HUNG WING SAN TONY v. KOO SHING SUN AND ANOTHER

HCCW 350/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 350 OF 2011

_________________

________________________

________________________

Background

1. This is the hearing of a Petition for the winding‑up of the 2^nd respondent, China Star Enterprise Hong Kong Limited (“the Company”) pursuant to section 177(1)(f) of the Companies Ordinance, Cap 32 (“the Ordinance”) on the ground that it is just and equitable to do so.  The Company was incorporated on 13 August 2003 under the Ordinance as a private company limited by shares.

2. Initially, the Company had two subscribers: the 1^st respondent (“Koo”) and Mr Lo Siu Hong (“Lo”).  They were the first directors of the Company.  Each of them held 5,000 shares in the Company making up the nominal share capital of HK$10,000.  In 2005, the Company increased its nominal share capital to HK$15,000 and 5,000 shares were issued to the Petitioner (“Hung”).  Hung was also made the 3^rd director since 30 May 2005.

3. It is not in dispute that Hung came to know Koo through the introduction of Lo.  Lo was a former colleague of Hung when they worked in Pentalpha Hong Kong Limited, a manufacturer of home appliances.  Both Lo and Hung are engineers.  On the other hand Koo is the owner of a toy manufacturing business.  He operates his business through Weizco Industries Limited (“Weizco”) which is a Hong Kong incorporated company controlled by Koo.

4. Weizco has an office in HongKong and factories in Zhuhai and Zhongshan.  The factory in Zhongshan is operated by a PRC company which is wholly owned by Weizco, namely Huatong Metals & Plastic Products Co, Ltd (“Huatong”). The major business of Huatong is toy manufacturing.  However, Koo has been keen on research and development and has invested in a variety of product development projects.

5. Lo and Koo have been friends for years.  When they first incorporated the Company in August 2003, it was their intention to use the Company as a vehicle for the development of a personal anion machine for killing air‑borne bacteria and virus.  This idea was prompted by the SARS outbreak in Hong Kong in early 2003.  In early 2004, sample product of the anion machine was produced and ready for production.  However, following the successful control of SARS, demand for such a product drastically dropped and hence the project was put to a halt.

6. In 2004, Lo moved to live and work in Shenzhen.  At that time, Hung was working for 東莞愛科電子有限公司 (“Airlux Group”) which was a household appliance manufacturer, including the manufacturing of solenoid pumps.  Hung told Lo that he was not happy working in Airlux Group and his idea of developing his own production of solenoid pumps.  According to Hung, what he lacked was financial backing.  Lo knew that Koo was interested in exploring new products.  Lo thus thought that by introducing Hung to Koo, he would be helping his two friends.

7. In April 2005, Lo introduced Hung to Koo.  According to Hung, he told Koo that he had researched into solenoid pumps since 1996 and that by 2005, his research had already reached a mature stage and he was ready to enter the market.  Their discussions eventually resulted in all three parties entering into a Chinese Cooperation Agreement dated 27 April 2005 (“the Agreement”).

8. One of the major issues in this case is whether the Company is in fact a quasi‑partnership.  It is thus necessary to set out the terms of the Agreement in full:

「

合作協議

顧仁生先生(以下簡稱顧生)，熊穎申先生(以下簡稱熊生)，盧紹康先生(以下簡稱盧生)，三位先生(以下簡稱三方) 以真誠合作，友好協商，互補優勢，共同努力，長期發展，均享利益為宗旨，於2005 年4 月 27 日簽訂合作協議，改組“華星企業香港有限公司” (英文名為: China Star Enterprise Hong Kong Ltd) (以下簡稱華星公司)。

此協議自簽字日起生效，協議有效期為壹拾年(TEN YEARS)。

三方合作的目的是開發，生產，銷售可專用於蒸氣類產品的微型電磁水泵(以下簡稱水䂞)為主的各煩電器零件以及微型負離子機等電器產品並均享利益。

1. 設立一間三方股東的有限公司:

1) 在香港改組已經註冊的“華星企業香港有限公司”(英文名為China Star Enterprise Hong Kong Ltd)。註資本仍為港幣$10,000 圓。

2) 盧生是三方合作的發起人，協調合三方意見，促成協議簽署。

三方在華星公司的地位平等，三方的職稱分別如下:

顧生為董事長(法人代表)	Chairman
熊生為執行董事	Managing Director
盧生為總經理	General Manager

三方各佔公司的 1/3 的股份，即33.333%。協議有效期內三方中任何一方可將其股份轉讓給其家人。合作協議有效期滿後，三方再商議延續協議，或轉變股份(內部出售或轉讓給家人)，或解散公司按股分配當時公司實際資產等事宜。

3) 華星公司盈利以後，三方商定公司留下再發展的盈利比例(25% 左右)。

4) 顧生在香港的威豪實業有限公司為華星公司提供可放一張辦公桌的辦公地方壹年。華星公司在适當時機將在香港另設辦公室並在深圳或東莞地區設立辦事處，作為公司研發和銷售可專用於蒸氣類產品的微型電磁水泵為主的各類電器零件和微型負離子機等電器產品的基地。

5) 協議生效後，華星公司首六個月起動，運作資金由顧生預支(估計約100萬港幣)。首六個月起動，運作資金(港幣100萬)分配如下:

認證和專利申請	25.0萬	每月薪金5.3萬，六個月共計	31.8萬
研發設備	11.3萬	開發打樣費用	2.0萬
零件，原材料	15.2萬	模具	14.7萬
_________________________________________________________
		共計港幣: 100.0萬

具體研發設備所用資金如下:繞線機 1.2萬，變頻儀 1.2萬，綜合測試台 3.2萬，小車床/ 鉆床 2萬，示被器等多秉試儀 3萬，空壓機 20BAR 0.7萬，共11.3萬。

6) 華星公司盈利以後，在盈利中先提取50% 資金逐步偿還顧生的預支款項。然後再按三方股份分取利益。由於三方合作之前熊生在設計開發微型電磁水泵上付出了大量的時間和金錢以及考慮到此項設計的技術價值，三方經友好協商決定在偿還顧生的預支款項後，每銷售一只水泵提取港幣伍角(HKD$0.50)給熊生，熊生在累計提取金額達到港幣100 萬圓(HKD$1,000,000.00)後不再提取。除此項所說的提取以外，協議期內三方都不再提取股份和薪酬之外的利益。

7) 所設計的微型電磁水泵和微型負離子機優先由顧生在中山(或珠海)的工廠負責生產，顧生在中山(或珠海)的工廠將以合理成本生產產品。華星公司盈利以後，三方可協商另設專廠生產。

8) 微型電磁水泵和微型負離子機的技術，專利和認証的所有權屬於華星公司。所有微型水泵和負離子機的生產必須按照設計規格及生產指引資料嚴格执行。

9) 每月舉行董事例會一次，三方輪流召隻并制定會議的時間和地點以及主持會議。如有需要，任何一方可提出增加安排會議。華星公司的事務由三方友好民主協商後作出決定，由熊生負責執行公司的日常運作。在下一次董事例會上熊生要報告上一次董事例會以來公司的日常運作狀況並聽取其他董事的意見。

10) 華星公司的財務，人事，工程設計，採購，物料，生產，品管，出貨等全部運作要對三方董事完全公開，並接受三方董事的監管。

2. 三方責任分工:

2.1 顧生負責以下工作:

1) 協同華星公司的市場開發。並側重採購，物料，生產和出貨的管理。

2) 按照水泵和微型負離子機全部零件的機械圖，製造五金和塑膠模具。

3) 試啤五金和塑膠零件，修改模具以達到設計要求。

4) 開發階段試啤500 套水泵和微型負離子機的五金和塑膠零件，并按照產品BOM備妥500 套所列各項原材料。(優先完成三個型號的水泵)。

5) 製作零配件，組裝零件和產品，嚴格控制質量。

6) 編寫各種產品生產工藝流程卡。

7) 印製產品說明書，保用卡，標貼，廣告單張和產品包裝彩盒。

8) 聯系客戶，推介產品，爭取訂單。

9) 正常運作: 按照所接的訂單采購零件，原材料，安排生產，包裝，驗貨，報關，付運，銀行信貸和L/C兌現事務。

2.2 熊生負責以下工作:

1) 全職全權負責華星公司的日常運作。並側重產品開發，財務和市場開發的管理。

2) 負責設計開發產品的機械部分。負責制定并执行產品的開發計劃及所有技術問題并保證此產品和其他公司的同類產品沒有利害沖突和法律糾紛。

3) 負責策劃并执行市場發展計劃。

4) 負責申請專利 (由盧生協同申請)。

5) 協同盧生申請VDE (或TUV)，UL認證。

6) 公司网頁設計 (www.solenoidpump.com.cn)。

7) 負責招聘公司重要骨干成員。

8) 編寫產品 (微型電磁水泵) 中文和英文說明書。

9) 聯系客戶，推介產品，爭取訂單。

2.3 盧生負責以下工工作:

1) 協同華星公司的市場開發，並側重申請各項認證，人事和品質控制管理。

2) 負責開發產品的電子部分。

3) 負責微型負離子機的技術。

4) 負責協同熊生專利申請。

5) 負責申請VDE (或TUV)，UL認證。

6) 編寫產品 (微型負離子機) 中文和英文說明書。

7) 設計產品廣告單張。

8) 計產品包裝彩盒。

9) 聯系客戶，推介產品，爭取訂單。

3. 工作進程

1) 合作協議簽訂之後，首先����動微型電磁水泵項目。

2) 熊生提供微型電磁水泵的開模具的資料，顧生在今年6 月左右完成三個型號的微型電磁水泵的模具制作。

3) 熊生提供微型電磁水泵樣品 (部分手板)，盧生在今年5 月開始進行三個型號的微型電磁水泵的VDE(或TUV)，UL認證申請。

4) 微型電磁水泵模具完成後，熊生將和顧生密切合作進行試模，試裝，調試及改進模具，使之達到設計技術要求。

5) 熊生在7 月左右正式加入華星公司為全職受薪股東，全力，全權負責公司的日常運作。熊生的月薪為3.3 萬港幣。協議有效期內此薪酬不作調整。

6) 今年8 月份左右試產，熊生加入華星公司後半年落實小量微型電磁水泵定單。

7)  為了減少華星公司的經營成本，盧生全職加入的時間待盈利後三方再商議決定。」

9. Consequently, the Company increased its nominal share capital to HK$15,000.  Hung was issued the additional 5,000 shares in the Company and made a director.  The Company then proceeded to set up a representative office in Shenzhen.  It also rented an area within the factory premises of Huatong in Zhongshan as the Company’s workshop (“the Workshop”).  The remaining parts of Huatong’s factory continued to be used by Huatong for its toys production.

