KEUNG, KEUNG SHING v. GANGFORD INTERNATIONAL LTD AND OTHERS

HCCW 181/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 181 OF 2008

----------------------

----------------------

----------------------

----------------------

J U D G M E N T

----------------------

The petition

1.  This is a petition for the winding up of Gangford International Limited群福國際有限公司 (“the Company”) on just and equitable grounds, alternatively for relief under section 168A of the Companies Ordinance, Cap. 32. The petitioner, Keung Keung Shing Rudolph (“Mr. Keung”), holds 4,900 of the 10,000 issued shares in the Company. The Company is the 1^st respondent. Madam Chou Ai Chun Romy (“Madam Chou”) is the 2^nd respondent; she holds 5,099 of the shares. The 3^rd respondent, Poly Shine Development Limited (“Poly Shine”), is a company set up by Madam Chou and holds one share as her nominee.

2.  Mr. Keung’s case is premised on an oral agreement or understanding he allegedly reached with Madam Chou in August 2007 (“the August 07 Agreement”), by which (1) the Company should cease trading; (2) he would transfer all his 4,900 shares to Madam Chou at par value after all the Company’s accounts receivable and accounts payable were fully settled; and (3) he would take over the business of the Company through his sole proprietorship Fortune International Company富華國際貿易公司 (“Fortune International”), and deal with the suppliers and customers of the Company for the purpose of paying off the Company’s debts and liabilities and collecting sums due and payable to the Company.

3.  He alleged Madam Chou reneged on the August 07 Agreement. Hence, he presented this petition in May 2008 to wind up the Company; alternatively, he seeks an order that Madam Chou and/or Poly Shine should purchase his shares at a fair value to be determined by the court.

4.  I will first set out the relevant background matters and other matters that should not be regarded as controversial.

The background

5.  Madam Chou is from Taiwan. She came to know Mr. Keung through his cousin, who attended university with her in Taiwan in the 1970s. She first met Mr. Keung in Hong Kong in 1972. After graduation, she worked in the textile and garment business and later set up her own business in this field. She has more than 30 years experience in this line of business.

6.  In 1987, she incorporated a company in Hong Kong known as Likefort (H.K.) Limited (“Likefort”) to carry on garment trading business. In 1993, she incorporated the Company in Hong Kong. The Company did not carry on business at the time. It was used solely to hold a property for Madam Chou in Suzhou, Jiangsu Province. Only two shares were issued, one to Madam Chou and the other to Poly Shine. They were the only directors.

7.  Mr. Keung’s family used to operate a tailor shop and he worked there in 1969. In 1973, he commenced the businesses of marketing books and magazines and financing film production in Hong Kong. He had no previous experience in the garment trading business. Otherwise, he has been doing business on his own for about 30 years and has substantial experience in business.

8.  Although Madam Chou and Mr. Keung had known each other since the 1970s, there was no business dealing between them until 2003, when they decided to form an association to carry on the business of import and export of garments. They agreed to use the Company, which was dormant at the time, for this purpose. Mr. Keung injected HK$490,000 into the Company in December 2003. On 17 December 2003, he was appointed a director of the Company. On the same day, Poly Shine transferred its one share to Mr. Keung and 9,998 new shares were issued, of which 5,099 were allotted to Madam Chou and 4,899 to Mr. Keung. So they held shares in the Company in the ratio of 51 to 49, with Madam Chou in the majority. Poly Shine did not resign as a director. There were thus three directors of the Company, Madam Chou, Mr. Keung and Poly Shine.

9.  Of the money injected by Mr. Keung into the Company, HK$4,900 was allocated to the consideration he paid for acquiring 4,900 shares, the balance of HK$485,100 was treated as a shareholder’s loan to the Company.

10.  Madam Chou did not inject money into the Company in 2003, although later on she also provided loans to the Company for its operations. In addition, she allowed the Company the use of an office free of charge in Lucida Industrial Building, Wang Lung Street, Tsuen Wan. This is a property owned by Likefort and has been used as its office. The Company changed its registered office to those premises in December 2003 and shared an office with Likefort.

11.  Mr. Keung was appointed the managing director of the Company. Madam Chou was the sole signatory of the bank accounts of the Company. As she had to travel on business, from time to time, she would pre-sign in blank a few cheques and applications for remittance to the bank and left them with Mr. Keung for emergency use. Both played a part in building up the business from scratch.

12.  In the beginning, the Company was engaged in the trading of hats and gift items, as Madam Chou had available samples left by a good friend. The business was not a success and there was a loss in 2004. Business gradually improved when they changed to import and export of garments. Madam Chou allowed the Company to use a part of her property in Suzhou for a liaison office. The Company was profitable in 2006 and 2007. It secured two substantial overseas customers. One was in the United States known as Image Solutions. The other was in Europe known as LeoMil Fashion.

13.  Fortune International was set up by Mr. Keung on 1 September 2006 with a place of business in Fortune Commercial Building, Tsuen Wan. According to the application for business registration, the nature of its business was import and export. Two changes to its business address were reported to the Business Registration Office. On 1 February 2007, it was changed to the residential address of Mr. Keung. Then on 24 October 2007, it was changed to Sunwise Industrial Building, Tsuen Wan.

