction results to the Company within the next 24 hours; and

(4)  Hop Kee would deduct its commission and the labour charge from the amount received from the buyers for the sale of the pigs and remit the balance of sale proceeds to the Company within the next 3 working days.

63.  The auction and record process was further simplified in early 2008 when Hop Kee implemented an automated system to assist the process.  The new system included an electronic device to measure the weight of each of the pigs sold, which would be recorded in the system.  Once the unit prices and the number of pigs sold at such prices were determined at the auction and entered into the system, the actual amount payable by the buyers would be calculated.  With this system in place, the staff of the Company would not need to copy the results of the auction from the handwritten records kept by Hop Kee or to monitor the weight of the pigs closely as such information would be automatically recorded in the system.

64.  Hop Kee has been providing daily sales records on the auction to the Company (collectively “Daily Records”), which listed out in detail (1) the unit prices, the total weight and number of the pigs sold at the prices and the revenue generated, (2) the commission payable to the Company, (3) the commission and labour charge payable to Hop Kee, and (4) the amount payable to the suppliers.

65.  As for the revenue generated by the sale of the pigs, it was handled by Hop Kee to the Company in the following manner:

(1)  The buyers would pay cash to Hop Kee at the Slaughterhouse when it took delivery of the pigs purchased.

(2)  Hop Kee would deduct its commission and labour charge from the amount received from the buyers, which would become the gross revenue of the Company.

(3)  Depending on the instructions of the Company, Hop Kee would either pay the gross revenue to the Company, or pay on behalf of the Company the amounts payable to the suppliers and Sam Ran together with “all incidental expenses concerning the distribution of live pigs on behalf of the Company in Hong Kong”[4].

(4)  Hop Kee would pay the gross revenue or the gross profits (ie gross revenue less the amounts paid to the Suppliers and Sam Ran) to the Company within the next 3 days.

66.  Under the modus operandi established by Mr Choi, the Company only has limited role or involvement in the import and sale process as follows:

(1)  The Company would apply for import permit from the Agriculture, Fisheries and Conservation Department (“AFCD”) in Hong Kong on a monthly basis, which would be issued to the Company, and handed over to Sam Ran for its use.

(2)  The Company rented 9 spaces at the Slaughterhouse from a company[5] to keep the pigs which have not been sold during the auction.  The first agreement signed was for the period from 1 December 2007 to 31 July 2009.

(3)  On a daily basis, the Company would liaise with the Suppliers on the number of live pigs to be exported to Hong Kong the next day, and would inform Sam Ran of the same so that it could deploy enough lorries to transport the pigs from the Shenzhen Warehouse to the Slaughterhouse.

(4)  Also on a daily basis, the Company would deploy a staff to monitor the auction process in the Slaughterhouse, copy the results of the auction as its record and bring the invoices issued by Hop Kee back to the Company.

(5)  The administrative and accounting matters were handled at the back office of the Company, which included (a) checking and reconciling the auction results copied by the staff against the Daily Records provided by Hop Kee, (b) checking the amounts paid by Hop Kee to the Company against the Daily Records, (c) reporting the sales results to the Suppliers, and (d) filing the invoices and other documentation relating to the agency business.

C6.  Managing the business — 28 November to 31 December 2007

67.  The first load of 400 live pigs were delivered to the Slaughterhouse on 28 November 2007.  Despite the importance of this occasion, which marked the beginning of the agency business, only Mr Choi and his brother-in-law, Mr Chan Hak Keung (陳克強) attended the Slaughterhouse.  Neither Mr Cheng nor Mr Lee appeared.  Nor did they enquire with Mr Choi about how the business had been carried on.    

68.  During the period from 28 November 2007 to 31 December 2007 (“34 Days”), the Company was managed and operated by Mr Choi alone.  He was assisted by his daughter, Ms Choi Man Kit (蔡敏潔), Mr Chan Hak Keung and Mrs Choi.  Mr Cheng and Mr Lee had no involvement in the day-to-day operation of the Company or its business.

69.  During this period, the Company had to face a number of challenges and obstacles posed by the others including the regulatory authorities and the competitors.  These included seeking to increase the daily quota for export of live pigs from the Mainland, dealing with the competitors’ attempts to exclude those buyers who purchased any pigs from the Company and the attempt by the local transportation companies to block Sam Ran’s lorries from entering into the Slaughterhouse.  Mr Choi was the only person who handled and resolved all these challenges, invariably in his capacity as the Chairman of the Company, which included seeking assistance from CCCFNP and the FEHD.   

70.  As for the internal affairs of the Company, they were primarily handled by Mrs Choi.  These included the day-to-day liaison with the Suppliers and Sam Ran as well as the administrative and accounting matters. She carried out these tasks at the Farm.  Mr Chan Hak Keung attended the Slaughterhouse on a daily basis to monitor the auction, copy the results of the auction and obtained the invoices from Hop Kee. 

71.  Pursuant to the 1^st Agency Agreement, the Company was entitled to charge 12% of the amount generated from the sale of the pigs as its commission.  After deducting its commission and charge, Hop Kee remitted the gross revenue to the bank account of Mrs Choi who, in turn, used the amount to pay the Suppliers, Sam Ran and other expenses incurred by the business.

72.  The gross profits generated by the Company amounted to $2,778,678.66 (ie the 34 Days’ Profits).

C7.  Agreement with Wens / Eagle Luck

73.  While the agency business was on-going, Mr Choi proposed to invite Wens to be a strategic investor of the Company with a view to raise capital to finance the existing and future business of the Company.  This was necessary as the Company only had capital of $5,400, which was credited as paid-up.

74.  The issues of introducing a strategic investor and injecting capital into the Company were discussed at the Board of Directors’ meeting held on 28 October 2007 attended by Mr Choi (as Chairman), Mr Cheng, Mr Lee and Mr KY Mak (as secretary).  This was the first time Mr KY Mak met with Mr Cheng and Mr Lee.  At the meeting, the directors considered the letter of intent of the same date from Eagle Luck Development Ltd (鵬福發展有限公司) (a subsidiary of Wens) (“Eagle Luck”) whereby Eagle Luck proposed to increase the capital of the Company to $100 million, to subscribe for 51% issued shares in the Company, and to use the capital raised to finance the business of the Company and to invest in a pig farm in the Mainland.  It was unanimously resolved that Mr Choi be authorised to represent the Company to negotiate with Eagle Luck on the matters stated in the letter of intent and to sign the relevant documents.

75.  Thereafter, at the meeting held on 1 November 2007 at Panglin Hotel in Shenzhen, which was attended by Mr Choi and Mr KY Mak on behalf of the Company and the representatives of Wens and Eagle Luck, the parties discussed the future mode of cooperation, the agency business then operated by the Company and the manner in which Eagle Luck would acquire the majority shareholding and how to deal with the remaining shareholdings. Reference was made to the involvement of the members of the Association.   

76.  There was another meeting held on 24 November 2007 in Guangzhou with representatives of Wens, which was attended by Mr Choi and Mr KY Mak on behalf of the Company.  At the meeting, the parties finalised the terms of the proposed investment by Eagle Luck into the Company.  The matters discussed at the meeting were set out in a document prepared by Mr KY Mak.    

77.  On 2 December 2007, Mr Choi, Mr Cheng and Mr Lee went to Guangzhou to meet with Mr Lai, a representative of Eagle Luck, and the parties entered into an agreement entitled “入股香港農業專區有限公司協議書” (“Eagle Luck Agreement”) signed by all parties on the same day.  Under the Eagle Luck Agreement, the parties agreed, inter alia, that:

(1)  the Company would raise $50 million capital from the shareholders and Eagle Luck (clause 1.1);

(2)  Eagle Luck would acquire not less than 51% issued shares in the Company (clause 1.2);

(3)  the Company would operate in accordance with the requirement of Eagle Luck’s parent company (clause 1.3);  

(4)  the first legal representative and Chairman of the Company would be Mr Choi whose shareholding in the Company would not be less than 10% (clause 1.4);

(5)  upon receiving 51% or more of the shares in the Company and completion of the injection of $50 million capital, and within 30 days thereafter, Eagle Luck would make a one-off payment of $5 million to Mr Choi, Mr Cheng and Mr Lee (clause 2.1); and

(6)  the capital raised by the Company would be used to finance its normal business and the balance would be used to invest in a company jointly established with the company nominated by Eagle Luck in the Mainland, which would produce and export its crop to Hong Kong (clause 2.3).

78.  The Eagle Luck Agreement was never performed by the parties, and none of the parties ever sought to enforce it.  There is a dispute on the reason for the non-performance of the Eagle Luck Agreement — Mr Choi says that Mr Cheng changed his mind for reason not clear to him, while Mr Cheng says that the Agreement was cancelled by Eagle Luck after Mr Lai had seen their dispute over the distribution of $5 million and the shareholdings between them.  There is no document or evidence from Mr Lai or Eagle Luck regarding the allegation cancellation of the Eagle Luck Agreement.  

C8.  1^st, 2^nd and 3^rd Proposals to invite subscription of shares

79.  It is the unchallenged evidence of Mr KY Mak that he had a meeting with Mr Cheng and Mr Lee on 10 December 2007 at the Panda Hotel (悅來酒店) in Tsuen Wan.  At the meeting, Mr Cheng gave various instructions on re-allocation of the shareholdings in the Company.  Mr KY Mak says that he just jotted down what was said by Mr Cheng, as he was confused by the instructions and did not know what Mr Cheng wanted him to do.  His handwritten notes show that Mr Cheng intended to give 3 months to the members of the Association to decide whether to subscribe for shares in the Company, and to issue 5% shares to each of the 7 associations which had supported the Company’s application to CCCFNP.  

80.  Pursuant to Mr Cheng’s instructions, Mr KY Mak prepared a letter dated 11 December 2007 in the name of the Association and to be signed by Mr Cheng as Chairman and by Mr Wong Yung Kan as President (“1^st Proposal”).  In the 1^st Proposal, Mr Cheng proposed to change the capital and shareholding of the Company as follows:

(1)  increase the capital of the Company to $50 million, being the amount stated in its application to CCCFNP (§1);

(2)  re-allocate the shareholding in the Company on the basis that it would have 50,000,000 issued shares, to be issued to the shareholders at $1.05 per share.  The capital raised would be used to pay the expenses incurred by the Company and to establish a pig farm in the Mainland (§2);

(3)  the shares in the Company would be issued to the 7 associations which had supported its application to CCCFNP (5% each), the pig and poultry association (2.5% each), Mr Cheng (7%), Mr Lee and Mr Choi (6% each), the 15 ExCo members (2% each) and the 22 members of the Association (0.5% each).  Any shares not taken up would be allocated by the directors in their absolute discretion (§§3 – 4); and

(4)  the Association would send the application forms to the members within 2 weeks which must be accepted by the applicants within the time stipulated (§5).

81.  Mr Choi was not aware of, and had not been consulted by, Mr Cheng before he instructed Mr KY Mak to prepare the 1^st Proposal.  In the end, the 1^st Proposal was not issued by the Association.  Mr Cheng says that this was because the members of the Association objected to the inclusion of Wens as a prospective shareholder, while Mr Choi saya that it was because Mr Wong Yung Kan considered that the 1^st Proposal should be issued by the Company, rather than the Association.  It seems to me that the reason given by Mr Choi to be more plausible, given that Mr Wong Yung Kan was named as one of the signatories of the 1^st Proposal.

82.  Thereafter, Mr Cheng instructed Mr KY Mak to prepare another document entitled “聯合股份募集及專案簡介” to be issued in the names of the Association and the Company (“2^nd Proposal”). The 2^nd Proposal stated, inter alia, as follows:

(1)  the authorised capital of the Company would be $50 million while its paid-up capital would be $5 million, to be allotted as follows: 12% to the Chairman (i.e. Mr Cheng), 6% to each of the 5 Vice-Chairmen, 5% to each of the 6 ExCo members, 10% to Hop Kee and 18% to members and other friends (clause 2.1);

(2)  the Board of Directors would consist of 7 directors and shareholders holding 14% shares would be entitled to nominate one director to the Board (clause 2.4);

(3)  the estimated expenses of the Company in Hong Kong would be $486,000 per annum (clause 3A);

(4)  the Company would establish an office near the Slaughterhouse, which would also be used as the office of the Association and the renovation cost would be $200,000 (clause 3B);   

(5)  the estimated expenses of the Company in the Mainland would be $387,015 per annum (clause 3C);

(6)  the financial analysis which estimated that the Company would be able to earn gross margin at 4.3% of the amount generated from the sale of the pigs (clause 4);

(7)  the business and sales plan including the existing arrangement with Hop Kee, and the plan to import and sell 400 to 500 pigs per day during the first year, to be increased to 1,000 pigs per day (clause 5);

(8)  the sales target for 2008 and 2009 which, on the basis of gross margin at 4.5%, would generate gross profits of $12,796,800 and $28,792,800 respectively (clause 6);

(9)  the various risk factors in operating the business (clause 7); and

(10)  other related regulatory matters (clause 8).

83.  Again, Mr Choi was not consulted by Mr Cheng about the 2^nd Proposal.  Nor did Mr KY Mak send the 2^nd Proposal to Mr Choi after it had been prepared. 

84.  On 18 December 2007, Mr Choi met with Mr Wong Yung Kan at which he was shown the 1^st Proposal and was asked to issue the same in the name of the Company.  Mr Choi says out of respect for Mr Wong Yung Kan and Mr Cheng, he agreed to issue the 1^st Proposal in the name of the Company.  At the meeting, Mr Wong Yung Kan suggested Mr Choi to let the other shareholders to re-participate in the business of the Company.

85.  Mr Choi then instructed Mr KY Mak to prepare a letter based on the terms of the 1^st Proposal to be issued in the name of the Company.  The letter was dated 20 December 2007 and signed by Mr Choi as Chairman of the Company (“3^rd Proposal”).  The contents of the 3^rd Proposal were almost identical to the 1^st Proposal save that the proposed shareholding for Wens was increased from 5% to 10%, while the shareholding for Mr Choi and Mr Lee was increased from 6% to 7%.  There is a dispute on whether the changes in the shareholdings had been discussed with Mr Cheng and Mr Lee before the 3^rd Proposal was issued by the Company.  I find that Mr Choi had obtained the agreement of Mr Cheng and Mr Lee on the changes, as neither of them has complained about the contents of the 3^rd Proposal after it was issued.    

86.  Also on 18 December 2007, Mr Cheng and Mr Lee attended the Fairview Office for the first time.  They requested Mr KY Mak to provide the company kit and the Eagle Luck Agreement to them.  Mr KY Mak did not accede to the request as he considered that it was the responsibility of the Fairview to retain the documents of the Company and he wanted to understand what was going on before handing over the documents to them.  As Mr Cheng insisted on taking the company kit, Mr KY Mak called the police for assistance. In the end, Mr KY Mak provided copies of the memorandum and articles of association, the business certificate, the minutes of the Board of Directors’ meeting on 28 October 2007 and the Eagle Luck Agreement after Mr Cheng and Mr Lee had signed a handwritten note to request for the same.     

87.  According to the record maintained by Mr Choi, the 3^rd Proposal was only received by some of the entities between 27 and 31 December 2007.  As will be seen in section C9 below, by that time, all the 50,000,000 shares in the Company were already issued to Mr Choi, Mr Cheng and Mr Lee.  It is not clear how the Company could allocate the shares to the applicants, should they decide to accept the 3^rd Proposal.

88.  As it turned out, no one accepted the 3^rd Proposal.    

C9.  Agreements reached on 20 December 2007

89.  In the meantime, there was a Board of Directors’ meeting of the Company held in the evening of 20 December 2007 at which Mr Choi, Mr Cheng, Mr Lee and Mr KY Mak were present.  As stated in the handwritten minutes prepared by Mr Cheng (“Handwritten Minutes of 20/12/2007”), the first 3 resolutions were passed unanimously resolved while the last resolution was not passed:

(1)  Mr Choi would from 1 January 2008 gradually transfer his duties on hand to Mr Cheng and Mr Lee:

「 蔡志偉董事答應將他手上的職務續[sic]步移交予鄭嘉成及李伯驥並將於2008年1月1日实施。」 (emphasis added) (§1)

(2)  Mr Choi would open a bank account at each of Bank of China and Standard Chartered Bank on 21 December 2007:

「 蔡志偉董事答應將於2007年12月21日到中國銀行開設一個戶口再到渣打銀行開設另一個戶口。」 (§2)

(3)  Mr Choi proposed to deposit the sale proceeds into the Company’s bank account, and to request Hop Lee to pay the Suppliers on behalf of the Company:

「 蔡志偉董事提議由2008年1月1日開始將貨款存入公司戶口，並要求合記三益豬欄代為向國內的企業結匯。」 (§3)

(4)  Mr Choi proposed to allocate the shareholdings in the Company as to 40% to himself and 30% to each of Mr Cheng and Mr Lee (§4).

90.  A few days after the meeting, Mr KY Mak prepared the typed-up minutes of the Board of Directors meeting held on 20 December 2007, which was signed by all the directors (“Typed-up Minutes of 20/12/2007).  The contents of these Minutes were largely similar to the Handwritten Minutes of 20/12/2007.  As Mr Cheng and Mr Lee dispute what was agreed at the meeting and the meaning of the words used in the Type-up Minutes of 20/12/2007, I set out the relevant resolutions as they appeared in the Minutes:

「3.1.1 工作安排

鄭嘉成先生動議分擔董事長現時的工作量。

董事長同意將他手上的部份工作逐步移交與鄭嘉成先生及李伯驥先生，並將於2008年1月1日起開始實施。

會議議決 以上動議經充分討論，並獲董事會全體一致通過。

3.1.2 開設公司銀行戶口

鄭嘉成先生動議開設公司銀行戶口，以預備公司開展業務時的需要。

董事長提議於2007年12月21日共開設二個銀行戶口，其中一個銀行戶口開始於中國銀行，主要用途是支付豬隻代理貨款，另一個銀行戶口開設於渣打銀行，主要用途是支付其他業務的開支。

會議議決 以上動議經充分討論，並獲董事會全體一致通過。

3.1.3貨款處理

為有效率處理貨款事宜，董事長動議由2008年1月1日開始，將由拍賣取得的豬隻代理貨款存入公司銀行戶口，並要求合記三益豬欄協助代為向國內的企業結匯。」 (emphases added)

91.  There is no dispute that at the meeting on 20 December 2007, Mr Choi, Mr Cheng and Mr Lee also agreed to allot 49,994,600 shares to themselves at $1 each, with Mr Choi and Mr Cheng receiving one share more than Mr Lee.  For this purpose, they signed the minutes of Board of Directors’ meeting and EGM stated to have been held on 20 December 2007, which recorded the unanimous resolutions approving the allotment.  Each of them also signed application dated 20 December 2007 to apply for the shares allotted by the Company.  I refer these documents signed by the parties for the purpose of issuing and allotting 49,994,600 new shares as “Allotment Documents”.  All the Allotment Documents had been prepared by Mr KY Mak and brought to the meeting on 20 December 2007 for the Shareholders to sign, and they signed them at the meeting.

