CHAN KAM YAU AND ANOTHER v. CHAN HUI KI TUP AND OTHERS

HCMP 693/2018

[2023] HKCFI 3367

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 693 OF 2018

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J U D G M E N T

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1.  There is before the court a petition presented by the 1^st and 2^nd petitioners (“P1-P2”) under s.724 of the Companies Ordinance (Cap 622) (“CO”) seeking buy-out relief against the respondents on the ground that the affairs of Promising Securities Company Limited (“Company”) have been conducted in an unfairly prejudicial manner.

2.  The Company engages in provision of brokerage services for securities traded on The Stock Exchange of Hong Kong Limited (“SEHK”).  It has since 2004 been registered with the Securities and Futures Commission (“SFC”) with a Type 1 Licence for dealing in securities.

3.  Except the Company (the 7^th respondent) and Ms Chan Chi Fuk (陳子福), the 6^th respondent (“R6”), the parties to the Petition are shareholders of the Company and their shareholdings are as follows:

Party	Name	Number of shares	Shareholding
1st Petitioner (“P1”)	Mr Chan Kam Yau (陳金友)	7,200,000	24%
2nd Petitioner (“P2”)	Mr Chan Chi Hung (陳志鴻), son of P1	1,200,000	4%
1st Respondent (“R1”)	Mrs Chan Hui Ki Tup (陳許琪沓), widow of the late Mr Chan Hing Sum (陳卿森) (“Hing Sum”)	6,000,000	20%
2nd Respondent (“R2”)	Mr Chen Ching Sheng (陳卿勝)	4,800,000	16%
3rd Respondent (“R3”)	Ms Tai Lai Ming  (戴黎明), administratrix of the estate of the late Mr Chen Hing Ting (陳卿庭) (“Hing Ting”)[1]	4,800,000	16%
4th Respondent (“R4”)	Mr Warren Santiago Ng, son of Mr Chan Hing Yin (陳卿賢) (“Hing Yin”)	4,800,000	16%
5th Respondent (“R5”)	Ms Wong Tsz Kwan Linda (王子君), daughter of Ms Chan Hing Man (陳卿敏) (“Hing Man”)	1,200,000	4%
	Total:	30,000,000	100%

4.  Before the trial, P1-P2 reached settlement with R1, R4-R5 and the claims were stayed as against R1 and discontinued as against R4-R5.  On Day 2 of the trial, P1-P2 reached settlement with R3 and the claim against her was discontinued.  Accordingly, this judgment only concerns P1-P2’s claims against R2 and his daughter (R6).

5.  It is P1-P2’s case that the shareholders and directors of the Company have all along been divided into 2 camps:

(1)  P1, his wife, the late Ms Tai Lai Wah (戴黎華)[2] (“P1’s wife”), and P2 are “Kam Yau Camp”; and

(2)  Hing Sum and his extended family members namely, R1-R6, Mr Chen Wah Chung Walter, the son of R2 (“Walter”), and Ms Tai Sau Man, the wife of R2 (“R2’s wife”), are part of “Hing Sum Camp”. 

6.  P1-P2 complain that R1-R6 have conducted the affairs of the Company in an unfairly prejudicial manner by:[3]

(1)  Abolishing the 0.2% minimum commission for Hing Sum Camp’s clients without consulting Kam Yau Camp, in breach of the “Fundamental Understanding” (as defined in §48(2) below);

(2)  Excluding P1-P2 from management in breach of law and the Fundamental Understanding;

(3)  Denying P1-P2 of information about the significant legal fees purportedly payable by the Company; and

(4)  Attempting to dilute P1-P2’s shareholding in breach of the Fundamental Understanding and in bad faith.

A.  FACTUAL BACKGROUND

7.  Unless otherwise stated, the following facts are taken from the Statement of Agreed Facts, the Agreed Chronology of Events or facts which are not in dispute.

A1.  Promising Securities Company

8.  P1 and Hing Sum were long-time friends which went back to 1965.

9.  On 11 April 1987, P1 and Hing Sum established Promising Securities Company (“PSC”) to carry on the business of provision of financial services including securities brokerage services to clients. 

10.  PSC was an exchange participant and held 2 Stock Exchange Trading Rights when SEHK was incorporated.

11.  Although PSC was registered as a sole proprietorship under the name of Hing Sum, it was in substance a partnership business between members of 2 families who contributed the following amounts as capital of PSC[4]:

Partners	Amount Invested (HK$)	Interest
Hing Sum	400,000	16%
R1	100,000	4%
Hing Yin	400,000	16%
R2	400,000	16%
Hing Ting	400,000	16%
Hing Man	100,000	4%
P1	600,000	24%
P1’s wife	100,000	4%
Total:	2,500,000	100%

12.  In 1990, PSC acquired Unit C, 14/F, Wing Cheong Commercial Building, 19-25 Jervois Street (“Property”) at HK$885,000 and used it as office.  In 1993, Hing Sum used Promising Trading Company (a company owned by him and R2) to acquire another property at 22/F Chun Wo Commercial Centre, 23-27 Wing Wo Street, Hong Kong (“22F Office”) and leased it to PSC and subsequently the Company as their office.

13.  In 2000, SEHK was listed.  PSC was awarded 1,610,000 shares in SEHK.  In the same year, Hing Sum sold 410,000 shares and used the proceeds to acquire 10,000 shares in Cheung Kong (stock code 001); 10,000 shares in Hutchison (stock code 013) and 31,367 shares in HSBC (stock code 005) all of which were registered in his name (collectively “Stocks”).

14.  PSC was in operation until 31 December 2003 when its trading licence expired. 

A2.  Establishment of the Company

15.  On 2 February 2001, the Company was incorporated with a view to take over the business of PSC so as to comply with the forthcoming securities trading regulations.  Except the Property and the Stocks which remained in the name of Hing Sum, all the assets of PSC including the accumulated profits of HK$73 million were injected into the Company. 

16.  Hing Sum, Hing Ting, R2 and P1 each subscribed for one share in the Company and were appointed as its first directors.  Hing Ting was also appointed as company secretary. 

17.  After several increases of capital and allotments of shares, by October 2008, the authorised and issued share capital of the Company was HK$30 million divided into 30,000,000 ordinary shares of HK$1 each. 

18.  Since 2 January 2004, the Company has been an exchange participant under Hong Kong Exchanges and Clearing Ltd in place of PSC and has taken over all the business of PSC.

19.  The composition of the Company’s board from 2002 is as follows:

Period	Directors	Remark
3/1/2002 – 9/8/2004	P1, Hing Sum, Hing Ting, R2
10/8/2004 – 1/9/2004	P1, Hing Sum, Hing Ting	R2 resigned
2/9/2004 – 15/12/2004	Hing Sum, Hing Ting	P1 resigned
16/12/2004 – 14/9/2013	P1, Hing Sum, Hing Ting	P1 was appointed on 16/12/2004
15/9/2013 – 20/5/2016	P1, Hing Ting	Hing Sum passed away on 15/9/2013
21/5/2016 – 25/5/2016	P1	Hing Ting passed away on 21/5/2016
26/5/2016 – 9/11/2016	P1, P2	P2 was appointed on 26/5/2016
10/11/2016 – 17/11/2016	P1, P2, R3, R6	R3 and R6 were appointed on 10/11/2016
18/11/2016 – 27/2/2017	P1, R2’s wife, R6	P2 was not re-elected as director and R2’s wife was elected as director at 2016 AGM
28/2/2017 – 31/8/2017	P1, R2’s wife, R6, Mr Mak Chi Leung (“Mak”)	Mak was appointed on 28/2/2017
1/9/2017 – 31/7/2019	R6, R2’s wife, Mak	P1 was not re-elected at 2017 AGM
1/8/2019 – 11/8/2019	Mak	R2’s wife and R6 resigned on 31/7/2019
From 12/8/2019	Mak,   Chan Ping Ping (陳平平)	Chan Ping Ping  was appointed on 12/8/2019

20.  Amongst the shareholders:

(1)  Only P1, Hing Sum and Hing Ting were involved in the management qua directors, and they directed the affairs and made all decisions for the Company. P1, Hing Sum and Hing Ting were Responsible Officers (“ROs”) of the Company from 2004;

(2)  In June 2005, P2 joined the Company as an account executive.  On 13 June 2005, he was appointed as a Licensed Representative of the Company[5];

(3)  R1 and R3-R5 had no involvement in the management of the Company, although R3 was appointed as a director for 7 days (10-17 November 2016);

(4)  Although R2 was appointed as one of the directors of the Company, he had to resign as director in August 2004 as he was not able to pass the examination for acting as director of a securities brokerage company.  Nevertheless, from time to time, R2 was asked by Hing Ting to sign some “minutes” of the “board” meetings of the Company approving the audited financial statements of the Company to signify his consent; and

(5)  It is R2’s case that all along, all major decisions were made by Hing Sum and Hing Ting, and all shareholders trusted and respected them.   

21.  On 15 September 2013, Hing Sum passed away whereupon R1 was appointed as administratrix of his estate. The shares in the Company together with the Property and the Stocks were transferred to R1 qua administratrix of Hing Sum’s estate. 

A3.  Missing Stock Incident

22.  In September 2014, a staff of the Company, Ms Chan Bun Yu (“Chan BY”), sold 1,600 HSBC shares belonging to a client without the latter’s authorisation and knowledge (“Missing Stock Incident”).  On 8 November 2014, the client found out about the missing stock. 