14.  In the summer of 2007, the Company had three employees. They were Jacky Ng, Wai Ka Yu Patrick (“Patrick Wai”) and Tina Wong. On 31 October 2007, Madam Chou prepared resignation letters dated 1 October 2007 for each of them to sign, stating that they would leave their job effective from 1 November 2007 and they were to acknowledge receipt of their salary for October 2007. Mr. Keung was not in Hong Kong at the time. He alleged Madam Chou dismissed these employees summarily without his knowledge and consent. She claimed the employees resigned voluntarily, having already given prior verbal notice of resignation to her. She then changed the lock of the office shared by the Company and Likefort. Also on 31 October 2007, she had arranged earlier for seven box files of financial records of the Company to be delivered to a firm of certified public accountants who were the auditors of the Company.

15.  Madam Chou asserted she took the above measures when she discovered on 31 October 2007 that Mr. Keung had misappropriated funds of the Company. A cheque of HK$330,000 bearing the date of 27 October 2007 was drawn on the Company’s account in favour of Fortune International and was cleared for payment on 29 October. Also on 29 October, US$148,000 was withdrawn from the Company’s bank account pursuant to an application for remittance dated 27 October 2007 in favour of Ningbo East Industrial Corporation Co. Ltd. (“Ningbo East”). It is not in dispute that the cheque and the application for remittance were pre-signed in blank by Madam Chou and left with Mr. Keung and that the particulars were completed or caused to be completed by him. Ningbo East was a supplier in the PRC.

16.  Further, Image Solutions had made payments totalling US$86,608.70 to Fortune International instead of to the Company for some purchase orders placed with the Company, pursuant to the request and representation in Mr. Keung’s email of 3 October 2007 that Fortune International “is a full 100% subsidiary company” of the Company. Mr. Keung sent a similar email on behalf of the Company to LeoMil Fashion on 4 October 2007 requesting this customer to make payment by telegraphic transfer of the deposit payable under the purchase order of the Company to “[his] 100% subsidiary company ‘Fortune International Co.’, as tax shelter purpose.”

17.  On the Sunday evening of 4 November 2007, Mr. Keung and Patrick Wai forcibly entered the office of the Company and removed documents and three computers, which contained details of transactions with customers and financial information. The security guard in the building tried to stop them but to no avail, nor was he able to reach Madam Chou or her husband Lin Chi Hua (“Mr. Lin”) by telephone in time.

18.  On 6 November 2007, Mr. Keung sent Patrick Wai with removal workers to collect his belongings and furniture from the office of the Company. This time, they were stopped by Mr. Lin. Mr. Keung went to the office immediately and an argument followed. Mr. Lin made a report to the police.

19.  On 22 January 2008, Mr. Keung instructed his former solicitors to write to Madam Chou stating that she had failed to convene a directors’ meeting for the past three months and refused to co-operate or produce books of account of the Company. It was stated that as the Company was in a deadlock, the Company should be wound up and all its assets should be sold and returned to “the shareholder”. If she should fail to agree to this course, Mr. Keung would present a winding-up petition on the ground there was “oppression of minority”, alternatively on the just and equitable ground.

20.  On 24 January 2008, the office of the Company was damaged by red paint. Mr. Lin reported this to the police.

21.  Also on 24 January 2008, Madam Chou lodged a complaint to the police alleging that Mr. Keung had misappropriated the funds of the Company through Fortune International. She provided further information to the police on 30 January and her statement was typed up and signed on 4 March 2008. She was later informed by the police that no criminal charge would be brought against Mr. Keung.

22.  On 30 January 2008, Mr. Keung’s former solicitors wrote to Madam Chou again, asking if she had any proposal to resolve the deadlock in lieu of winding up.

23.  Madam Chou replied to the letters of Mr. Keung’s former solicitors by two letters both dated 5 February 2008. She claimed she had never been requested to hand over the account book and it was Mr. Keung who was responsible for the preparation of the first set of accounts (from incorporation to 31 March 2005), which were provided to the auditors for audit and signed by Mr. Keung. In any event, as the Company’s computers and relevant documents had been lost to her, information was not complete and it would take time to collect information to do the accounts. She did not agree to wind up the Company.

24.  On 14 February 2008, Mr. Keung’s former solicitors wrote a without prejudice letter to Madam Chou again asking her to provide management accounts, so Mr. Keung could “make a reasonable offer for either party to purchase or to sell.” Madam Chou replied by letter on 27 February 2008 stating that as the source documents for preparing accounts had been lost and information would need to be collected, she was unable to say when the accounts could be updated despite the endeavours she made and proposed Mr. Keung could handle the management accounts instead so as to resolve their dispute.

25.  On 4 February 2008, Madam Chou executed a trust deed and an instrument of transfer by which one share in the Company held by her was transferred to Poly Shine to hold on trust for her. This was done without Mr. Keung’s knowledge and consent.

26.  This petition was presented on 5 May 2008. It was twice amended, on 10 June 2008 and 1 September 2008. Mr. Keung was legally represented throughout. Madam Chou was not legally represented for part of the period and has made a number of affirmations in Chinese when she was acting in person, those of importance have been included in the trial bundles with the relevant exhibits.

27.  On 13 May 2008, Madam Chou issued a notice for the annual general meeting of the Company to be held on 10 June 2008 to attend to the following business: to re-appoint directors of the Company for the ensuing years and to present the financial statements. Mr. Keung received the notice but did not attend the meeting. Acting by their proxies, Madam Chou and Poly Shine passed a resolution at the meeting to re-elect themselves as directors upon their retirement from office at the annual general meeting as provided in article 7 of the articles of association. Mr. Keung was not re-elected as a director. It was further resolved that the Company would not set up the post of managing director. The meeting noted that management accounts from 1 April 2005 to 31 March 2008 had been prepared and submitted to the auditors for audit and that the auditors had requested further supporting documents by a letter dated 13 May 2008, including sales and purchase invoices and inventory record. It was resolved to provide the documents requested as soon as possible when they were available.