92.  In addition, Mr Choi, Mr Cheng and Mr Lee also signed 股東權益協議書(agreement as to shareholders’ interest dated 20 December 2007 (“Shareholders’ Agreement”).

93.  There is a dispute as to whether the Shareholders’ Agreement was signed on 20 December 2007 — Mr Choi and Mr KY Mak say that it was signed before the Shareholders proceeded to hold the Board meeting recorded in the Handwritten Minutes of 20/12/2007, while Mr Cheng says that it was signed 2 days later, at Wai King or Lung Wah restaurant, when he was having lunch with Mr Choi.  The relevance of this dispute relates to Mr Cheng’s contention the Shareholders’ Agreement was subject to 2 conditions precedent, namely (1) the complete handover of all the work and duties undertaken by Mr Choi in the Company on 1 January 2008, and (2) the immediate opening of 2 bank accounts in the name of the Company (“Alleged Conditions Precedents”), both of which, he says, was agreed between the parties at the Board meeting on 20 December 2007.

94.  I reject Mr Cheng’s evidence that he only signed the Shareholders’ Agreement 2 days after the meeting on 20 December 2007, as it is contradictory to all the evidence and his own pleaded case:

(1)  In §50 of RAPOD, it is pleaded that the Shareholders’ Agreement was signed by Mr Cheng and Mr Lee at the meeting on 20 December 2007.

(2)  Under cross-examination, Mr KY Mak says that he drafted the Shareholders’ Agreement and brought it to the meeting on 20 December 2007 for the Shareholders to sign, and they signed it at the meeting.  His evidence accords with the evidence of Mr Choi and makes sense, as there was no reason why the Shareholders would only sign the Allotment Documents, the Board Minutes of 20/12/2007 but not the Shareholders’ Agreement.

95.  There is no dispute that the Shareholders also signed the minutes of the Board of Directors’ meeting held on 20 December 2007 at 8:35 pm (“Board Minutes of 20/12/2007”) which recorded that the Shareholders’ Agreement was approved by all the directors unanimously.

96.  In all the minutes of the meetings held on 20 December 2007, Mr Choi was described as the Chairman and he signed them as Chairman of the meetings.

97.  There is no dispute that on 21 December 2007, Mr Choi opened a bank account in the name of the Company at Bank of China and another account at Standard Chartered Bank, and Mr Choi, Mr Cheng and Mr Lee were named as joint signatories.  As Mr Cheng and Mr Lee did not attend the banks to sign the documents required to open the bank accounts until early January 2018, the bank accounts were only opened on 6 or 7 January 2008.

C10.  Meeting on 30 December 2007

98.  There was a meeting held on 30 December 2007 at a restaurant in Shek Kong (石崗金疊餐廳), which was attended by the Shareholders and Mr Wong.  At the meeting, a transportation agreement was signed between the Company and Sam Ran whereby the Company agreed to engage Sam Ran to handle all the transportation matters from 1 January 2008 to 31 December 2022.  Mr Choi signed the agreement on behalf of the Company and as Chairman of the Company, while Mr Cheng and Mr Lee signed it as directors.  

99.  There were two sets of minutes for the meeting on 30 December 2007, one handwritten by Mr Wong and one typed up minutes (together “Minutes of 30/12/2007”).  As their contents are identical, I will refer to the typed up version.  There is no dispute that:

(1)  this meeting was not a Board meeting of the Company, and no resolution was passed in respect of any of the matters set out in the Minutes of 30/12/2007; and

(2)  the matters stated in §§1 and 2 [6] are correct.

100.  §2 of the Minutes of 30/12/2007 stated as follows:

「 因時間上未能配合，於二零零八年一月一日前，本公司之運作暫由蔡志偉先生經營，故此該日期前本公司業務上之盈虧一概由蔡志偉先生承担，於該日期後，蔡志偉先生並承諾，交回營運權於本公司。」

English translation:

“ Owing to lack of coordination in time, before 1^st January 2008, the operation of the Company was temporarily run by Mr Choi Chi Wai, so the profit and loss of the Company before that date was to be enjoyed and borne by Mr Choi Chi Wai, Mr Choi Chi Wai also promised to return the right of operation to the Company after that date.” (emphasis added)

101.  The Minutes of 30/12/2007 also stated as follows:

(1)  Mr Wong was appointed as an executive director of the Company and his salary would be $10,000 per month (§4);

(2)  Mr Choi was appointed as Chairman of the Board of Directors while Mr Cheng and Mr Lee were appointed as directors, all appointment was for 2 years (§6);

(3)  As the Company had not formally commenced its operation before 1 January 2008 and had not raised any capital, each director would first subscribe for 7% of the shares $1.05 per share, but they agreed to advance a loan of $3.5 million to the Company as its temporary working capital, to be paid by 15 January 2008.  Any director who failed to pay up before this date would be treated as having waived his right to subscribe for his share (§6).  This is the “Capitalisation Agreement” relied upon by Mr Choi in the Derivative Action;

(4)  The directors’ remuneration of Mr Choi was $40,000 per month with allowance of $20,000, while the remuneration of Mr Cheng and Mr was $30,000 per month each (§7); and

(5)  For employees, Ms Choi would be the secretary at monthly salary of $10,000, Mrs Choi would be the liaison officer at monthly salary of $15,000 while Mr Chan Hak Keung would receive $13,000 per month and be responsible for documentations (§8).  

102.  Mr Cheng does not accept that the matters set out in §§3 – 10 of the Minutes of 30/12/2007 were agreed upon by the Shareholders.  In his oral evidence, Mr Cheng clarifies that the matters stated in §§3 – 10 of the Minutes of 30/12/2007 were mentioned by Mr Choi at the meeting, but he did not say whether he agreed or disagreed.  Mr Cheng says that in his mind, it was not necessary to discuss any matters about the Company as Mr Choi had already agreed to hand over control the Company, whereupon he and Mr Lee could decide any matters on their own.  As for Mr Choi, he says that all the matters set out in the Minutes of 30/10/2007 were discussed and agreed upon by Mr Cheng and Mr Lee at the meeting, although no formal resolutions were passed as it was not a Board meeting.

103.  I find that the matters stated in §§3 – 10 of the Minutes of 30/10/2007 were agreed upon by the Shareholders, for the following reasons:

(1)  Mr Wong was present throughout the meeting.  He was asked to record the matters discussed and agreed and he did so in the form of the handwritten minutes.  He confirms the accuracy of the minutes and his evidence is not challenged during his cross-examination;

(2)  Mr Lee was present at the meeting and the matters discussed were within his knowledge.  I infer from his silence that he knew that the matters stated in §§3 – 10 of the Minutes of 30/12/2007 had been agreed upon by the Shareholders but chose not to say so.

(3)  The matters stated were subsequently carried out by the Company or the parties. These included (a) Mr Wong participating at the next Board meeting of the Company qua director, (b) Mrs Choi was employed by the Company as “liaising supervisor” until 10 June 2008[7];(c)Mr Choi received $60,000 as his director’s remuneration and allowance until 31 March 2008; and (d) on 12 January 2008, Mr Choi sent to Fairview a cheque of $3.5 million made in favour of the Company for the purpose of paying up 7% of the shares issued to him.

C11.  Managing the agency business – 1 January to 15 April 2008

104.  On 1 January 2008, the first day when Mr Cheng and Mr Lee were supposed to take up some of the duties previously undertaken by Mr Choi, neither of them attended the Farm, the Fairview Office or the Slaughterhouse, which were the only places at which the Company’s business and affairs were carried out.  They did not make any enquiry with Mr Choi or Mr KY Mak about the affairs of the Company.  Nor did they make any request to Mr Choi or Mr KY Mak to hand over any affairs of the Company.

105.  Mr Choi continued to operate the agency business with the assistance of his family members.  For this purpose, Mr Choi:

(1)  entered into an agreement with 3 out of the Suppliers[8] on 26 February 2008 whereby the suppliers agreed to appoint the Company as their agent from 1 March 2008 to 31 December 2008 on terms that they would supply no less than 640 live pigs per day, the commission payable to the Company would be 10% and the Company would pay the net amount generated by the pigs sold to the Suppliers within 5 working days; and

(2)  applied for and obtained import permits from AFCD on behalf of the Company until 15 April 2008, when AFCD refused to issue any further permit to him after it had been informed by the Board of Directors of the Company that Mr Choi did not have the authority to make the application on behalf of the Company.

106.  The gross profits generated by the agency business during the period from 1 January to 15 April 2008 was $9,198,108.45 (“4.5 Months’ Profits”).  Pursuant to Mr Choi’s instructions, the entire amount was held by Hop Kee on account of the Company.

C12.  Removal of Mr Choi as director

107.  While Mr Choi was still carrying on the agency business, without any prior notice or discussion, Mr Cheng instructed Fairview to issue a notice dated 10 January 2008 purportedly on behalf of the Board to convene an EGM on 12 January 2008 to consider resolutions to (1) remove Mr Choi as a director and appoint Mr Wong But Hung and Mr Lam Wing Yuen (2 of the 8 Individuals) as directors of the Company, (2) replace the company Secretary with a new company Secretary, and (3) arrange new authorised signatories (“Purported Notice of 10/1/2008”).

108.  Mr Choi, through his solicitors, Messrs Gallant Y T Ho & Co (“GYTH”), complained on 11 January 2008 that the Purported Notice of 10/1/2008 was invalid.  In the same letter, GYTH stated that at the Board meeting on 30 December 2007, it had been unanimously resolved that Mr Choi be appointed as Chairman of the Company for 2 years from 1 January 2008 and that each shareholder should provide $3.5 million as “temporary capital contribution” in the form of shareholder’s loan by 15 January 2008.  A cashier order for $3.5 million payable to the Company was provided by Mr Choi to Fairview on 12 January 2008 as payment for 7% shares issued to him.  Mr Cheng and Mr Lee did not pay any amount to the Company by 15 January 2008.

109.  In response, Mr Cheng and Mr Lee instructed Messrs Chan, Evans, Chung & To (“CECT”) to issue a letter dated 25 January 2008 making a number of serious allegations against Mr Choi (“CECT’s Letter of 25/1/2008”).  The allegations will be considered in section D1 below.

110.  Pursuant to another notice dated 2 February 2008 issued by Mr Lee, a Board meeting was held on 13 February 2008 (“Board Meeting of 13/2/2008”) to consider resolutions to remove Mr Choi and Fairview as director and company secretary respectively and to convene an EGM.  The Board Meeting of 13/2/2008 was attended by Mr Cheng, Mr Choi, Mr Lee and Mr Wong and a representative of the new company secretary.  At the Meeting:

(1)  Mr Cheng insisted on acting as Chairman.  He did not recognise Mr Wong as director and only allowed Mr Choi, Mr Lee and himself to vote on the resolutions;

(2)  Mr Choi said that as he had not been told about the reasons for removing him and Fairview, he had to instruct GYTH to complain about his removal;

(3)  Mr Choi reiterated that at the meeting at Wai King on 24 or 25 November 2007, both Mr Cheng and Mr Lee made clear that they did not want to undertake the agency business, whereupon Mr Choi said he would carry on the business on his own, and be responsible for all its profits and loss.  In response, Mr Cheng said he had not heard of it while Mr Lee said “因為你當時只說我做住先”;

(4)  Mr Choi also referred to Mr Wong Yung Kan asking him when he would handover the business “幾時才取回出來” and his agreement to do so on 1 January 2008.  Mr Lee confirmed that Mr Choi had said so at the time; and

(5)  Despite Mr Cheng’s objection, resolutions were passed to remove Fairview as company Secretary and replaced by Faith (Nominees) Limited, and to convene an EGM on 8 March 2008 to consider the removal of Mr Choi as director.

111.  On the same day the resolutions were passed, a notice was issued to convene an EGM to be held on 8 March 2008 to consider a resolution to remove Mr Choi as director.

112.  By letter dated 19 February 2008, GYTH gave notice on behalf of Mr Choi to appoint 2 persons as additional directors, and requested the Company, Mr Cheng and Mr Lee to consider at the coming EGM the way to resolve the Company’s shortage of capital, which was required to import the live pigs into Hong Kong and to set up the other facilities in Mainland.

113.  At the EGM held on 8 March 2008 (“EGM of 8/3/2008”), there were arguments between Mr Choi and Mr Cheng as to (1) whether Mr Choi’s shareholding in the Company should be larger in light of the $3.5 million he paid to the Company, (2) whether Mr Choi or Mr Cheng should act as Chairman of the meeting, and (3) whether the Minutes of 30/12/2007 accurately reflected what had been agreed at the meeting.  As to (3), Mr Cheng acknowledged at the meeting that some of the matters stated in the Minutes of 30/12/2007 had been agreed by him, although he did not identify which matters.  After these intense arguments, Mr Choi left the meeting.

114.  It appears that resolutions were passed by Mr Cheng and Mr Lee at the EGM of 8/3/2008 to remove Mr Choi as director of the Company, as notification of change of director was filed at the Companies Registry on 11 March 2008.  No minutes of the EGM of 3/8/2008 have been disclosed and it is not clear whether there was any discussion on the reasons for removing Mr Choi as director.  However, given that Mr Cheng and Mr Lee had already decided to remove Mr Choi as director on 10 January 2008, it is reasonable to infer that there would not be any discussion on the reasons for removing Mr Choi as director.

C13.  Taking control over the Company

115.  Even before removing Mr Choi as a director of the Company, Mr Cheng and Mr Lee have already been taking steps to obtain control over the Company, its agency business and assets in the following manner.

116.  First, at the Board meeting on 13 February 2008, Mr Cheng and Mr Lee caused resolutions to be passed to remove Fairview as company secretary and to change the registered office to a newly rented office at Sheung Shui Plaza (“SS Office”) with effect from 8 March 2008.

117.  Secondly, on 14 February 2008, Mr Cheng requested Fairview to return the books and records of the Company.  Upon receiving payment of its professional fees, Fairview returned all of them to the Company on 5 April 2008.

118.  Thirdly, Mr Cheng and Mr Lee decided not to use the bank accounts already opened by the Company at Bank of China and Standard Chartered Bank. Instead, they opened a new bank account of the Company at Bank of Communications (“BOC”), with 2 of them being its only authorised signatories.

119.  Fourthly, Mr Cheng and Mr Lee caused CECT to issue a demand letter to Hop Kee on 20 March 2008, requesting it to pay all the monies owed to the Company into its bank account at Standard Chartered, and stating that if Hop Kee continued to deal with Mr Choi (who had been removed as director), it did so at its own risk.  In response, on 27 March 2008, Hop Kee through its solicitors pointed out that Mr Choi had been running the agency business all along and still held the import permits of the Company, and requested CECT to confirm whether Mr Choi still had authority to act on behalf of the Company.  On 1 May 2008, Mr Lee on behalf of the Company instructed Hop Kee to pay the 4.5 Months’ Profits to the Company, whereupon Hop Kee paid the entire amount into the Company’s bank account at BOC on 16 May 2008.

120.  Fifthly, Mr Cheng and Mr Lee continued to follow the modus operandi established by Mr Choi in carrying on the agency business, and entrusted the actual work relating to import, transportation and sale of the live pigs to Sam Ran and Hop Kee.  They decided to replace all the family members of Mr Choi by new employees and employed a part time accountant, Ms Hung Yin Ling (“Ms Hung”), to handle the accounting and banking matters.  They also replaced Mr Chan Hak Keung with 2 junior staff (whose monthly salary was less than $10,000) to attend the Slaughterhouse to copy the results of the auction.

121.  Sixthly, Mr Cheng and Mr Lee appointed the Management Company, a newly formed shelf company, to manage the business of the Company.

D.  COMPLAINTS IN THE PETITION

122.  Against the above facts, Mr Choi complains that the affairs of the Company have been mis-managed by Mr Cheng and Mr Lee in an unfair manner and that his interest as shareholder has been prejudiced. Based on his complaints pleaded in the Petition and the Amended Points of Claim (“APOC”), the defences pleaded in the Re-Amended Points of Defence filed on behalf of Mr Cheng and Mr Lee (“RAPOD”) and the Agreed List of Issues, the complaints fall into 10 categories and the issues raised by the parties may be summarised as follows:

(1)  On exclusion from management:

(a) whether the Company was formed on the basis of the common intention, mutual understanding and/or agreement of the Shareholders that each of them would enjoy equal right to participate in the management of the Company or whether Mr Choi was just a strategic shareholder;

(b) whether the agreements reached by the Shareholders on 20 December 2007 and 30 December 2007 precluded Mr Cheng and Mr Lee from removing Mr Choi as a director or whether the agreements on 20 December 2007 required Mr Choi to surrender complete control of the Company to Mr Cheng and Mr Choi from 1 January 2008;

(c) whether the Shareholders reached a consensus on 20 December 2007 on the gradual transfer of some of the management functions previously undertaken by Mr Choi or whether they agreed that Mr Choi had to surrender complete control to Mr Cheng and Mr Lee from 1 January 2008; and

(d) whether the removal of Mr Choi as a director constitutes an unfair prejudice to him or whether his removal was in the interest of the Company.

(2)  On the 34 Days’ Profits:

(a) whether the Shareholders reached an oral agreement in late October 2007 at Wai King to allow Mr Choi to operate the agency business on his own account (“Oral Agreement”) or whether no such agreement existed and it was Mr Choi who wrongfully took control of the Company to the exclusion of Mr Cheng and Mr Lee; and

(b) whether the Shareholders’ Agreement was subject to the Alleged Conditions Precedent.

(3)  On the Eagle Luck Agreement, whether it was terminated as a result of Mr Cheng and Mr Lee reneging on it or whether the Agreement was cancelled by Eagle Luck.

(4)  On the capitalization of the Company:

(a) whether the Shareholders agreed to pay up the amount due on the shares issued by the Company or whether their agreement was conditional upon the fulfillment of the Alleged Conditions Precedent; and

(b) whether Mr Cheng and Mr Lee acted in breach of their fiduciary duties in failing to demand the Shareholders to pay the amount due on the shares issued and, instead, resorted to borrowing loans at substantial interest.