23.  On 23 December 2014, the SFC and the Company jointly appointed Mazars Corporate Recovery & Forensic Services Ltd (“Mazars”) to conduct an independent review in relation to the Missing Stock Incident.

24.  On 27 May 2015, Mazars delivered its Independent Investigation Report on the Missing Stock Incident.

A4.  Requisition

25.  On 21 May 2016, Hing Ting passed away[6], leaving P1 as the only director of the Company.  P1 procured the appointments of P2 to the following positions in the Company:

(1)  On 26 May 2016, P2 was appointed as an additional director.

(2)  On 23 June 2016, the SFC approved the appointment of P2 as a RO[7].

(3)  On 28 June 2016, P1 submitted a form to the SFC to add P2 as an additional authorised signatory, and remove R2, Hing Ting and Hing Sum as authorised signatories.

26.  By letter dated 14 October 2016, R1-R5 (holding 72% shareholding) requisitioned the board to convene an Extraordinary General Meeting (“EGM”) pursuant to s.566 of the CO for the purpose of passing the following resolutions (“Requisition”):

(1)  The appointment of P2 as executive director and secretary of the Company be “revoked retrospectively”;

(2)  R2, R3 and R6 be appointed as executive directors of the Company with effect from the date of the EGM; and

(3)  R6 be appointed as secretary of the Company with effect from the date of the EGM.

27.  No EGM was convened by P1-P2 in response to the Requisition.

28.  In the meantime, on 19 October 2016, P2 notified the SFC that R2 and Ms Shum Yan Yee Marceline had ceased to be licensed representatives of the Company, citing “dismissal” in relation to an investigation of a theft case as reason. 

29.  On 23 October 2016, P1’s wife passed away[8].

A5.  2016 AGM

30.  On 10 November 2016, P1-P2 approved the appointment of R3 and R6 as additional directors of the Company.  On the next day, R6 filed a Form ND2A at the Companies Registry regarding the appointments.

31.  On 18 November 2016 at 4:30pm, R6 gave 2 hours’ notice to P1-P2 to hold an Annual General Meeting (“AGM”) at 6:30pm on the same day (“2016 AGM”) for the purpose of considering the following matters[9]:

“1. Considering the report of the directors for the year ended 31 December 2015… and the independent auditor’s report to the members of the Company and the financial statements for the year ended 31 December 2015…; and

2. Other ordinary business of the Company in accordance with Table A and the Articles”.

32.  At the 2016 AGM, which was attended by P1-P2, R1-R3 and R4-R5[10]:

(1)  R6 proposed that all directors had to be re-elected;

(2)  Resolutions were passed by R1-R5 (a) re-electing P1 and R6 as directors; (b) electing R2’s wife as director; and (c) engaging T.O. Yip & Co Limited to prepare new audited financial statements for 2015; and

(3)  R1-R3 voted against the resolution to re-elect P2 as director[11].

33.  It is R2/R6’s case that all shareholders of the Company agreed to hold the 2016 AGM on short notice, evidenced by the consent form signed by each of them on 18 November 2016 (“Consent Form”). 

34.  It is P1-P2’s case that the 2016 AGM and the resolutions passed thereat were invalid in that (1) insufficient notice was given to the shareholders, in breach of article 52 of the Articles of Association of the Company (“AA”); (2) no notice was given in respect of the proposed re-election of directors, in breach of article 52 of the AA and s.462(4) of the CO; (3) no 28-days’ notice as required by s.578(1) of the CO had been given to P2.  The removal of P2 as director is the tipping point of the deterioration of the relationship between the two camps that led to the presentation of the Petition.

35.  After the 2016 AGM, the following events occurred:

(1)  On 21 November 2016, R6 caused 4 closed-circuit televisions (“CCTVs”) to be installed at the 22F Office without consulting P1.  According to R6, this was done to ensure safety, prevent crime, theft or misconduct or investigate potential crime, theft or misconduct and to comply with the Securities and Futures (Keeping of Records) Rules (Cap. 571O)[12], and they did not capture the trading room or P1’s office.  On the same day, P2 removed the CCTV installed at the room which had been used by P1 as his office. 

(2)  On 23 November 2016, R6 filed a Form ND2A with the Companies Registry stating that P2 had resigned as director with effect from 18 November 2016.

(3)  At the board meeting held on 1 December 2016 which was not attended by P1, R2’s wife and R6 resolved to terminate P2 as the Company’s company secretary and changed the email address of the Company to admin@promisingsec.com (“Admin Address”).  R6 notified the SFC and the Companies Registry regarding the changes on 9 and 23 December 2016 respectively.[13].

(4)  On 19 December 2016, Mak was approved by the SFC as a Licensed Representative of the Company[14]. 

(5)  On 19 December 2016, P2 notified the SFC that the Company’s email address be changed from Admin Address back to promisings@outlook.com (“Outlook Address”) with effect on the same day.

(6)  By letter dated 30 December 2016, R6 on behalf of the Company informed P2 that his employment was terminated with immediate effect, and his positions as Licensed Representative and RO of the Company ceased with immediate effect[15].

(7)  On 9 January 2017, R6 changed the locks to the main entrance of the 22F Office but did not provide a set of keys to P1.

(8)  On 9 January 2017, the Company issued a memorandum to P2 stating that he had been terminated with effect from 30 December 2016 and his act in entering the 22F Office constituted “trespass”, and a security guard was hired to ensure the safety and security of the Company.

(9)  On 10 January 2017, P2 retorted by filing with the Companies Registry a ND2A form (signed by P1) stating that he had been appointed as director of the Company on 18 November 2016.

(10)  On 21 February 2017, Mak was approved by the SFC as a RO of the Company[16]. 

(11)  On 27 February 2017 and 24 May 2017, Mr Shum Yiu Fai (“Shum”) was approved by the SFC as a Licensed Representative and a RO respectively[17].

A6.  Proposed Allotment

36.  Meanwhile, by letter dated 4 November 2016, the SFC informed the Company that it was of the view that the Company had been guilty of misconduct and/or was not a fit and proper person to remain licensed in that (1) it allowed Chan BY, an unlicensed person, (a) to perform regulated functions including opening accounts and placing orders for clients; (b) to steal 1,600 HSBC shares from client and caused the proceeds be paid into her husband’s account; and (c) to misappropriate the shares in 24 clients’ accounts which worth HK$8 million and caused the proceeds be transferred to her husband’s account (HK$5.19 million) and the balance to the accounts of 9 clients during the period from 1 January 2011 to 30 November 2014; and (2) it did not have any internal control policy in place until 2015, and proposed to order the Company to pay a fine of HK$14 million.

37.  At the board meeting held on 28 February 2017, it was resolved that a provision in the amount of HK$14 million be reserved for the possible SFC’s disciplinary action in relation to the Missing Stock Incident[18].

38.  On 3 March 2017, R6 on behalf of the board issued a notice to convene an EGM to be held on 20 March 2017 for the purpose of considering a resolution to increase the share capital of the Company[19].

39.  At the EGM held on 20 March 2017, the following resolutions were passed by the majority of the shareholders (with P1-P2 voting against) (collectively “Proposed Allotment”):

(1)  To increase the share capital up to HK$35 million at HK$0.25 per share (“Resolution 1”);

(2)  To allot up to 3,650,000 shares to Walter (“Resolution 2”); and

(3)  To allot up to 3,650,000 shares to R6 (“Resolution 3”)[20].

40.  On 28 April 2017, the SFC notified the Company that a fine of HK$3.5 million would be imposed[21].

41.  At the meeting held on 4 May 2017 (“May 2017 Meeting”), it was resolved inter alia that the Company would accept the SFC’s proposed fine of HK$3.5 million.  There is a  dispute as to whether this was a shareholders’ meeting (as P1-P2 claim) or a board meeting (as R2/R6 claim).

42.  It is R2/R6’s case that as the fine was much lower than anticipated, there was no need to implement Resolutions 1 to 3[22], but they did not inform P1-P2 of the same. 

A7.  Payment to P.H. Chin & Co. (“PHC”)

43.  At the May 2017 Meeting, a resolution was passed by all directors unanimously (P1, R2’s wife and R6) that the Company would instruct PHC “for the ongoing legal work and pay on account for the additional legal fees in the amount of HK$4,000,000”.

44.  On 9 May 2017, a cashier order in favour of PHC in the sum of HK$4 million was issued.  The amount paid to PHC was in addition to the HK$600,000 which had already been paid to PHC in settlement of their costs.

A8.  2017 AGM

45.  At the AGM of the Company held on 1 September 2017 (“2017 AGM”) at which P1-P2 were absent, R1-R5 voted against the re-election of P1 as a director of the Company.

46.  On 27 October 2017, P1-P2 through their solicitors, Messrs. Simon CW Yung & Co, sent a pre-action letter to R1-R6 and Walter complaining that the affairs of the Company had been conducted in a manner unfairly prejudicial to the interests of the Company and P1-P2, and requiring them to confirm within 28 days their agreement to purchase P1-P2’s shares at a “consideration satisfactory” to them failing which proceedings would be commenced against them.  On the same day, P1 resigned as director, Licensed Representative and RO of the Company. 