28.  On 22 July 2008, Madam Chou applied to court for a validation order as the Company’s bank accounts were frozen on 24 June 2008 following the presentation of the petition. On 20 August 2008, I made a validation order allowing the Company to withdraw sums from its bank accounts not exceeding HK$166,000 a month in the ordinary course of business, on condition that Madam Chou is to provide details of payments made by the Company to Mr. Keung’s solicitors and that the latter may inspect supporting documents of the payments on notice.

29.  On 25 August 2009, after the notice for trial was issued, Mr. Keung’s solicitors wrote an open letter to the respondents’ solicitors with an offer for a full and final settlement by Mr. Keung to acquire all of Madam Chou’s interest in the Company “at a current fair market value on a pro rata basis”. In the petition, which has been twice amended, the buy-out relief sought is the other way round, for Madam Chou and/or Poly Shine to purchase Mr. Keung’s shares. In the open offer, it was proposed that for the valuation of shares, Mr. Keung is to have access to the relevant documents of the Company regarding the current value of its shares and a joint accounting expert shall be appointed to determine the current fair market value of the shares. Madam Chou declined the offer by letter dated 11 September 2009.

30.  Only one set of audited accounts of the Company was ever prepared, covering the period from incorporation to March 2005. They were signed in November 2005. Other than the information provided to the court at the time of the application for a validation order in July and August 2008, there is no further update on the financial position of the Company. Madam Chou has been running the business on her own since November 2007. In the evidence she filed in support of a validation order, the Company was solvent and business was carried on at a profit. I have no reason to think the position is any different today. Had it been otherwise, Mr. Keung would not have made an offer in August 2009 to purchase the respondents’ interest in the Company. As for the two substantial customers of the Company, Image Solutions has continued to do business with the Company. Mr. Keung has taken over the business of the Company with LeoMil Fashion through Fortune International and subsequently Fortune RK International Limited 富都國際貿易有限公司 (“Fortune RK”), also a company owned or controlled by him. Hence, there is a de facto split of the customers of the Company.

The complaints in the petition

31.  The case of Mr. Keung as set out in the petition and the basis for seeking winding up or relief under section 168A may be summarised as follows.

32.  Since Mr. Keung joined the Company in December 2003, the Company has been operated on the basis of a personal relationship between the parties involving mutual trust and confidence and it was their contemplation that both should participate in the management.

33.  Differences arose between them since 2006 and Madam Chou became disinterested in the affairs of the Company and ceased to participate, except to sign cheques and documents for the operation of the Company’s bank accounts. She told Mr. Keung the Company had no prospects and indicated to him in August 2006 her intention to dissolve the joint venture between them. As a result, Mr. Keung set up his sole proprietorship, Fortune International, with the aim of continuing the garment trading business on his own.

34.  The August 07 Agreement was then made between them, in the terms as mentioned earlier.

35.  Since the agreement was entered into, the Company had ceased trading. Mr. Keung through Fortune International repaid all the debts owed by the Company to its creditors except in respect of shareholder’s loan, and recovered all sums due to the Company for the Company’s benefit, except a sum of US$195,864.22 payable to the Company by Image Solutions. With the consent of Madam Chou, since September 2007, Fortune International operated at the office of the Company with the assistance of the Company’s employees.

36.  Madam Chou then reneged on the August 07 Agreement and acted wrongfully in that:

(1)   she dismissed all three employees of the Company summarily on 27 October 2007, without Mr. Keung’s knowledge and consent;

(2)   she removed all documents of the Company, including its financial statements and accounts, and the documents of Fortune, from the registered office and changed the lock of the office premises, denying Mr. Keung access to the premises;

(3)   she later lodged a false complaint to the police that Mr. Keung had misappropriated funds of the Company through Fortune International, when in fact the funds were applied for the purpose of settling the accounts between the Company and its creditors and debtors, and among them were Mr. Keung, Ningbo East and Image Solutions, pursuant to the August 07 Agreement;

(4)   she excluded Mr. Keung from the management of the Company since late October 2007, before he had completely performed the August 07 Agreement, and has failed or refused to give him access to the financial statements and documents or give an account of the financial position of the Company, notwithstanding his request by the letters of his former solicitors in January and February 2008.

37.  For the above reasons, Mr. Keung contended there was a breakdown of trust and confidence between them and further co-operation was impossible. The affairs of the Company were conducted in a manner unfairly prejudicial to him, alternatively it is just and equitable to wind up the Company.

38.  As I have mentioned earlier, the crux of his case was premised on the existence of the August 07 Agreement. Without that agreement, he would not be able to justify his actions in causing Fortune International to receive payments from the Company’s customers and making payments to its creditors, and in causing Fortune International to take over the business of the Company with Image Solutions and LeoMil Fashion.

Madam Chou’s case

39.  Madam Chou made only one substantive affidavit in English, being her 10^th affidavit. When her solicitors prepared that affidavit, they did not incorporate all salient matters in her previous affidavits in Chinese. Nor did they include the more important Chinese affidavits in the trial bundles. No adverse inference on her credibility should be drawn from the failure to provide a comprehensive affidavit to the court. She should not be held responsible for her solicitors’ work.