10. According to documents registered with the Companies Registry, Lo resigned as a director of the Company as of 28 August 2008.  It was also recorded that Lo transferred his 5,000 shares to Koo on 15 December 2008.  Then on 29 December 2008, Koo transferred 1,000 shares to Hung.  Since then, the percentage shareholding of Koo and Hung became 60% and 40% respectively.

The issues

11. It is Hung’s case that the Company is in fact a quasi-partnership.  He alleged that since the second half of 2009, Koo carried out a series of unfair and prejudicial conduct which eventually resulted in a total breakdown of trust and confidence between him and Koo.  Further, as a result of Koo’s wrongful conduct, the business of the Company was effectively put to a standstill in October 2011.  Hung thus alleged that Koo’s conduct resulted in a loss of the Company’s substratum.  In the circumstances, Hung prayed that it is just and equitable to wind‑up the Company.  The list of alleged misconduct was set out in Hung’s written Chinese Opening as follows:

(1)  Koo stopped funding the Company and withheld payments due to its suppliers.  This directly caused the collapse of the Company;

(2)  Koo solicited the Company’s key employees to join Huatong with a view to replicating a similar production line in direct competition with the Company;

(3)  Koo plotted to hijack the Company’s business and/or deprive Hung of the fruits of success;

(4)  Koo wrongfully refused to sign the draft audited accounts and file a tax return;

(5)  Koo unilaterally removed and misappropriated the Company’s plants, machines, raw materials and stocks;

(6)  Koo wrongfully deprived Hung of his salaries and bonuses;

(7)  Koo refused to reimburse Hung the money he paid out for discharging the Company's expenses; and

(8)  Koo unlawfully appointed his son Gudy Koo (“Gudy”) as a director of the Company with a view to siphoning off the Company's money kept in its bank account maintained at the Bank of China.

12. In addition to the complaints originally pleaded in the Petition, Hung included further complaints in his Points of Claim, Points of Reply and his Opening submissions as follows:

(1)  Koo actually holds 10% shares in the Company on trust for Hung;

(2)  Koo approached Mr Tam Leung and Mr Hung Tak Hing to join Huatong for pump production;

(3)  Koo had misappropriated HK$2 million from the Company;

(4)  Huatong failed to account for tax rebates to the Company;

(5)  the Company has never declared any dividend;

(6)  Huatong had overcharged the Company in respect of mould-making fees and rentals; and

(7)  there is a loss of substratum of the Company.

13. It is Koo’s case that the Company is not a quasi‑partnership.  He characterized the Agreement as a shareholders’ agreement.  He considered himself an investor.  Hence, the first issue to decide in this case is whether the Company was established and has been operated as a quasi-partnership.

14. Koo then denied the alleged misconduct on his part and provided, through the evidence of himself and his witnesses, detailed refutations.  Koo further asserted that Hung has not come to this court with clean hands.  It is Koo’s case that Hung (together with his wife and companies under his/their control) surreptitiously set up a rival business and intentionally run down and diverted the Company’s business.  It was Hung who caused the closing down of the Company’s operations.  Any breakdown of mutual trust and confidence or any inactivity or reduction in business activity of the Company was due to Hung’s misconduct and breach of fiduciary duties.  It is Koo’s case that the Company still has prospect of a viable business.  It is not in dispute that the Company still has over HK$6 million sitting in a bank account with Bank of China since October 2011.

Quasi-partnership

15. There is no dispute on the applicable legal principle which was expounded in the seminal speech of Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd[1].  The application of this principle has recently been explained by To J in Re Hercules Holdings Limited[2] as follows:

“A company is an incorporation with separate corporate personality. A quasi-partnership is difficult to define. As pointed out by Lord Wilberforce in Ebrahimi and Westbourne Galleries [1973] AC 360 at 379, the expression is confusing. It is a shorthand expression for a company in which the exercise of membership rights by members of a company may, by reason of its particular circumstances, be subjected to equitable considerations of a personal character arising between the individual members which might make it inequitable for them to insist on their legal rights or to exercise them in a particular way. Such circumstances are usually associated with small private companies, but the fact that a company is a small one, or a private company, is not enough. 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; (ii) an agreement or understanding, that all, or some, of the shareholders, shall participate in the conduct of the business; (iii) restriction on 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.”

16. When the Company was first incorporated, it was formed between two old friends Koo and Lo with a view to cooperating in the development of a new business venture, namely the anion machine project.  When Lo introduced his ex‑colleague and friend Hung to Koo, he described his intention as helping two of his friends.  Koo’s role was obviously that of an investor and provider of various resources. Lo and Hung also invested in the Company, albeit not on monetary terms.  They both invested their talent, engineering experience and technical knowhow.  The preamble and terms of the Agreement contained repeated references to “friendly cooperation for mutual benefits/profits”.  An initial period of cooperation was expressly set for 10 years.  It is clear from Clause 1 of the Agreement that the Company was to be the corporate vehicle that would embody the cooperative venture between the three persons.  Within a period of 10 years, it was only contemplated that transfer of shares could be made to family members of each party.  This is an important factor to show that the parties wished to preserve the personal nature of this cooperation.  The parties also contemplated that after the initial period of 10 years, they could either continue to cooperate for a further term or to dissolve the Company.  By that time, selling one’s shares to outsiders could also become one possible scenario.  This again high-light the fact that within the 10 years, the running of the Company would bear the hallmark of a “personal cooperation between friends”.

17. Clause 2 of the Agreement also spelt out in detail the respective duties and responsibility of each of the three parties in the cooperation.  Furthermore, Clause 1(9) mentioned that decisions of the board of directors should be arrived at through “friendly and democratic negotiations”.  Clause 1(10) also stated in clear terms that the entire operation and management of the Company would be subject to the supervision of all three persons.

18. In my judgment, the circumstances underlying the original incorporation of the Company and the subsequent addition of Hung as one of the cooperating parties and shareholders, when read in the light of the terms of the Agreement “合作協議”, indicated that the cooperation of the three shareholders of the Company was of a personal character.  Their cooperation bore significant hallmarks normally pertaining to a quasi-partnership.  It is perhaps intuitive to note that despite the submissions originally made in the written Opening of Mr Suen (counsel for Koo), he did not insist on submitting that the Company is not a quasi-partnership in the Closing Submissions.  I am satisfied on the evidence that the Company is in fact a quasi-partnership.

Clean hands

19. One major opposition to the Petition is Mr Suen’s submission that Hung did not come with clean hands.  Mr Suen relied on the following dictum of Lord Cross in Ebrahimi v Westboarne Galleries[3]:

“A petitioner who relies on the ‘just and equitable’ clause must come to court with clean hands, and if the breakdown in confidence between him and the other parties to the dispute appears to have been due to his misconduct he cannot insist on the company being would up if they wish it to continue.”

20. This principle was explained in subsequent English authorities and summarized in the judgment of Le Pichon J (as she then was) in Yeung Bun v Brio Technology International Ltd & another[4].  It was held that “clean hands” is not an overriding requirement and that the doctrine only applies where a breakdown of confidence was the basis of the petition and that the alleged misconduct was causative of the breakdown.

21. In the present case, the breakdown of mutual trust and confidence was the basis of the Petition.  Hung accused Koo of causing the breakdown.  On the contrary, Koo accused Hung as the real culprit for the breakdown of trust and confidence.  In fact, the most substantial portion of Mr Suen’s cross‑examination of Hung was spent on the issue of Hung’s secretive involvements in several companies which rival the business of the Company.  Koo also relied on the evidence of Mr Ko Chiu Kelvin (the 6^th witness for the respondents), a private detective engaged by Koo to conduct an investigation on the activities of Hung.  Mr Ko adduced an investigation report which included voluminous exhibits.  A consideration of this issue will also reflect on the credibility of Hung.  This is where I propose to commence my examination of the evidence.

深圳華星恆泰泵閥有限公司 (SZCNHT)

22. The Chinese name of the Company is 華星企業香港有限公司.  It maintained a representative office in Shenzhen.  It is not in dispute that in the early formative years, all expenses incurred by the Company would be paid on its behalf by Weizco.  These expenses would include those for the purchase of materials from suppliers; expenditures for the Shenzhen representative office; and payroll for staff working both at the Shenzhen representative office and the Workshop.  Weizco would then maintain a running account with the Company recording the amount of money owing from the Company to Weizco.  This mode of operation continued even though in later years the Company was able to generate income.  As explained by Hung, the Company would generate revenue from two main sources: (i) export revenue which would be received by the Company’s bank account maintained with Bank of China in Hong Kong; (ii) revenue from PRC sales which would be transacted through Huatong (since PRC VAT invoices would be required).  Such revenue would be received by Huatong which also maintained a running account with the Company; and (iii) non‑VAT and non‑export sales of samples in small quantities which could be done directly by the Shenzhen representative office. As for the Company’s expenditures, Koo insisted that they would continue to be paid mainly through Weizco and some by Huatong.  The Company would from time to time transfer money from its Bank of China account to Weizco.  As a result of this mode of operation, the accountant of Weizco actually oversaw the expenditures incurred by the Company in the course of maintaining the running accounts between Weizco, Huatong  and the Company.