(5)  Whether the Shareholders reached any agreement on the matters set out in the Minutes of 30/12/2007 and, if so, whether Mr Cheng and Mr Lee acted in breach of such agreement.

(6)  On the engagement of the Management Company:

(a) whether the engagement was made to divert the profits generated by the Company to the Management Company or whether the appointment was made in recognition of the assistance provided by the members of the Association in meeting the demand of the Suppliers;

(b) whether the remuneration under the Management Agreement was excessive or whether it was justified by the operational needs of the Company; and

(c) whether Mr Cheng and Mr Lee exercised due diligence in overseeing the Management Company, in particular, whether they failed to detect the overpayment and to recover the amount overpaid to the Management Company.

(7)  Whether the directors’ remunerations paid to Mr Cheng and Mr Lee were justified or excessive.

(8)  Whether Mr Cheng and Mr Lee have unreasonably refused to declare any dividends to the Shareholders.

(9)  Whether the administration expenses for the year ended 31 March 2010 were unreasonable and unexplained or whether they were justified having regard to the adverse change in market condition.

(10)  Whether Mr Cheng and Mr Lee’s act in denying Mr Choi’s access to the financial information and refusing to provide explanation to the questions raised by Mr Choi on the audited accounts were justified or constitute unfair prejudice.

123.  The issues will be analysed in turn.

D1.  Exclusion from management

124.  The applicable legal principles are not in dispute.  The starting point is the seminal speech of Lord Wilberforce in In re Westbourne Galleries Ltd [1973] AC 360 at 379B–G in the context of a “just and equitable” winding up petition:

“ … The words [just and equitable] are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. ‌… The ‘just and equitable’ provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.

… The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence—this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be ‘sleeping’ members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members’ interest in the company—so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.”  

(emphases added)

125.  The approach to the concept of unfairness in an unfair prejudice petition runs parallel to the concept of “just and equitable” as a ground for winding up as explained in In re Westbourne Galleries Ltd.  The concept of fairness must be applied judicially and the content which it is to be given by the court must be based upon rational principles.  The context and background are very important (O’Neill v Phillips [1999] 1 WLR 1092 at 1098D – 1099F, per Lord Hoffmann; Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501 at §§43 – 45, per Ma CJ and Lord Millett NPJ).

126.  In O’Neill v Phillips, at 1101D – 1102B, Lord Hoffmann explained what would give rise to an equitable constraint in this way:

“ … So I agree with Jonathan Parker J. when he said in In re Astec ( B.S.R.) Plc. [1998] 2 B.C.L.C. 556, 588:

‘in order to give rise to an equitable constraint based on ‘legitimate expectation’ what is required is a personal relationship or personal dealings of some kind between the party seeking to exercise the legal right and the party seeking to restrain such exercise, such as will affect the conscience of the former.’

… But 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 Blisset v. Daniel the limits were found in the ‘general meaning’ of the partnership articles themselves. 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 a matter of justice and equity although for one reason or another (for example, because in favour of a third party) it would not 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 analogy of contractual frustration suggests itself.  The unfairness may arise not from what the parties have positive 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: non haec in foedera veni.  It is well recognized that in such a case there would be power to wind up the company on the just and equitable ground (see Virdi v. Abbey Leisure Ltd. [1990] B.C.L.C. 342) and it seems to me that, in the absence of a winding up, it could equally be said to come within section 459.  But this form of unfairness is also based upon established equitable principles and it does not arise in this case.” 
 (emphases added)

127.  As to what may constitute considerations of a personal character involving mutual confidence, “this may come in the form of mutual understandings between members of a company or what may have been ‘an accepted course of conduct between the parties whether or not cast into the mould of a contract.’” (Kam Leung Sui Kwan v Kam Kwan Lai at §46).

128.  With the above principles in mind, I turn to the evidence.

129.  It is Mr Choi’s evidence that at the time he formed the Company with Mr Cheng and Mr Lee, he did so on the basis of personal relationship and the trust each of them reposed on the other.  It was the mutual understanding of the Shareholders that they would work as equal partners in establishing and running the business together.  Mr Choi says that it was on these bases that he decided to use the Company to bid for the agency business and allowed Mr Cheng and Mr Lee to re-participate in the agency business despite the Oral Agreement and the fact that neither of them had made any contribution to the Company.  Mr Choi accepts under cross-examination that although there was no agreement to the effect that the Shareholders could only act with their unanimous consent, it was the mutual understanding between the Shareholders that they would be equal partners of the Company, and would be entitled to run its business together.  I accept Mr Choi’s evidence.

(1)  The personal relationship and mutual trust reposed by the Shareholders on each other is demonstrated by the fact that the Shareholders decided to become shareholders and directors without any written or formal agreement.  Indeed, Mr Cheng confirms under cross-examination that at the beginning of their cooperation, he treated Mr Choi with his heart and he only ceased to do so after he visited the Fairview Office on 18 December 2007.

(2)  The fact that Mr Choi used his time and personal resources to apply for and establish the agency business for the benefit of the Company was consistent with the bases upon which the Company had been formed, as it made no sense for Mr Choi to devote so much time and resources to set up the business for the Company unless he trusted his fellow shareholders and directors and had the understanding that he would be entitled to run the business as an equal partner.

(3)  The equality between the partners is evidenced by the fact that the shareholding of Mr Choi, Mr Cheng and Mr Lee has always been equal, and that each of them was appointed as a director of the Company from the outset.

(4)  As Mr Lee joined the Company at the same time as Mr Cheng and Mr Choi, it is reasonable to infer that he joined the Company on the same basis of personal relationship involving trust and upon the mutual understanding that each of them would be an equal partner in the Company.

130.  In their RAPOD, Mr Cheng and Mr Lee claim that it was Mr Cheng who decided to establish the Company and invited the members of the Association to be “strategic shareholders”, and Mr Choi was “invited as a strategic shareholder of the Company so that the Company could secure a source of business should the transport service materialize”.  On this basis, they deny that there was any agreement between the Shareholders “which formed the basis of any mutual trust and understanding or any quasi-partnership arrangement”.  I reject this assertion.

(1)  As stated in section C2 above, the Company was formed pursuant to the instructions of Mr Choi (not Mr Cheng) after the members of the Association had rejected Mr Cheng’s idea to jointly establish a company to capture the business opportunities arising from the farm in Shaoguan.

(2)  At the inception of the Company, Mr Choi, Mr Cheng and Mr Lee became its shareholders and directors at the same time.  There is no evidence in support of the assertion that Mr Choi was “invited” by Mr Cheng to be a “strategic shareholder” at all.

(3)  To the contrary, the undisputed evidence discussed in sections C3 and C4 above all point to the fact that far from being a “strategic shareholder” for the alleged purpose, Mr Choi single handedly built up the agency business, which the Company has continued to benefit up to now.  Neither Mr Cheng nor Mr Lee had any substantive involvement in the process.

(4)  In my view, the assertion that Mr Choi was invited as a “strategic shareholder” for the alleged purpose was an assertion created by Mr Cheng and Mr Lee in their attempt to deny the fact that the Company was formed on the bases described by Mr Choi.

131.  I find that the Company was formed on the basis of personal relationship involving trust reposed by the Shareholders on each other, and upon the mutual understanding that they would work as equal partners in running its business together. It follows that the Company is a quasi partnership and Mr Choi is entitled to participate in managing its business as an equal partner in the same way as Mr Cheng and Mr Lee.  There is thus an equitable constraint on each Shareholders that he could not exercise his legal power in such a way as to exclude the others from participating in the management of the Company.

132.  As stated in section C12 above, as early as 10 January 2008, Mr Cheng and Mr Lee already decided to remove Mr Choi as a director of the Company.  At the Board Meeting of 13/2/2008 and the EGM of 8/3/2008, Mr Cheng and Mr Lee did not provide any reason for removing Mr Choi as a director. It is clear from the transcript of the Board Meeting of 13/2/2008 that Mr Cheng and Mr Lee merely proceeded on the basis that as the majority shareholders, they could exercise their legal power to remove Mr Choi as a director without any reason.  In light of my finding on the bases upon which the Company was formed, I do not think that Mr Cheng and Mr Lee could fairly or equitably exercise their majority power in this way.

133.  In their RAPOD, Mr Cheng and Mr Lee assert that it was “both lawful and proper and for the interest of the Company” to remove Mr Choi as a director as he had wrongfully seized control of the Company from late October 2007 to 30 April 2008 to exclusion of Mr Cheng and Mr Lee and had “mismanaged the Company in breach of his director’s duty and fiduciary duty towards the Company and to the detriment and prejudice of both the Company and the Respondents as shareholders”.  No particulars have been provided on the alleged mismanagement or the detriment allegedly suffered by the Company.  The allegation flies against the undisputed facts that:

(1)  far from seizing control of the Company to the exclusion of Mr Cheng and Mr Lee, Mr Choi had kept them fully informed of the status and operation of the agency business.  This can be seen from the fact that Mr Cheng was able to instruct Mr KY Mak to prepare the 2^nd Proposal, which set out in considerable details the budget and business plan of the Company and the issues facing the Company (see section C8 above).  Had Mr Cheng been completely excluded as he alleged, he would not have been able to come up with such Proposal;

(2)  it is clear that Mr Choi took steps to involve Mr Cheng and Mr Lee on important matters concerning the Company.  For example, in seeking to introduce Wens as a strategic investor, Mr Choi provided the letter of intent from Eagle Luck to Mr Cheng and Mr Lee and sought their approval before proceeding further.  He also arranged representatives of Wens / Eagle Luck to meet with Mr Cheng and Mr Lee which led to the signing of the Eagle Luck Agreement.  See section C7 above;

(3)  Mr Choi arranged meetings with Mr Cheng and Mr Lee to discuss matters concerning the Company, which led to the various agreements reached on 20 December 2007 and 30 December 2007.  See sections C9 and C10 above; and

(4)  during the period when the Company was managed by Mr Choi alone, it grown from a shelf company with no asset or business to a company with a substantial and profitable business.

134.  In his oral evidence, Mr Cheng asserts that the reasons for removing Mr Choi as a director were those stated in correspondence although he does not identify which letter(s) he has in mind.  As the only letter relevant to the alleged misconduct referred to by Mr Mak during his cross-examination is the CECT’s Letter of 25/1/2008, I will consider the allegations contained in this letter.  The allegations made by Mr Cheng and Mr Lee included, inter alia:

(1)  the application to CCCFNP was made by the Company “for and on behalf of the Association”, but Mr Choi failed to “report back to the Association or the Company about the business of the Company”;

(2)  Mr Choi acted in breach of his fiduciary duty as director of the Company and his duty “as a trustee of the Association” by carrying on the business of the Company as if it were his business, and in complete disregard of the interest of Mr Cheng, Mr Lee, the Company and the Association;

(3)  Mr Choi treated the Company’s money as his own;

(4)  Mr Choi assigned “valuable contracts to connected persons”;

(5)  Mr Choi hired his close relatives as servants of the Company;

(6)  Mr Choi appointed a “connected person” as a director of the Company;

(7)  Mr Choi purported to arrange the distribution of share of the Company;

(8)  Mr Choi purported to lend $3.5 million to the Company;

(9)  Mr Choi represented to the outside world that he was the Chairman of the Company and that he alone could act on behalf of the Company;

(10)  Mr Choi failed to allow inspection of documents upon demand; and

(11)  Mr Choi failed to handover any properties of the Company upon demand [D/330].

135.  In my view, the allegations made in CECT’s Letter of 25/1/2008 are wholly without merit and some of them are clearly false.

136.  First, the allegation that the agency business was obtained and carried on by the Company “for and on behalf of the Association” and that Mr Choi was obliged to account to the Association (§134(1) – (2) above) is manifestly false.  Upon the court’s enquiry, Mr Mak expressly disavows the allegation, and confirms that the Association has no right or interest in the Company or the agency business.

137.  Secondly, the allegation that Mr Choi treated the Company’s money as his own (§134(3) above) flies against the contents of the Shareholders’ Agreement, the Board Minutes of 20/12/2007 and §2 of the Minutes of 30/12/2007, all of which recorded the fact that the Shareholders had agreed that Mr Choi was entitled to operate the agency business on his own during the 34 Days, and that the Company, Mr Cheng and Mr Lee “had nothing to do with the profits or liabilities” of the business during this period.  The allegation that Mr Choi treated the Company’s money as his own is disingenuous, given that Mr Cheng and Mr Lee have expressly agreed to allow Mr Choi to retain the 34 Days’ Profits.

138.  Thirdly, the allegations about assigning “valuable contracts to connected persons” and hiring close relatives as servants of the Company (§134(4) – (5) above) are wholly without merit.  These matters were well known to Mr Cheng and Mr Lee and they never made any complaint about them at any of the meetings of the Company.  Indeed, it is difficult to see how Mr Cheng and Mr Lee could honestly instruct CECT to make these allegations against Mr Choi, given that:

(1)  they followed the same modus operandi established by Mr Choi and continued to appoint Hop Kee and Sam Ran as the agents to carry on the agency business;

(2)  the engagement of family members to carry on the agency business was made after the Oral Agreement and during the period when neither Mr Cheng nor Mr Lee took part in the operation of the agency business.  It must be obvious to them that it was necessary for the Company to hire someone to handle its day-to-day operation and affairs.  In fact, after Mr Cheng and Mr Lee had taken control of the Company, they also hired 3 staff to handle these operational matters;

(3)  the total monthly salaries paid to Mr Choi’s 3 family members amounted to $38,000 only, which was very modest and commensurate with the level paid by the Company to the 3 staff hired by Mr Cheng and Mr Lee; and

(4)  the complaint about Mr Choi’s decision in hiring his relatives to do substantive work for the Company, viewed against the decision of Mr Cheng and Mr Lee in engaging the Management Company at excessive remuneration without having to do any substantive work, illustrate the lack of good faith and sense of fairness on the part of Mr Cheng and Mr Lee.

139.  Fourthly, the allegations on appointing a “connected person” as director of the Company, purporting to arrange the distribution of share of the Company, and the attempt to lend $3.5 million to the Company (§134(6) – (8) above) are wholly without basis:

(1)  in light of my finding that the matters stated in §§3 – 10 of the Minutes of 30/12/2007 were agreed upon by the Shareholders (see section C10 above).  In any event, given that on Mr Cheng’s case, he had not expressed any disagreement to these matters at the meeting, I do not see how he and Mr Lee could criticise Mr Choi for acting under the belief that the matters had already been agreed upon, such that it was incumbent upon him to act accordingly; and

(2)  as for the complaint about distribution of shares, it is not clear which distribution this complaint was directed at.  There were only 2 proposed distribution of shares in which Mr Choi was involved.  The 3^rd Proposal was based on the 1^st and 2^nd Proposals which had been emanated from Mr Cheng (see section C8 above).  By issuing the 3^rd Proposal, Mr Choi was effectively agreeing to put forward the terms proposed by Mr Cheng under the 1^st and 2^nd Proposals.  The other distribution of shares was the allotment of 49,994,600 shares on 20 December 2007, which was agreed to by the Shareholders.

140.  Fifthly, the allegation that Mr Choi had wrongfully represented to the others that he was the Chairman and that he alone could act on behalf of the Company (§134(9) above) is again disingenuous.  Mr Cheng and Mr Lee were clearly aware of the fact that Mr Choi had been acting as the Chairman of the Company, both externally and internally, and they never complained about it:

(1)  in all his dealings with the third parties including making the application to CCCFNP and subsequently, establishing the modus operandi of and carrying on the agency business, Mr Choi invariably described himself as the Chairman of the Company; and

(2)  similarly, in all the minutes of the Board meetings and general meetings of the Company, Mr Choi was described as the Chairman of the Company.

141.  Sixthly, the allegation that Mr Choi failed to allow inspection of the documents (§134(10) above) was made on a false premise.  As discussed in section C8 above, the request for inspection of documents was made to Fairview, not Mr Choi.  In any event, the documents requested by Mr Cheng and Mr Lee were duly provided by Fairview to them.

142.  Seventhly, the alleged failure of Mr Choi in handing over “any properties” of the Company upon demand (§134(11) above) was extremely vague and in any event, wholly unjustified in light of the fact that:

(1)  the 4.5 Months’ Profits had been held by Hop Kee (not Mr Choi) and subsequently paid into the Company’s account at BOC, which has been controlled by Mr Cheng and Mr Lee to the exclusion of Mr Choi;

(2)  the books of records of the Company kept by Fairview were returned to Mr Cheng following his request; and

(3)  no demand has ever been made to Mr Choi for the return of the minutes of the first meetings of the Company and the Company’s chop and seal kept by him.  Indeed, after Mr Cheng and Mr Lee had obtained control over the Company, they decided to adopt a set of new seal and chop for the Company.

143.  Lastly, Mr Mak submits that if the court finds that the Shareholders did not reach the Oral Agreement, then “the position must be that [Mr Choi’s] removal from the Board could not have been unfairly prejudicial because it was brought about by [Mr Choi’s] own wrongful act”, citing Mears v R Mears and Co (Holdings) Ltd [2002] 2 BCLC 1 at §§27 – 35.  The submissions must be rejected:

(1)  This is not the case pleaded in the RAPOD.  Nor is there any evidence to suggest that the reason for removing Mr Choi was due to the non existence of the Oral Agreement.

(2)  I find that the Shareholders did enter into the Oral Agreement (as discussed in section D2 below).

(3)  In any event, I do not think that it was open to Mr Cheng and Mr Lee to remove Mr Choi as director on 8 March 2008 on the ground that he had operated the agency business on his own, having agreed to allow Mr Choi to do so in the form of the Shareholders’ Agreement, the Board Minutes of 20/12/2007 and §2 of the Minutes of 30/12/2007.

144.  For the above reasons, I find that in removing Mr Choi as a director, Mr Cheng and Mr Lee were relying solely on their majority power qua shareholders of the Company, and they did not state or rely on any other ground or allegation in support of their act.  Although Mr Cheng asserts that the grounds for removing Mr Choi were stated in correspondence, the allegations raised in CECT’s Letter of 25/1/2008 are wholly without merit and some of them are clearly false. It is clear from the steps taken by Mr Cheng and Mr Lee (discussed in section C13 above) that even before Mr Choi was formally removed as a director, they had already been taking steps to seize control over the Company’s business, affairs and assets to the exclusion of Mr Choi.