40.  Madam Chou denied the existence of the August 07 Agreement or any agreement in August 2007 to dissolve her joint venture with Mr. Keung. She denied she had become disinterested in the Company or that she thought it had no prospects. She said the first occasion when they discussed dissolution of their joint venture was on 4 October 2007, the terms of that discussion were contained in a note, written and signed by Mr. Keung that day. According to her, this was just an initial agreement or understanding that Mr. Keung was to leave the Company, that the Company would be responsible for paying two suppliers in the PRC of RMB 650,000 for producing goods for the Company as set out in a table typed on the upper part of the note, and that Mr. Keung would be responsible for other payments, if any, not listed in the table. There was no discussion on important matters such as the shareholdings in the Company, the business of the Company, the accounts receivable and payable since the preparation of audited accounts made up to March 2005, the declaration of dividends out of the surplus, and tax to be paid on the profits, all of which would need to be resolved when they put an end to their business co-operation in the Company.

41.  The reason why she acted as she did in taking away seven files containing financial records to the Company’s auditors, arranging for the termination of employment of three employees, and changing the lock of the office was because of her discovery on 31 October 2007 of Mr. Keung’s misappropriation of funds of the Company.

42.  In any event, she denied that she had dismissed the three employees, that she had refused Mr. Keung access to the financial documents of the Company, or that she had refused to provide accounts. It was Mr. Keung who had removed the financial records out of the office when he took away documents and three computers on 4 November 2007.

43.  As a result of Mr. Keung’s misappropriation of funds and breach of fiduciary duties, he is not entitled to the relief claimed. It was his conduct that brought about the breakdown of mutual trust and confidence.

The major issues

44.  The major issues to be resolved in this petition may be stated as follows:

(1)   if the association between Mr. Keung and Madam Chou in the Company was in the nature of a quasi-partnership;

(2)   if Madam Chou had become disinterested in the Company and ceased to participate in its business prior to October 2007;

(3)   if the August 07 Agreement had existed;

(4)   what agreement or understanding was reached by Mr. Keung and Madam Chou on 4 October 2007;

(5)   if the breakdown of mutual trust and confidence was caused by Mr. Keung’s conduct; and

(6)   if Madam Chou had wrongfully withheld financial information of the Company.

The witnesses

45.  Mr. Keung, Tina Wong and Patrick Wai gave evidence for the petitioner. Madam Chou was the only witness for the respondents.

46.  Mr. Keung made seven affirmations in all. Only his 1^st, 2^nd, 6^th and 7^th affirmations were relied on in this trial. Tina Wong and Patrick Wai each made one affirmation in Chinese.

47.  Madam Chou made eight affidavits in Chinese when she was acting in person. Her 9^th and 10^th affidavits were prepared in English by her solicitors. Some of the affidavits she made for the application for a validation order are relevant to the issues at the trial. Apart from the 9^th and 10^th affidavits, I have allowed four affidavits made on the following dates to be admitted as evidence in this trial: 21 June 2008, 12 August 2008, 15 August 2008 and 18 August 2008. She testified in Mandarin.

48.  By and large, I accept the evidence of Madam Chou. I regard her evidence as coherent and credible, notwithstanding evidence to the contrary given by the three witnesses for the petitioner, and despite some inconsistencies in her oral testimony and her affidavits. She tended to digress and provide rambling answers to questions put to her, despite my stern warnings. But I do not think she was being evasive. She genuinely wanted to give her entire account of events and somehow thought the court had not understood her version fully or properly. She came across as capable and decisive. Although she may yield to emotions at times, she is made of sterner stuff and could match up to Mr. Keung in strategy.

49.  Mr. Keung is astute and resourceful, and well capable of looking after his own interest. My view on his evidence of the crucial agreement in August 2007 is that it is inherently improbable. His various explanations for his actions between September to November 2007 beg belief. His purported reasons for his actions do not appear to be in character given his considerable experience in business. 

50.  As for Tina Wong and Patrick Wai, they are partisan witnesses. Both are in the employment of Fortune RK. Their evidence does not add materially to Mr. Keung’s case. I treat their evidence with circumspection.

51.  I turn to consider the major issues in dispute in the order as mentioned above.

If the association was a quasi-partnership

52.  I am satisfied on the evidence the association of Mr. Keung and Madam Chou in the Company was formed and continued on the basis of a personal relationship between them involving mutual confidence. In the beginning, Madam Chou had passed on to Mr. Keung her considerable knowledge and experience in the garment trade and had put him in touch with her business contacts in the PRC. As she said, she was like a teacher to him. She would not have done so but for their mutual trust and confidence. Both had committed their funds to build up the business until it became viable. It was their common understanding that both would participate in the management and the business of the Company was operated in that way for quite some time when their relationship was harmonious. The Company being a private company, there is restriction in the articles of association on the transfer of shares. This seems to be a typical case in which the association of shareholders could be regarded as a quasi-partnership importing equitable considerations which may make it unjust or inequitable to insist on legal rights imposed by the articles of association, such as the provision in article 7 that directors shall retire at the annual general meeting and be eligible for re-election.

53.  Mr. Henry Fung, who appeared for the respondents, did not contend to the contrary. 

If Madam Chou had become disinterested in the Company and ceased to participate in its business prior to October 2007

54.  Mr. Keung’s allegation that Madam Chou had lost interest in the Company’s business since mid 2006 and she had indicated to him her intention to end their joint venture was meant to provide justification for the preparatory steps he took in leaving the Company and to give credibility to the August 07 Agreement. I do not accept his evidence. 

55.  He claimed Madam Chou had lost interest in the Company as she was busy running Likefort and she had told him the Company had no prospects. I find that incredible. Both parties had spent considerable time and resources in building up the business jointly from scratch for over two years. By 2006, they were able to enjoy the first results of their efforts and the Company was making a profit. As Madam Chou had asked rhetorically in one of her affidavits, it would be contrary to reason if she should lose interest and want to withdraw from a profitable enterprise just when the Company had cultivated two substantial overseas customers and business was beginning to prosper.