47.  R1-R6 did not respond to the pre-action letter.  P1-P2 presented the Petition on 9 May 2018.

B.  ISSUES

48.  Taking into account the settlement reached between P1-P2 with R1, R3-R5 and the Agreed List of Issues prepared by counsel, the issues which require determination of the court are:

(1)  Issue 1: Was PSC formed as a partnership between Kam Yau Camp and Hing Sum Camp on the basis of a personal relationship of mutual trust and confidence (“Fundamental Relationship”)?

(2)  Issue 2: Was there a relationship of mutual trust, understanding and expectation between Kam Yau Camp and Hing Sum Camp in relation to the operation of PSC that (“Fundamental Understanding”)[23]:

(a)  they would consult each other in respect of all decisions concerning the affairs of PSC, and neither of them would make any major decision on behalf of PSC without the consent of each other;

(b)  they would be given an equal share in the management of PSC and neither of them should be excluded from the management and operation of PSC;

(c)  Each of them would be entitled to participate in the affairs of PSC equally;

(d)  Hing Sum and P1 should be treated equally in the management and operation of PSC and should have an equal say in making major or strategic decisions affecting PSC’s affairs; and

(e)  Hing Sum and P1 should each take an executive role towards the management of PSC with equal status and benefits?

(3)  Issue 3: Did the Company continue to operate on the basis of the Fundamental Relationship and Fundamental Understanding, such that the Company would be considered a quasi-partnership?

(4)  Issue 4: Was Hing Sum Camp’s act in lowering the minimum commission for those trades in the accounts of Hing Sum Camp’s clients and those of their clients made without the knowledge and approval of Kam Yau Camp and, if so, was it unfairly prejudicial to Kam Yau Camp?

(5)  Issue 5: Even if (which is denied by R2/R6) there is a relationship of mutual trust and confidence and Fundamental Understanding, whether Kam Kau Camp breached the Fundamental Understanding by unilaterally appointing P2 as director, thereby excluding R1-R5 from the management of the Company?

(6)  Issue 6: Has Hing Sum Camp unfairly prejudiced Kam Yau Camp by excluding them from the management of the Company?

(7)  Issue 7: Has Hing Sum Camp unfairly prejudiced Kam Yau Camp by denying Kam Yau Camp access to financial information in relation to the legal fees in the total sum of HK$4,600,000 paid by the Company to PHC?

(8)  Issue 8: Has Hing Sum Camp unfairly prejudiced Kam Yau Camp by attempting to dilute P1-P2’s shareholding in the Company from 28% to 4.9% through the Proposed Allotment?

(9)  Issue 9: If the answer to Issues 4, 6, 7 and/or 8 above is in the affirmative, what if any remedies should be granted in favour of P1-P2?

C.  DISCUSSION

C1.  Relevant Principles

49.  Generally, shareholders are entitled to exercise their legal rights in accordance with the articles of association and the agreement reached between them unless the exercise of legal rights are subject to equitable constraints.  The principle has been explained by 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.” (underlined added)

50.  The same principle applies in the context of an “unfair prejudice” petition under s.724 of the CO.  In O’Neill v Phillips [1999] 1 WLR 1092, 1101D – 1102B, Lord Hoffmann explained the circumstances which 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.” (underlined added)

51.  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, at 1098D – 1099F; Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501 at §§43 – 45, per Ma CJ and Lord Millett NPJ).

52.  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).

53.  A useful summary of the principles can be found in Grace v Biagioli [2005] EWCA Civ 1222, §61:-

(1)  The concept of unfairness, although objective in its focus, is not to be considered in a vacuum.  An assessment that conduct is unfair has to be made against the legal background of the corporate structure under consideration.  This will usually take the form of the articles of association and any collateral agreements between shareholders which identify their rights and obligations as members of the company.  Both are subject to established equitable principles which may moderate the exercise of strict legal rights when insistence on the enforcement of such rights would be unconscionable.

(2)  It will not ordinarily be unfair for the affairs of a company to be conducted in accordance with the provisions of its articles or any other relevant and legally enforceable agreement, unless it would be inequitable for those agreements to be enforced in the particular circumstances under consideration.  Unfairness may consist in a breach of the rules or in using rules in a manner which equity would regard as contrary to good faith.

(3)  To be unfair, the conduct complained of need not be such as would have justified the making of a winding-up order on just and equitable grounds.

(4)  A useful test is always to ask whether the exercise of the power or rights in question would involve a breach of an agreement or understanding between the parties which it would be unfair to allow a member to ignore.  Such agreements do not have to be contractually binding in order to found the equity.

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

54.  The above authorities illustrate that, in the context of a “just and equitable” petition or an “unfair prejudice” petition, the petitioner needs to show that the respondents have acted in breach of (1) what the parties agreed in contract (including the articles of association which is a statutory contract binding upon all shareholders) such that there was a breach of his legal rights (legal rights); or (2) what the parties have accepted to be the practice or the manner in which the affairs of the company should be conducted, even though such practice or manner is inconsistent with the terms of the contract or articles (accepted practice).  However, the court expects a petitioner who relies on accepted practice to demonstrate that there has been a relatively long period of acceptance of the practice in question by the shareholders concerned such that they cannot insist on their strict legal rights.  Further, even if there was no breach of legal rights on the part of the respondents, if the conduct complained of involved the respondents having exercised their legal rights in breach of the equitable constraint on such rights, it may warrant the court exercising its equitable jurisdiction and grant the relief sought by the petitioner.  A typical case is where the petitioner has the right to participate in, but has been excluded from, the management by the respondents exercising their voting rights to remove him as a director. 

55.  It is necessary to state the principle as very often, the parties and their legal representatives do not really appreciate the true principles and seem to think that by calling a company a quasi partnership, the petitioner can complain about the conduct of the respondents even though the conduct did not involve any breach of legal rights or accepted practice and there was no equitable constraint on the exercise of legal rights on the respondent.  A typical example is where the company is the vehicle through which the commercial parties cooperate with each other and their rights and obligations are set out in the articles of association and shareholders’ agreements.   

C2.  Issues 1 & 2: Basis of Operating PSC

56.  In my view, it is indisputable that PSC was in substance a partnership between members of the families of Hing Sum and P1 and was formed and operated on the basis of the Fundamental Relationship and Fundamental Understanding.  This is amply borne out by the following evidence, which are not in dispute:

(1)  P1 has since 1971 been engaged in securities business.  He worked at a security company as floor trade representative and accountant and P1’s wife was a staff of the settlement department.  In 1985, Hing Sum who came from the same village as P1 and had then known him for over 20 years, proposed to start a securities business together so as to leverage on P1’s strong clientele and experience in the industry[24].

(2)  Due to insufficient funding, P1 and Hing Sum invited Madam Law to be their partners and they set up Trademore Securities Company (“Trademore”).  P1 and Hing Sum both acted as floor trading representatives, while P1’s wife and Madam Law were responsible for settlement.  In addition, P1 was responsible for accounting matters.  The cooperation did not last long owing to their disagreement with Madam Law[25]. 

(3)  In 1987, P1 and Hing Sum left Trademore in 1987 and started PSC as their business.  P1 and Hing Sum invited their respective family members to invest in PSC and their interests were represented by the amounts they invested (see table in §11 above).  Although PSC was a sole proprietorship registered in Hing Sum’s name, it was in substance a partnership between P1, Hing Sum and their respective family members[26].

(4)  The daily operations and affairs of PSC were handled by P1, Hing Sum and P1’s wife, with P1’s wife responsible for settlement, P1 responsible for finance and accounting work, and P1 and Hing Sum acted as floor trading representatives of PSC.  P1 and Hing Sum were joint decision markers for PSC[27].

(5)  It was only until 1990 that Hing Ting began to learn the operation of PSC.  His role was subordinate to P1, who taught Hing Ting how to deal with finance and accounting matters and gradually delegated part of the accounting and settlement matters to him[28]. 

(6)  PSC was managed in a very informal manner.  There was no partnership deed or any written agreement. All partners had trust and confidence in P1 and Hing Sum, and left the management of PSC to them.

(7)  Despite his investment in PSC[29], R2 had no involvement in PSC.  Nor does he have any personal knowledge about how PSC was formed or operated including the reason for registering PSC as a sole proprietorship.[30]  R2 accepts in cross-examination that he and his siblings trusted Hing Sum could manage PSC well and would protect their interests. 

57.  It is not clear how R2/R6 can dispute the existence of the Fundamental Relationship and Fundamental Understanding when:

(1)  It is R2’s own evidence that he had no involvement in the management or operation of PSC[31] and does not have any personal knowledge as to how PSC was formed or operated;

(2)  R6 did not have any involvement in PSC.  Nor does she have any personal knowledge about any matter concerning PSC; and

(3)  During cross-examination, P1’s evidence dealing with relationship of parties, background, business and manner of cooperation including the Fundamental Understanding[32] has not been challenged.   