23. At the material times, one major PRC supplier of the Company was 深圳鑫安達五金制品有限公司 (“SZYOT”).  According to the evidence of Gudy (the 4^th witness for the respondents), it was in January 2009 that the former accountant of Weizco Mr Kelvin Yip (“Kelvin”, the 3^rd witness for the respondents) left his employment.  Kelvin was succeeded by Miss Catherine Cheung (“Catherine”).  In the course of taking over the files and records from Kelvin, Catherine became concerned with the lack of supporting documents for the running account maintained between Weizco and the Company.  At the material times, Miss Louise Ng (“Louise”) was responsible for maintaining the books of accounts of the Company.  Louise is in fact Hung’s wife.  There were thus numerous interactions between Catherine and Louise with a view to settling the running account.  Gudy’s evidence is that he and Catherine were unable to obtaining the necessary supporting documents from Louise and Hung despite numerous demands and meetings.  In particular, in relation to certain sums purportedly due to certain suppliers, Gudy and Catherine decided to contact those suppliers directly to seek confirmation since they received no supporting documents from Lousie.  SZYOT was one of those major suppliers.  By an email dated 1 September 2009[5], Catherine requested SZYOT to provide “對帳單” (accounts reconciliation).  In response, SZYOT provided Catherine with two sets of accounts reconciliation, one in relation to the Company and the other in relation to a company named “華星恆泰”, the abbreviated Chinese name of SZCNHT.  Gudy was thus alerted to the existence of SZCNHT and it was his suspicion that materials supplied by SZYOY to the Company and SZCNHT were all charged to and paid by the Company.

24. This led to a chain of enquiries resulting in significant revelations:

(1)  On 14 August 2009, a company named China Star Industrial Hong Kong Limited (華星泵閥香港有限公司) was incorporated in Hong Kong (“CS Industrial”).  Louise was the sole shareholder and director[6]. Since 8 April 2011, 30% shareholding in CS Industrial was transferred to Mr Zhen Fanhong (“Zhen”).  Zhen is a director and shareholder of Lai Yeung Industrial (Hong Kong) Ltd (“Lai Yeung”) which is an associated company of SZYOT.

(2)  On 23 October 2009, SZCNHT was incorporated in the PRC.  The two shareholders were 夏傳榜(“Ha”) and鄒愛貞(“Zhou”).  Hung acted as its first Legal Representative (法定代表人); Executive Director (執行常務董事) and General Manager (總經理).  On 7 April 2010, Hung was replaced by his wife Louise as Legal Representative and Executive Director.  However, Hung remained all along as its General Manager until 1 November 2010 when he was replaced by Mr Liu Zhen Bin (“Liu”).  Liu is another director and shareholder of Lai Yeung.  Liu is the husband of Zhen thus equally linked with SZYOT.

(3)  Both CS Industrial and SZCNHT carried on the business of manufacturing and marketing solenoid pumps[7] bearing model references which were substantially similar to those of the Company[8].  Both CS Industrial and SZCNHT have thus been engaged in business competition with the Company.

(4)  One can see the striking similarities in the Chinese and English names of CS Industrial and SZCNHT as compared to those of the Company.  The adoption of “華星” and “China Star” in the company names could not have been accidental and carried passing off implications.

25. The Company had in fact instituted HCA 162/2012 (“the Action”) against Hung, Louise, CS Industrial and SZCNHT for inter alia breach of fiduciary duties and passing off.  In the Amended Defence and Counterclaim filed on 19 June 2013 by Hung in the Action[9], Hung made the following assertions:

(1)  Hung admitted that CS Industrial was established by Louise.  Hung stated that he was not involved in the business, operations and affairs of CS Industrial.

(2)  He admitted that SZYOT was a major supplier of the Company and that Zhen was his acquaintance.  He however denied having close business relationship with Zhen.

(3)  As for SZCNHT, Hung denied that it was owned or controlled by him or Louise.  Despite having been its Legal Representative, Executive Director and General Manager, Hung denied having participated in its operation between 23 October 2009 and 1 November 2010.  He said his positions were merely “nominal”.

(4)  In particular, Hung said that he was asked by Zhou, his “longstanding friend for over 30 years”, to hold such nominal positions.  Hung said that he agreed to such invitation “to help an old friend”.

(5)  Hung said that it was only in and around January 2012 that Zhou offered him a job as a technical consultant of SZCNHT.  That was the first time he became involved in the affairs of SZCNHT.

26. At the beginning of Hung’s cross-examination by Mr Suen, Hung still insisted that Zhou was his friend and that in agreeing to become the “nominal” Legal Representative of SZCNHT, he was merely helping a friend.  Hung was then asked about Louise’s role as Legal Representative and Executive Director of SZCNHT between 7 April 2010 and 1 November 2010.  Hung was evasive and said he was not clear about Louise’s involvement in the business and affairs of SZCNHT.  To explain why and how he and Louise got involved with SZCNHT, Hung said under cross-examination:

“At the beginning when this company [SZCNHT] was incorporated I did have intention to have a factory for [the Company]. The setting up of such a big factory, the future development of [the Company] and for further exploration of market, I thought it was feasible. That was why at the beginning I was its legal representative and general manager. Later, because I was a director in [the Company], I thought it was not appropriate so I resigned. That time, I was not able to find another person, and I talked with my wife, and so her name would then be used. Later on, two of us were of the view that both of us were not appropriate, therefore both of us resigned.”

27. It was through repeated questioning by Mr Suen who brandished his knowledge of various precise personal particulars of Zhou that Hung eventually succumbed and admitted that Zhou is his mother-in-law.  When questioned as to why he had hitherto been referring to Zhou as a friend, Hung beguilingly argued that they indeed were friends and that their relationship just changed.  It is interesting to note that Louise equally avoided mentioning Zhou as her mother in the Amended Defence she filed in the Action[10]. She even said that she was asked to replace Hung because she was a Hong Kong resident.  It was then further revealed that the other shareholder of SZCNHT, namely Ha, is another relative of Hung and Louise.  Ha is in fact the cousin of Hung’s mother.  Given such close relationship between all four persons, I am not impressed by the evidence of Hung, particularly when he stated that he was not clear about Louise’s involvement in the operation of SZCNHT.  Even on his own evidence, Louise had been a career woman assisting him in the business of the Company.  His refusal to reveal the exact role and participation of Louise in the affairs of SZCNHT was most evasive.  In the subsequent course of cross-examination, Hung also gave inconsistent evidence about Louise’s involvement in SZCNHT.  At one stage, Hung agreed that the version put forward by Louise in her Defence in the Action was correct: namely, that apart from her nominal capacity, she was not involved in the business of SZCNHT.  However, later in cross-examination, Hung stated that Louise received wages of RMB10,000 per month from SZCNHT for serving as its Finance Manager.  Zhou is admittedly a retired mechanical engineer of a textile factory.  It is difficult to see how, all of a sudden, she became (as Hung alleged) experienced in the research and development of solenoid pumps.  Neither was it satisfactorily explained as to Zhou’s and Ha’s financial resources and business experience which enabled them to set up such a sizable manufacturing facility.  Furthermore, Hung did not satisfactorily explain why Liu of SZYOT became intricately involved in the affairs of SZCNHT.  I find his evidence contrived.  I am of the view that Hung behaved evasively seeking to hide his involvement in the establishment and operations of SZCNHT.

28. In the affirmations filed in these proceedings, the pleadings filed in the Action, and in the course of cross‑examination, Hung repeatedly stated that he had absolutely no involvement in the business and affairs of SZCNHT prior to becoming its technical consultant in January 2012.  According to the Investigation Report of Kevin Ko[11], Mr Ko described in detail the investigative steps undertaken at the factory premises of SZCNHT.  Visits were made on divers dates between 10 February 2012 and 31 October 2012.  Workers of SZCNHT were interviewed who gave detail information as to the business operations of SZCNHT.  In fact, one worker was able to identify the boss of SZCNHT as “Mr Xiong (熊先生) who is a little short and fat”[12].  Those descriptions matched the features of Hung.  The worker also identified two deputy managers, one Mr Wu (吳) and the other Mr Yan (嚴).  Another worker provided the investigator with a Contact List of SZCNHT as of 1 November 2011 (“the Contact List”)[13].  The Contact List equally mentioned two deputy managers bearing such surnames.  Other workers were able to provide abbreviated names of some major suppliers of SZCNHT which matched with the names of five previous suppliers of the Company[14].  On 1 April 2012, certain product samples and production documents of SZCNHT were obtained[15].  On 15 April 2012, a pack of discarded documents and some samples were obtained[16].  Notably from these discarded documents were Production Orders of SZCNHT bearing the signatures of Mr Zhou Wu (周武) and illegible English signatures that resembled “Tony”[17].  Tony is incidentally the English name of Hung.  Mr Zhou Wu’s name also appeared in the Contact List.  These Production Orders were dated between April and June of 2010. Then on 11 May 2012, further discarded documents were received by the investigator[18].  Amongst these discarded documents were Production Orders of SZCNHT bearing the signatures of Zhou Wu and what appeared to be the Chinese signatures of Hung[19].  These Production Orders were dated August 2010.  Similar Production Orders were obtained on 29 May 2012[20]bearing dates between July and August 2010.  On 9 August 2012, further discarded documents from SZCNHT were retrieved showing the identities of various suppliers of SZCNHT[21].  Further discarded items were retrieved on 16 October 2012[22] and 31 October 2012[23].  These documents were various in nature but related to different aspects of operation of SZCNHT.  Many showed signs of crossing-out and defacement as well as free-flow Chinese handwritings.  Their appearances are entirely consistent with their provenance as described in the Investigation Report.  I have also demanded Mr Suen to show me several original documents and two of them have been made physical exhibits.  If I accept the evidence contained in the Investigation Report to be truthful and reliable, it would at least mean that Hung had been actively involved in the business operation of SZCNHT as early as 2010.  This would flatly contradict his evidence that he held only “nominal” positions in SZCNHT until sometime after January 2011.