56.  I am inclined to think Madam Chou’s evidence here more in keeping with reality. I find her role in the business of the Company, especially the liaison with suppliers in the PRC, reduced since 2006. But this was not because of her losing interest in the Company, nor did she cease to participate in its business. I accept her evidence as by then Mr. Keung had gained some experience in this field, he sidelined her in building up his own network of suppliers in Ningbo. As Madam Chou had pointed out, the factory workshop in Ningbo set up initially with the Company’s funds in early 2007 bore the same Chinese characters (富都) as the name of the limited company set up subsequently in Hong Kong by Mr. Keung, Fortune RK. This was no coincidence, but indicative of Mr. Keung’s intentions quite early on that he was to control the Ningbo export operations and the workshop to the exclusion of Madam Chou. By 2007, the goods ordered by LeoMil Fashion were all produced by suppliers sourced by Mr. Keung in Ningbo. 

57.  As for the establishment of Fortune International in September 2006, I find this was not due to the reason alleged by Mr. Keung, namely, that Madam Chou had indicated to him her intention of dissolving their association in the Company.

58.  It is not in dispute that in 2005, Mr. Keung had used the Company to handle the orders placed by his brother in Toronto, Canada for hotel supplies and that in 2006, with the consent of Madam Chou, the Company ceased to deal with these orders and they were processed by another entity set up by Mr. Keung, which was Fortune International. Whether Madam Chou had known of Fortune International when it was first set up, or only when she discovered the Company’s cheque of HK$330,000 made payable to Fortune International in October 2007 is immaterial. There is no suggestion Fortune International was involved in the import and export of garments until the summer of 2007. I acknowledge there is apparent inconsistency in Madam Chou’s evidence when she had learned of Mr. Keung setting up Fortune International, but I do not think this is sufficient to cast doubt on other parts of her evidence which I accept. 

If the August 07 Agreement had existed

59.  According to Mr. Keung’s 1^st affirmation, the August 07 Agreement was made at the initiative of Madam Chou. It was Madam Chou who told him in August 2007 that she had decided the Company should cease trading and she requested him to transfer his shares to her. Upon learning her decision, he agreed to transfer his shares to her at par, after all the accounts receivable and payable were fully settled. He alleged that as the Company had ceased trading, they agreed he would take over the business of the Company through Fortune International and deal with the Company’s suppliers and customers directly for the purpose of paying off the Company’s debts and liabilities and collecting the sums due and payable to the Company. That in essence was the August 07 Agreement.

60.  He repeated the above version in his 7^th affirmation and added this explanation why Madam Chou had agreed to let him take over the business of the Company when they were to end their association. Madam Chou allegedly said to him it would be difficult for her to retain the business relationship with LeoMil Fashion and Image Solutions after he left the Company, as she did not have much contact with these customers in the past and she did not care if he would continue to do business with them after he left. He claimed as he had been busy doing business, he could not spare a thought for the arrangement of his leaving the Company.

61.  On Mr. Keung’s case, he was only to pay Madam Chou a nominal sum being HK$4,900 for transferring all his shares to her. In getting back the Company, Madam Chou would have a bare shell (the property in Suzhou held by the Company on trust for Madam Chou is irrelevant as there is no dispute Mr. Keung had signed an acknowledgment dated 18 December 2003 stating that the property is Madam Chou’s personal property and has nothing to do with him), as its goodwill, business, assets and liabilities would be taken over by Mr. Keung. And although Mr. Keung was to be responsible for the accounts payable, he would stand to gain, as it was admitted by him that it was envisaged there would be a surplus in that the accounts receivable would exceed the accounts payable.

62.  I see no reason at all why Madam Chou or any one with a modicum of sense would agree to such a decidedly disadvantageous deal. I have not the least doubt Mr. Keung’s evidence here is not worthy of belief. There are other pointers that the August 07 Agreement is a fabrication.

63.  Firstly, this agreement, which would clearly be of importance to the parties, was not contained in any contemporaneous document, or mentioned in any letter before action of Mr. Keung’s former solicitors. Given that both parties were very experienced in doing business, it would be extraordinary that neither of them had put in writing what they had agreed.

64.  Secondly, Mr. Keung’s allegation that he was to take over all the assets of the Company including its bank balance and there was no need to share with Madam Chou the surplus of the accounts receivable was not mentioned in his petition, which was twice amended, or in any of his affirmations. There was no credible explanation for the omission of this obviously important matter.

65.  Thirdly, contrary to Mr. Keung’s allegation, the Company did not cease business after the alleged agreement was made in August 2007. According to the statement of account caused to be prepared by Mr. Keung in respect of the payments made and received by Fortune International for the Company, purchase orders were placed by LeoMil Fashion throughout the period from July 2007 to 9 November 2007. These purchase orders were not produced but the invoices to LeoMil Fashion for a 30% deposit were produced. They were issued by the Company between 5 August and 12 September 2007, and signed by Mr. Keung as a director. 

66.  Fourthly, Mr. Keung’s allegation that Madam Chou had agreed to take back the Company without the valuable business of the two substantial customers as those customers would follow him to his new firm was not borne out by subsequent events. He was only able to get the business of LeoMil Fashion after he left, Image Solutions chose to continue to do business with the Company.

67.  Fifthly, the shares of the Company are obviously not of nominal value, as Mr. Keung is seeking in this petition to have his shares purchased at a fair value to be determined by the court and he has made an open offer to purchase the respondents’ shares at fair market value to be determined by a joint expert.