145.  In exercising their majority power to remove Mr Choi as a director of the Company, Mr Cheng and Mr Lee acted in breach of the bases upon which the Company had been formed, and their conduct was unfair and prejudicial to the interests of Mr Choi as it deprived his right to run the Company and its business as an equal partner.

146.  Further, the removal of Mr Choi as a director also prejudiced his interest in the Company as he lost his right to share in the profits through director’s remuneration. This was unfair to Mr Choi as the other 2 partners, Mr Cheng and Mr Lee, continued to receive director’s remuneration at $60,000 per month, in addition to the other allowance and benefits such as the use of Company’s cars and receiving reimbursement for their entertainment and travelling expenses, as further described in section D7 below.

147.  In light of my conclusion on exclusion from management, it is unnecessary to decide the other issues identified in §122(1)(b) – (c) above.  Nevertheless, for the sake of completeness, I find that at the meeting on 20 December 2007, the Shareholders agreed that from 1 January 2008 onwards, Mr Cheng and Mr Lee would share some of the work or duties previously undertaken by Mr Choi and that the transfer would be effected gradually.  This finding is based on the clear wordings of the Handwritten Minutes of 20/12/2007 and the Typed-up Minutes of 20/12/2007 (discussed in section C9 above), and the evidence of Mr Choi and Mr KY Mak as to what happened at the meeting.

148.  I reject the allegation made by Mr Cheng and Mr Lee that at the meeting on 20 December 2007, the Shareholders agreed to a complete handover of all the work and duties from Mr Choi to them, for the following reasons:

(1)  The allegation is inconsistent with the contents of the Handwritten Minutes of 20/12/2007 prepared by Mr Cheng himself and the Typed-up Minutes of 20/12/2007 prepared by Mr KY Mak;

(2)  The allegation is contradicted by the fact that Mr Choi remained a director of the Company after 1 January 2008, a position which carried the duties to manage the Company;   

(3)  The allegation made no sense as there was no reason (none has been suggested) why Mr Choi would agree to a complete handover of all his work and duties he had been carrying on for the Company. This was particularly so when he had worked so hard to establish the agency business from scratch; and

(4)  Had the Shareholders agreed to a complete handover of all the work and duties from Mr Choi to Mr Cheng and Mr Lee on 20 December 2007, it would not have been necessary for them to discuss at the meeting on 30 December 2007 how to operate the Company from 1 January 2008 including the appointment of Mr Choi as Chairman for a term of 2 years and the remuneration and allowance to be paid to the directors.

149.  I turn to the meeting held on 30 December 2007. As discussed in section C10 above, I find that the Shareholders did agree upon the matters set out in §§3 – 10 of the Minutes of 30/12/2007, which included Mr Choi’s appointment as Chairman of the Board for 2 years at $60,000 per month.

150.  Thus, even if I were wrong in finding that the Company was formed on the bases contended by Mr Choi, the act of Mr Cheng and Mr Lee in excluding Mr Choi from the management of the Company was contrary to the agreements reached by the Shareholders on 20 December 2007 and 30 December 2007 that Mr Choi could continue to manage the Company as Chairman and director of the Company.  Such conduct was unfair and prejudicial to Mr Choi’s interest as he lost his right to receive his remuneration of $60,000/month from 1 April 2008 onwards.

D2.  34 Days’ Profits    

151.  It is Mr Choi’s evidence that in late October 2007 at Wai King, the Shareholders reached the Oral Agreement that Mr Choi could operate the agency business on his own account.  He says at that time, the Ministry of Commerce wanted the Company to commence its operation as soon as possible.  Mr Cheng and Mr Lee were pessimistic about the business, as they were concerned that the Company would not be able to compete with Ng Fung Hong and Guangnan Hong, both of which were substantial companies and had been in the business for some time.

152.  During cross-examination, it is suggested to Mr Choi that there was no urgency to start the operation, nor did the Ministry of Commerce ask the Company to start its operation as soon as possible.  The suggestion appears to be based on Mr Cheng’s assertion that his intention was to start the operation sometime in 2008 when the pig farms were relocated to ASZ and the pigs could be re-imported into Hong Kong.

153.  Mr Cheng’s assertion cannot be true.

(1)  The fact that the Ministry of Commerce was keen to see the Company to start its operation can be seen from the report on the press conference of the Ministry of Commerce held on 25 October 2007 where the spokesman told the press that the 3^rd authorized agent (ie the Company) had just been appointed, and the Ministry would focus on assisting the new agent to start its operation as soon as possible.

(2)  Consistent with this, the Shareholders Agreement recited the fact that the Ministry of Commerce had “immediately requested the Company to perform the agency duties” as one of the reasons for the Shareholders to agree to allow Mr Choi to operate agency business on his own.

(3)  Under cross-examination, Mr Cheng accepts that it would take about 2 years to obtain all necessary approval before the live pigs raised in the ASZ could be re-imported into Hong Kong. It was impossible for the Company to start operation in 2008 in the manner he asserts.  

154.  Mr Choi’s evidence is corroborated by Mrs Choi who was present at the meeting at which the Oral Agreement was reached.  Mrs Choi recalls that Mr Lee and Mr Cheng both appeared to be skeptical about the future of the business, and they mentioned about financial constraints or limits and discouraged Mr Choi from commencing the business.  Mr Choi insisted that he would give it a try and, upon seeing that Mr Choi was keen to start the business, Mr Cheng and Mr Lee said that they would not participate, and Mr Choi should bear all the consequences in doing so.  After the meeting, while Mrs Choi was waiting outside Wai King, Mr Lee came to her and asked her to persuade Mr Choi to give up the idea as there was no money to start the business, whereupon Mrs Choi responded that they should just let Mr Choi try.  This evidence of Mrs Choi is not challenged during her cross-examination.

155.  Mr Mak submits that Mr Choi’s account on the Oral Agreement “is mired with inherent improbabilities and inexplicable by any standard of commercial reasonableness”, on the bases that (1) Mr Cheng and Mr Lee would not suddenly become disinterested in the business, (2) Mr Cheng’s act in putting forward the 1^st and 2^nd Proposals was inconsistent with the Oral Agreement, (3) Mr Choi did not take steps to formally take over the Company or transfer all the shares to himself, and (4) the Shareholders still went to meet with Wens on 24 November 2007 to discuss its potential investment in the Company.  It seems to me that the submissions are made on the erroneous basis that under the Oral Agreement, Mr Cheng and Mr Lee agreed to give up all their rights and interests in the Company, which is not the case advanced by Mr Choi.  As Mr Choi says in his evidence, which I accept to be true, the intention of the Shareholders was that Mr Choi would run the operation on his own account as a try (“等我試試”) and no fixed period was agreed.  As a matter of fact, it was only until the Shareholders’ Agreement that the Shareholders agreed that the period for which Mr Choi could operate the business on his own was from 28 November 2007 to 31 December 2007.   

156.  The evidence of Mr Choi and Mrs Choi that the Shareholders reached the Oral Agreement in late October 2007 is also corroborated by the fact that during the 34 Days, Mr Cheng and Mr Lee were not concerned with, and had no involvement in, the operation of the agency business at all.  Their act in not spending any time or resources in establishing or operating the agency business is consistent with the fact that the Shareholders had entered into the Oral Agreement in late October 2007, such that the success or failure of the agency business had nothing to do with them.  More importantly, it is supported by the express terms of the Shareholders’ Agreement, as discussed further below.  I accept the evidence of Mr Choi and Mrs Choi and find that the Shareholders reached the Oral Agreement in late October 2007.

157.  The Shareholders’ Agreement was in Chinese and its English translation is not in dispute.  Given its importance, I set out the terms in full:

“ Executed this agreement as to shareholders’ interest. Mr. Cheng Ka Shing, Mr. Choi Chi Wai, and Mr. Lee Pak Kee set up the Hong Kong Agriculture Special Zone Limited at ….

Hong Kong Agriculture Special Zone Limited (‘the Company’) obtained the franchised agency of importing live pigs to Hong Kong from the Ministry of Commerce of the People’s Republic of China on 22^nd October 2007.

After obtaining the franchise, the Ministry of Commerce of China immediately requested the Company to perform the agency duties. Since the agency business would involve a huge amount of operating capital, Mr. Cheng Ka Shing and Mr. Lee Pak Kee took the view that they could not inject fund immediately into the Company as operating capital, whereas Mr. Choi Chi Wai was of the view that the issue of operating capital could be resolved. Having regard to the existence of difference over the issue of operating capital and the need to meet the demand of the Ministry of Commerce, Mr. Cheng Ka Shing, Mr. Choi Chi Wai and Mr. Lee Pak Kee, in a cordial atmosphere, had arrived at a consensus. Mr. Cheng Ka Shing and Mr. Lee Pak Kee agreed that Mr. Choi Chi Wai could operate the agency business personally. The validity period [for such] operation was from 28^th November 2007 to 31^st December 2007.

During the [said period of personal operation], the Company, Mr. Cheng Ka Shing and Mr. Lee Pak Lee had nothing to do with the profits or liabilities. [Neither of them] would need to be responsible for any loss or incur any liability. For purpose of avoiding lack of sufficient evidence other than what was orally agreed, this agreement was executed as confirmation and record. This agreement consists of 4 copies, each shareholder would keep a copy and the remaining one would be kept by the Company as its record.

This agreement as to shareholders’ interest was made and the following shareholders and witness signed as follows:”

(emphases added)

158.  Despite the very clear terms of the Shareholders’ Agreement, Mr Cheng and Mr Lee contend (at §50 of RAPOD) that it was “not enforceable or binding” on them because they signed the Shareholders’ Agreement on the Alleged Conditions Precedent, which Mr Choi agreed but failed to fulfill.

159.  The Alleged Conditions Precedent were not mentioned anywhere in the Shareholders’ Agreement.  Nevertheless, Mr Cheng seeks to introduce extrinsic evidence to vary the express terms of the Shareholders’ Agreement.  He does so by asserting, in §§30 and 32 of his witness statement, as follows:

“ 30. At that time, Lee and I were most eager to regain control of the Company. Weighing between the time and trouble to take legal action against the Petitioner on the one hand and the earnings for the short period of time since the import of pig started, Lee and I agreed that on the pre-requisite that the Petitioner really surrendered control on 1^st January 2008 and set up new bank accounts on behalf of the Company for the proceeds to be deposited into, we could agree that he could keep the profits of the Company up to 31^st December 2007.”

“ 32. The other document was a shareholders’ agreement. The shareholders’ agreement did not include terms discussed during the meeting and therefore I handwritten the minutes. It was on the express basis that the terms of the handwritten minutes were the pre-requisites for the terms of shareholders agreement that all the parties signed on both documents.” (emphasis added)

160.  The defence is wholly devoid of merit and must be rejected.

161.  First, the Handwritten Minutes of 20/12/2007 prepared by Mr Cheng himself did not refer to the Shareholders’ Agreement at all.  Mr Cheng has not been able to proffer any sensible explanation as to why he did not record the so-called agreement by the Shareholders to the effect that the Shareholders’ Agreement was subject to the Alleged Conditions Precedent.      

162.  Secondly, it is Mr KY Mak’s clear evidence (which I accept) that the Shareholders never agreed at the meeting of 20 December 2007 that the Shareholders’ Agreement was subject to the Alleged Conditions Precedent.  Consistent with this, in the Typed-up Minutes of 20/12/2007 prepared by him, there was no reference to the Shareholders’ Agreement, let alone it being subject to the Alleged Conditions Precedent.  Mr Cheng and Mr Lee signed the Typed-up Minutes of 20/12/2007 to signify their agreement to its contents.    

163.  Thirdly, in the Board Minutes of 20/12/2007, which was signed by Mr Choi, Mr Cheng and Mr Lee, it was recorded that the Shareholders’ Agreement was approved unanimously by all the directors, again without any reference to the Alleged Conditions Precedent:

「董事會收到有股東提交之“股東權益協議書”（以下稱協議書），關於由2007年11月28日至2007年12月31日止的公司股東權益安排事項。

會議決議 董事會對該協議書已充分討論，現董事會全體一致同意及通過本決議案，並予以確定及執行。」

164.  It is well established that where, as here, a person of full age signed the documents, he is bound by the documents unless he establishes one of the recognized vitiating factors.  The principle has been explained by Ribeiro PJ in Ming Shiu Chung & Ors v Ming Shiu Sum & Ors (2006) 9 HKCFAR 334 at §§84 and 87:

“ 84. … Reliance is universally placed on signatures appended to documents by persons of full age and understanding as signifying the signatory’s assent or adherence to what that document states. Where such a person has signed a document which purports to have legal effect, the law has never regarded it as enough to show that he signed without knowing its contents for the document to be disavowed. It is an everyday occurrence that people sign documents without reading the small (or even the large) print and therefore sign without actually knowing the terms (or all the terms) of the document signed. But they are held to the documents which they have chosen to sign unless there is shown to be a recognized legal basis for concluding that their apparent consent has been in some way vitiated or that reliance on that document by some other person falls into some category of unconscionable conduct justifying relief in equity.

…

87. The vitiating factors at common law include fraud, mistake, misrepresentation, non est factum, duress, undue influence and lack of mental capacity: see, for instance, Blay v Pollard & Another [1930] 1 KB 628; and Gillman v Gillman (1946) 174 LT 272. To disown a signed legal document, facts constituting the particular vitiating factor relied on must be pleaded and established by the evidence. …” (emphases added)

165.  As Mr Cheng and Mr Lee have not identified, let alone established any of the recognized vitiating factors, they are bound by their signatures to the Shareholders’ Agreement, the Handwritten Minutes of 20/12/2007, the Typed-up Minutes of 20/12/2007 and the Board Minutes of 20/12/2007.  

166.  Fourthly, the existence of the Alleged Conditions Precedent was also inconsistent with the conduct of Mr Cheng and Mr Lee. Had the Shareholders agreed on the Alleged Conditions Precedent:

(1)  Mr Cheng and Mr Lee would have attended the banks on 21 December 2007 together with Mr Choi to open the Company’s bank accounts to ensure that the accounts could be operated on that day or shortly afterwards so that the proceeds of sale could be deposited into such accounts.  Mr Cheng is unable to explain why he and Mr Lee did not attend the banks with Mr Choi on 21 December 2007 and, instead, waited until early January 2008 before they went to the banks to sign the necessary documents; and

(2)  Mr Cheng and Mr Lee would have attended the places of business of the Company on 1 January 2008 to take complete control over its business and affairs.  Mr Cheng tries to justify his act in not attending any of the places of business of the Company by asserting that he did not know that Mr Choi had been carrying on the business of the Company at the Farm and that he did not have the “pass” required to enter into the Slaughterhouse.  He is unable to explain why he did not attend the Fairview Office on 1 January 2008 which he knew was the registered office of the Company.  I do not accept that Mr Cheng did not know that the Farm was one of the places of business of the Company, as he could easily have found out such fact from Mr Choi or his family members or any of the personnel at Hop Kee and Sam Ran had he wanted to do so.  Nor do I accept his reason for not attending the Slaughterhouse, given that Mr Cheng could have requested Mr Choi to apply for a “pass” for him but he never did.  

167.  As for Mr Lee, I infer that the reason why he did not attend the banks to open the bank accounts on 21 December 2007 or to attend any of the places of business of the Company on 1 January 2008 was because he knew that these 2 matters could be effected by them gradually, and the Shareholders never agreed that the Shareholders’ Agreement was subject to the Alleged Conditions Precedent.

168.  In any event, even if the Shareholders had agreed that the Shareholders’ Agreement was subject to the Alleged Conditions Precedent, it is clear that the condition for opening bank accounts was fulfilled as Mr Choi did open the Company's bank accounts at Bank of China and Standard Chartered Bank on 21 December 2007.  As regards the so-called complete handover of all the work and duties undertaken by Mr Choi in the Company on 1 January 2008, the condition was not fulfilled due to the failure on the part of Mr Cheng and Mr Lee in attending to the places of business of the Company to effect the handover.  It is well settled that where the performance of a term of contract depends on the act or cooperation of the other party, that other party must refrain from doing anything that would obstruct the party’s performance (Chitty on Contracts, 31^st ed, §§13-012 and 13-013).  The act of Mr Cheng and Mr Lee in not attending any of the places of business of the Company had the effect of obstructing Mr Choi’s performance of completely handing over his duties and work.  It is not open to Mr Cheng and Mr Lee to rely on their own default and contend that Mr Choi acted in breach of the Alleged Conditions Precedent.

169.  In summary, all the evidence discussed above including the contemporaneous documents signed by the Shareholders point to the same fact that the Shareholders had reached the Oral Agreement in late October to the effect that Mr Choi was to be responsible for the profit and loss of the Company during the period when he operated the business alone.  Subsequently, the Shareholders entered into the Shareholders’ Agreement to record their agreement that Mr Choi was to be responsible for the profit and loss of the Company during the 34 Days.  I find that the Alleged Conditions Precedent was a pure fabrication created by Mr Cheng and Mr Lee for the ill purpose of seeking to defeat Mr Choi’s right to retain the 34 Days’ Profits.

D3.  Eagle Luck Agreement

170.  As discussed in section C7 above, there is no dispute that the Eagle Luck Agreement was never performed by the parties.  There is no suggestion that as a result of the non-performance of the Eagle Luck Agreement, the Company or Mr Choi has suffered any prejudice, whether financially or otherwise.  It is for this reason that at the outset, the court enquires with Mr Yau as to why this complaint, even if established, can be said to be unfairly prejudicial to the interest of the Company or Mr Choi.  As I understand it, Mr Yau submits that it is relevant to the background and generally, to show that Mr Cheng and Mr Lee are persons who have no respect for agreements and would act in accordance with their own wishes.

171.  I do not accept that this is a proper basis for making a complaint for unfair prejudice.  As section 724 (or its predecessor, section 168A) makes clear, only the affairs which are unfair and prejudicial to the interests of the Company or a shareholder may give rise to a relief under the section.  It is not the purpose of the section for a petitioner to adopt a “kitchen sink” approach and raises every dispute between the shareholders in a petition under section 724 irrespective of whether such dispute has caused any prejudice to the Company or the shareholder.   

172.  Nevertheless, since the parties have given extensive evidence on the issue, I will set out my finding on this issue in case anything turns on it.