58.  Nevertheless, Mr Vincent Lam (appearing with Mr Kurt Ng), counsel for R2/R6, submits that Issues 1 and 2 should be answered in the negative because:

(1)  There was no division of 2 camps.  The partners each had his or her own reason for joining PSC.  For example, R2 joined the partnership in support of his brother, Hing Sum.[33]

(2)  PSC was a continuation of Trademore.  It is P1’s evidence that, after disagreements between Hing Sum and Madam Law on the operations of Trademore, he and Hing Sum decided to set up PSC. There is no explanation as to how a “business partnership” in Trademore transcended into a partnership built on mutual trust and confidence in PSC.[34]

(3)  There is no evidence as to how Hing Sum and P1 reached agreement on the Fundamental Relationship and Fundamental Understanding on behalf of their family members.[35]

(4)  In May 2016, P1 appointed P2 as director of the Company at the exclusion of Hing Sum Camp.[36]

59.  I do not think it is open to Mr Lam to dispute Issues 1 and 2, when P1’s evidence on the manner of cooperation including the Fundamental Understanding goes unchallenged.  In any event, there is no merit in the  submissions.   

60.  As regards the first point, the partners’ motive in joining PSC is irrelevant.  The fact that R2 decided to join the partnership in order to support his brother is consistent with PSC being founded and operated on the basis of the Fundamental Relationship and Fundamental Understanding.

61.  In respect of the second point, Trademore was a different business and the partners were different.  More importantly, the fact that P1 and Hing Sum decided to form another business and invited their respective family members to invest in the business shows that P1 and Hing Sum trusted and had confidence in each other, and they wanted to continue their cooperation in the form of PSC. 

62.  As for the third point, the crux of the matter is that despite the existence of other partners and their substantial capital contribution, P1 and Hing Sum were the only persons who managed the business of PSC and they made all decisions jointly.  As submitted by Mr Patrick Siu (appearing with Mr Rex Yam), counsel for P1-P2, this indicates that P1 and Hing Sum represented their respective family members in the partnership and that they operated PSC on the basis of the Fundamental Relationship and Fundamental Understanding. 

63.  In respect of the last point, I am unable to see how P2’s appointment negates the existence of the Fundamental Understanding.  The appointment was made following the demise of Hing Ting, which left the Company with P1 as its only director.  It was necessary to appoint an additional director to the Company and no other shareholder had indicated their willingness to be so appointed.  I will deal with this contention in more detail under Issue 5. 

C3.  Issue 3: Basis of Operating the Company

64.  In my judgment, the undisputed facts support P1-P2’s case that the Company was formed and operated on the basis of the Fundamental Relationship and Fundamental Understanding until the demise of Hing Sum:

(1)  The only reason for incorporating the Company was to comply with the new regulatory regime which required all securities brokerage business to be operated by a company. 

(2)  All the partners of PSC became shareholders of the Company and their shareholdings in the Company are the same as with their interests in PSC.  None of the partners were required to pay any consideration for the shares issued to them.   

(3)  There is no evidence to suggest that the shareholders considered that the business or affairs should thenceforth be conducted on the basis of the AA. 

(4)  P1 and Hing Sum continued to manage the business and affairs qua directors, and they made all decisions for the Company.  They assumed the important position as the ROs of the Company.

(5)  P1 continued to manage the finance and accounting matters of the business and of the Company.  Under cross-examination, R2 accepts that P1 was all along in charge of and managed the finance and accounting matters of the Company, and he never asked P1 about either matter.   

65.  The fact that the Company was formed and operated on the basis of the Fundamental Relationship and Fundamental Understanding until the parties’ dispute began in 2016 is consistent with, and corroborated by, the following facts and matters. 

66.  First, no formal meetings, be it board meeting or general meeting, were ever convened or held by the Company prior to the 2016 AGM.  Instead, only “paper minutes” were prepared and signed by the directors or shareholders, and there was no fixed pattern as to how such “minutes” were to be signed.  For example, R2 signed the “board minutes” dated 27 April 2016 for the purpose of approving the audited financial statements of the Company even though he was not a director. 

67.  Second, as R2 fairly accepts at trial, the two camps did not follow the AA or the CO when dealing with the affairs of the Company.  Apart from not holding an AGM every year as required by the CO, the directors did not retire or stand for re-election at an AGM, as required by the AA.

68.  Third, the conduct of R1-R6 after the demise of Hing Sum in 2016 shows that the Fundamental Understanding was something known to and accepted by all shareholders in that:

(1)  They were content to let P1 and Hing Ting to continue to act as directors and managed the affairs of the Company in the same way as they did in the past; and

(2)  At the 2016 AGM, R1-R5 voted for the appointment of P1 as director, despite their disagreement over P1’s act in procuring P2 to be appointed as a director. 

69.  As stated above, Mr Lam does not challenge P1’s evidence that the Company was formed on the basis of the Fundamental Relationship and Fundamental Understanding.  In his cross-examination, Mr Lam only challenges P1’s evidence that the Fundamental Understanding continued to exist during the period from 2001 and 2013 when Hing Ting was also a director of the Company.  In response to those lines of questions, P1’s evidence is that:

(1)  While there was no requirement that any resolution had to be passed by all directors unanimously, prior to making any decision, he and Hing Sum always consulted with each other, and no decision would be made on behalf of the Company without consulting the other; 

(2)  The position remained the same during the period from 2001 to 2013 when Hing Sum, Hing Ting and he were directors.  Only he and Hing Sum had one “vote”.  All decisions had to be discussed and could only made with the consent of both Hing Sum and him. 

(3)  Although it is put to P1 that Hing Ting as director also had one “vote”, P1 does not agree with the suggestion.  I note that there is no evidence, documentary or otherwise, in support of Mr Lam’s suggestion that Hing Ting had or did exercise the right to “vote” during the period when he was a director, or that any decisions of the Company were made by the directors in the manner he suggests.  To the contrary, it is not in dispute that until the 2016 AGM, the Company did not hold any board meeting or AGM, and all the affairs were directed and decided by Hing Sum and P1.   

70.  I accept P1’s evidence, which is consistent with and corroborated by the undisputed facts discussed in §§64-68 above. 

71.  R2/R6’s case is that the Company was not a quasi-partnership and the shareholders’ rights were governed strictly by its constitution.  In light of the undisputed facts set out in §§56 and 64 above, I do not think that there is any evidential basis for R2/R6 to advance such a case.  It is clear from the evidence that until Hing Sum Camp sent the Requisition to P1-P2 in October 2016, no one in the Company had ever considered, let alone acted in accordance with, the AA. 

72.  Nevertheless, for completeness, I will explain why I consider the submissions advanced by Mr Lam to be wholly without merit.   

73.  Mr Lam submits that the existence of the Fundamental Relationship and Fundamental Understanding is contradicted by the following facts and matters:

(1)  After P2 had failed to be re-elected as director at the 2016 AGM, P1 signed a Form ND2A on 10 January 2017 to state that P2 had been appointed as a director on 18 November 2016, without consulting Hing Sum Camp.[37]

(2)  On 19 December 2016, P2 submitted a notification to the SFC (“19 Dec Notification”) stating that the Company’s email would be changed from the Admin Address to the Outlook Address.[38]

(3)  From 2 September 2004 to 15 December 2004, Hing Sum and Hing Ting were the only directors of the Company.  If the Fundamental Relationship and Fundamental Understanding existed, P1 would not have resigned without appointing any director from Kam Yau Camp.[39]

(4)  From 10 August 2004 to 1 September 2004, and from 16 December 2004 to 14 September 2013, for nearly 10 years, the directors were P1, Hing Ting and Him Sum.  There was clearly no “equal representation” as alleged by P1-P2.[40]

74.  As regards the first point:

(1)  I accept P1’s and P2’s evidence that the reason for preparing and filing the Form ND2A was that, to their minds, R1-R6’s attempt to remove P2 as a director at the 2016 AGM was wrongful and invalid. 

(2)  P1-P2’s view was well founded.  It is P1’s unchallenged evidence that at the 2016 AGM, the shares remained registered in Hing Ting’s name and R3 was not a shareholder.  More importantly, although the shareholders consented to holding the 2016 AGM on short notice, there was no notice given to the shareholders that they would be asked to consider and vote on the appointment of directors.  The invalidity of the notice was considered further in Section C6.1 below.   

(3)  More importantly, in signing and filing the Form ND2A, P1-P2 were not making a decision to appoint P2 as director. Rather, they signed and filed the Form ND2A for the purpose of reversing what they considered to be an invalid decision purportedly made by R1-R5 at the 2016 AGM.

75.  In respect of the second point, as can be seen from the facts set out in §35(3) above, it was R2/R6’s decision to change the email address which the Company had been using to communicate with the SFC without consulting P1 or P2.  I accept P2’s evidence that he submitted the 19 Dec Notification because the RO of the Company had always used the Outlook Address to communicate with the SFC, but someone had changed the Company’s email address without informing him or P1.  During cross-examination, R6 accepts that by changing the email address, P2 was merely trying to revert to the email which the Company had been using to communicate with the SFC.  In other words, in submitting the 19 Dec Notification P2 was only seeking to restore the status quo ante, rather than making a decision on behalf of the Company without consulting Hing Sum Camp. 

76.  As for the third point, I do not regard P1’s absence from the board for a period of 3 months would undermine the existence of the Fundamental Understanding.  This is particularly so when the evidence shows that since the inception of the Company, P1 was involved in the management of the Company and he made all decisions for the Company jointly with Hing Sum. 

77.  The fourth point does not avail R2/R6, in light of my acceptance of P1’s evidence that Hing Sum and P1 had been the decision makers of the Company.