68.  Miss Emma Wong made a valiant attempt to persuade the court Mr. Keung’s evidence should be accepted. I have considered her submissions. I do not propose to deal with each of the matters she relied on.

69.  Miss Wong contended that the court should infer that Madam Chou had known since September 2007 that Fortune International had operated at the office of the Company with the assistance of the Company’s employees, and this inference would provide support to the existence of the August 07 Agreement. I see no credible basis for drawing this inference. I accept Madam Chou’s evidence she had never agreed with Mr. Keung that the business of Fortune International was to be operated at the Company’s office or with the assistance of the Company’s employees. I find that she did not discover Fortune International had received payments from the Company and the Company’s customers until 31 October 2007.

70.  Miss Wong tried to make sense of Madam Chou agreeing to give away the valuable business of the Company and accepting only the par value of Mr. Keung’s shares. She submitted Madam Chou would have been powerless any way in preventing him from doing business with Image Solutions and LeoMil Fashion after he quit the Company, and the business of LeoMil Fashion was in fact lost to the Company after he left. I cannot see how this would help Mr. Keung’s case. The fact that he could have poached business from the Company is not a reason why he should not pay a fair price for the valuable business and goodwill of the Company.

71.  The removal of the nameplate of the Company from the tenants’ directory on the ground floor of the building was relied on as evidence to show Madam Chou’s intention of ceasing business of the Company and support for the existence of the August 07 Agreement. I reject this contention. The nameplate of the Company on the 21^st floor of the building was retained. It is unclear whether the ground floor nameplate was removed in January 2008 after the office was damaged with red paint or in November 2007 after Mr. Keung attempted to remove his belongings and furniture and the police was called. Madam Chou’s reason for doing so was understandable, whichever incident triggered the removal of the nameplate.

72.  As for the termination of the employment of three employees on 31 October 2007, this was relied on to show Madam Chou had intended to stop the Company’s operations and counsel sought to attribute this to the existence of the August 07 Agreement. Madam Chou’s explanation for arranging the termination of these employees on 31 October 2007 was because she discovered Mr. Keung had withdrawn most of the funds of the Company such that it was not viable for the Company to continue its operations at the time. I accept her explanation. Miss Wong’s suggestion that Madam Chou had resumed operation of the business of the Company just for the purpose of defeating this petition is far-fetched.

73.  Reliance was also placed on the subsequent agreement made at a meeting of Mr. Keung and Madam Chou in Panda Hotel on 16 November 2007. According to Mr. Keung, Madam Chou told him the Company did not have sufficient funds to pay salaries and tax. On his instruction, Tina Wong arranged for payment by Fortune International to the Company of HK$20,000 and US$30,000 to alleviate the Company’s difficulty. In return, Madam Chou agreed to instruct Image Solutions to pay the outstanding purchase price to Fortune International, and she did so as borne out by an email sent on her behalf to Image Solutions on 17 November 2007 although she countermanded her instructions a few days later.

74.  Mr. Keung alleged that Madam Chou’s agreement in November to approve payment by Image Solutions to Fortune International was pursuant to the August 07 Agreement. I reject his evidence in this respect. I find that the reason why she agreed to instruct Image Solutions to pay Fortune International the outstanding price was because Mr. Keung had on 13 November 2007 emailed the customer asking it to cancel the purchase orders with the Company as the Company could not make delivery and to issue new purchase orders to Fortune International instead, otherwise he would not arrange for the suppliers to ship the goods. She was driven by circumstances to compromise so that Mr. Keung would make shipment, in order to maintain good relationship with Image Solutions. I do not agree with Miss Wong that Madam Chou’s evidence on this matter is inconsistent.

75.  I find on the evidence the August 07 Agreement had not existed.

What agreement or understanding was reached by Mr. Keung and Madam Chou on 4 October 2007

76.  Madam Chou mentioned the agreement or understanding she had reached with Mr. Keung on 4 October 2007 in her affidavits made on 21 June 2008 and 15 August 2008. She produced a note with Mr. Keung’s handwriting containing the gist of their discussion. Mr. Keung did not deal with the October agreement in his affirmations.

77.  According to his oral evidence, after the parties had made the August 07 Agreement, they had a further agreement or understanding on 4 October 2007 to resolve the dispute regarding the accounts and his leaving the Company. By the further agreement, it was agreed that he could leave when the handing over of the goods listed in the note had been cleared. The delivery date of the last batch of goods listed in the note was 20 September 2007. He alleged that by the further agreement, the parties had taken 20 September 2007 as the cut-off date for the purpose of paying off the Company’s debts and collecting sums due to the Company.

78.  Madam Chou’s evidence is that the discussion that day was the first time they talked about the dissolution of their association. Mr. Keung called her back as she was to go out for lunch. They could only talk for half an hour or so as Mr. Keung had to travel to Ningbo in the afternoon. He told her he had found a new office and would move out. He also informed her the name of the exporting entity was changed to Ningbo East and she signed two remittance forms to pay for the Company’s shipments in the total sum of about US$110,000. Upon her enquiry as to the liabilities of the Company, he showed her a typed document setting out in a table various shipments and the amounts payable by the Company to suppliers in the PRC.  

79.  Some figures and characters were written in the table by Mr. Keung at the time of the discussion. He explained in evidence that according to his calculation, the total outstanding payment due from the Company to two suppliers in the PRC in respect of the shipments listed in the table was RMB 650,508.50. Madam Chou’s evidence was to similar effect.