173.  Mr Choi’s evidence that the reason for the non-performance of the Eagle Luck Agreement was because Mr Cheng changed his mind after signing the Agreement for reason which he was not clear.  I accept Mr Choi’s evidence.  The overwhelming impression I have after hearing the evidence given by the witnesses is that Mr Cheng thought that he could dictate the affairs of the Company in the way he wished, and had no hesitation in changing his mind or unilaterally deciding important matters of the Company without consulting Mr Choi.  The examples included:

(1)  his act in unilaterally stating at the ExCo meeting on 6 September 2007 that if the Company succeed in its application to CCCFNP, the benefit would belong to the Association (see section C3 above);

(2)  his unilaterally act in instructing Mr KY Mak to draft the 1^st Proposal on 10 December 2007 and subsequently, the 2^nd Proposal (see section C8 above);

(3)  his conduct in ignoring the agreements reached by the Shareholders on 20 December 2007 and 30 December 2007 and took step to remove Mr Choi as a director of the Company from 10 January 2008 without any valid reason (see section D1 above); and

(4)  his act in seeking to renege on the Oral Agreement and the Shareholders’ Agreement (see section D2 above).

174.  Mr Cheng gives 2 very different versions on the reasons for the termination of the Eagle Luck Agreement.  In §26 of his witness statement, Mr Cheng says:

“ Subsequently, the Petitioner proposed to us that HK$1.6 million should go to the Petitioner, Lee and I should each take HK$1.2 million, and Mr Mak should take $1 million. Lee and I strongly objected. The Petitioner even said to representatives of Wens that he solely owned the Company. Wens therefore got an impression that the shareholding structure of the Company was in a mess and decided to cancel the share purchase agreement. Give the unreasonable proposal of the Petitioner, Lee and I also agreed that the share purchase agreement should be cancelled. The Petitioner did not object.”

175.  In his oral evidence, however, Mr Cheng asserts that Mr Lee and he agreed to the same proposed distribution of the $5 million made by Mr Choi.  However, when the 3 of them went to Shenzhen to meet with representatives of Wens on 4 December 2007, Mr Choi mentioned for the first time that he wanted 48% shareholding in the Company, leaving Mr Lee and Mr Cheng with 0.5% each.  The representatives of Wens said that this was not fair and began to argue with Mr Choi.  In the end, the representatives of Wens said that as the Shareholders had not agreed on the future shareholding, the Eagle Luck Agreement should be cancelled and kicked them out of the meeting.

176.  Mr Choi denies having made the proposed distribution of $5 million.  He says that he only learnt about it from Mr KY Mak, who said that the proposal came from Mr Lee. Mr Choi did not discuss with Mr Cheng or Mr Lee about the proposed distribution as the Eagle Luck Agreement had not been completed.  Mr Choi’s account on the proposed distribution of $5 million is corroborated by Mr KY Mak.  It is reasonable to infer that the proposed distribution was made by Mr Lee to Mr KY Mak in the circumstances described by Mr KY Mak.  

177.  As for the meeting with Wens, Mr Choi says that after Mr KY Mak told him about the 1^st Proposal, he realised that Mr Cheng and Mr Lee had decided to renege on the Eagle Luck Agreement.  At the meeting between the Shareholders and Wens held after 10 December 2007, Mr Cheng and Mr Lee said that the members of the Association objected to the Eagle Luck Agreement and Mr Choi said that it was not right for Mr Cheng and Mr Lee to renege on the Eagle Luck Agreement whereupon the representatives of Wens told them to go back to consider how they wanted to proceed with the matter.

178.  I reject Mr Cheng’s evidence on the meeting with Wens which is full of inconsistency and is inherently implausible.  As discussed in section C7 above, far from saying that he solely owned the Company, Mr Choi had acted in an open and candid manner throughout his dealings with Wens and involved Mr Cheng and Mr Lee at every stage.  More importantly, it was expressly stated in clause 1.1 of the Eagle Luck Agreement that Mr Cheng, Mr Lee and Mr Choi were the shareholders of the Company and that the 3 of them were directors of the Company.  All these show that Mr Choi could not have asserted that he solely owned the Company.  It is also inconceivable that the representatives of Wens would cancel the Eagle Luck Agreement on the basis that it was unfair to Mr Cheng and Mr Lee.  On the other hand, the evidence of Mr Choi (which I accept) accords with the fact that Mr Cheng had unilaterally instructed Mr KY Mak to prepare the 1^st Proposal having decided not to perform the Eagle Luck Agreement.  

D4.  Capitalisation issue

179.  As stated in section C9 above, the Shareholders unanimously agreed that the Company should issue 49,994,6000 shares to themselves at $1 each.  I have no hesitation in rejecting the contention raised by Mr Cheng and Mr Lee that the Shareholders’ agreement to pay up the amount due on the shares issued was conditional upon the fulfilment of the Alleged Conditions Precedent for the following reasons:

(1)  the Allotment Documents including the application dated 20 December 2007 did not refer to the Alleged Conditions Precedent at all;

(2)  in the return of allotments filed by the Company with the Companies Registry on 2 January 2008, it was stated that 49,994,600 shares were allotted and the total paid-up capital was $50 million.  Upon filing the return of allotment, the Company made a representation to the outside world that it has paid-up capital of $50 million.  It is not open to the Company or any Shareholders to suggest that their agreement to the issue of new shares was conditional upon the Alleged Conditions Precedent; and

(3)  in his oral evidence, Mr Cheng does not suggest that the Shareholders signed the Allotment Documents conditional upon the Alleged Conditions Precedent.  He confirms that the Shareholders signed the Allotment Documents on 20 December 2007 before the meeting commenced.   

180.  Upon accepting the new shares issued to them, the Shareholders and each of them became liable to pay the amount payable on the shares.  This is trite law.  As stated in Gore-Browne on Companies, 45^th ed, §22[11]:

“ An application for shares, followed by a communication that an allotment has been made, constitutes a contract between the applicant and the company, from which neither party is at liberty to withdraw ….

Usually certain amounts are made payable on the application and allotment. The sums payable on application and allotment are not ‘calls’, but are payable under the express contract constituted by the terms of allotment. The Companies Act 1985, s.14(2) classified such amounts payable to the company as specialty debt. Section 33(2) of the Companies Act 2006 changed this by stating that money payable by a member to the company under its constitution is of the nature of an ordinary debt. Unless otherwise expressly stated (as, for instance, when part is a premium) these sums when paid go in satisfaction of the amounts payable on the shares.” (emphases added)

181.  In Hong Kong, section 23(2) of the former Companies Ordinance (Cap 32), which applied to the allotment of shares on 20 December 2007, provided that “All money payable by any member to the company under the memorandum or articles shall be a debt due from him to the company, and be of the nature of a specialty debt”.

182.  Other than the Alleged Conditions Precedent, no other defence has been pleaded by Mr Cheng and Mr Lee as to why they did not cause the Company to demand the Shareholders to pay the amount admittedly due on the shares issued.

183.  In §§70 – 71 of their RAPOD, it is pleaded that when Mr Cheng and Mr Lee took over the business in May 2008, the Company was required to raise $10 million to meet the Suppliers’ demand for letters of guarantee which, they claim, was a condition created solely by Mr Choi although they do not explain how.  Mr Cheng and Mr Lee sought the assistance from the members of the Association to “pool their funds together to provide the guarantee” in support of the letter of guarantee.

184.  In §§46 to 50 of his witness statement, however, Mr Cheng says that a supplier required a deposit of $10 million from the Company as Mr Choi had been in arrears of paying $7 million to it.  Mr Cheng says that it was “undesirable that the amount be satisfied by shareholder’s equity” as he hoped that the Company would generate profits which could be used to satisfy the deposit.  He and Mr Lee approached members of the Association who agreed to provide the fund to guarantee the issue of a letter of guarantee and requested some remuneration.  Given this and the fact that Mr Choi did not hand over anything to them and they had to begin the operation on their own, they caused the Company to enter into the Management Agreement with the Management Company in return for ²⁄₉^th of the profits.  However, in his supplemental witness statement, Mr Cheng contradicts himself in this way:

“ The Petitioner repeatedly exaggerated the need for capital. Since I took over control of the Company, [Hop Kee] has generally been able to settle the fees of the suppliers and transportation company. Seldom did the Company need to take money out of its reserve for its daily operation. Even if it does, the profit cumulated would usually be enough to settle the short term financial needs.”

185.  In his oral evidence, Mr Cheng contradicts himself again and asserts that the Company’s need for capital stemmed from the fact that in the beginning of May 2008, the suppliers reduced the credit period from 7 days to 2 days although he does not explain why.  This cannot be right.  As discussed in section C11 above, in the new agreements signed between the Company and the Suppliers for the period up to 31 December 2008, the credit period was reduced from 7 days to 5 days.

186.  I do not accept Mr Cheng’s assertions that the Company was in need of fund in May 2008 or that the members of the Association had provided $10 million of their funds as security for the facility provided by the bank to the Company in light of the following facts and matters:

(1)  Under the modus operandi of the Company, the Company would not need any working capital in its agency business.  Indeed, this was the situation described in Mr Cheng’s supplemental witness statement.  Although the credit period was reduced from 7 days to 5 days, the Company would still be able to use the sale proceeds to pay the suppliers, Hop Kee and Sam Ran in good time.

(2)  In the facilities letter dated 26 May 2008 and the certified extracts of minutes and resolutions of the Board dated 27 May 2008 provided to BOC, 3 “one time letter of guarantee facility” issued in favour of Hunan Wellful, Hubei Cereals Oils and Guangxi Fungrich in the aggregate amount of $10 million was to be provided by BOC (“Facility”).  The security referred to was a pledge of deposits for $10 million and a “general running deed of indemnity” to be executed by the Company.  Given that Hop Kee had just deposited $9,198,108.45 (ie 4.5 Months’ Profits) into the Company’s bank account at BOC on 16 May 2008, it is reasonable to infer that such amount was pledged to BOC.  This is despite the fact that in the bank statements of BOC for the month ended 28 May 2008, various deposits, transfers and withdrawals were made into and out of the BOC account, as no explanation has been provided by Mr Cheng or Mr Lee on the nature or purpose of these deposits, transfers and withdrawals.    

(3)  In all the documents relating to the Facility, there was no reference to any security provided by any third party. No other document has been disclosed by Mr Cheng and Mr Lee to show that any members of the Association had provided any security for the Facility.  

187.  Nevertheless, at the Board meeting of the Company on 9 May 2008, Mr Cheng and Mr Lee stated that the bank had refused to issue any letter of guarantee for the Company in the absence of any security, whereupon the ExCo members agreed that the Company could provide security for the bank in the aggregate amount of $10 million at the interest rate of 58% per annum.

188.  According to the minutes of the Board meeting held on 23 March 2009, it was stated that as Mr Choi had failed to return any of the profits made by the Company, the Company did not have sufficient assets to provide any collateral to the bank.  The directors therefore decided to use high interest rate to attract friendly parties to help the Company to resolve its need for fund.  In light of the substantial amount of interest incurred, Mr Cheng and Mr Lee agreed to repay all the interest expense to the Company by 31 March 2010.  The matters stated in these minutes could not be true, given that the Company received the 4.5 Months’ Profits and could have used them to provide security for the Facility.

189.  As it turned out, Mr Cheng and Mr Lee did not repay the interest expense to the Company and, instead, caused it to be recorded as amounts due from directors with no interest and repayable within one year.  The amounts recorded in the audited accounts for the year ended 31 March 2009 (“2009 A/C”) as due from Mr Cheng and Mr Lee were $1,899,000 and $1,900,000 respectively.  In the audited accounts for the year ended 31 March 2010 (“2010 A/C”), the entire amounts were shown to have been repaid.  It is not clear when and how the amounts were repaid by Mr Cheng and Mr Lee.

190.  On 26 June 2009, Mr Cheng convened an EGM to be held on 27 July 2009 to discuss matters concerning the provision of guarantee letters to the suppliers and the associated interest.  In response, on 7 July 2009, Mr Choi requested the directors to provide documents evidencing the suppliers’ request for guarantee letters, the 2008 A/C, 2009 A/C and the updated accounts of the Company.  By letter dated 8 July 2009, Mr Cheng appears to have provided some documents relating to the bank’s request for security in support of the issue of the guarantee letters[9] but refused to provide any accounts of the Company on the basis that Mr Choi had not properly explained the accounts for the period up to 8 March 2008.  At the EGM held on 27 July 2009 at which Mr Choi was absent, it was resolved that as the Company did not have sufficient funds to provide any security for the guarantee letters, but Mr Cheng and Mr Lee were willing to provide guarantee for the Company at reasonable interest rate.  There is no document to show that the personal guarantee was in fact provided.  

191.  At another EGM held on 9 March 2010 attended by Mr Cheng and Mr Lee with Mr Choi being absent, it was noted that Hunan New Wellful had requested for documents to clarify the relationship between the Management Company and the Association and a payment of $3 million in advance, which was met by $2 million lent by Mr Cheng and the $1 million from the Company’s fund.  It was resolved that interest should be paid to Mr Cheng at 9% per annum.  Again, no document has been disclosed by Mr Cheng and Mr Lee in relation to this $2 million loan said to have been advanced by Mr Cheng.  

192.  By another notice dated 6 July 2010 issued by Mr Cheng to convene an EGM to be held on 26 July 2010, it was stated that Mr Cheng and Mr Lee had used their personal funds as security for a guarantee letter issued by the bank to Guangxi Fungrich which had expired in June 2010, and the supplier requested for an increase in the amount guaranteed by $1.5 million.  At the EGM held on 26 July 2010 which was attended by the Shareholders, Mr Choi requested to see the documents relating to the guarantee letter requested by Guangxi Fungrich and the repayment of the amounts owed by Mr Cheng and Mr Lee to the Company, both of which were rejected by Mr Cheng.  No resolution was passed to pay interest on the amount said to have been guaranteed by Mr Lee and Mr Cheng.

193.  In the absence of any primary documents disclosed by Mr Cheng and Mr Lee in support of the security allegedly provided by Mr Cheng or the members of the Association to the bank, I do not accept that any collateral was in fact provided.

194.  Even if, contrary to my finding, the Company was in need of $10 million as security for the Facility in May 2008, Mr Cheng and Mr Lee were duty bound to cause the Company to demand the Shareholders to pay the amount due on the shares issued to them. In answer to the questions posed by the court, Mr Cheng accepts that it was the responsibility of the directors to raise finance in the most advantageous manner.  He admits that the reason why he and Mr Lee did not cause the Company to demand the Shareholders to pay the amount due on the shares issued was because Mr Lee did not have the fund to meet such demand:

「 問：咁公司急需錢喇，我必須要問你喇，你知唔知係董事嘅責任呢去睇下，公司即係如果需要錢嘅時候就用咩嘢方法去籌錢就對公司最有利，你承唔承認有咁嘅責任，呢個係董事嘅責任？

答：係。

問： 咁我哋睇咗好多文件呢，其實知道12月20號嗰時已經發咗股畀你哋三位㗎喇，記唔記得？

答： 係，記得。

問： 發咗股，但係就未畀錢，記唔記得？

答： 係，記得。

問：你知㗎嘛。咁其實最簡單咪叫三個股東畀錢囉，因為佢對公司已經有責任係要對發咗股嘅1鈫1股畀錢㗎喇。

答：係。

問：係呀，咁點解唔做呢樣咁簡單嘅動作呢，要$10,000,000，咪每人$3,300,000囉，…

答：我知道。

問：…點解唔做啲咁嘅動作？

答：因為李生反對。

問：李生反對。

答：係。

問：佢反對乜嘢呀？

答：即係佢話佢冇錢呀。

問： 咁如果李生反對，係李生啫，係咪？

答： 係。

問： 咁有冇問過蔡生呀？

答： 蔡生係…

問： 你三位都係股東嚟㗎嘛，你作為董事，其中一個責任，你同唔同意係要對股東即係負責任？

答： 係。

問： 係喇，咁蔡--李生唔同意啫，點解唔開個股東大會問下，不如而家--反正三個股東都爭公司錢喇，咪叫三個股東畀錢囉，一人畀三百幾萬，點解唔去做呢個動作呢？

答： 我哋有畀電話蔡生話我哋而家要呢筆錢，佢係拒絕咗。

問： 哦，即係而家就話蔡生都拒絕咗，係咪？

答： 拒絕，即係你係問我喺呢件事上面，我就話…

問： 有冇做過啫？

答： 有做過，…

問： 唔好隨便--…

答： …有打過電話。

問： …唔好隨便講出嚟，因為其實頭先你講話李生冇錢呢樣嘢我冇睇過，…

答： 係。

問： …係可能我睇漏喇，但係我冇睇過有任何一個人或者任何文件咁樣講過㗎，即係唔係話你開個董事會提出『不如籌錢喇』，然後李生話『我冇錢喎，不如唔好用呢個方法喇』，冇見過咁嘅文件？

答： 係，冇講過，喺呢個文件上冇講過，…

問： 係，即係你而家諗出嚟嘅。

答： …不過而家你問我，我就話畀你聽，當時因為我都…

問： 即係你諗到其實當--嗱，我想睇清--嗱，搞清楚，當時係有諗過定係其實完全冇諗過？

答： 即係你話我完全冇諗過…

問： 供股嗰樣嘢。

答： …供股嗰樣嘢，我哋有問過，…

問： 其實有嘅，唔。

答： …因為李生話冇錢，蔡生拒絕畀錢。

問： 蔡生拒絶畀錢，你而家話，但係你從來冇講過個喎呢樣嘢，…

答： 係呀，…

問： …喺你嘅證供裡面從來冇講過嘅？

答： …因為亦都冇人會問過呢樣嘢。

問： 其實聽落唔係好合理，如果你真係有問過蔡生話--蔡生唔畀錢，咁佢後來做咩嘢無啦啦自己話攞$3,500,000出嚟啫？

答： 咁--咁…

問： 兩樣嘢唔吻合嘅，明唔明呀？

答： 我明呀，但係你--我就想法庭--即係法官大人你要明白，呢$3,500,000唔係畀--唔係擺咗落個公司度呀，你係show咗張支票話我有張支票喺度，你要我show，我show張$30,000,000畀你睇都得，我凈係show張支票有咩嘢意思呢，你係要入咗我戶口，你先證明到呢筆錢到咗位吖嘛。

問： 我而家個講法就畀次機會你睇下喇，…

答： 好。

問： …我嘅講法就係話你而家先話問過蔡生就話供股，蔡生唔同意呢樣嘢呢，因為係你第一次講出嚟，從來冇文件，你自己都冇講過嘅，…

答： 我--我--我唔係…

問： …咁所以我就去問你，你係咪仍然堅持係有呢件事有發生過嘅？」 (emphases added)

195.  Therefore, even if (contrary to my finding) the Company required to raise $10 million in May 2008 to provide the security in support of the Facility, the decisions of Mr Cheng and Mr Lee not to cause the Company to demand the Shareholders to pay the amounts owed and, instead, resorted to borrowing from the members of the Association and Mr Cheng constituted a breach of their fiduciary duties as they had put the interests of Mr Lee ahead of the interests of the Company. It follows that any amounts paid by the Company as interest to Mr Cheng or the members of the Association are voidable and should be repaid by Mr Cheng and Mr Lee to the Company.