29. Mr Kelvin Ko, who adduced the Investigation Report, was cross‑examined by Hung and remained unshaken throughout.  Hung asked whether remunerations were given to informants.  Mr Ko fairly said that he was unable to affirm or deny as the actual investigation was conducted through his agents.  He however pointed out that much of the information was also obtained by investigating agents (acting under pretext) interviewing various suppliers of SZCNHT. Clearly under those circumstances, no remuneration could have been offered and there could have been no incentive for the suppliers to fabricate.  He also mentioned that conversations had been recorded although only the gist thereof was set out in the Investigation Report.  I find Mr Kevin Ko to be a cogent and honest witness and I accept his evidence.  Certainly, I would exercise caution towards the hearsay evidence of the interviewed workers.  Nonetheless, I am able find corroboration of their evidence from various documents exhibited to the Investigation Report.  I am also satisfied as to the provenance of those documents obtained by the investigating agents and annexed to the Investigation Report.

30. Hung was also cross-examined by Mr Suen on various documents which purportedly bore his signatures.  In relation to a Production Order of SZCNHT dated 13 August 2010[24], Hung initially denied that it bore his Chinese signature and demanded to inspect the original.  Mr Suen was able to adduce the originals of two similar Production Orders which were made Exhibits R1 and R2.  Mr Suen also provided a table listing out all other SZCNHT documents which bore the signatures of Hung and Louise.  Exhibits R1 and R2 appeared to be photocopies of two respective original Production Orders.  The alleged signatures of Hung on Exhibits R1 and R2 were hence photocopies of the original signatures.  However, they were each chopped with an original stamp in red ink.  The stamp read: “深圳市華星恆泰泵閥有限公司 受控文件”.  When asked whether Exhibits R1 and R2 bore his signatures, Hung was wavy and said he was not certain. He did not suggest them to be forgeries and provide reasons for so suggesting. He did not even suggest that they looked in any way dissimilar to his Chinese signature. When asked whether the stamp was that of SZCNHT, Hung again said he could not confirm because he never paid attention to that.  Hung was then referred to a Delivery Itinerary of the Company bearing Hung’s English signature “Tony”[25].  Hung confirmed that it bore his English signature.  Hung was then referred to a Production Order of the Company dated 25 February 2009[26].  This Production Order was strikingly similar in format to Exhibits R1 and R2.  It also bore the signatures of Zhou Wu and “Tony” which looked exactly the same as those signatures appearing in Exhibits R1 and R2.  Hung again evaded and said he was not certain about this document.  I find Hung’s evidence contrived and difficult to reconcile.  Hung’s position boiled down to a bare non-admission of authenticity in respect of the various SZCNHT documents retrieved by the investigating agents.  Although I have not been assisted by expert evidence, I can see striking similarities in the Chinese signatures of Hung in Exhibits R1, R2 and many other undisputed documents of the Company.  I can also see similar striking similarities between the English signature “Tony” on various SZCNHT documents and some undisputed documents of the Company.  These Chinese and English signatures all appeared to be written in free-style.  Hung did not suggest that they looked different in any appreciable way from his genuine signatures.  I had previously stated that I am satisfied with the provenance of the SZCNHT documents retrieved by the investigating agents.  The evidence of Hung created no doubt on my mind and I find that the various SZCNHT documents were not fabrications.  They bore the signatures of Hung.  They were all created in the year 2010, a time when Hung denied having any participation in the business operation of SZCNHT.  I find that these documents contradict the evidence of Hung.  They provide another cogent reason for rejecting Hung’s credibility.

31. Hung was then cross-examined on an email dated 20 August 2010 from “Annie” of SZCNHT to Louise and Hung[27]. The title of this email was “組織架構圖”.  In the attached Organization Chart of SZCNHT, Hung was stated to be the General Manager.  Under Hung were two consultants, one of which was Mr Yim Chung Wai.  Hung admitted that Mr Yim was his friend and consultant.  Louise was stated to be a manager in charge of three departments: Marketing; Purchasing; and Financial.  Mr Zhou Wu was stated to the Person‑in‑charge of Development.  The assistant General Manager was Mr Wu Zu “吳阻”.  These names (and others appearing in the Organization Chart) appeared also in the Contact List mentioned above.  Hung was wholly unable to provide cogent and credible explanation as to why Louise’s name appeared as a manager in charge of various important departments in SZCNHT.  It is also important to note that Koo obtained this email from Liu. In fact, on 16 January 2013, Liu instituted legal proceedings in the PRC against Hung.  It was Liu’s case that in August 2009, Hung invited him and he agreed to invest in Hung’s project of establishing a solenoid pumps manufacturing plant.  Pursuant to that agreement, he and Hung each invested RMB1.5 million and SZCNHT was established.  Liu further stated that SZCNHT used Hung’s relatives as registered shareholders and Hung was made the Legal Representative[28]. At the trial, Hung objected to Koo making use of documents obtained from Liu. I had ruled against Hung’s objection.  In the course of Hung’s submission, he argued that Liu was merely a lender of funds to SZCNHT and alleged that Liu’s PRC litigation was maliciously pursued.  Whether Liu was truly an investor or a mere lender is not for me to decide.  What interests me more is the fact that Hung provided no explanation as to why Liu would describe him as the protagonist.  This assertion of Liu was not traversed by Hung in his evidence. Liu’s version was also consistent with the undisputed company registration documents concerning SZCNHT.

32. Faced with overwhelming documentary evidence as to his active participation in the business activities of SZCNHT prior to January 2011, Hung gave evidence that there was an alleged plan to nurture SZCNHT into an OEM factory for the Company.  Hung described SZCNHT as an OEM supplier of the Company.  He said that it was common to get involved in the operation of a supplier.  When asked to provide a list of the things he did in SZCNHT, Hung said:

“(1) there was a chance that I signed some documents in relation to processing of SZCNHT, eg some application for ISO, there were internal documents relating to ISO, so I help her to sign these documents;

(2) since at that time there was an intention to develop SZCNHT into a big factory, so clients were introduced to SZCNHT for it to contact these clients.  At the time, the quality of the Company’s production was not so good and there was a crisis.  There were some small and difficult clients, so they were introduced to SZCNHT.  These clients included Zhejiang Sing Lai Tak; Zhejiang Hoi Pok; and Zhejiang Chut Lik who had previously purchased solenoid pumps from the Company”

33. Hung’s evidence is to be read together with his evidence set out in paragraph 25 above.  In a nutshell, Hung argued that his involvement in the activities of SZCNHT was all done for the benefit of the Company.  He was merely seeking to nurture a big OEM factory for the Company.  In my view, Hung’s purported explanation was disingenuous and utter nonsense.  If the setting up of SZCNHT was for such benevolent objective, I fail to see why all these activities were done behind the back of Koo.  Clause 1(7) of the Agreement clearly contemplated that after the Company became profitable, the parties could negotiate for the establishment of a specific factory to handle production. I cannot see any legitimate reason for excluding Koo in the establishment of a production plant to serve the interest of the Company.  Nor can I find any legitimate basis for diverting business and clients of the Company to SZCNHT which was established by Hung, his wife and/or their relatives (even assuming that Liu was not an investor).

34. Mr Suen further submitted that this purported explanation from Hung was a relatively new invention. It was never mentioned in the Points of Reply filed in these proceedings; the original and Amended Defence in the Action; and any of the affirmations filed by Hung in these proceedings except in his latest affirmation dated 7 August 2013 and filed shortly before the trial.  By that time, Koo had adduced the Investigation Report and various documents obtained from Liu which contained clear evidence of Hung’s involvements in SZCNHT and his diversion of the Company’s business to SZCNHT.  I agree.  In his 3^rd Affirmation[29], Hung was still denying that he had diverted the Company’s business to any company or person.  In a vain attempt to explain the overwhelming evidence disclosed in the Investigation Report, Hung now admitted that there was such diverting of business but beguilingly argued that it was done to avoid certain quality problems in the Company’s production.  I find that Hung had not been honest and frank in revealing his true connection and involvement in SZCNHT.  I find that Hung had been making up stories as he went along.

35. Mr Suen also relied on an email dated 13 April 2010[30] as evidence of Hung being a beneficial owner of SZCNHT.  This email was sent from “Candy”, a staff working in the accounts department of SZCNHT to Louise (by Louise’s email address in SZCNHT).  Candy referred to a list of materials received by SZCNHT and sought instructions from Louise for their accounting treatment.  Candy specifically referred to those items brought to SZCNHT by Hung and  asked Louise: “是借還是做投入?”, ie to be recorded as “borrowed from Hung” or as “Hung’s injection”?.  This email showed that SZCNHT’s accounting staff considered Hung to be one of the investors in SZCNHT.  Such impression, if in any way inaccurate, was not corrected by Louise in her reply email[31].  This is thus contemporaneous evidence consistent with and supportive of Mr Suen’s submission that Hung and Louise did not simply hold “nominal” positions in SZCNHT.

36. Mr Suen also referred me to certain business documents of SZCNHT obtained by Koo from Liu.  In a Quotation issued by SZCNHT to a customer dated 6 May 2010[32], it bore in its heading the Chinese name of SZCNHT and a “CS” logo strikingly similar to that of the Company[33]. This Quotation also bore the Chinese signature of Hung and a round chop of the Company.  It also bore a signature chop which read in English: “For and on behalf of Shenzhen CSHT Limited Company, authorized signature”.  This Quotation thus gave an impression to the customer that it was issued by a “China Star” company.  Mr Suen then referred to a Delivery Note issued by SZCNHT on 23 December 2010.  The heading of this Delivery Note bore the Chinese name深圳華星恆泰泵閥有限公司and its English name “Shenzhen CNHT Limited ”.  It also bore a “CN” logo.  This document again bore the Chinese signature of Hung. This time, it was chopped by a round chop of SZCNHT.  In cross-examination of Hung, it was suggested to him that SZCNHT initially adopted a “CS” logo [of the Company] and only changed to the “CN” logo towards the end of 2010.  Hung claimed that he did not know.  Hung also denied knowledge of SZCNHT initially adopting an English name of “Shenzhen CSHT Limited Company”.