80.  The bottom half of the document was in Mr. Keung’s handwriting[1] and signed by him. The English translation of the handwritten note is as follows:

“To: Gangford International Limited

The above is responsible by Gangford to receive the goods and make payment.

If there are other sums not listed above, Keung Keung Shing would be responsible.

For all the things thereafter, Keung Keung Shing has nothing to do with Gangford. 4/10/07 12:00 noon”.

81.  I am unable to see how the agreement on 4 October 2007 as evidenced by Mr. Keung’s note would support his case there was the August 07 Agreement.

82.  What the parties had agreed on 4 October 2007 was an agreement in principle that Mr. Keung would leave the Company. It was only a preliminary agreement, mainly concerned with the outstanding liability of the Company to pay its PRC suppliers as at that date. It was not an agreement to dissolve the Company. As mentioned by Madam Chou, important matters such as shareholdings, business transactions, dividends, tax liability had not been discussed. She had no chance to verify the figures given to her by Mr. Keung, and the details were not worked out. For instance, in respect of goods ordered by LeoMil Fashion, a 30% deposit was required before shipment and the balance within 30 days of delivery. As at 4 October, the Company had received 30% deposit for goods which were yet to be shipped. Mr. Keung alleged that the Company should pay him the deposit received so he could pay the suppliers and make shipment. But there was no agreement to that effect.

83.  The second sentence in the note that Mr. Keung would be responsible if there were other sums not listed in the table is not unambiguous. I do not construe the last sentence of the note as meaning that from 4 October 2007, the business transactions entered into by the Company before that date would be taken over by Mr. Keung and that he would pay suppliers and make shipments to customers. I accept Madam Chou’s evidence the last sentence, which was written at her suggestion, was merely the kind of declaration that would be made when an employee leaves a company. I reject Mr. Keung’s evidence concerning the October agreement where he differed from Madam Chou.

84.  Madam Chou went on a business trip on 12 October 2007 and returned to Hong Kong on 27 October. She thought she would have an overall agreement with Mr. Keung on the terms of his leaving the Company, but there was no opportunity for further discussion when she discovered the withdrawal of funds by him on 31 October 2007.

If the breakdown of mutual trust and confidence was caused by Mr. Keung’s conduct

85.  I have described earlier the discoveries made by Madam Chou on 31 October 2007 about the withdrawal of funds by Mr. Keung and his email to Image Solutions and LeoMil Fashion on 3 and 4 October 2007 representing Fortune International to be a wholly owned subsidiary of the Company to receive payment on the Company’s behalf. As I have found the August 07 Agreement did not exist, Mr. Keung would not be able to justify his actions.

86.  In any event, the evidence he gave as to why he caused HK$330,000 to be paid to Fortune International by using a cheque pre-signed by Madam Chou and US$148,000 to be paid to Ningbo East by using a remittance form pre-signed by her is contradictory and unbelievable.

87.  Mr. Keung claimed he withdrew HK$330,000 from the Company’s bank account intending to reserve the money for paying the Company’s creditors in future, because he was worried the Company might not be able to pay its liabilities in time as Madam Chou felt upset about ending their business association and she refused to sign remittance forms or cheques. He also asserted when he withdrew HK$330,000, he believed his shareholder’s loan had not been repaid and he was entitled to payment of that sum. He produced a statement of account prepared by Tina Wong to support his contention that this sum had been fully applied to settle various liabilities of the Company to PRC suppliers. He did not however produce the source documents for the statement of account, claiming that the suppliers had refused or failed to co-operate by making available the relevant payment records. So no document from Ningbo East was produced to show that the remittance of US$148,000 was for payment of the Company’s liabilities.

88.  The allegation that Madam Chou was upset about ending their business relationship does not tally with other parts of his evidence where he claimed it was Madam Chou who had suggested and decided the Company should cease trading and she intended to dissolve their association. If the withdrawal were meant as a reserve fund to pay the Company’s future debts, it could not be repayment to Mr. Keung of his shareholder’s loan. Besides, according to the audited accounts, as at 31 March 2005 the amount owed to Mr. Keung for shareholder’s loan was HK$384,652.50. Mr. Keung admitted that since then, the Company had paid him a total sum of HK$400,000 by three cheques dated 19 June 2006, 31 July 2006 and 22 January 2007. He said he was unsure about the nature of these payments. If that was the case, he could not be sure about his entitlement to be repaid his shareholder’s loan to the extent of HK$330,000.

89.  I do not attach significance to the statement of account produced by Mr. Keung for payments received and made by Fortune International purportedly on behalf of the Company in the last quarter of 2007 and in January 2008. Source documents to verify the figures in the statement have not been produced. The fact that Mr. Keung had made payments to the suppliers and received payments from LeoMil Fashion of the 70% being the balance of the purchase price only indicated Fortune International had taken over part of the business of the Company. This does not go to show what he did was with the prior consent of Madam Chou.

90.  The unauthorised withdrawal of a large part of the Company’s funds and the improper diversion of the Company’s receivables and business constituted serious misconduct. What Madam Chou did subsequently was a result of and in reaction to her discovery of Mr. Keung’s misconduct on 31 October 2007. The complaints against her in the petition – unilateral dismissal of employees, removing documents to the Company’s auditors, denying Mr. Keung access to the office and the documents, lodging a complaint to the police of misappropriation of funds by him, and excluding him from the management since late October 2007 – are all unfounded. It was Mr. Keung’s misconduct that led to the breakdown of mutual trust and confidence, and his misconduct was the substantive cause of the breakdown in confidence.