D5.  Agreement reached on 30 December 2007

196.  As discussed in section C10 above, the matters stated in §§1 – 2 of the Minutes of 30/12/2007 are not in dispute.  As for the matters stated in §§3 – 10 of the same Minutes, I find that the Shareholders did agree at the meeting on 30 December 2007 on those matters.

D6.  Engagement of Management Company

197.  Shortly after Mr Cheng and Mr Lee had taken control over the Company, they caused the Company to enter into an agreement dated 1 May 2008 with the Management Company (“Management Agreement”) whereby the parties agreed as follows:

「 1. 甲方[10] 委托乙方[11] 唯一全權代為管理所有關於大陸進口生豬到香港分發銷售有關事宜的實際執行管理各樣提供服務

2. 有效期與甲方和國家商務部批准予由大陸進口生豬到香港分發銷售時期相同

3. 代價為甲方所賺取佣金的9份2 」

198.  On the face of the Management Agreement, the Company engaged the Management Company to manage, in its absolute discretion, the entire agency business for so long as it remains an agent authorised by CCCFNP.  In return, the Management Company was entitled to receive ²⁄₉^th of the commission earned by the Company.

199.  According to the reconciliation tables prepared by the Company and the further submissions of Mr Yau and Mr Mak, except the amount of gross profits made by the Company for the period from 1 April 2010 to 15 September 2010, the following amounts are not in dispute:

Period	Company’s gross profits[12]	Remuneration actually paid to Management Company	% of Company’s gross profit
1.5.2008 – 31.3.2009	$6,136,219.71	$3,649,140.80	59.47%
1.4.2009 – 31.3.2010	$3,875,008.10	$485,170.72	12.52%
1.4.2010 – 15.9.2010	$2,015,885.32	$270,689.46	13.43%
TOTAL	$12,027,113.13	$4,405,000.98	36.63%

200.  As regards the gross profits for the period from 1 April 2010 to 15 September 2010, the parties only differ by $77,350.  I accept Mr Yau’s submission that the amount $154,700 paid to Sam Ran for its service from 11 to 20 September 2010 should be apportioned by half, given that only 5 days out of the 10 days’ period are covered in the table.

201.  There is no dispute that shortly after its appointment, Mr Cheng and Mr Lee instructed Hop Kee to pay the daily gross revenue generated by the sale of live pigs to the bank account of the Management Company.  The Management Company then paid the Suppliers, Sam Ran and its remuneration and remitted the balance to the Company’s bank account.  Mr Cheng says that in May 2009, he discovered that the Management Company had overcharged its remuneration by taking ²⁄₉^th of the gross revenue received from Hop Kee, rather than ²⁄₉^th of the net profits made by the Company as he intended to pay.  Since then, Mr Cheng instructed Hop Kee to pay the gross revenue directly to the Company, so that the Company could pay the auppliers, Sam Ran and other expenses.

202.  Despite the discovery of the overcharge, Mr Cheng did not take any step to recover the amount overpaid from the Management Company.  Instead, he continued to retain the Management Company so that he could deduct the remuneration payable by the Company from the amount it had overcharged.

203.  Mr Cheng subsequently decided to terminate the appointment of the Management Company on 15 September 2010.  At that time, the amount owed by the Management Company was $1,912,938.80 (“Overcharged Balance”).  No step had been taken by the Company to recover the Overcharged Balance for about 2 years until 27 September 2012 when an action was finally commenced against the Management Company to claim the same.  After obtaining default judgment against the Management Company on 7 November 2012 for the Overcharged Balance together with interest and fixed cost at $11,045 (“Default Judgment”), no step was taken to enforce the Default Judgment.    

204.  Mr Choi makes the following complaints about the appointment of the Management Company:

(1)  It was not made for the benefit of the Company but to divert the profits generated by Company to the Management Company (or, rather the 8 Individuals behind the Management Company).

(2)  The remuneration paid to the Management Company was excessive and disproportionate to the expenses incurred by the Company during the time when it was managed by him alone.

(3)  If and to the extent that Mr Cheng and Mr Lee maintain that the Management Company was only entitled to charge ²⁄₉^th of the net profits made by the Company (as opposed to ²⁄₉^th of the gross revenue earned by the Company), they acted in breach of their duties in allowing the Management Company to overcharge its remuneration, failing to terminate the appointment and to recover the amount overpaid to the Management Company.

205.  In §§66 – 76A of the RAPOD, Mr Cheng and Mr Lee deny that the appointment was made for the purpose of diverting the profits made by the Company. They seek to justify the appointment and the remuneration paid on the following grounds:

(1)  the appointment was made against the background that the members of the Association had assisted the Company to provide security for the letters of guarantee demanded by the Suppliers;

(2)  the remuneration paid to the Management Company was not excessive or proportionate and was justified having regard to the operational needs of the Company;

(3)  the decision to retain the Management Company after discovery of the overcharge was made in the best interests of the Company, as the Company would be able to deduct its remuneration from the amount overcharged.  The Overcharged Balance was written off as a bad debt in the Company’s accounts; and

(4)  Mr Cheng and Mr Lee caused the Company to obtain the Default Judgment.  As the Management Company did not have sufficient assets to satisfy the Default Judgment, no further action was taken to enforce it.   

206.  Mr Mak submits that the appointment of the Management Company cannot form the basis of an unfair prejudice claim because (1) the appointment has already been terminated and, as such, cannot form the basis of a complaint under section 724, which is to put an end to any alleged mis-management rather than to redress past conduct, and (2) any loss resulted from the appointment is a loss suffered by the Company and, therefore, a reflective loss which cannot be claimed by Mr Choi.

207.  The submissions are misconceived.  As section 724(1) makes clear, the provision covers a situation where “the company’s affairs are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of one or more members (including the members)”.  This is wide enough to cover past conduct.  There is no issue of reflective loss as any amounts the directors are liable to compensate to the company would not be paid to the petitioner directly.  Rather, the amounts would either be ordered to be paid to the company or be treated as adjustments to the value of the company, in the event that a buy out order is made.   

208.  It is well established that in considering whether the directors have abused their fiduciary powers for an improper purpose, the court would approach the matter in the way as expounded by Lord Wilberforce in Howard Smith Limited v Ampol Petroleum Limited [1974] AC 821 at 832F–H, 835F–H:

“ … when a dispute arises whether directors of a company made a particular decision for one purpose or for another, or whether, there being more than one purpose, one or another purpose was the substantial or primary purpose, the court, in their Lordships’ opinion, is entitled to look at the situation objectively in order to estimate how critical or pressing, or substantial or, per contra, insubstantial an alleged requirement may have been. If it finds that a particular requirement, though real, was not urgent or critical, at the relevant time, it may have reason to doubt, or discount, the assertions of individuals that they acted solely in order to deal with it, particularly when the action they took was unusual or even extreme.”

“ In their Lordships’ opinion it is necessary to start with a consideration of the power whose exercise is in question, in this case a power to issue shares. Having ascertained, on a fair view, the nature of this power, and having defined as can best be done in the light of modern conditions the, or some, limits within which it may be exercised, it is then necessary for the court, if a particular exercise of it is challenged, to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not. In doing so it will necessarily give credit to the bona fide opinion of the directors, if such is found to exist, and will respect their judgment as to matters of management; having done this, the ultimate conclusion has to be as to the side of a fairly broad line on which the case falls.” (emphases added)

209.  As stated in Howard Smith, at 834F–H, where self-interest of the directors is involved:

“ … they will not be permitted to assert that their action was bona fide thought to be, or was, in the interest of the company; pleas to this effect have invariably been rejected (e.g. Fraser v. Whalley, 2 Hem. & M. 10 and Hogg v. Cramphorn Ltd. [1967] Ch 254)—just as trustees who buy trust property are not permitted to assert that they paid a good price.

  But it does not follow from this, as the appellants assert, that the absence of any element of self-interest is enough to make an issue valid.  Self-interest is only one, though no doubt the commonest, instance of improper motive: and, before one can say that a fiduciary power has been exercised for the purpose for which it was conferred, a wider investigation may have to be made. …”

210.  As regards the reasons for appointing the Management Company, Mr Cheng gives 2 different versions in his witness statements.

211.  In §§46 – 50 of his witness statement that the appointment was a form of “return” for the security allegedly provided by certain members of the Association (see §184 above).  This cannot be true.

(1)  For the reasons discussed in section D3 above, I reject Mr Cheng’s assertion that the members of the Association have provided any security for the Facility in May 2008.

(2)  Even if, contrary to my finding, the members of the Association did provide the security for the Facility sometime after 26 May 2008 (date of facilities letter), their act could not provide a justification for the decision made by Mr Cheng and Mr Lee more than 3 weeks ago in causing the Company to enter into the Management Agreement.   

212.  In §§6 – 10 of his 2^nd supplemental witness statement, Mr Cheng says that some (unidentified) members of the Association made some “noises” to the suppliers and CLA and made insinuation about the financial stability of the Company.  Although the members refused to subscribe for the shares offered to them, they continued to approach Mr Cheng and asked for a plan to participate.  When he and Mr Lee took control over the Company, the Company “was in a mess” and they needed to look for people to deal with the operation.  The position was worsened by the default of Mr Choi in making payment, which led to the Suppliers requesting for “a big deposit”.  Then Mr Cheng says this:

“ In the interest of the Company, we needed to respond to requests of the members of the Association. We therefore took this opportunity to strike a deal with them, so that there could be a win-win situation — they could benefit from the Company’s business and we could stop them from complaining while getting funds and management support.”

213.  As Mr Lee has not come forth to prove his pleaded justifications, in the following discussion, the references to Mr Lee are based on the undisputed facts, my finding in other sections of this judgment or the inferences I make against Mr Lee. 

214.  The allegation that the Company was “in a mess” is wholly unfounded.  As discussed in section C5 above, the Company continued to adopt the same modus operandi established by Mr Choi in carrying on its business.  Had Mr Cheng and Mr Lee abided by the agreement reached between the Shareholders on 30 December 2007, the Company would have been able to benefit from the services provided by Mr Choi, Mrs Choi, Ms Choi and Mr Chan Hak Keung (see sections C10 and D5 above).  I do not see how Mr Cheng and Mr Lee could honestly complain that the Company “was in a mess” when it was their own decisions to renege on the agreement reached on 30 December 2007 and replaced all the persons who had built up the agency business from the scratch.

215.  As discussed in section D1 above, Mr Mak accepts on behalf of Mr Cheng and Mr Lee that the members of the Association have no interest or right in the Company.  They are strangers to the Company.  It is a misuse of their power to appoint the Management Company for the purposes of satisfying the requests of the members of the Association still less to benefit them.  In exercising their power for the purposes of the members of the Association, Mr Cheng and Mr Lee have put the interest of the members of the Association (or, rather the 8 Individuals) ahead of the interests of the Company and, therefore, acted in breach of their fiduciary duties owed to the Company.

216.  Moreover, it is clear that during the 28.5 months of its appointment, the Management Company has not done any substantive work for the Company:

(1)  Neither the Management Agreement nor the witness statements of Mr Cheng sheds any light on the precise work or responsibility undertaken by the Management Company.

(2)  None of the document disclosed by the Company, Mr Cheng and Mr Lee shows that the Management Company has done any substantive work for the Company.

(3)  As the Company continued to adopt the modus operandi established by Mr Choi in carrying on the agency business and employed its own staff to handle the administrative matters and other matters at the Slaughterhouse, there was no other substantive work required to be done by the Management Company.

(4)  Mr Choi says in his oral evidence (which I accept) that the operation at the Slaughterhouse was handled by Hop Kee and the Company’s role was only limited to copying the results of the auction. After implementation of the automation system, the work required to be done by the Company at the Slaughterhouse process would be even more simple.  His evidence is corroborated by the evidence of Mr Chan.

(5)  Although Mr Cheng in his oral evidence suggests that the Management Company did send a number of staff to attend the Slaughterhouse, he is unable to point to any specific work undertaken by such staff.  I do not accept his evidence. 

(6)  Even if, which I do not accept, the Management Company did send some staff to attend the Slaughterhouse, their presence would have been entirely redundant as all the substantive work at the Slaughterhouse were done by Hop Kee or the Company’s staff.   

217.  Looking at the situation objectively, it is clear that Mr Cheng and Mr Lee have been treating the Management Company favourably and have put its interest ahead of the interest of the Company, evidenced by their following actions and decisions:   

(1)  they decided to enter into the Management Agreement with the Management Company, despite the fact that it was a newly incorporated company with no relevant experience in the agency business;

(2)  the terms of the engagement were extremely favourable to the Management Company in that it allowed the Management Company to take ²⁄₉^th of the commission (or 2/9^th of the net profits as Mr Cheng suggests) earned by the Company without having to undertake any substantive work for the Company or to bear any expenses incurred by the Company in operating its agency business;

(3)  they paid a substantial sum of $1,273,725 to the Management Company on 2 June 2008 for no discernible reason and caused the amount to be recorded as a loan when there was absolutely no justification for advancing such loan;  

(4)  they allowed the Management Company to use the same accountant (Ms Hung) to handle its accounting and banking matters and without putting in place any system to monitor or control the gross revenues received by the Management Company from Hop Kee and the amount it took as its remuneration;

(5)  they permitted the Management Company to use the SS Office as its office and to use the spaces rented by the Company at the Slaughterhouse.  Although Mr Cheng says that the Management Company paid a monthly rent to the Company, it is clear that the amount paid would not be substantial, given that the rental income stated in the 2009 A/C, the 2010 A/C and the audited accounts for the year ended 31 March 2011 (“2011 A/C”) were $12,000, $140,670 and $77,220 respectively, giving a total amount of $229,890;

(6)  they allowed the Management Company to receive all the gross profits from Hop Kee from May 2008 onwards, thereby putting the Company at risk of not being able to recover its own money from the Management Company;

(7)  they permitted the Management Company to retain the amounts it saw fit as its remuneration, and remitted the balance to the Company.  This led to the Management Company being able to take the amount in excess of the remuneration they intended to pay the Management Company;

(8)  even after discovering the overcharge in May 2009, Mr Cheng and Mr Lee did not take any step to recover the amount overcharged or to terminate their appointment.  Rather, they allowed the Management Company to retain its role and continue to earn ²⁄₉^th of the net profits of the Company as its remuneration; and

(9)  they only commenced legal proceedings against the Management Company on 27 September 2012, more than 2 years after they had discovered the overcharge.  After obtaining the Default Judgment against the Management Company, they never took step to enforce it, thereby leaving the Company to bear the loss suffered as a result. 

218.  In putting the interest of the Management Company ahead of the interest of the Company in the above manner, Mr Cheng and Mr Choi acted in breach of their fiduciary duties owed to the Company.

219.  As can be seen from the table at §199 above, the remuneration received by the Management Company accounted for 36.63% of the gross profits made by the Company.  Even taking into account the contention of Mr Cheng and Mr Lee that of the $4,405,000.98 actually received by the Management Company, $2,285,536.42 represented the amount overcharged, the amount charged by the Management Agreement would be $2,119,464.56, equivalent to 17.62% of the gross profits made by the Company.  As the Management Company did not carry out any substantive work for the Company, the amount of remuneration paid to it, whether in the amount of $4,405,000.98 or $2,119,464.56, viewed objectively, was excessive and wholly unjustified.

220.  The failure on the part of Mr Cheng and Mr Lee to recover the amount overcharged by the Management Company and their decision to retain the Management Company after discovery of the overcharge constituted a further breach of their fiduciary duties as it was incumbent upon them to protect the interest of the Company by taking all possible steps to recover the amount overcharged.  This is particularly so when the Management Company was owned by the 8 Individuals who were their fellow members of the ExCo and whose interest they had sought to advance by making the appointment.  

221.  As the appointment of the Management Company was made by Mr Cheng and Mr Lee in breach of their fiduciary duties, it is voidable and is set aside.  It follows that Mr Cheng and Mr Lee are liable to compensate the Company for the $4,405,000.98 paid by the Company to the Management Company.

D7.  Director’s remuneration

222.  The principles governing the propriety of the payment of directors’ remuneration are well-established and may be summarised as follows. 

223.  A director is an officer of the company and, in the absence of a service contract, is not regarded as an employee of the company.  The nature of the remuneration of directors has been explained thus:

“ But what is the remuneration of directors? I think it is pretty clear that, like the compensation for loss of the services of the managing director, it is a gratuity. A director is not a servant. He is a person who is doing business for the company, but not upon ordinary terms. It is not implied from the mere fact that he is a director, that he is to have a right to be paid for it. … but in some companies, there is a special provision for the way in which the directors should be paid; in others there is not. If there is a special provision for the way in which they are to be paid, you must look to the special provision to see how to deal with it. But if there is no special provision their payment is in the nature of a gratuity …. Directors, under those circumstances, often do get money. But whenever they get it it is in the nature of a gratuity voted. That does not get rid of the difficulty, because one must still ask oneself what is the general law about gratuitous payments which are made by the directors or by a company so as to bind dissentients. … The test there again is not whether it is bonâ fide, but whether, as well as being done bonâ fide, it is done within the ordinary scope of the company’s business, and whether it is reasonably incidental to the carrying on of the company’s business for the company’s benefit. … The law does not say that there are to be no cakes and ale, but there are to be no cakes and ale except such as are required for the benefit of the company.” (emphases added).

(Hutton v. West Cork Railway (1883) 23 Ch D 654, at 671 – 673, per Bowen LJ)

224.  Directors are not entitled as of right to any remuneration, whether on quantum meruit basis or otherwise (Gore-Browne on Companies, 45^th ed, §13[14]).  Moreover, unlike other employees, a director is a fiduciary and, as such, is under a duty not to make a profit out of his trust or to put himself in a position where there is a conflict between his personal interests and his duty as a fiduciary.  This rule, which is applicable to all trustees of which a director is one, depends “not on fraud or mala fides, but on the mere fact of a profit made.”  (Guinness Plc v Saunders [1990] 2 AC 663, 689F – 692D, per Lord Templeman)

225.  Mr Mak submits, and I agree, that the following principles are applicable to the present case:

(1)  Where controlling directors pay themselves remuneration not by reference to a standard proper reward for the services rendered but a means to distribute profits of the company, such conduct would be unfairly prejudicial to the interests of non-director member (Re Kam Fai Electroplating Factory Ltd HCCW 534/2000, unreported, 8 December 2003 at §82, per DHCJ Poon (as he then was)).