78.  For the above reasons, I find that the Company was formed and operated on the basis of the Fundamental Relationship and Fundamental Understanding, which were accepted by all shareholders. This creates an equitable constraint in the exercise of legal rights on the part of R1-R5 such that they could not exercise their voting rights to remove P1 as director or to exclude P1 from the management of the Company in the absence of any misconduct (none has been suggested prior to or at the 2017 AGM).   

C4.  Issue 4 – Minimum Commission

79.  P1-P2 complain that Hing Sum Camp has unilaterally abolished the minimum commission requirement without consulting them.

80.  P1-P2’s pleaded case is as follows:[41]

(1)  It has been the policy and practice of the Company that the Company should charge at least 0.2% (“Minimum Commission”) on every trade of listed shares carried on for the clients.

(2)  In June 2016, it was discovered that without the knowledge and approval of P1-P2 or the board, R1-R3 caused a change to the computer settlement system whereby the Minimum Commission was changed from 0.2% to 0.1-0.15% for those trades concluded “in the securities accounts of the Hing Sum Camp and those of their clients”, resulting in serious loss and damage to the Company.

(3)  Such unilateral change of the Minimum Commission was in breach of the Fundamental Relationship and Fundamental Understanding.

81.  At trial, Mr Siu clarifies that P1-P2’s complaints are confined to those trades conducted by Hing Sum Camp for their clients, but not the trades conducted by shareholders in Hing Sum Camp themselves (i.e. R1-R5).[42]

82.  R2/R6’s pleaded defence[43] is that there was “no reason” and “it would make no business sense” for the Company to maintain any Minimum Commission following the abolition of the minimum commission rules in April 2003, and no approval by the board or any person was required before reducing the commission rate. 

83.  There is no dispute that:

(1)  Until 30 March 2003, the Company was required to charge a minimum commission rate on every trade of listed shares carried on for the customers;

(2)  On 1 April 2003, SEHK abolished the rules on minimum commission rates;

(3)  Under cross-examination, P1 accepts that in 2009, there was discussion about reduction of commission for the trades carried on through the accounts maintained by the shareholders;

(4)  During cross-examination, R2 gives evidence that as far as the accounts of his clients were concerned, at least before November 2016, he continued to charge the Minimum Commission.  Mr Siu has not identified a single client account in which R2 charged less than 0.2% commission;  

(5)  R2 says under cross-examination that in fact, P1 and Hing Sum had decided to charge a lower commission of 0.15% for all the trades carried on through the accounts of P1 and Hing Sum and their respective family members.  It was after R2 had learnt this from a staff that he began to reduce the commission for the trades carried on through his and his family members’ accounts to 0.15%.  His evidence is not being challenged;

(6)  The commissions charged against the trades conducted by the Company for each clients were recorded in the computer system, and were readily accessible to P1-P2 at any time.  The same information was also shown in the statements issued to the clients; and

(7)  In particular, in the monthly rebate statements, the commissions charged against the clients and the rebates to the sales concerned were listed, those statements were available in the computer system and could be accessed by P1-P2 at any time. 

84.  There is no merit in P1-P2’s complaint. 

85.  First, the reduction of commission charged for the trades carried on through the accounts of P1 and Hing Sum and their respective family member clients was a matter decided by P1 and Hing Sum, and they themselves benefitted from the reduction.  I am unable to see how P1 can complain about a decision made by him and Hing Sum.

86.  Second, as can be seen from the undisputed facts summarised in §83 above, the reduction in commission had been in place before 2013 (i.e. the demise of Hing Sum), it is inconceivable that P1, who was all along in charge of finance and accounting matters, would not know about the change. 

(1)  This is particularly so when P1 had complete access to the Company’s computer system including the statements issued to the clients and the monthly rebate statements.  When this is put to P1 under cross-examination, he claims that he is not able to read English and do not know how to use computer.  I do not think that his evidence in this regard is truthful.  When P1 gives evidence on his complaint about not being able to access the computer he had been using at work, he is at pain to emphasise how important it was for him to have access to the computer system.   

(2)  Further, if P1 did not read any information kept in the computer system, including the statements and monthly rebate statements as he claims, it is difficult to see how he could perform his duty in managing the finance and accounting matters of the Company or to act as the director and RO of the Company.

(3)  Most importantly, P1-P2 cannot pretend that they did not know about the reduction in Minimum Commission, when the trades carried on through their accounts were also charged the reduced commission rate. 

87.  It is not open to P1-P2 to complain about the reduction in Minimum Commission, which was known to and accepted by (at least) P1, as I so find.   

88.  Third, the complaint as pleaded is that the reduction of the Minimum Commission only applied to Hing Sum Camp and their clients.  However, it is clear from the evidence that the reduction applied to the accounts of all shareholders and their family members.  Although Mr Siu tries to salvage the complaint by saying that it is only directed to those trades carried on by Hing Sum Camp’s clients, no such clients have been identified or put to R2/R6 during cross-examination. 

89.  Fourth, I do not consider the reduction in Minimum Commission for some clients (even if made out) to be unfair, still less prejudicial to the interests of the Company.  P1-P2 have not adduced any evidence to show that the interests of the Company has been prejudiced in any way. 

90.  I reject P1-P2’s complaint about the reduction of the Minimum Commission.

C5.  Issue 5 – Appointment of P2

91.  The next issue concerns the effect of P2’s appointment as a director on 26 May 2016, 5 days after the demise of Hing Ting.

92.  R2/R6 contend that by unilaterally appointing P2 as a director, P1 has wrongfully excluded R1-R5 from management, and should be denied of any relief for unfair prejudice.  Reliance is placed on Harbour Front Ltd v Leung Yuet Keung & Others [2018] HKCFI 358, where Harris J held (§§42, 44) that if a shareholder acts in such a way as to destroy the mutual trust which was central to any agreement that he could take part in management, “he loses the right to argue that his exclusion alone justifies the court making a winding-up order on the just and equitable ground or granting relief for unfair prejudice”. 

93.  The contention is wholly devoid of merit.   

94.  First, it is clear that P2 was only appointed as a director to fill the vacancy after the demise of Hing Ting, rather than to exclude or oust R1-R5 from management of the Company:

(1)  Regulation 5 of Table A in the First Schedule to the former Companies Ordinance (Cap 32) (“Table A”), which applies to the Company, provides that unless the Company in general meeting shall otherwise determine, the number of directors shall not be less than 2. 

(2)  The Company required at least 2 licensed persons to act as its  directors. 

(3)  P1’s evidence is that he told R2 that in the absence of any suggestion, he would proceed to appoint P2 as a director, and that since no alternative candidate was put forward, P1 appointed P2.

(4)  Under cross-examination, R2 fairly accepts that (a) none of R1, R4 or R5 had any involvement in dealing with the affairs of the Company; (b) he did not know how the Company operated and he did not request to be appointed as a director; (c) amongst the shareholders, only P1 and P2 had experience in dealing with the Company’s operation.  In effect, R2 acknowledges that P2 was the only viable candidate to fill the vacancy.

95.  Second, I accept P1’s evidence that he had consulted R2 before appointing P2 as a director.  Although R2’s evidence is that P1 only consulted him on whether to appoint R2 as RO (which position was also vacated upon Hing Ting’s death, and had to be filled as required by the Securities and Futures Ordinance (Cap 571)), rather than as director, it is inherently unlikely that P1 would only mention to R2 the appointment of RO, but not the appointment of director given that both positions were important and had to be filled after the death of Hing Ting. 

96.  Third, as R2 accepts under cross-examination, after the passing of Hing Ting, P1 had not refused any request from Hing Sum Camp to be represented in the board of directors. 

97.  Fourth, not long after P2’s appointment, on 10 November 2016, P1-P2 passed a board resolution appointing R2’s wife and R6 as additional directors of the Company.  Subsequently, at the 2016 AGM held on 18 November 2016, P1-P2 qua shareholders voted in favour of appointing R2’s wife and R6 as directors.  This shows that, far from excluding Hing Sum Camp from management, P1-P2 took step to ensure that R1-R5 had representation at the board.  This alone is sufficient to negate any suggestion that P1-P2 had the alleged intention to exclude R1-R5 from management.

98.  For the above reasons, I hold that in appointing P2 as a director, P1 did not act in breach of the Fundamental Understanding and, in any event, P1-P2 did not exclude R1-R5 from management of the Company. 

C6.  Issue 6 – Exclusion of P1-P2 from management

99.  The next issue is whether R2/R6 have unfairly prejudiced P1-P2 by excluding them from the management of the Company. 

100.  In light of my finding that the Company was formed and operated on the basis of the Fundamental Relationship and the Fundamental Understanding, there was an equitable constraint on the shareholders not to exercise their voting right in a way which would constitute a breach of the Fundamental Understanding.  The right to participate in the management of the Company applied to both P1-P2 as Hing Sum Camp had 2 directors (R2’s wife and R6) at the relevant times. 

101.  In exercising their voting right at the 2016 AGM and the 2017 AGM in such a way which led to P2 and P1 not being re-elected as directors, R1-R5 acted in breach of the Fundamental Understanding.  Such act was unfairly prejudicial to the interests of P1-P2 as they have been denied of the right to participate in the management of the Company, which was an important right upon which the Company had hitherto been formed and operated. 