37. It appeared however that on 14 August 2009, Louise incorporated a company in Hong Kong named China Star Industrial Hong Kong Limited華星泵閥香港有限公司(“CS Industrial”).  Louise was its sole shareholder and director. 12 days after Louise set up CS Industrial (ie on 26 August 2009), Hung made an application to the Hong Kong Trade Marks Registry to register the “CS” mark[34]. This application was made in his sole personal name as the proprietor of the said mark.  As mentioned earlier, SZCNHT was incorporated in the PRC on 23 October 2009.  Hung was its then registered Legal Representative.  Two weeks later (ie 6 November 2009), Hung made another application to the Hong Kong Trade Marks Registry seeking to register the “華星” mark[35].  Again, this application was made in his sole personal name as the proprietor of the mark.  Mr Suen then referred to two more applications made by Hung to the China Trade Mark Office.  These two applications were made on 7 August 2009 and in Hung’s sole personal name as proprietor.  These applications were consistent with the fact that the Chinese names of SZCNHT and CS Industrial both adopted the words “華星” and the initial letterhead of SZCNHT adopted the “CS” mark.  The adoption of the current English name SZCNHT and the switch to a “CN” did not make much sense because the Chinese company name continued to adopt the words “華星” which would be abbreviated as “CS” rather than “CN”.  In my view, this subsequent move was most likely an afterthought, possibly after realizing potential repercussion in passing off.  Mr Suen suggested to Hung that he made the trade mark applications so that SZCNHT and CS Industrial could make use of the marks “CS” and “華星” with a view to confusing customers.  Hung denied and claimed that these four applications were made for the benefit of the Company.  Hung however accepted that he did not tell Koo about these applications.  I do not accept the explanation of Hung.  Under Clause 1(8) of the Agreement all technical knowhow patent and certification would belong to the Company.  Naturally, all interests in the trade name and goodwill would also belong to the Company.  There was absolutely no reason for Hung to make the four applications in his personal name and capacity as owner/proprietor of the marks.  If the applications were made in the Company’s name, I would agree that there might not have been a need to specifically inform Koo.  That was however not the case.  It is perhaps intuitive to note Hung’s reply to my question as to why Louise decided to incorporate CS Industrial.  Hung said that it was because Louise worried that their work/business would face a crisis.  I agree with Mr Suen and find that Hung surreptitiously made those applications paving the way for his diversion of the Company’s business to SZCNHT and CS Industrial.  Hung eventually admitted in cross-examination that CS Industrial did engage in the business of selling solenoid pumps around early 2010 although he alleged that CS Industrials did not deal with ex‑customers of the Company.  It was nonetheless an admission that CS Industrial did carry on competing business with the Company since early 2010. 

38. Mr Suen then confronted Hung with a Purchase Order issued by Hop Shing dated 29 July 2010[36] for the purchase of solenoid pumps.  This order was issued to CS Industrial and SZCNHT which apparently shared the same office in Shenzhen.  When asked about this transaction, Hung became evasive and claimed that he was not clear whether Hop Sing was a customer of CS Industrial.  His evidence was inconsistent with his earlier positive assertion that CS Industrial did not deal with ex-customers of the Company.  Hung disputed the authenticity of this Purchase Order but provided no grounds.  This Purchase Order is to be read together with a subsequent Delivery Note, Inspection Report, Delivery Email and Bank Remittance Record[37] showing that goods had indeed been manufactured and delivered.  CS Industrial was the recipient of the price of the goods.  I do not for a moment doubt the authenticity of this whole set of documents. They were amongst a pile of documents that Koo obtained from Liu[38].  In fact, these documents obtained from Liu consisted of individual sets of documents of SZCNHT/CS Industrial, each set relating to an individual transaction.  Not all of them had been specifically referred to in the cross-examination of Hung.  I had however studied them.  Each set of documents relating to a particular transaction contained detailed and coherent information about that transaction.  I am satisfied that they are inherently unlikely to be fabrications.  Since 1 November 2010, Liu has been the General Manager of SZCNHT.  Liu clearly would have access to genuine documents of SZCNHT.  I have also cross-checked the documents against those exhibited in the Investigation Report.  I can find documents of similar format from both sources[39].  I consider this to be subtle attestation of their mutual authenticity.  I reject Hung’s bare assertion that whatever documents obtained from Liu must have been fabrications.

39. Mr Suen also put to Hung a set of documents beginning with a Purchase Order issued by Zhejiang Hai Bo to the Company[40]. They were clear evidence that Hung had procured SZCNHT to take up this order.  Hung put up purported excuse that at the material time there was quality problem in the Company and he did not want the Company to take risk.  He thus introduced SZCNHT to Zhejiang Hai Bo so that SZCNHT could take up the order in place of the Company.  I do not accept Hung’s contrived explanation.  According to Hung’s own evidence, he nurtured SZCNHT so that it could act as an OEM factory for the Company.  Assuming that there were truly some quality problems with the Company’s manufacturing plant at Huatong, the Company could still have accepted the order and passed on the manufacturing work to SZCNHT as its OEM factory.  There was absolutely no justification for introducing a new business entity to deal directly with an established customer of the Company, thereby risking the lost of this customer.  I find this to be clear evidence of diversion of the Company’s business to SZCNHT.

40. It also transpired that unbeknown to Koo, on 13 March 2009 a company named CNSN International Industrial Limited 中順國際實業有限公司 (“CNSN”) was incorporated by Louise in Hong Kong.  She has been the sole shareholder and director of CNSN throughout.  Mr Suen referred to a letter issued by CNSN to TUV SUD (the organization that granted TUV Certifications) dated 9 April 2009[41]. The letter, which was in relation to solenoid pump Models CSD‑01 and CSD‑02, read:

“We, CNSN International Industrial Limited hereby authorizes China Star Enterprise Hong Kong Ltd (Shenzhen Branch) with address… to act on behalf of us to apply for the TUV PS testing and certification service for the captioned model.

All correspondences and technical documents are to be submitted/received by China Star Enterprises Hong Kong Limited (Shenzhen Branch) while the certificate holder will be us.  The required test fees…certificate fees/annual fee & factory inspection fee will be paid by China Star Enterprises Ltd (Shenzhen Branch).”

41. This letter was attached with two pages of “Data Form”[42] listing CNSN as the applicant and Huatong as the production facility.  This letter was also signed by Hung in his capacity as the General Manager of CNSN.  In the course of cross-examination, Hung admitted that he did not notify Koo to obtain his consent before using CNSN as the entity to hold the TUV Certification.  In order to explain the actions of he and Louise, Hung said that at the material time in 2009, he was moving in the direction of “multi-branding”, ie the Company making products under different brands some of which were more expensive than the other.  He said that it would require certificates holder and the sellers of individual brands to be non-associated entities (at least on the records).  Hung also produced Exhibit P2 and some explanatory notes[43]. Exhibit P2 was an Authorization Letter for Secondary License Application in respect of Models CSD‑01 and CSD‑02 dated 8 May 2009.  It showed that CNSN was the primary license holder and the Company applied to be a secondary license holder.  Hung said that his plan would require the Company to be a “listed company 列名”, ie secondary license holder.  The explanatory notes purport to explain why the Company should not be made the primary license holder.  I find his explanation contrived.  There was absolutely no evidence from Hung demonstrating that the Company actually marketed solenoid pumps under brand names other than the “CS” brand.  Again, if his intention was nothing but benevolent, there was no reason for not informing Koo and obtaining his consent before using a company solely owned by his wife to do the trick.  It is also important to note that CNSN was established in March 2009.  It could not have been sheer coincidence that several months later, Hung and Louise (and their relatives) secretly established CS Industrial and SZCNHT and carried on competing business.  Furthermore, Hung’s purported explanation was contradictory to what he had previously said in his 3^rd Affirmation[44] where he said:

“My wife set up a company called CNSN and has caused it to register in its own name a certification with TUV. Again, as my wife was concerned about the prejudicial conduct on the part of Mr Koo, who was in the course of setting up a parallel production line by enticing Mr Mei in late 2008, she was merely preparing for the worst.”

42. I reject Hung’s evidence as being disingenuous.  It was apparent from the letter dated 9 April 2009 that the Company’s financial resources and the status of Huatong were utilized in the application of license by CNSN.  Hung admitted that in May 2010, Louise applied for SZCNHT to be added as another factory for the TUV Certification.  This time, the requisite fees were paid by Louise on behalf of SZCNHT.  Then eventually, in March 2011[45], Hung applied to remove the Company and replace it with SZCNHT in the TUV Certification.  I find that all these were done in rough unison with the establishment of CS Industrial and SZCNHT with the ultimate objective of siphoning off the Company’s business.

43. Based on the above discussions and analysis on evidence, I make the following findings of fact:

(1)  Hung was not a credible and reliable witness.  I find him evasive and dishonest. On numerous occasions, he made up his evidence and excuses as he went along.

(2)  I find that he and Louise were the true driving force behind the establishment of CNSN, CS Industrial and SZCNHT with the sinister and surreptitious objective of siphoning off the business of the Company and carrying out the business of solenoid pumps in competition.  In all the circumstances, I further infer that Hung and Louise are the beneficial owners of these three companies.  Zhou and Ha are merely their nominees/front-persons.

(3)  Hung and Louise had adopted the words “華星” and “CS” in the names of their companies and used the “CS” logo in letterheads deliberately with a view to confusing customers (in particular, existing customers of the Company) into believing that their companies were somehow connected/associated with the Company.  These were clear acts of passing off.

(4)  Hung had actually diverted the Company’s business.

(5)  Hung acted in breach of fiduciary duty as a director of the Company since early 2009.

(6)  Hung has not come to this court with clean hand and his inequitable actions were causative of the breakdown of mutual trust and confidence between him and Koo.

44. On this ground alone, I will decline to exercise the equitable jurisdiction of this court in favour of Hung.  I will dismiss the Petition for the Winding-up of the Company.  It is for completeness sake that I will also briefly deal with the remainder of Hung’s complaints in the Petition.