91.  There is nothing in Miss Wong’s point that Madam Chou should have given Mr. Keung an opportunity to defend himself before she excluded him from the office in late October. Mr. Keung was not in Hong Kong when she made the discoveries on 31 October 2007. I accept her evidence she had asked a staff Jacky Ng to contact Mr. Keung when she discovered unauthorised withdrawals from the Company’s bank accounts using the blank cheque and the remittance form she had signed, and the response she got was an assertion that all of the moneys belonged to Mr. Keung. Given the circumstances, she had to act decisively to protect the interest of the Company. There was no unfairness to Mr. Keung. He was not denied opportunity to defend himself after his return to Hong Kong in early November. What he did thereafter – removing three computers from the Company’s office without Madam Chou’s consent so he could conduct business on his own with its customers, sending email to Image Solutions asking for purchase orders to be issued to Fortune International instead – showed that he was bent on taking over the business and customers from the Company. He was not interested in staying with the Company or in defending himself why he should not be excluded from management of the Company.

If Madam Chou had wrongfully withheld financial information of the Company

92.  It is not entirely clear if this is a free-standing complaint or whether it is part of the complaint related to the actions taken by Madam Chou when she allegedly reneged on the August 07 Agreement.

93.  The complaint, as I understand it, was that Madam Chou refused or failed to disclose the accounts and financial documents of the Company despite the request by letters of Mr. Keung’s former solicitors in early 2008. Further, she had failed to comply with an order in these proceedings for specific discovery made on 4 December 2008.

94.  I do not consider the complaint of failure or refusal to disclose accounts and financial documents to be made out. In the course of her application for a validation order, Madam Chou produced a letter from the auditors of the Company dated 13 May 2008 acknowledging delivery of accounting records of the Company on 18 March 2008 for the years ended 31 March 2006 and 31 March 2007. The auditors requested further documents for them to carry out audit work, including sales invoices, purchase invoices, inventory record, receivables and payables. She was unable to supply these documents as records had gone missing after Mr. Keung had removed documents, three computers and the software on 4 November 2007. She did her best to update records from the bank statements and having discussed with the auditors, prepared a statement of receipts and payments to include all the receipts and payments of the Company either through its bank accounts or her personal accounts from 1 November 2007 to 30 June 2008. The auditors reviewed the statement and gave an opinion on 11 August 2008 that it has been properly prepared.

95.  Madam Chou was anxious to obtain a validation order so she could lift the freeze on the bank accounts and continue to operate the business of the Company. She knew she had to adduce satisfactory evidence to the court on the financial condition of the Company. If she had available the documents requested by the auditors, there was no reason why she would not have provided them for audited accounts to be prepared to assist her application. I find that she had made serious attempts to provide financial information of the Company in July and August 2008, on the basis of documents and information available to her. 

96.  An order was made by consent on 4 December 2008 that Madam Chou is to give discovery to be verified on affidavit of the documents set out in a schedule including all correspondence between the Company and Image Solutions since 2005, and all sale invoices and purchase invoices of the Company since 1 April 2006. Pursuant to the order, she filed a list of documents on 17 December 2008 and verified the list in her 9^th affidavit. In her affidavit, which was prepared by her solicitors, it was stated that she has brought an action against Mr. Keung in the District Court in 2008 and she “[is] not prepared to produce documents in relation to Image Solutions, sale invoices and purchase invoices” generated after 4 October 2007, except for documents already disclosed in her previous affirmations, because she “[believes] the same are privileged and irrelevant to this winding-up action and production of the same will prejudice [her] claim against [Mr. Keung] in [the District Court action].”

97.  When she was asked about this affidavit in cross-examination, she claimed she had produced all the documents she was required to produce and did not appear to understand the claim of privilege she made. Her counsel Mr. Fung was unable to explain to the court how the claim of privilege came to be made except to say his instructions were that she had disclosed all the documents in her possession. Her solicitors subsequently provided a written explanation to the court saying they have failed to make clear in the affidavit that objection was taken only to disclosing the invoices of other customers apart from Image Solutions and LeoMil Fashion that have been developed by the Company after Mr. Keung left, as such invoices are irrelevant to the matters in issue. I do not think Madam Chou has wilfully withheld any relevant document.

Conclusion and orders

98.  There is no basis for relief under section 168A or for winding up on the just and equitable ground. I have found that Mr. Keung’s misconduct was causative of the breakdown of mutual trust and confidence (Yeung Bun v. Brio Technology International Ltd. [2002] 2 HKLRD 218 at 223F to 225C; Vujnovich v. Yujnovich [1990] BCLC 227 at 231H to 232A). I have found his misconduct to be serious. Even if his misconduct were not causative of the breakdown in trust and confidence, the court would have refused to make a winding-up order on the just and equitable ground as this would be against the principle that he who seeks equity must do equity (Ng Yat Chi v. Max Share Ltd. [2001] 1 HKLRD 561 at 572E to I; and [2001] 3 HKLRD 299 at 302H). Re Yenidje Tobacco Co. [1916] 2 Ch 426 at 430 relied on by Miss Wong for the proposition that a partnership should be dissolved where the relationship between parties has degenerated into a state of animosity with no hope of reconciliation has no application to these circumstances. I dismiss the petition.

99.  I make an order nisi Mr. Keung is to pay the costs of the respondents in these proceedings.

[1] The writing in Chinese reads: “致群福國際有限公司 以上為群福負責收貨付款。如有其他未列上數，由姜強勝負責。今後一切事宜，姜強勝與群福無關。4/10/07 12.00 noon”