102.  For completeness, I will deal with the other contentions raised by the parties under Issue 6. 

103.  In the Agreed List of Issues, various acts of exclusions are identified[44] but they may be dealt with under 3 heads of complaints:

(1)  the removal or non-election of P2 as director at the 2016 AGM;

(2)  the removal or non-election of P1 as director at the 2017 AGM; and

(3)  the appointment of Mak and Shum as ROs of the Company.

C6.1  Failure to elect P2 at 2016 AGM

104.  Regulation 52 of Table A provides that:

(1)  An AGM and a meeting called for the passing of a special resolution shall be called by at least 21 days’ notice in writing.

(2)  However, an annual general meeting shall, notwithstanding that it is called by shorter notice, be deemed to have been duly called if it is so agreed by all the members entitled to attend and vote at the meeting.

105.  Under common law, a matter cannot be deliberated upon at the meeting if it is outside the scope of the business that is specified in the notice of that meeting.  A notice that makes reference to, but fails to state with sufficient particularity, the general nature of the business to be transacted at the proposed meeting is inadequate and may render the meeting and hence the resolution passed thereat invalid (Law of Companies in Hong Kong, 3^rd ed, §§9.053 – 9.054).

106.  Adequacy of notice helps to ensure that the decisions of the company in general meeting on matters relating to the interests of the company and members are made on an informed basis.  The question is whether the information contained in the notice fully and fairly informs the shareholder about the matter upon which he or she will have to vote (Law of Companies in Hong Kong, §§9.057 – 9.058).

107.  A notice of meeting must not be “tricky”, “misleading” or “inadequate”.  Directors have a duty in equity to give shareholders sufficient information for them to make an informed decision about proposals to be put to them at meetings.  A lack of information may constitute misrepresentation by omission.  It is a matter of sensible judgement by the directors in each case and ultimately by the court if complaint is made to it (Company Meetings and Resolutions: Law, Practice, and Procedure, 3^rd ed, §§3.22 – 3.23).

108.  The requirement for adequate notice is now enshrined in s.576(1) of the CO, which requires inter alia a company to ensure that a notice of a general meeting “states the general nature of the business to be dealt with at the meeting” and, if a resolution is intended to be moved at the meeting, “includes notice of the resolution” and “includes or is accompanied by a statement containing the information and explanation, if any, that is reasonably necessary to indicate the purpose of the resolution”.

109.  In the present case:

(1)  The document said to constitute valid notice to convene the 2016 AGM at short notice is the Consent Form dated 17 November 2016 (one day before the meeting), which was signed by the shareholders at the 2016 AGM.

(2)  P1-P2 contend that (a) they did not sign the Consent Form and (b) in any event, the Consent Form was tricky, misleading and inadequate.

(3)  I reject the first point.  The Consent Form on its face bears the signature of all 5 shareholders.  When this is put to P1 during cross-examination, he accepts that he and P2 did sign the Consent Form and the statement at §33 of his 6^th affirmation (i.e. he had never seen the Consent Form) is wrong.

(4)  As regards the second point, R2/R6 contend that retirement and appointment of director fell within the scope of §2 of the Consent Form (i.e. “other ordinary business of the Company in accordance with Table A and the Articles”) and article 7 of the AA provides that all directors shall retire from office and shall be eligible for re-election at every AGM.  I am unable to accept their contention. 

(5)  It seems to me that the Consent Form was plainly inadequate.  There was no mention about retirement or election of directors.  The inadequacy must be seen against the fact that prior to the 2016 AGM, the Company never convened or hold any AGM nor require any director to retire from office.  As no adequate notice was given to P1-P2 about the retirement or election of directors, the resolution against the re-election of P2 as director (with R1, R2 and R4-R5 voting against) was invalid. 

110.  Even if, contrary to my view, proper notice regarding the retirement and re-election of directors at the 2016 AGM had been given to P1-P2, it seems to me that R2/R6’s conduct in seeking to remove P2 as director at the 2016 AGM was unfairly prejudicial to the interests of P1-P2 for the following reasons:

(1)  Until the 2016 AGM, the Company  never convened or hold any general meeting.  Nor did the Company or any shareholder ever suggest, still less require, any director to retire from office at any general meeting, despite the express requirements of the AA and the CO.

(2)  Instead, the Company had always been managed by the 2 camps on the basis of the Fundamental Understanding without any objection from any shareholder.  The shareholders including R2 must be taken as having accepted that no director would be required to retire from office at an AGM.

(3)  If R2 wanted to depart from the Fundamental Understanding, at the minimum, he should give clear notice to all shareholders that at the 2016 AGM, the shareholders would be asked to consider a resolution to change the manner in which the Company had hitherto been managed by requiring all directors to retire at every AGM.  This was not done and no explanation has been provided.  When R6 is asked why she did not give any notice to the shareholders about retirement or appointment of directors before the 2016 AGM, the only explanation provided is that she followed the requirement of the AA.  This cannot be a valid reason as the Company never followed the requirement of the AA.  It was not open to R6 (who is not even a shareholder) or R2 to unilaterally change the manner in which the Company had been managed, let alone without any proper opportunity given to all the shareholders to consider and discuss the matter.

(4)  There was no good reason to justify the non-election of P2 as director.  As can be seen from the minutes of the 2016 AGM, there was no discussion about the performance of P2 prior to R1, R2 and R4-R5 voting against the resolution to re-elect P2 as director.  Given that the Company required 2 licensed persons to be its directors, their votes against the appointment in effect rendered the Company unable to meet  the regulatory requirement.  Although R6 subsequently asserted that P2 had not discharged his duty as director, no particular or detail was provided by her.

111.  For the above reasons, the resolution against the re-election of P2 as director (with R1, R2 and R4-R5 voting against) was invalid.  Further, R2/R6’s conduct in seeking to remove P2 as director at the 2016 AGM was unfairly prejudicial to the interests of P1-P2.

C6.2  Failure to elect P1 at 2017 AGM

112.  In R2/R6’s Closing, they rely on the following matters to justify their act in voting against the resolution to elect P1 as director at the 2017 AGM:

(1)  P1 was responsible for the Missing Stock Incident as he was a director and was responsible for finance and accounting matters. Instead of taking responsibility, P1 pointed fingers at others such as R2 and Hing Ting.[45]

(2)  P1 unilaterally filed the Form ND2A on 10 January 2017 to purportedly appoint P2 as a director.[46]

(3)  On 26 May 2017, P1 accidentally sold 4,973 shares in China Resources Land Ltd (“CRLL”) from the account of Ms Chan Kam Lee (“CKL”) (a client of P1), even though CKL only had 4,913 shares in CRLL.  To cover up this mistake, P1 borrowed stocks belonging to another client (Luk Siu Lan) without the latter’s authority.[47]

(4)  P1 should be held accountable for the insufficient audit evidence provided to the auditors, which resulted in the auditors issuing a disclaimer of opinion in their report dated 9 June 2017.[48]

(5)  While he was still a director of the Company, P1 diverted the business of the Company in that he caused some of the Company’s clients to move their shares to Afflux Securities Ltd (“Afflux”), where P1 was subsequently employed as a Senior Consultant.[49]

113.  The above matters are based on R6 Aff §§66-91 where she devoted 13 pages to describe a series of alleged “misconduct” on the part of P1 including the event leading to suspension of P1’s licence for one month in August 1997, almost 20 years prior to her involvement in the Company and of which she has no personal knowledge.  There is no evidence to suggest that in voting against the appointment of P1 as director, R1-R5 had in fact taken into account any of these alleged “misconduct” referred to by R6.  It seems to me that these allegations are no more than ex post facto justifications introduced by R6 to justify the act of R1-R5 in voting against the resolution for appointing P1 as director.   

114.  In any event, I do not think that any of the alleged “misconduct” justify R1-R5’s decision in removing P1 as director.

115.  As regards the Missing Stock Incident, I accept Mr Siu’s submission that there was no basis for R2/R6 to put the blame on P1 when (1) the relevant cheque involved in the Missing Stock Incident was not signed by P1, but by R2 and Hing Ting; (2) the fact that (on R2/R6’s case) the Missing Stock Incident was reported to Hing Ting suggests that it was Hing Ting, not P1, who should be primarily responsible for the Incident; (3) the Independent Investigation Report prepared by Mazars did not identify any negligence on P1’s part; and (4) as evidenced by the SFC’s letter dated 4 November 2016, the Company had told the SFC that it was Hing Sum and Hing Ting who had failed to implement the policy of ensuring only fit and proper persons could perform the relevant duties. 

116.  In relation to the filing of the Form ND2A, as stated in §74 above, P1 was merely seeking to reverse what he considered to be an invalid resolution purportedly resolved upon by R1, R2 and R4-R5 at the 2016 AGM.  It was not a “misconduct”.

117.  As regards the short sell incident, I accept P1’s evidence that he oversold 60 shares in CRLL (which were script shares) due to an oversight, and be immediately took remedial measure by borrowing 60 shares from Luk Siu Lan after obtaining her consent to do so.  Despite R6 reporting the matter to the SFC, no action has been taken by the SFC.  I am unable to see how R2/R6 can elevate the incident as a “misconduct”.

118.  As for the disclaimer of opinion in the 2016 auditors’ report:

(1)  In their pleading[50], R2/R6 allege that P1 provided “insufficient audit evidence” to the auditors without providing any particulars as to what evidence the auditors considered insufficient or why this constituted a “misconduct” on the part of P1. 