Stoppage of funding causing the collapse of the Company

45. Hung’s complaint was that Koo delayed in making payment for all expenses relating to the Company.  Hung said that in 2009, Weizco was late in payment of expenses on behalf of the Company despite the fact that money had already been remitted by the Company to Weizco.  During the second half of 2009, the Company’s business was growing rapidly and the amount of purchasing costs and of operation expenses increased.  At the same time, revenue received by the Company in Hong Kong also rapidly increased.  Starting from March 2009, Koo suggested a new method for accounting.  Prior to March 2009, he would discuss with Koo for instance at the beginning of January as to the expected expenses for February.  After agreeing with Koo, the Company would then issue a cheque to Weizco, usually in the latter half of January for the expenses of February in advance.  That was the original method.  Koo however introduced a change and required the submission of monthly budgets.  After Hung provided his budgets, Koo’s financial people would keep picking faults with the budgets and that caused delay.  Consequently, the Company was subjected to operational difficulties, in particular, the Company’s suppliers did not get paid.  Hung was forced to adopt measures such as delaying payment of his own wages and pleading with suppliers to continue supporting the Company despite late payments.  In 2009 to 2010, he was under such great pressure that he sold his flat in Shenzhen and used his own funds to pay for the Company’s expenses.  Then in July 2010, all payments were stopped by Weizco.  In August to September 2010, Hung chased Koo for payments.  On 10 October 2010, Hung had a meeting with Koo.  At that meeting, Hung issued a cheque in the sum of HK$2 million odd to Weizco and gave Koo details of the payments that had to be settled on behalf of the Company.  Hung referred to a table prepared by him to demonstrate his case[46].  The table showed that a total sum of RMB1,284,376.34 owing to a number of suppliers were settled.  On the other hand, a total sum of RMB1,272,733.22 allegedly owing to other suppliers was held up “被截留”.  Hung said that Koo had promised to pay the various suppliers within 10 days but failed to do so.  Koo maintained that the accounts had to be checked thoroughly before payments could be effected.  Despite such difficulties, Hung said that production continued until early 2011.

46. According to Koo, Hung was all along responsible for managing the Company’s finance. This can be seen from Clause 2.2(1) of the Agreement.  Since around the end of 2008, he had been requesting Hung to provide him with books of accounts of the Company.  In around April 2009, he also requested Hung to provide monthly budgets with forecasts of cash required to cover the operational expenses of the Shenzhen Office and the Company’s operation in the PRC. Despite repeated demands, Hung failed to do so.  In particular, Hung did not provide all the necessary supporting documents to account for the use and whereabouts of the Company’s funds.  As a result, the Company was only in a position to settle payments to suppliers after verifying with them the outstanding amounts against voluntary production of supporting documents from respective suppliers.

47. Koo referred me to a number of minutes of meetings[47] one of which concerned a financial meeting held on 17 December 2008.  It was signed by Hung and Louise.  It recorded Hung’s appreciation of the support from Koo and Weizco.  Hung also expressed that within the financial year of 2009, he would progressively perfect the functioning of various departments of the Company, especially in financial operation and settling of accounts[48].  The minutes then set out the arrangements for clearing-up and settling the accounts of all financial years prior to 2008, including the settling of the running/current accounts maintained between the Company, Huatong and Weizco.  It set out a time table (ending on 15 January 2009) for the settling and verification of accounts for financial years prior to 2008.  Louise and Kelvin were responsible for this process.  Louise was also required to provide Kelvin with the 2008 financial statements for verification and handling by the end of April 2009.  Kelvin would then provide the verified financial statements to the auditors for tax declaration.

48. In the minutes of the meeting held on 18 September 2009[49], Koo stated that one important objective of the meeting was to understand the financial operations of the Company.  He pointed out that it was problematic and lacking in supervision.  He suggested increase in financial management.  These were not objected by Hung.  In fact, Hung continued to express gratitude to Koo’s support.  Other attendees of the meeting pointed out that financial information of the Company was not clear and requested for better transparency. It was also stated that most financial information was kept by the Company and Koo requested Hung to allow Catherine to check the Company’s accounts.  In reply, Hung expressed that he was very open.  There were also discussions on the need for a full and accurate set of financial statement, implying the lack of it as at that meeting.  In the end, it was decided that by the beginning of November 2009, Louise would provide a full set of accounts of the Company from its inception to 2009.  She was also required to provide information on various unclear aspects in the funds‑flow of the Company.

49. Another important meeting took place on 22 November 2009.  It seems, according to the meeting minutes[50], that Louise had not fully discharged what was entrusted to her at the last meeting.  Koo explained that the purpose of the meeting was again to understand the books of accounts of the Company.  Hung stated that at the beginning, he thought the running accounts handled by Louise would be sufficient but had recently discovered their deficiencies.  Catherine pointed out that for nearly a year, Louise still failed to provide her with the running accounts promised.  That was not disputed by Hung and Louise although they sought to put up some excuses.  In the end, it was agreed that Hung would find a Hong Kong accountant to handle the accounts of the Company.

50. The next meeting was on 30 December 2009.  The minutes[51] set out an agreed time-table for Hung and Louise to submit profit and loss accounts; balance sheet; and detailed current accounts.  Hung was specifically cross‑examined on this set of minutes.  He could not confirm whether he had agreed to do the aforesaid at that meeting.  Yet he admitted that at one later meeting, he did agree to try his best to provide them.  Hung was then referred to the minutes of the meeting on 25 August 2010[52] at which representatives of Koo placed on record that up to that date, Hung had failed to provide any profit and loss account; balance sheet; or detailed current accounts to Koo.  Hung was unable to provide any explanation other than putting forward a bare denial. Hung’s failure to provide proper accounting documents and records was also reiterated during the 10 October 2010 meeting[53].  Hung referred me to certain truncated accounting records provided by Louise[54].  In my view, they were clearly incomplete and insufficient to constitute proper and wholesome accounting records of a company.

51. I consider that Koo’s version of facts was more consistent with contemporaneous documents.  Furthermore, by reason of my previous observations on Hung’s lack of credibility, I prefer the evidence of Koo.  I find that Hung and Louise persistently failed to provide Koo and his staff with truthful and accurate books of accounts and financial information of the Company.  As for the issue of monthly budgets, Hung was able to adduce some emails attached with what he considered as budgets[55]. The first email was dated 23 October 2007 and attached with an October 2007 budget.  The second email was dated 27 December 2007 attaching a January 2008 budget.  The third email was dated 22 February 2008 attaching a February 2008 budget.  They all pre‑dated Hung’s allegation of “change of accounting practice in March 2009”.  As Kelvin put it in cross‑examination, Louise would at times provide what she described as “budgets”. However, she only provided them sporadically.  Most of the time, the so‑called budgets were supplied so late that they constituted mere instructions to make payments.  His evidence was consistent with the fact that Hung could only refer to five emails in which such “budgets” were attached and that several of them were clearly ex post facto. Kelvin was unshaken in cross-examination.  He left Koo’s employment since January 2009 and was still willing to stand as a witness for Koo.  I find him an honest witness and find that Louise did not provide monthly budgets on regular punctual basis to him.  I also accept the evidence of Koo that he did demand for regular provision of budgets which was not complied with by Hung and Louise.

52. It is also to be noted that on 2 September 2009, an email from SZYOT put Gudy and Catherine on alert as mentioned in paragraph 22 above.  In the circumstances, Koo had a legitimate concern over deficiencies in the financial management of the Company by Hung and Louise.  Koo and his staff members were justified in exercising caution before making payments to purported suppliers[56]. In the end, I accept Koo’s evidence as set out in his table[57] that the cheques he received from Hung on 10 October 2010 were eventually utilized in the manners set out in the said table after prudent verifications.  The fault thus did not lie in Koo when payments to certain suppliers were delayed.  Koo should not be blame when some suppliers did not eventually get paid having failed/refused to provide adequate proof of their alleged debts.  The fault lied in Hung and Louise who failed to provide accurate accounts, financial information and supporting documentations to Koo and his staff.

53. It is Koo’s case that since October 2010, Hung had been procuring the cessation and closure of the Company’s business.  Koo accused Hung of refusing to sign a cheque of the Company in the sum of HK$1,010,000 which was payable to Weizco for onward remittance to PRC so that operational expenses of the Shenzhen Office could be paid.  Hung’s repeated refusal to sign the cheque was evidenced by contemporaneous emails[58].  Hung admitted his refusal and tried to excuse himself on the ground that Weizco was withholding payments to some suppliers.  He required that the suppliers be fully paid before he would agree to sign the said cheque.  In my view, Hung’s attitude was improper.  He knew that the said cheque was unquestionably needed for the subsistence of the Shenzhen Office.  It lies in his mouth to accuse Koo of putting the Company to collapse.  I accept the evidence of Koo that as a result, staff of the Company had to be laid off one after the other.  At the same time, Hung stopped accepting fresh orders for the Company.  I find that Hung’s conduct was in fact the real cause of the collapse of the Company.

Koo solicited key employees of the Company to join Huatong to replicate a production line in competition with the Company

54. Hung’s evidence was that in April 2009, his former colleague Mr Hung Tak Hing and Mr Tam Leung called and asked if he had a problem with Koo.  Hung was surprised and was told that Mr Mei Jianbo (“Mei”) telephoned them and asked them to join Huatong to make solenoid pumps. Mr Hung Tak Hing was an experienced electronic engineer.  Mr Tam Leung was an experienced solenoid pump salesman.  They were not employees of the Company.  Hung said that such a team lined up would be a threat to the Company. Although Mr Hung Tak Hing and Mr Tam Leung told him that they would not join Mei, this incident alerted Hung as to Koo’s intention. Hung further said that in 2009, a number of financial meetings were held between personnel of the Company, Huatong and Weizco.  At one meeting, Catherine gave Louise a USB and asked her to copy on it the list of suppliers and customers of the Company.  Louise then discovered in the USB a folder named “Open new company”. Then in April 2009, Hung discovered from the internet a website containing a description/introduction of Weizco.  In such description, it was stated that Weizco was associated with a company named Chungshan China Star Electronic Co (中山華星電磁製品有限公司).  Hung said that this must be the new company established by Koo with a view to carrying on competing business of solenoid pumps production.