(2)  If the court is satisfied that the payments made were genuine exercise of the company’s power to pay remuneration, applying an objective test and ordinary standards, in the absence of evidence that the payment made were patently excessive or unreasonable, it is not for the court to engage in minute examination of whether it would have been more appropriate or beneficial to the company to fix remuneration at a certain level, which is a matter for the management (Re Hing Ming Gondola (HK) Co Ltd  HCMP 418/2008, unreported, 30 June 2009, at §113, per Kwan J (as she then was)).

226.  There is no dispute that after Mr Cheng and Mr Lee had taken control over the Company, they caused the Company to pay $60,000 per month as their remuneration as directors of the Company retrospectively from 1 November 2007. According to the audited accounts of the Company prepared under the instructions of Mr Cheng and Mr Lee, they received an aggregate amount of $15,324,000 as their directors’ remuneration as follows:

Year ended 31 March	Amount paid
2008	$600,000
2009	$1,560,000
2010	$1,560,000
2011	$1,560,000
2012	$1,596,000
2013	$2,112,000
2014	$2,112,000
2015	$2,112,000
2016	$2,112,000
TOTAL	$15,324,000

227.  So far as the remuneration received by Mr Cheng and Mr Lee for the 2 months from 1 November to 31 December 2007, it is void as there was no agreement or resolution reached or passed by the Shareholders which permit them to receive this remuneration.

228.  In any event, given that Mr Cheng and Mr Lee had no involvement in managing the business or affairs of the Company during the period from 1 November to 31 December 2007, there was no basis for them to receive any remuneration from the Company.  It follows that Mr Cheng and Mr Lee are liable to repay the $240,000 received by them as remuneration for the 2 months in 2007 to the Company.  

229.  As for the remuneration from 1 January 2008 onwards, in light of my finding that the Shareholders reached an agreement on 30 December 2007 to pay $30,000 per month to each of Mr Cheng and Mr Lee as their remuneration for 2 years (see section C10 above), they were entitled to receive $1,440,000 from 1 January 2008 to 31 December 2009, and should repay an aggregate amount of $1,440,000 overpaid to them.  

230.  As for the remuneration received by Mr Cheng and Mr Lee from 1 January 2010 onwards, it was not covered by any agreement reached by the Shareholders, but was approved by the resolutions passed by Mr Cheng and Mr Lee themselves qua majority shareholders.  The question is whether the payment of such remuneration was unfair and prejudicial to the interest of Mr Choi.

231.  Mr Mak submits that as Mr Choi has not adduced any evidence on the market level of a director working in the comparable field with comparable expertise or workload, the court may take the $60,000 per month, being the remuneration proposed by Mr Choi himself at the meeting of 30 December 2007, as the appropriate level of remuneration for Mr Cheng and Mr Lee.  I disagree.  The $60,000 per month was the remuneration agreed to be paid to Mr Choi in circumstances where he had been acting as the Chairman of the Company,  was instrumental in securing and building up the agency business for the Company and in the expectation that he would continue to act as such Chairman.  There is no basis to equate the position of Mr Choi with that of Mr Cheng and Mr Lee.   

232.  Mr Mak submits that given the work done by Mr Cheng in liaising with members of the Association, Mr Wong Yung Kan and the CLA; and the effort of Mr Cheng and Mr Lee in securing a new supplier in Shanghai, assisting the import of live pigs from the ASZ and making the business to become “more sustainable” with a cash reserve of over $10 million, the remuneration paid to them could not be said to be excessive.  I am unable to agree.

233.  So far as Mr Lee is concerned, there is no evidence to suggest that he has done any substantive work for the Company, other than participating in meetings and voting in the same way as Mr Cheng at all meetings of the Company.

234.  As for Mr Cheng, I do not regard his act in liaising with the members of the Association may be regarded as the work done for the Company, given that the members of the Association have no right or interest in the Company.  Nor do I accept the suggestion that Mr Cheng’s work in assisting the import of live pigs from the ASZ may be regarded as work for the Company, as there is no suggestion that the Company has extended its business to the live pigs imported from the ASZ.  

235.  Although Mr Cheng claims that he spent a lot of time to deal with the Company’s affairs including negotiating with the Suppliers and the additional supplier in Shanghai and dealing with the CLA to ensure that the agency business could be maintained, I do not accept that these work required him to spend a lot of time or effort.  As discussed in section C5 above, the entire modus operandi of the business had been established by Mr Choi, and after Mr Cheng and Mr Lee took control of the Company, Mr Cheng simply followed the same mode in operating the business.  There was very limited work required to be done by the Company, which was performed by 3 junior staff.  There was no justification for their decision to pay $60,000 per month to themselves as director’s remuneration.

236.  The only reasonable inference I can draw is that their decision in paying such a high level of remuneration to themselves was motivated by a desire to distribute a large part of the profits of the Company to themselves, leaving the balance to be distributed to the Shareholders by way of dividends. As a matter of fact, as at 31 March 2016, the retained profits of the Company only amounted to $14,127,564.46 (which included the 4.5 Months’ Profits), which was less than the $15,324,000 paid to Mr Cheng and Mr Lee by way of director’s remuneration. Such conduct of Mr Cheng and Mr Lee was both unfair and prejudicial as Mr Choi was the only shareholder who had been deprived of the right to receive distribution of the profits made by the Company in this way.  

237.  It follows that adjustment should be made in the valuation of the Company on the basis that the $13,884,000 (being $15,324,000 less $1,440,000 they were entitled to receive) received by Mr Cheng and Mr Lee should be treated as if it had not been paid.

238.  In ordering the above adjustment, I have taken into account the fact that Mr Cheng and Mr Lee would in effect be acting as directors of the Company from 1 January 2010 without any remuneration.  But this was the result of their act in excluding Mr Choi from the management of the Company and depriving him of the right to share in the distribution of the profits by way of director’s remuneration.  Moreover, I consider that the other allowance and benefit enjoyed by Mr Cheng and Mr Lee qua directors (such as reimbursement of entertainment expenses and use of Company’s cars) were sufficient compensation for  the limited work they had done for the Company.

D8.  Failure to declare dividend   

239.  Where the directors have refused to pay reasonable dividends which the company is in a position to pay, the court may order the company to be wound up on the basis that the proper and legitimate expectations of the members have been defeated (In re a Company (No 00370 of 1987), ex p Glossop [1988] 1 WLR 1068, at 1076c–f).

240.  Moreover, non-payment of dividends, or payment of unreasonably low dividends, in circumstances where the company is able to pay substantial dividends or has substantial reserves, is capable of constituting unfair prejudice (Quinlan v Essex Hinge Co Ltd [1996] 2 BCLC 417, at 427d; Re Sam Weller & Sons Ltd (Re a Company No 823A of 1987) [1990] BCLC 80 at 88b–d).

241.  Mr Mak submits that the decision whether to declare dividend is a commercial decision which the directors are entitled to make, having regard to the commercial needs of the company (Company Law in Hong Kong — Practice and Procedure 2015, §8.096 p 375).  As a general principle I agree, but the burden is on the directors to justify their decision when it is being challenged.

242.  There is no dispute that during the 9 years when the Company has been under the control of Mr Cheng and Mr Lee, no dividend has been declared or paid to the Shareholders.

243.  According to the audited accounts for the year ended 31 March 2012, by the time the Petition was presented, the Company had retained profits of $7,878,749.28.  The amount was increased to $14,127,564.46 for the year ended 31 March 2016.  As the Company only engages in a single business which is well established and fairly stable, prima facie, the retained profits could have been paid to the Shareholders by way of dividends.

244.  The first time Mr Cheng and Mr Lee indicated that the Company was in a position to declare dividend was in the letter of CECT dated 29 June 2016.  No detail on the proposed dividend was provided, and Mr Choi was requested to contribute $1,800 to the Company as “initial share capital” as the auditor had not been able to verify the amount previously paid by the Shareholders.  Mr Choi through his solicitors responded 9 months later, pointing out that his complaint for failure to declare dividend has been made in the Petition at the outset, and the suggested declaration of dividend came too late.

245.  Mr Cheng advances 2 reasons to justify his decision in not declaring any dividend in the past 9 years.  First, he says that he considered that dividends should only be declared when the Company has sufficient reserve to do so.  Secondly, he says he relied on the “legal advice” given to him to the effect that the Company could not declare any dividends when its shares have not been paid up.

246.  As regards the first reason, I do not think it is sufficient for Mr Cheng to rely on a general assertion that dividends should only be declared when the Company has sufficient reserve to do so.  This is particularly so when the Company only carries on a single business which is well established and does not require any new investment.   

247.  As for the so-called “legal advice” received by the directors, under cross-examination, Mr Cheng clarifies that the advice he relied on was given by the auditor.  However, as Mr Fok says in his oral evidence, whether the Company should declare dividend has nothing to do with the auditor, and the auditor has no right to say whether the Company should or should not declare dividend.  He confirms that he did not give any advice to the directors to the effect that the Company could only declare dividend when the amount payable on the issued shares is actually paid up.  I accept Mr Fok’s evidence and reject Mr Cheng’s assertion that the directors acted under the alleged advice given by the auditor.  

248.  In light of the Company’s substantial retained profits and the absence of any proper justification as to why they did not declare dividends, I consider that the failure on the part Mr Cheng and Mr Lee to cause the Company to declare any dividends to the Shareholders was both unfair and prejudicial to the interests of Mr Choi.   

D9.  Administration expenses

249.  In §22 of the APOC, Mr Choi complains that that the “unexplained administration expenses totalling $13,696,321” for the year ended 31 March 2010 was unreasonable as it exceeded the expenses for the previous year by more than $5 million even though the revenue for that year remained similar to the level the year before, which resulted in a net loss of $3,3556,355.   

250.  The complaint arose out of Mr Choi’s request made in his letter dated 7 December 2010 requiring the directors to explain, inter alia, the various items shown in the 2010 A/C including the various expenses which amounted to $13,696,321.

251.  At the AGM held on 8 December 2010 (“AGM of 8/12/2010”), Mr Choi stated that he had a lot of queries on the 2010 A/C and requested the directors to explain and clarify.  In response, Mr Cheng said that the queries raised by Mr Choi concerned the operating information, and the Company could not list out each and every information for the Shareholders.  If Mr Choi wished to express any view, he could take legal action.  He said that the Company would provide a written reply.

252.  Mr Cheng’s response is to say the least unhelpful.  It is clear from his response that he had no respect for Mr Choi’s right as a shareholder and failed to appreciate that it was the duty of the directors to answer the questions raised by the shareholders on the business and accounts of the Company.

253.  The reply came in 3 month later in the form of a letter dated 28 February 2011 signed by Mr Cheng (“Reply”).  In the Reply, Mr Cheng explained that the various expenses shown in the 2010 A/C was attributed to change in accounting treatment, director’s remuneration, account receivable of $609,689.24 held by the Management Company, the amount $2,597,034.11 owed by Mr Choi (the 34 Days’ Profits) and provision for bad debt in the amount of $3,206,723.35.  The explanations made no sense as account receivable and the amount owed by Mr Choi, on their face, should be recorded as assets.  As for the provision for bad debts, given the amount involved, it was incumbent upon the directors to explain how they came about and why they considered the debts to be irrecoverable.  No such explanation was provided by the directors.   

254.  In §§83-95 of RAPOD, Mr Cheng and Mr Lee does not adopt the explanations set out in the Reply.  Instead, they say that the reasons for the net loss of $3,3556,355 incurred by the Company for that year were due to (1) the reduction in the commission paid by the suppliers to the Company, and (2) the increase in the transportation costs and the bonus payable to the buyers at the Slaughterhouse.

255.  In my view, neither of the reasons pleaded in the RAPOD explains the increase in administration expenses for over $5 million:

(1)  In his 3 witness statements, Mr Cheng does not allude to either of the reasons pleaded in RAPOD.

(2)  In any event, the reduction in the commission paid by the suppliers only related to the revenue of the Company.  It had nothing to do with the increase in the administration expenses.

(3)  There was no increase in transportation cost. Mr Wong says in his witness statement that since October 2008, the transportation fee paid to Sam Ran has been reduced from $1,550 to $1,300 per lorry load of pigs.  Despite Mr Wong’s repeated requests, Mr Cheng and Mr Lee refused to raise the transportation fee to the original rate and merely offered to pay an allowance of $50 for each lorry load of pigs.  Mr Wong’s evidence has not been challenged.

(4)  As for the bonus paid to the buyers, under cross-examination, Mr Choi explains that under the agreement dated 24 December 2008 signed with the 3 suppliers[13] for the year 2009, the $10 bonus per pig was in fact paid by the suppliers to the Company. Instead of paying the same bonus to the buyers, the Company only had to pay the bonus from the 6^th pig bought by the buyers.  In other words, far from being an expense of the Company, the bonus in fact formed part of the revenue of the Company.  This evidence of Mr Choi is not challenged.

256.  Mr Mak in his closing submissions relies heavily on the Reply and submits that in light of the explanations set out therein, the administration expenses for the year ended 31 December 2010 were reasonable.  Mr Mak prepares an Annex 1 which purports to explain the nature of the expenses recorded as administration expenses.  I do not think it is open to Mr Mak to rely on the Reply or Annex 1 given that these documents and their contents are neither pleaded in the RAPOD nor alluded to by Mr Cheng in his witness statements or oral evidence.

257.  In my view, faced with a sudden increase in administration expenses to the extent of $5 million, Mr Choi was perfectly entitled to ask the directors to explain and account for the increase.  As directors of the Company, it was incumbent upon Mr Cheng and Mr Lee to provide proper explanation on the questions raised by Mr Choi.  The cavealier response at the AGM of 8/12/2010, the Reply and the RAPOD given by Mr Cheng and Mr Lee demonstrate that they completely disregarded the right of Mr Choi as a shareholder of the Company and failed to treat Mr Choi fairly and in good faith as one would expect from the directors of a company.

D10.  Denial of access to financial information

258.  In §§25 – 26 of APOC, Mr Choi complains that Mr Cheng and Mr Lee repeatedly refused to answer questions raised by him or to provide information concerning the Company’s affairs.  It was only until Mr Choi applied under s.152FA of the former Companies Ordinance that Mr Cheng and Mr Lee produced some documents of the Company to Mr Choi.   

259.  In §§101 – 102 of RAPOD, Mr Cheng and Mr Lee deny the complaint and contend that the questions raised by Mr Choi “were duly answered. The proceedings for inspection of documents were misconceived.”  This defence is surprising, if not disingenuous, given that Mr Choi succeeded in persuading Mr Justice L Chan to grant an order against the Company, Mr Cheng and Mr Lee on 5 June 2012, requiring them to produce a whole array of documents relevant to the queries raised by Mr Choi which remained unanswered at the time of the order.    

260.  Mr Yau in his opening submissions draws my attention to the various passages in the Decision of Mr Justice L Chan relating to the queries raised by Mr Choi on the 2008 A/C, the 2009 A/C, the 2010 A/C and the 2011 A/C including the increase in administration expenses for the years ended 31 March 2010 and 31 March 2011, and his view that the questions raised were reasonable to which no satisfactory answers were provided by the directors.

261.  It suffices to say that at trial, the position remains that no satisfactory answers have been provided by Mr Cheng and Mr Lee to most of the questions raised.

262.  Mr Yau points out that except the audited accounts, the financial documents in the trial bundles had been made up to 2012 and were produced by Mr Cheng and Mr Lee pursuant to the order of Mr Justice L Chan.  Mr Yau submits that this reinforces Mr Choi’s complaint that Mr Cheng and Mr Lee have continued to deny Mr Choi’s access to the financial information on the one hand and refusing to provide proper explanation to the questions raised by Mr Choi on the audited accounts of the Company.  I agree.

263.  The above conduct of Mr Cheng and Mr Lee is unfair to Mr Choi.  It has the effect of depriving Mr Choi’s right to know the financial performance of the Company and the reasons behind the substantial increase in expenses and the corresponding reduction in its profits and, as such, is prejudicial to his interest qua shareholder.

E.  3 ACTIONS

264.  In my view, the 3 actions are wholly unnecessary and their commencement are against the underlying objectives of the CJR and only serve to waste costs.

E1.  1^st Company’s Action

265.  In his opening submissions, Mr Co describes the “major misconducts” of Mr Choi pleaded in the statement of claim, all of which are alleged to have been made by Mr Choi in breach of his fiduciary duties and/or breach of trust.  As this court points out to Mr Co, the matters pleaded in relation to the (1) the donation of $500,000 on 21 February 2008, (2) the application for a branch office for the Company on 13 March 2008 and (3) the failure to make proper declaration of the pigs imported do not give rise to reasonable causes of action for breach of fiduciary duties or breach of trust.

266.  As for the claim for the 34 Days’ Profits, Mr Co is asked to explain why the directors decided to cause the Company to commence the action against Mr Choi, rather than waiting for the court’s determination on the same issue which had already been raised by the parties in the Petition.  Mr Co is unable to provide any explanation other than asserting that the Company is entitled to make the claim against Mr Choi.

267.  The court indicates to Mr Co that it is minded to order the directors to pay the costs of the action personally irrespective of the outcome of the issue on the 34 Days’ Profits as there was no reason why the directors should use the Company’s fund to litigate what is in effect a dispute between the Shareholders.  The principle was fully explained in Re CG & L Investment Ltd v Wyatt Estates Ltd [1992] 1 HKC 78 (CA) at 82E – 83D which, in turn, referred to the well known passages in Re Crossmore Electrical and Civil Engineering Ltd (1989) 5 BCC 37 and Re A Company (No 004502 of 1998), ex p Johnson [1991] BCC 234; and Re Milgate Developments Ltd [1991] BCC 24.

268.  At Day 4 of the trial, Mr Co informs the court that the Company abandons all the claims made against Mr Choi in the action except the claim in relation to the 34 Days’ Profits. 

269.  As discussed in section D2 above, I reject all the allegations advanced by Mr Cheng and Mr Lee in relation to Mr Choi’s right to retain the 34 Days’ Profits.  In particular, I find that the Alleged Conditions Precedent was a pure fabrication created by Mr Cheng and Mr Lee for the ill purpose of seeking to defeat Mr Choi’s right to retain the 34 Days’ Profits.