(2)  At trial, Mr Lam points to p.1 of the auditors’ report, which suggested that one of the bases for disclaimer of opinion was that “the manually operated accounting system resulted in numerous errors”.  If and insofar as R2/R6 allege that P1 was responsible for the Company using a manual (instead of computerised) accounting system in 2016, I reject the allegation.  As submitted by Mr Siu, (a) there is no suggestion that P had ever objected to upgrading the Company’s accounting system, and (b) in any case, if R2/R6 considered that the Company should upgrade the system, they could have raised the matter so that the directors can consider and decide on the same. 

119.  In respect of the transfer of clients’ shares to Afflux:

(1)  The main events relied on by R2/R6 in support of their allegation are (a) on 24 August 2017, P2 told a client of his to move to another securities firm; and (b) on 19 September 2018, P1 performed a cross-trade between, on one hand, a client called Mr Lin Jui Sheng (“LJS”) and, on the other hand, LJS’ wife and son, with a view to paying off LJS’s indebtedness owed to the Company and facilitating LJS’s transfer to Afflux. 

(2)  As regards the first event, I agree with Mr Siu that it did not constitute any wrongdoing on the part of P1 when the approach was made by P2 who, on R2/R6’s case was no longer a director or an employee of the Company[51].

(3)  The second event did not amount to diversion of business, given that (a) the cross-trade was conducted after P1 had already ceased to be a director; (b) the cross-trade had the net effect of settling LJS’s liability to the Company, which was beneficial to the Company; (c) LJS only moved to Afflux on 6 November 2019, long after the cessation of P1’s directorship; and (d) LJS was a client of P2, not P1.

120.  For the above reasons, even if R1-R5 had taken into account the alleged “misconduct” when exercising their right to vote against the re-election of P1 as director at the 2017 AGM, I do not consider that their act could be justified by the alleged “misconduct”.

C6.3  Appointments of Mak and Shum

121.  There is no dispute that the appointments of Mak and Sum as ROs were made by R2/R6 and without consulting Kam Yau Camp.  During cross-examination, R6 admits that the appointments were made without consulting P1.

122.  In my view, the appointments were made by R2/R6 in breach of the Fundamental Understanding as the decisions were not ones which could be made by R2/R6 acting unilaterally and without consulting Kam Yau Camp. 

123.  The breach is unfairly prejudicial to the interests of P1-P2 having regard to (1) the importance of the role to the Company; (2) the fact that the role has always been assumed by members of the 2 camps; and (3) Mak and Shum are employees and their salaries have to be paid by the Company.   

C7.  Issue 7 – Denial of financial information

124.  Although the Company paid a total sum of HK$4.6 million to PHC, Mr Siu in his closing submissions only focuses on the payment of HK$4 million made on 9 May 2017.

125.  P1-P2’s case is that R2/R6 have failed to give any proper account for the HK$4 million payment.  P1’s evidence is that:

(1)  At the May 2017 Meeting, R6 threatened that if P1 did not agree to pay PHC HK$4 million (on top of the HK$600,000 already paid), she would instruct PHC not to liaise with the SFC on the settlement of the complaint arising from the Missing Stock Incident.

(2)  Under such threat, P1 had no alternative but to sign the cheque paying HK$4 million to PHC.

(3)  However, that evening, P1 felt that there was something wrong with the payment. On the next day (5 May 2017), he informed R2 that he would go to the bank to stop the payment.

(4)  Notwithstanding that, on 10 May 2017, R6 caused the Company to issue a cashier order in favour of PHC for HK$4 million.

(5)  Despite that, R2/R6 failed to account for the payment of the HK$4 million.

126.  The defence of R2/R6 is twofold:

(1)  P1-P2 have no right or entitlement to receive information relating to the HK$4 million payment, other than that contained in the accounts.[52]

(2)  In any event, P1-P2 have not been kept in the dark regarding the payment to PHC. 

127.  I reject the first point.  The Company was operated on the basis of the Fundamental Understanding, Kam Yau Camp had the right to request for information about the payment, particularly when it involved a significant amount.  In any event, as a director of the Company, P1 had the right to request for the same information so as to satisfy himself that the payment should be made.

128.  The second point is well founded.  The evidence shows that P1-P2 have not been denied information relating to the HK$4 million payment:

(1)  P1-P2 clearly knew and consented to appointing PHC to advise and represent the Company on all matters concerning the Notice of Proposed Disciplinary Action received from the SFC relating to the Missing Stock Incident.  P1-P2 signed a board resolution to that effect on 10 November 2016.  Although P1 alleges (in his affirmation) that he signed this resolution as a result of R2/R6’s misrepresentation and undue influence, he retracts this allegation during cross-examination.

(2)  It is not in dispute that both P1-P2 attended the May 2017 Meeting at which it was resolved that PHC be instructed “for the ongoing legal work and pay on account for the additional legal fees in the amount of HK$4,000,000”.  P1-P2 must have known that the HK$4 million payment was to cover the legal costs to be incurred by the Company in connection with the SFC’s proposed disciplinary action relating to the Missing Stock Incident.

(3)  After the May 2017 Meeting, P1 himself approved the payment by signing a cheque for HK$4 million payable to PHC.  I reject P1’s allegation that he signed this cheque due to alleged coercion on the part of R6.  P1 does not come across as a person who could be coerced or threatened by R6.  I agree with Mr Lam that there was no reason for R6 to force P1 to sign the cheque given that Hing Sum Camp did not need his signature to make payment to PHC (as evidenced by the cashier’s order issued on 9 May 2017).

(4)  By letter to P1-P2’s solicitors dated 24 November 2017 (before the commencement of these proceedings), PHC explained the legal services that the HK$4.6 million payment was meant to cover.  P1-P2 did not ask for further information in their reply letter dated 4 December 2017. 

129.  Mr Siu invites the Court to draw adverse inference against R2/R6 for their failure to disclose the fee notes issued by PHC.  I reject this submission.  It is not clear to me, and Mr Siu has not articulated, exactly what inference the court should draw.  I do not see any reason for R2/R6 to disclose the fee notes when P1-P2 did not ask for such documents after having seen the explanation provided by PHC. 

130.  I reject P1-P2’s complaint regarding the payment of HK$4 million to PHC. 

C8.  Issue 8 – Proposed Allotment

131.  Where, as here, the petitioner complains that a rights issue is unfairly prejudicial to his interest, the court will be guided by the following principles (Tong Yuen Man v China Habit Ltd [2018] HKCFI 1703, §§194–196, per DHCJ Blair):

(1)  In principle, a rights issue made to dilute the holding of a minority shareholder in circumstances where the company has no immediate requirement for further funding may amount to unfair prejudice.

(2)  The fact that the petitioner is offered shares on the same terms as other shareholders does not necessarily mean that the rights issue could not have been unfairly prejudicial to his interests if the majority know that he does not have the money to take up his rights. 

132.  Even if the company has a genuine need to raise capital, it is incumbent upon the directors to set the price at a level which is fair to all (Re Sunrise Radio [2010] 1 BCLC 367, §§76–95).

133.  Mr Siu submits that the Proposed Allotment was totally inexplicable in commercial terms and was designed by R2/R6 to dilute P1-P2’s shareholding, having regard to the following matters:

(1)  The Company did not need to raise HK$35 million:

(a)  Although the SFC had on 4 November 2016 proposed to order the Company to pay a penalty of HK$14 million, at the meeting on 28 February 2017, the board merely resolved that a provision in the amount of HK$14 million be reserved.

(b)  According to the Company’s audited accounts, as at 31 December 2016, the Company held HK$9.6 million in cash and cash equivalents, and had net assets of almost HK$21 million.  These figures have already taken into account the fact some of the monies were held on behalf of clients and therefore could not be used.

(2)  The par value of the Company’s share is HK$1 per share.  There was no reason for R6 to propose allotting new shares at a substantially discounted rate at HK$0.25 per share.

(3)  Even if the Company had to raise capital, it could do so by way of rights issue so as to avoid diluting the shareholding of the shareholders.  This was never considered.  Instead, R6 proposed, and the majority resolved, to allot 3,650,000 shares to each of R6 and Walter.

(4)  There was no legitimate reason for allotting 3,650,000 shares to R6 and Walter.  The proposed allotment of 7,300,000 shares to R2’s children was designed to dilute P1-P2’s shareholding from 28% to 22.5%.

134.  Mr Lam submits that:

(1)  The second point has not been pleaded as part of the allegation that the Proposed Allotment was wrongful and therefore cannot be run.[53]  I disagree.  In §7 of POC, it is pleaded that HK$0.25 was a “substantially discounted rate”.

(2)  In any event, HK$0.25 cannot be said to be a substantially discounted price given that (a) according to the Company’s audited statements, it had net assets of around HK$20.9 million as at 31 December 2016; (b) if one made a further deduction of HK$14 million (representing the expected penalty to be imposed by the SFC at that time), the net asset value would be around HK$6.9 million; (c) in turn, this would mean that each share was worth HK$0.23.

(3)  There is no plea in the POC that R6 should have proposed a pro-rata allotment.  I disagree.  It is reasonably clear from §38 of POC that P1-P2 complain that the Proposed Allotment was an attempt to dilute their shareholding.   