55. Koo denied having solicited any of the Company’s employees with a view to establishing another production line of solenoid pumps. Koo called Mei as his witness (the 2^nd witness for the respondents).  Mei was an ex‑colleague of Hung.  He had followed Hung to work in a number of factories.  In 2007, he was invited by Hung to join the Company.  Mei was mainly responsible for R&D works to develop new solenoid pumps.  He admitted that his working relationship with Hung deteriorated and he felt that Hung was hoping that he would leave the Company.  Mei tendered his resignation in October 2008.  Hung instantly agreed.  Whilst Mei was working in the Company, he had little contact with Koo. Hung however told him that Koo was aware of his departure and wished to talk to him.  Hung expressed that he would not like to see Mei joining Huatong.  At a subsequent meeting between Mei and Koo, the latter did invite Mei to join Huatong.  Mei told Koo about Hung’s reservation as he did not wish to create tension between Koo and Hung.  Koo appreciated Mei’s concern and said that he already obtained Hung’s consent.  Mei thus agreed to and did join Huatong around November 2008.  At Huatong, Mei was initially responsible for R&D of mistifier, toy floss candy machine, and toy popcorn machine.  Later he became involved in R&D of activated charcoal, capacitors and electric cars.  He was never involved in the development of solenoid pumps.  Towards the end of 2010, production of solenoid pumps by the Company came to a standstill.  Nearly all workers at the production line left.  Koo thus asked Mei to assist in assessing the situation.  After inspection, Mei concluded that most of the production moulds had been removed.  Remaining spare parts were mostly sub‑standard. He concluded that the Company had lost its production capability.  Towards the end of March 2011, a customer of the Company chased for delivery of pumps under a production order.  Mei discovered that the goods involved had already been produced and were just stored at the warehouse. He informed Koo that the goods could be delivered to the customer and Koo in turns informed Hung.  These were all his involvements with solenoid pumps after joining Huatong.  He flatly denied Hung’s version of the alleged telephone discussions between him, Mr Hung Tak Hing and Mr Tam Leung.

56. Mei was cross‑examined by Hung.  Mei remained firm and unshaken.  Hung referred Mei to some emails in March 2013[59] showing that Mei was helping Gudy to handle solenoid pump business.  Mei readily admitted.  Mei explained that since all staff had left the Company by March 2011, Koo asked him to assist in handling matters concerning solenoid pumps as and when such issues arose.  It was because customers had approached the Company saying that they could not contact Hung.  Mei stressed that in so doing, he was helping the Company, not Huatong.  He categorically stated that up to now, Huatong has never developed a solenoid pump business.  Hung cross‑examined Mei on some emails exchanged in April 2012[60].  In fact, these emails wholly corroborated Mei’s version.  Reading the emails in context, Mei and Gudy were trying to handle the Company’s business.  They specifically referred to using Koo’s name card bearing the Company’s name.  I accept Mei as an honest and cogent witness.  I clearly prefer Mei’s direct evidence to Hung’s hearsay version of the telephone discussions between Mei, Mr Hung Tak Hing and Mr Tam Leung[61].

57. As for the folder named "Open new company" found in the USB, Hung referred me to its computer printout[62].  Koo explained that Hung misunderstood the situation all together.  Koo said that in 2009, he asked Catherine to assist the Company in establishing a proper accounting system.  Catherine thus approached Hung and Louise asking them to provide information.  Catherine was using Weizco’s software, it was probably why the folder was described as “Open new company”, referring the Company as the “new company”.  I can see support for Koo’s version in the root directory of the said folder.  It referred to “China Star建立Account所需資料.xls”.  The subsequent excel sheets were named “Item List”, “Vendor List” and “Customer List”.  There was only one sample entry and Louise’s name was mentioned.  There was instruction in Chinese “以上為例子, 煩請填上”.  These documents were wholly consistent with Koo’s explanation which I accept.

58. Hung then referred me to a web-search of Weizco by using the “公司黃頁” of Alibaba[63].  Gudy (the 4^th witness for the respondents) explained that Koo and Weizco had never set up a company known as中山華星電磁製品有限公司.  He had made enquiries and discovered that the said advertising description was posted by one Mr Yau of Techboy (Zhong Shan) Electronic Technology Co Ltd.  The descriptions were mistaken and never approved by Koo or Weizco.  Gudy produced an email of Mr Zhaoxu of Techboy[64] who investigated over the matter and discovered that the advertising description was erroneously posted by his ex‑colleague Mr Yau.  I accept Gudy’s explanation.  Hung’s accusation that Koo had established a competing business of solenoid pump was erroneous.

59. On the other hand, Hung was subjected to extensive cross-examination by Mr Suen on the issue that he had in fact solicited a number of ex‑employees of the Company to work for SZCNHT.  This was the case put forward by the Company in the Action.  In the Amended Defence filed by Hung in the Action, he pleaded:

“20(a) Save it is admitted that Mr Zhou Wu [周武], Mr Chen Huizhong [陳惠鍾], Mr Chen Zhongke [陳忠克] and Mr Wu Shoubao [吳壽宝] were employees under the payroll of the Shenzhen Office…[Hung] avers that:-

(i) the aforementioned 4 members of staff were made redundant as early as August/September 2010, when [Koo] withheld funding…

(ii) [Hung] is aware that Mr Zhou Wu and Mr Chen Huizhong subsequently joined [SZCNHT] but denies that he has procured them to do so;

(iii) notwithstanding having joined [SZCNHT] as technical consultant in 2012, [Hung] is not aware of Mr Chen Zhongke and Mr Wu Shoubao having joined [SZCNHT].

(b) Save it is admitted that Mr Feng Zhijie [馮志杰] was under the payroll of Shenzhen Office and was head of the production lines of the Company at Huatong…[Hung] avers that:

(i) To the best of his knowledge, Mr Feng left the Company in and around March/April 3011 to join a company called 123 Coffee Machine.

(ii)  Notwithstanding having joined [SZCNHT] as technical consultant in 2012, [Hung] is not aware of Mr Feng having joined [SZCNHT] as its staff.”

60. In cross‑examination, Hung first maintained that it was in 2012 that he became certain that Mr Zhou Wu and Mr Chen Huizhong worked in SZCNHT.  Later he changed his evidence and said that he saw them working at SZCNHT in January/February 2011.  As far as his evidence about Mr Zhou Wu is concerned, it was contradicted by various Production Orders retrieved by the investigator from SZCNHT.  A number of such Production Orders were co‑signed by Mr Zhou Wu and Hung well back in July/August 2010.  In any event, the names Mr Zhou Wu and Mr Chen Huizhong appeared prominently in the Contact List.  In relation to Mr Chen Zhongke, Mr Wu Shoubao and Mr Feng Zhijie, Hung changed his evidence and admitted that prior to 2012, he already knew that they worked for SZCNHT.  In an email dated 13 April 2010[65], Mr Chen Zhongke already appeared as a staff of SZCNHT.  At that time, Mr Chen Zhongke was still working for the Company because even on Hung’s pleaded case[66], Mr Chen was only laid off by the Company in August/September 2010.  Furthermore, the name of Mr Chen also appeared in the Organization Chart of SZCNHT as of 20 August 2010[67]. Faced with such conundrum, Hung claimed to have been mistaken in his Defence filed in the Action due to some misunderstanding between him and his solicitors.  Hung was unable to explain how such alleged misunderstanding could have arisen.  The averments in the Amended Defence were very specific and coughed in simple English.  I do not accept Hung’s explanation.  Hung also eventually admitted in cross-examination that when the names of Mr Zhou Wu, Mr Chen Zhongke, Madam Li Miu Juan (李妙轉), Madam Wu Zhang Ling (胡江玲) appeared in the Organization Chart of SZCNHT, they were still employees of the Company.  It is clear to me that the version put by Hung in his Amended Defence was disingenuous.  He had to change his evidence because of the subsequent disclosure of the Investigation Report and the documents obtained from Liu. 

61. In the end, Mr Suen worked on the Contact List of SZCHNT[68] and high‑light a total of 21 persons who had been ex-employees of the Company.  Hung confirmed the correctness of that statement.  In the light of my earlier findings that Hung was behind SZCNHT and that he had hitherto been beguilingly hiding his involvement in SZCNHT, I further infer and find that Hung had in fact solicited a number of employees of the Company to work for SZCNHT well back in 2010.  Again, Hung has been identified as the most probable cause for the collapse of the Company’s production.  It was Hung who plotted to hijack the Company’s business, not the other way round.

Koo wrongfully refused to sign draft audited accounts & file tax return

62. I have previously found that Hung and Louise persistently failed to provide truthful and accurate books of accounts and financial information to Koo and his staff.  In or about October 2012, Hung produced a draft financial statement to Koo and asked for his signature.  Koo refused.  In my view, there was every justification for Koo to refuse to sign the draft financial statement, the contents of which he never had proper opportunity to verify.  Without a true and accurate audited financial statement, one cannot even begin to deal with tax declaration.  On this ground alone, I find no merit in Hung’s complaint under this limb.

Koo unilaterally removed/misappropriated Company’s property

63. According to Hung’s Opening, in February/March 2011, Koo carried out a stocktake of the Company's materials kept at Huatong.  In March 2011, the Company's materials were transferred to Huatong  without his knowledge and consent.  I was referred to the minutes of meeting held on 18 February 2011[69]. Although Hung was not present, he was represented by three PRC lawyers (嚴宗偉, 衷穎, 袁仲剛).  Mr Yim was admittedly a friend and consultant of Hung. Also present were three staff members of the Company and an independent third party.  The three lawyers representing Hung expressly agreed to the stocktake and the agreed procedures were set out.  It was also stated that after completing the stocktake, the materials would be locked up and the key would be given to Mr Kwong Sau Leung (鄺秀良), the warehouse controller of the Company.  From the subsequent written remark made by Mr Kwong, those materials together with some moulds, tooling and equipment were handed over to Huatong on 9 March 2011.