270.  It follows that the only remaining claim in the 1^st Company’s Action must fail and I dismiss the Action.

271.  As for costs, Mr Cheng and Mr Lee and those advising the Company should know that as a result of the Board Minutes of 20/12/2007, the validity of which has never been challenged by anyone, the Company was bound by the Shareholders’ Agreement and could not act inconsistently with it.  Yet, they completely ignored the resolution passed by all the directors and caused the Company to commence the 1^st Company’s Action against Mr Choi.  There is no explanation from Mr Cheng and Mr Lee as to why they considered that it was proper for them to have acted in this way.

272.  In the absence of any explanation, it is reasonable to infer that in causing the Company to commence the 1^st Company’s Action, Mr Cheng and Mr Lee were seeking to use the Company’s fund to advance their own allegations against Mr Choi, and to create maximum pressure on Mr Choi.  In so acting, Mr Cheng and Mr Lee have abused their power as directors and misused the Company’s money to pursue the 1^st Company’s Action.  They are liable to compensate the Company for its own costs incurred in pursuing the 1^st Company’s Action including all the costs of solicitors and counsel appearing for the Company at the trial and the costs expended by the Company in correspondence.  The Company’s own costs should form part of the adjustment in the valuation as I consider that it is a matter arising from Mr Choi’s complaint in the Petition.  

273.  As for the adverse costs incurred by Mr Choi in defending the 1^st Company’s Action, to mark the disapproval of the court on Mr Cheng and Mr Lee’s conduct, I am minded to order all the costs of and occasioned by the 1^st Company’s Action to be paid by Mr Cheng and Mr Lee personally and be taxed on an indemnity basis, with certificate for 2 counsel.

274.  As Mr Cheng and Mr Lee are technically non-parties to the 1^st Company’s Action, pursuant to O.62 r.6A(1), I order that they be joined as parties to the 1^st Company’s Action for the purpose of costs only, and I direct Mr Cheng and Mr Lee to lodge their submissions in opposition to the costs order I am minded to make within 14 days of this Judgment and to issue a summons for a 30-minute hearing unless the parties agree to dispense with the need for the hearing.

E2.  The Derivative Action

275.  As stated in section A above, the Derivative Action is commenced for the sole purpose of enforcing the Capitalisation Agreement which was an agreement reached between the Shareholders on 30 December 2007.  It is in that sense a personal claim made by Mr Choi against Mr Cheng and Mr Lee. Such a claim has already been raised as a complaint in the Petition and the issues are joined.  It seems to me that it is both unnecessary and pointless for Mr Choi to commence the Derivative Action to litigate the same complaint.

276.  In response to the court’s enquiry as to why the Derivative Action was commenced, Mr Yau submits that the only reason for commencing the Derivative Action was because Mr Choi wished to seek an interlocutory injunction to compel Mr Cheng and Mr Lee to abide by their obligation in contributing to the capital of the Company.  In my view, this is not a valid reason for commencing the Derivative Action at all as it was open to Mr Choi to make the same application for interlocutory injunction in the Petition. Indeed, such interim relief is pleaded in the APOC prayer (6).  

277.  As for Mr Yau’s submission that the Capitalisation Agreement is also pleaded as a derivative claim brought by Mr Choi on behalf of the Company, with respect, I do not see how the Capitalisation Agreement can form a claim in a derivative action.  Apart from the fact that the essential requirements for the claim to come within the exceptions to the rule in Foss v Harbottle have not been pleaded in the statement of claim, it is clear that the refusal on the part of Mr Cheng and Mr Lee to abide by the Capitalisation Agreement is not and cannot constitute a “fraud on minority”.  

278.  I therefore dismiss the Derivative Action.  I make an order nisi that the costs of and occasioned by the Derivative Action be paid by Mr Choi to the Company, Mr Cheng and Mr Lee, such costs to be taxed on a party and party basis.  For the avoidance of doubt, the costs of the Company is only limited to the costs in providing discovery, if any.

279.  As for the other costs incurred by the Company in the Derivative Action including the costs in filing a defence, they should be borne by Mr Cheng and Mr Lee as it is a misuse of the Company’s fund for the Company to take any substantive step in the Derivative Action, other than giving discovery.  These costs should form part of the adjustment in the valuation.   

E3.  2^nd Company’s Action  

280.  The only claim made by the Company against Mrs Choi is for repayment of the 34 Days’ Profits on the bases that Mr Choi acted in breach of her fiduciary duties as employee of the Company, dishonest assistance and knowing receipt.

281.  During the cross-examination of Mrs Choi, Mr Co does not put any questions to Mrs Choi about her knowledge, let alone the allegation of dishonesty to her.  This is not surprising given that in the witness statements filed behalf of the Company, no such allegation has been made against Mrs Choi. The claim based on dishonest assistance and knowing receipt is bound to fail.

282.  For the reasons discussed in section E2 above, Mr Choi was entitled to retain the 34 Days’ Profits. I dismiss the Company’s claim against Mrs Choi.  

283.  When asked by the court as to why the directors considered it necessary to commence the 2^nd Company’s Action against Mrs Choi, having already raised the same issues in the Petition and the 1^st Company’s Action, Mr Co’s only response is that Mr Choi may not have sufficient asset to pay any judgment which may be awarded against it.  I reject the suggestion.  Apart from the fact that Mr Choi is an accomplished businessman, it is indisputable that the 33.33% shares he held in the Company are valuable assets which may be used to answer any judgment the Company may obtain against him.

284.  In the absence of any proper explanation, the court is driven to infer that in causing the Company to commence the 2^nd Company’s Action against Mrs Choi, Mr Cheng and Mr Lee were seeking to use the Company’s fund to advance their own allegations against Mr Choi, and to create maximum pressure on Mr Choi, which constitutes a misuse of the Company’s fund.

285.  The Company’s own costs in pursuing the 2^nd Company’s Action should form part of the adjustment in the valuation for the same reason that it arises from Mr Choi’s complaint in the Petition.

286.  As for the adverse costs incurred by Mrs Choi in defending the 2^nd Company’s Action, I am minded to order all the costs of and occasioned by the 2^nd Company’s Action to be paid by Mr Cheng and Mr Lee personally and be taxed on an indemnity basis, with certificate for 2 counsel.

287.  The same directions on joiner of Mr Cheng and Mr Lee for the purpose of costs only (at §274) apply to the 2^nd Company’s Action.

F.  CONCLUSION AND REMEDIES

288.  In light of my findings on unfair prejudice discussed in sections D1 to D10 above, it is inevitable that there should be a parting of way between the Shareholders as it would be unfair to require Mr Choi to remain as a shareholder alongside with Mr Cheng and Mr Lee who have in the past 9 years managed the Company in a manner which only benefitted themselves and the Management Company (and the 8 Individuals behind it) and in complete disregard of Mr Choi’s rights and interest in the Company and to his prejudice.  The case cries out for an order so as to put an end to the matters complained of.

289.  There are 5 main issues to consider:

(1)  whether a share purchase order should be made and, if so, against whom;

(2)  the date of valuation;

(3)  the basis of valuation;

(4)  whether there should be a discount for the minority or a premium for the majority; and

(5)  the instances of unfairly prejudicial conduct for which specific adjustments should be made in the valuation.

F1.  Share purchase order

290.  A share purchase order is the most important and commonly granted remedy, as the order has the advantage of effecting a “clean break” (Robin Hollington QC, Shareholders’ Rights, 7^th ed, §8-44).  A share purchase order is appropriate in a case involving exclusion from management or where the respondent has shown a propensity for using the company’s assets for his personal benefit and the benefit of his family and friends, as it would be unfair to the petitioner to be “locked in” as minority in the company where there is no practicable way of regulating the conduct of the company’s affairs in future so that it is a case for a “clean break” (Re Elgindata Ltd [1991] BCLC 959 at 1005f–i).

291.  In my view, it is appropriate to make a share purchase order so as to bring an end to the matters complained of by Mr Choi and to achieve a clean break between the Shareholders.

292.  In the APOC and his witness statements, Mr Choi says that it is appropriate for him to buy out the shares held by Mr Cheng and Mr Lee given his contribution and dedication to the Company in securing and building up the agency business and operated it profitably.  On the other hand, Mr Cheng and Mr Lee are “selfish, greedy and incompetent” and, therefore, not suitable to manage the Company, which is supposed to serve an important public function of stabling the supply and prices of imported live pigs in Hong Kong and creates competition in the market.  Mr Choi believes that if the Company is placed under his control, it will be able to play a more active role in bringing more and better quality live pigs into Hong Kong.  His evidence in this regard is not challenged.

293.  Given that Mr Choi has single handedly obtained the agency business and established the modus operandi in less than 3 months, and managed to generate profits in excess of $11 million in the first 5.5 months, I consider that he is more suitable and, certainly more effective, in managing the business of the Company.

294.  I agree that the Company has an important public function to play. In view of my findings on the conduct of Mr Cheng and Mr Lee, which falls far short of the standard one would expect from directors and fiduciaries, I do not consider that they should be entrusted with the responsibility of managing the Company.  Indeed, in their RAPOD, Mr Cheng and Mr Lee have not pleaded that if unfair prejudice is made out, they should be ordered to buy out Mr Choi’s shares.  Nor has Mr Cheng said in his witness statements or oral evidence why he and Mr Lee should be entitled to buy out Mr Choi’s shares.

295.  This notwithstanding, Mr Mak submits that if the court finds that Mr Choi’s complaints are made out, his shares should be bought out by Mr Cheng and Mr Lee on the grounds that (1) the court rarely orders the majority be bought out, (2) it is not the object of section 724 “to put the petitioner in a better position by expropriating the majority shareholder”, and (3) it would be unusual to order the majority to be bought out where they are actively concerned in the management and are willing and able to buy out the minority at a fair price, citing Company law in Hong Kong — Practice and Procedure 2015, §8.117, pp 388 – 389.

296.  I do not think it is open to Mr Mak to seek this relief in his closing submissions, when his clients have not done so in their pleadings and evidence. In any event, Mr Mak’s arguments must be rejected.

297.  First, the number of shares held by each shareholder is the same.  It is wrong to characterize Mr Cheng or Mr Lee as the majority.  The fact that Mr Cheng and Mr Lee chose to exercise their power in the same way does not without more make either of them to become the majority shareholder.

298.  Secondly, the usual order requiring a shareholder to sell his shares (or to buy out the other’s shares) is for the shares to be sold at a fair value.  So long as a fair price is paid, there is no question of expropriating the shares. This is particularly so when the agency business of the Company was obtained and built up by Mr Choi at the outset, which Mr Cheng and Mr Lee have continued to follow to-date.   

299.  Thirdly, far from willing and able to buy out Mr Choi’s shares, the consistent stance of Mr Cheng and Mr Lee is to fight the Petition to the end.  They have never made any open offer to buy out Mr Choi’s shares.

F2.  Date of valuation

300.  The choice of the date of valuation is a matter for the court’s exercise of discretion.  The overriding requirement is that the date of valuation should be fair on the facts of the particular case.  In Profinance Trust SA v Gladstone [2002] 1 BCLC 141 §§60 – 62, Walker LJ (as he then was) held, after conducting an exhaustive review of the earlier authorities, that whist the valuation could be back-dated to provide for past oppression, the starting point was that the shares should be valued as nearly as possible to the actual date of sale:

“ [60] … The starting point should in our view be the general proposition stated by Nourse J. in London School of Electronics Ltd, Re [1986] Ch 211 at 224: ‘Prima facie an interest in a going concern ought to be valued at the date on which it is ordered to be purchased.’ That is, as Nourse J. said, subject to the overriding requirement that the valuation should be fair on the facts of the particular case.”

301.  Neither the Petition nor the RAPOD has pleaded what the parties claim should be the appropriate date of valuation.

302.  Mr Yau submits that the date of the order after adjudication of the petition is the “norm date”, while Mr Mak contends that the date of the Petition should be the date of valuation as “any date later than that would be unfair” to Mr Cheng and Mr Lee who have built up the Company’s business after that date.  I do not accept this.  As is clear from my findings at sections D and E above, far from building up the business, Mr Cheng and Mr Lee have mis-managed the affairs, business and fund of the Company.

303.  In my view, it is appropriate to fix the date of valuation as the actual date of sale.  The Company is a going concern and has been making profits.  There is no reason why the profits made by the Company should not be taken into account in the valuation.  Indeed, if the valuation is made on the date of the Petition, it would mean that Mr Cheng and Mr Lee would be deprived of their share in the profits generated from the date of the Petition to the date of sale.  I do not think it is right or fair in the circumstances of this case.

F3.  Basis of valuation

304.  The parties have not taken any stance in pleadings on this issue. Nor has any submission been made by counsel.

305.  The starting point for valuation of a shareholding in a private company is almost invariably the value of the company as a whole.  Usually, but not invariably, the material value of the company as a whole is the value in the open market assuming a hypothetical willing (but not anxious or forced) seller and buyer (Hollington, Shareholders’ Rights, §8‑134).

306.  The principle was explained by Lord Millet in CVC v Demarco [2002] 2 BCLC 108 (PC) at §§41 – 42 and 45 in this way:

“ [41] The rationale for denying a discount to reflect the fact that the holding in question is a minority holding lies in the analogy between a quasi-partnership company and a true partnership. On the dissolution of a partnership, the ordinary course is for the court to direct a sale of the partnership business as a going concern with liberty for any of the former partners who wish to bid for the business to do so. But the court has power to ascertain the value of a former partner’s interest without a sale if it can be done by valuation, and frequently does so where his interest is relatively small: see Syers v Syers (1876) 1 App Cas 174. But the valuation is not based on a notional sale of the outgoing partner’s share to the continuing partners who, being the only possible purchasers, would offer relatively little. It is based on a notional sale of the business as a whole to an outsider purchaser.

[42] In the case of a company possessing the relevant characteristics, the majority can exclude the minority only if they offer to pay them a fair price for their shares.  In order to be free to manage the company’s business without regard to the relationship of trust and confidence which formerly existed between them, they must buy the whole, part from themselves and part from the minority, thereby achieving the same freedom to manage the business as an outsider purchaser would enjoy.”

“ [45] Where the court has power to order the respondents to purchase the petitioner’s shares, the flaw in the proposition that the value of his shares is measured by the remedy is readily apparent. … The concept of a fair price assumes that the shares have an objective value by which the fairness of the offer can be assessed.” (emphases added)

307.  Applying the principle in CVC v Demarco, I hold that the Company should be valued as a whole and on a going concern basis.

F4.  Discount or premium

308.  In the Petition and the APOC, it is pleaded that there should be no discount for minority shareholding or premium for the majority shareholding.  In the RAPOD, Mr Cheng and Mr Lee contends that there should be a minority discount in the event that a buy out order is made against them.  

309.  Both Mr Yau and Mr Mak relies on Re Bird Precision Bellows Ltd [1984] BCLC 195 but makes different spins out of the case.  Mr Yau submits that in a case where it is established that the company is a quasi partnership and unfair prejudice is made out, there should not be any discount or premium.  Mr Mak, on the other hand, submits that Mr Choi has acted in such a way as to deserve his exclusion from management, relying on the alleged wrongful seizing of control of the Company from November 2007 to 30 April 2008.

310.  As stated above, it is not right to characterize Mr Cheng and Mr Lee as the majority shareholders.  Given that the shareholding of the Shareholders is equal, there should be no discount or premium applicable to any of their shareholding.

311.  Even if I were wrong in considering the shareholding of each of the Shareholders separately such that Mr Cheng and Mr Lee should be regarded as the majority, in light of my findings on the bases upon which the Company was formed and the unfairly prejudicial conduct of Mr Cheng and Mr Lee, I do not consider that there should be any premium for their shareholding.  Equally, had I ordered Mr Cheng and Mr Lee to buy out the shares of Mr Choi, there should not be any discount for his minority shareholding (see CVC v Demarco, §41).

F5.  Adjustments to valuation

312.  Mr Yau submits that where as here, unfair prejudice is made out, the court may order the valuation of the Company on the basis that the sums representing the prejudice to the Company would be reimbursed to the Company with interest (Tam Po Kei v Tam Bo Kin (No 1) [2011] 1 HKLRD 537 at §127, per Harris J).  Mr Mak does not dispute this.

313.  On the basis of my findings set out in sections D and E above, I order that the following adjustments be made to the valuation of the Company:

(1)  In relation to exclusion from management, the Company is liable to pay $60,000/month to Mr Choi as his remuneration as director for the period from 1 April 2008 to 31 December 2009;

(2)  If and to the extent that any interest is paid by the Company to the members of the Association or Mr Cheng for allegedly providing any security for the Facility or any letter of guarantee or any loan allegedly advanced to the Company, Mr Cheng and Mr Lee are liable to repay the same to the Company;

(3)  In relation to the engagement of the Management Company, Mr Cheng and Mr Lee are liable to repay $4,405,000.98 to the Company;

(4)  In relation to directors’ remuneration, Mr Cheng and Mr Lee are liable to repay $13,884,000 to the Company for the remuneration received up to 31 March 2016 and any further amount received by them from the Company from 1 April 2016 onwards;

(5)  In relation to causing the Company to incur unnecessary costs in defending the Derivative Action, Mr Cheng and Mr Lee are liable to compensate the Company for all the costs incurred by it in defending the Action including the costs in filing a defence; and

(6)  In relation to the misuse of the Company’s funds in seeking to claim the 34 Days’ Profits and commencing the 1^st and 2^nd Company’s Actions, Mr Cheng and Mr Lee are liable to compensate the Company for all the legal costs incurred by it.

314.  As the parties have not made any submissions on the question of interest, I shall leave it to the parties to address the court on the issue as part of the proceedings on valuation.

F6.  Costs of the Petition

315.  As for costs of the Petition, I make a costs order nisi that:

(1)  the costs of and occasioned by the Petition be paid by Mr Cheng and Mr Lee to Mr Choi, to be taxed if not agreed with certificate for 2 counsel; and

(2)  the costs of and incurred by the Company in the Petition be paid by Mr Cheng and Mr Lee to the Company, to be taxed on an indemnity basis.

F7.  Disposition in 3 Actions

316.  As stated in section E above, I dismiss the 1^st Company’s Action, the Derivative Action and the 2^nd Company’s Action and make the costs orders as stated in §§273 – 274, 278 and 286 – 287 above.