(4)  In his Closing, Mr Lam seeks to justify the increase of capital on the basis that, on the face of the 2016 audited accounts, the Company was at the time “balance sheet insolvent and/or cash flow insolvent”.[54]  I reject the submission.  The submission deviates from R2/R6’s pleaded case, which is that the EGM on 20 March 2017 was convened “to ensure the Company would have sufficient cash to embrace for the potential substantial penalty of SFC”[55].  Also, R6 accepts that she had not read the 2016 audited accounts before the EGM.

135.  In my view, the Proposed Allotment is unfairly prejudicial to the interests of P1-P2 and should be set aside. 

136.  First, the evidence does not support R2/R6’s contention that the Company had a genuine need to raise new capital of HK$35 million at the time Resolutions 1 to 3 were passed:

(1)  The SFC only proposed to impose a fine of HK$14 million but did not say when the fine would be imposed.  Even if there was any basis to suggest that the SFC would impose the fine shortly (none has been suggested), there was no basis to believe that the SFC would not give time to the Company to raise fund if it was necessary to do so.

(2)  The Company had cash and cash equivalent of HK$9.6 million, which could be used at any time.   

(3)  As P1 pointed out during the EGM held on 20 March 2017, in addition to the current assets recorded in the audited accounts, the Company owned the Stocks held by R1 on trust for the Company, which could be sold to raise fund if necessary.  In addition, the Company would be able to claim its loss arising from the Missing Stock Incident from insurer. 

(4)  It had never been explained or considered by R1-R6 at the EGM why the Company had to raise new capital of HK$35 million at all, which was more than 2 times the fine proposed by the SFC. 

137.  During cross-examination, R6 says, for the first time, that HK$35 million was needed as the Company had made a representation to the SFC on 23 January 2017 that it would increase its capital by HK$35 million, and fund proofs were provided to show that R1 and R2 had the financial means.  I am unable to accept her evidence, which has not been pleaded in R2/R6’s Defence or mentioned in any of the affirmations filed by them.  Nor is it supported by any document.  When asked by this Court as to why the representation letter was never disclosed to P1-P2 given its importance to the Company, the only explanation given by R6 is that she did discuss the matter with other shareholders who said that they would support the increase in capital, and she did not discuss the matter with P1-P2 because she believed that they did not care as neither of them had asked about the matter.  Her evidence, if true, only highlight the fact that R6 was only willing to discuss the matter of raising capital with Hing Sum Camp and had no wish to keep P1-P2 informed of the matter.   

138.  Second, even if, contrary to my view, R1-R6 genuinely believed that there was a need to raise fund, given the importance of the matter, the obvious thing to do would be for R6 (who chaired the EGM) to explain all options available to the Company for raising funds.  The obvious options available were (1) to ask if any shareholders were willing to advance loans to the Company; (2) to use the Property (held by R1 on trust for the Company) as security to borrow loan from banks; (3) to borrow loans from banks; and (4) to raise new capital by way of a right issue, so that all shareholders could consider whether or not to subscribe for the shares offered to them.  None of these options were considered, even after P1-P2 challenged R6’s proposal and the need to raise new capital.  Instead, R6 simply rushed through the proposal and asked the shareholders to vote on Resolutions 1 to 3.  The only inference I can draw is that R6 had no wish to explore other means to raise capital, and only wanted to ensure that the Proposed Allotment could be approved at the EGM.

139.  Third, shortly after the EGM, on 28 April 2017, the SFC notified the Company that a fine of HK$3.5 million would be imposed.  If, as R6 claims, the only reason for the Proposed Allotment was to raise fund to pay the fine which would be imposed by the SFC, she should convene another general meeting for the shareholders to consider whether or not to cancel or revoke Resolutions 1 to 3.  At the minimum, she should inform the shareholders that in view of the substantially lower fine imposed by the SFC, the board would not proceed with the increase in capital and the Proposed Allotment.  This was never done and no explanation has been provided by her.

140.  Fourth, there was no explanation at the EGM as to why R6 proposed that 3,650,000 shares should be allotted to her and her brother. Under cross-examination, R6 says that the shares were allotted to her and Walter because no other shareholders would subscribe for additional shares in the Company.  I reject this evidence, which does not feature in her affirmation or R2/R6’s Defence.  It can be seen from the minutes of the EGM that P1 did object to the Proposed Allotment on the ground that it would dilute the shareholding of the shareholders, while P2 objected on the ground that the Company did not need any new shareholder.

141.  Fifth, it is clear that in proposing the price of HK$0.25 per share, R6 did not consider whether the price truly reflected the value of the shares to be issued or whether the price was a fair price, particularly when it was offered to 2 new shareholders who had no interest and no contribution to the Company.  Instead, R6 simply fixed the price at the level she considered appropriate without regard to the interests of the shareholders, in particular P1-P2. 

142.  Lastly, the price of the Proposed Allotment at HK$0.25 per share was clearly at an undervalue.  If one just takes the net asset value of the Company as stated in the 2016 audited accounts, the value of the issued share was HK$0.7 per share.  This has not taken into account (1) the value of the Stocks and the Property held by R1 on trust for the Company, which has not been reflected in the audited accounts; and (2) the value of the Company’s business as a going concern, which was also not reflected in the audited accounts. 

143.  For the above reasons, I hold that the Proposed Allotment was put forward by R2/R6 and approved by R1-R5 for the improper purpose of diluting P1-P2’s shareholding in the Company.

144.  Although R2/R6 have not implemented the Proposed Allotment, I agree with Mr Siu that it would be open to R1-R6 to allot the shares at any time as the Resolutions 1 to 3 have not been cancelled or revoked in any way. 

C9.  Issue 9 – Remedies

145.  In light of my conclusions on the Fundamental Relationship and Fundamental Understanding (Issues 1-3), exclusion from management (Issue 6) and the Proposed Allotment (Issue 8), I find that the affairs of the Company have been conducted by R2/R6 in an unfair manner and the interests of P1-P2 have been prejudiced. 

146.  Although R1, R3-R5 have also participated in the exclusion from management and the Proposed Allotment, P1-P2 have settled with them and they ceased to be parties to the proceedings without any objection from R2/R6.  Mr Siu submits that the appropriate relief is for the court to make an order requiring R2/R6 to buy out the shares of P1-P2 in the Company.  He cites Apex Global Management v FI Call Ltd [2014] BCC 286, §125 where Vos J (as he then was) observed that ss.994-996 of the Companies Act (equivalent to ss.724-726 of CO) provide a wide and flexible remedy where the affairs of a company have been conducted in a manner that is unfairly prejudicial to the interests of some or all of its members.  Non-members who are alleged to have been responsible and have been made parties to the petition can be made primarily or secondarily liable to buy the petitioners’ shares. 

147.  In any event, as R1-R5 approved the Proposed Allotment to R6 (and Walter), I do not think that they would have any objection to R6 becoming a shareholder of the Company by purchasing the shares held by P1-P2.

148.  Mr Lam submits that a buy out order would be “unfair” as R2 only holds 16% shareholding in the Company, and he would be “stuck” with the Company whose value has now been diminished as a result of the diversion of business by P1-P2. 

149.  It seems to me that having conducted the affairs of the Company in the manner unfairly prejudicial to the interests of P1-P2, it is not open to R2/R6 to say that it would be unfair for them to buy out the shares of P1-P2.  There is no other way to remedy P1-P2 having been  excluded  from management, and none has been suggested by Mr Lam.   

150.  As to Mr Lam’s submission that the value of the Company has been diminished, it is not in dispute that after P1-P2 have ceased to be directors of the Company, they engage in securities brokerage business through another company, which inevitably have a negative impact on the business and hence the profits generated by the Company.  It seems to me that it would be fair in the circumstances for the court to order R2/R6 to buy out P1-P2 shares on the date at which the shares are to be sold and transferred to them. The reduction in revenue and profits would be reflected in the valuation of the Company.

151.  The buy out order will be on the following bases:

(1)  The equity value of the Company is to be assessed as at 31 December 2023 in the first instance and updated to the date of actual sale and transfer (“Date of Valuation”) and on the basis that it is a going concern and include the current market value of the Property and the Stocks (“Value”);

(2)  The price of P1-P2’s shares is 28% of the Value and without any discount for minority interest (“Price”); and

(3)  R2/R6 do purchase P1-P2’s 28% shareholding at the Price within 60 days (or such other date as the court permits) of the Date of Valuation.   

152.  I direct the parties to submit proposed directions on assessing the Value by a Court-appointed expert following the standard directions on valuation set out in Appendix B to PD 3.4 within 21 days of this Judgment.  This notwithstanding, I direct the parties to make open offers to the other on the price at which R2/R6 are to purchase P1-P2 shares within 14 days of this Judgment with a view to obviate the need for the parties to incur further costs in determining the Value and the Price. The party which fails to “beat” the offer made by the other party may expect to pay all the costs occasioned by the valuation to be taxed on a higher scale.  

153.  As for costs, I make a costs order nisi that R2/R6 should pay 50% of the costs of and incurred by P1-P2 in the Petition including all costs reserved, to be taxed if not agreed.  I do not think this is a case which warrant a certificate for 2 counsel. 

154.  The apportionment of costs have already taken into account  (1) the fact that P1-P2 fail on Issues 2 and 4 and should pay the costs incurred by R2/R6 in defending the same; (2) P1-P2 have abandoned their claims against R1 and R3-R5; and (3) P1-P2 are entitled to recover 70% of the costs of the trial.