64. The answer of Koo was simple and straight-forward. He said that following the departure of Mr Kwong in March 2011, the Company no longer had any staff.  The property of the Company was thus handed over to Huatong for safekeeping.  Save one incident, they remain intact up to the present moment at the site of Huatong.  The only exception was that some of the materials had been used to satisfy a previous order from “Dongguan Makers” which the Company was obliged to complete[70]. Mr Suen also referred me to the contemporaneous emails between Koo and Hung[71]. It began with Hung’s email dated 6 April 2011 containing, inter alia, an accusation of unauthorized transfer of the Company’s property to Huatong.  In his reply email on 9 April 2011, Koo refuted the allegation, stating that they were safely stored at Huatong’s plant.  In Hung’s reply email on 10 April 2011, he no longer maintained the accusation.  Nor did he suggest any other method of safekeeping  the Company’s property.  I accept Koo’s evidence which was also corroborated by the evidence of Mei.  I find no merit in Hung’s complaint.

Koo wrongfully deprived Hung of his salary & bonus

65. Hung complained that he had not been paid his salaries since July 2010.  Under cross‑examination, Hung agreed that his monthly salary would consist of a Hong Kong portion (HK$9,000 plus HK$1,000 MPF) and a Shenzhen portion (HK$23,000).  As for the four months of July to October 2010, the total sum of the Hong Kong portion was HK$36,000.  I was referred to a cheque dated 19 October 2010 drawn payable to Hung[72]. This cheque was unsigned.  According to Koo, it was issued with a view to replacing an earlier cheque[73]. The earlier cheque was dated 10 October 2010 in the sum HK$40,000 made payable to Hung and was co‑signed by Koo and Hung.  Koo said that this cheque mistakenly included $4,000 which represented the MPF contributions for the four months.  Hence, the cheque dated 19 October 2010 was issued to replace it.  Koo said it was Hung who refused to sign the replacement cheque.  In cross-examination, Hung merely put up a bare denial and provided no explanation.  I prefer the evidence of Koo and find that it was Hung who refused to sign the cheque.  As for the Shenzhen portion of Hung’s salaries for July to October 2010, it formed part of the HK$1,010,000 cheque mentioned in paragraph 49 herein.  The said sum of HK$1,010,000 was for defraying the expenses of the Shenzhen Office for July to October 2010 which would include the Shenzhen portion of Hung’s salaries.  Again, I prefer the evidence of Koo and find that it was Hung who refused to sign the said cheque resulting in the non‑payment of his own salaries for July to October 2010.

66. According to Hung, the Company’s production stopped by March 2011. Concerning the salaries for November 2010 to March 2011, Mr Suen was right to point out that Hung never made any request or demand for payment.  Hung brought this complaint for the first time in the Petition (28 October 2011) and later in the Labour Tribunal proceedings (10 November 2011).  The Labour Tribunal proceedings have been transferred to the High Court and stayed pending the resolution of these proceedings. In the Labour Tribunal proceedings, Hung claimed for unpaid salaries up to and including September 2011.  Hung was unable to give cogent reason in cross‑examination as to why he was still entitled to monthly salaries between March and September 2011.  I reject his preposterous assertion that he still had to go to office every day to deal with “suppliers” despite the closure of the Company’s business.  The overwhelming probability is that Hung would have been spending his time and effort for SZCNHT.  After all, I am not required to adjudge on this Labour Tribunal claim.  All I need to consider is whether there was any unfair prejudicial conduct on the part of Koo in relation to this issue.  Mr Suen referred me to Re Bestwell Fareast Ltd.[74] in which Chu J (as she then was) said at paragraph 30:

“Prima facie, non-payment of sums by a company to its shareholder does not per se constitute unfair conduct prejudicial to the shareholder’s interest as a shareholder. At the most, it gives rise to a claim in debt against the Company. It is a quantum leap to say that because the Company has failed to pay the petitioner commission and salaries as well as reimbursement for expenses, the respondent directors are guilty of unfairly prejudicial conduct.”

67. I accept Mr Suen’s submission and find that Hung’s complaint under this limb has no merit.

Koo’s refusal to reimburse Hung

68. Hung alleged that from 30 August 2010 to 30 September 2011, he had advanced funds to the Company in the total amount of RMB1,380,000 which Koo refused to reimburse him[75].  Mr Suen referred me to Hung’s letter before action dated 13 October 2011[76]. The letter did not mention the specific amount of funds allegedly advanced by Hung, and it did not demand Koo to make reimbursement.  Instead, this matter was only mentioned obliquely after making various other complaints of prejudicial conduct:

“In the circumstances, our client has no alternative but to consider realizing his investment in the Company and get reimbursed the sums which were incurred during the Company’s course of business and prepaid by him. In this connection, we have standing instructions to proceed to petition the court to grant an unfair prejudice remedy under section 168A of the Companies Ordinance (Cap. 32) or a winding up order on just and equitable ground under section 177(1)(f) of the Companies Ordinance (Cap. 32) as an alternative.”

69. Similarly, there were no particulars of these alleged advancements of funds in the Petition.  The figure was first put forward in the Hung’s first affirmation in form of a table [77] and I was not shown any supporting documents.  In the circumstances, the principle of Re Bestwell Fareast Ltd equally applies and I find that Hung’s complaint under this limb has no merit.

Koo unlawfully appointed Gudy as director

70. The legality of Gudy’s appointment as a director of the Company was the subject matter of HCMP 189/2012.  When the matter first came before Harris J, his lordship held that the resolution appointing Gudy as a director of the Company was valid and effective[78].  Hung appealed against the judgment of Harris J and by the time of the hearing of this Petition, the matter was still pending appeal to the Court of Appeal.  Subsequently by a judgment of the Court of Appeal delivered 1 November 2013[79], the Court of Appeal unanimously dismissed Hung’s appeal.  In the circumstances, I have to proceed on the basis that the appointment of Gudy was lawful and valid and reject Hung’s complaint under this limb.  In so far as it is necessary, I also accept Mr Suen’s submissions on evidence as set out in paragraphs 87 to 90 of his Closing Submissions.

Koo actually holds 10% shares in the Company on trust for Hung

71. Mr Suen submitted that it is a belated and inconsistent allegation.  Up to and including the presentation of the Petition, Hung had all along been asserting that Koo is the 60% majority shareholder of the Company.  This is demonstrated by Hung’s letter‑before‑action when he first pitched his case.  Hung put forward the same case in the Labour Tribunal proceedings[80] consistently describing Koo as the majority shareholder.  Then four months after the Petition, Koo issued HCMP 189/2012 seeking a declaration that Gudy’s appointment as director was lawful and valid. Koo’s case was based on his right of appointment as majority shareholder even in the deliberate absence of Hung at the relevant EGM.  It was only when Hung filed his affirmation in opposition on 20 April 2012 that he first raised the allegation of Koo holding 10% shares on trust for him.

72. According to Hung, he was told by Koo sometime in 2008 that Koo had persuaded Lo to leave the Company due to the latter’s insignificant contribution.  Koo said he would do the convincing and it was unnecessary for Hung to communicate with Lo on the matter.  Around August 2008, Koo asked the Company to reimburse Weizco for the sum of HK$80,000 it paid to Lo for the acquisition of his shares.  Hung relied on a pay‑in slip[81] to show that the Company did reimburse Weizco in the sum of HK$80,000 on 1 September 2008.  Hung then accused Koo of lying because unbeknown to him, Koo had in fact secretly dealt with Lo as early as November 2006.  Hung referred to a document which he said he discovered only in the course of the Labour Tribunal proceedings[82].  It was a copy of the cheque 004503 issued by Weizco to Lo on 4 November 2006 in the sum of HK$80,000.  The lower portion of the photocopy recorded Lo’s agreement to sell his shares in the Company to Koo.  Hung also adduced a set of accounts reconciliation purportedly captured from Louise’s computer as the accounts settled between Louise and Kelvin[83].  In this document, Kelvin referred to the cheque 004503 as “Lo Siu Hong paid on behalf of China Star Ltd”.  The document also referred to the 1 September 2008 payment by the Company to Weizco as “Transfer to Weizco支付Lo Siu Hong轉Weizco”.  On casual reading, this document tends to support Hung’s argument.  However, it must be borne in mind that this document (even if genuine) was only exchanged between Louise and Kelvin. Hence it could at most evidence their mutual understanding which may or may not be accurate.

73. It is thus Hung’s case that Lo’s shares were actually purchased by and in name of the Company.  Since the basis of the Cooperation Agreement was “all parties on equal footing”, he and Koo should remain as 50/50 shareholders of the Company.  However, for the purpose of “face”, Koo wanted to appear superficially as the majority shareholder and Hung agreed to accommodate Koo.  Hung thus maintained that Koo has been holding 1,000 shares in the Company on trust for him.  He also stressed that there was no board resolution approving the transfer of Lo’s shares to Koo.

74. Koo on the other hand said that in or about 2006, Hung complained to him about Lo not devoting sufficient time to the Company’s business.  This led to a meeting between Koo and Lo.  Lo explained that he was unable to devote more time to the Company’s business because he was still, at that time, under full time employment with a third party.  On or about 5 November 2006, it was orally agreed between Koo and Lo that Koo would acquire Lo’s shares at a consideration of HK$80,000.  In particular, Lo stressed that he would only sell his shares to Koo and no one else.  Lo was obviously not happy with Hung’s attitude towards him.  It was only in December 2008 that, at the advice of accountants, the sale of shares was formalized.  Koo’s version was supported by the evidence of Lo.

75. It is Koo’s case that prior to his discussion with Lo, Hung was already aware that Koo would offer to purchase Lo’s shares. Koo was adamant under cross‑examination that he did tell Hung about his acquisition of Lo’s shares well before 2008.  Koo was also adamant that the shares were bought by him, not the Company. That was corroborated by the contemporaneous Chinese agreement signed by Lo at the bottom of the cheque 004503 copy. Lo did specifically state that the shares were sold to Koo rather than to the Company “股份全數轉讓給顧仁生先生(香港身份証A_____(_))”[84]. Lo confirmed his intention of selling only to Koo in his viva voce evidence.  Lo did not shy away from his disappointment towards Hung.  He felt betrayed by Hung.  Koo explained that he used the funds of Weizco to pay for Lo’s shares because he had been using Weizco somewhat as his personal company.  That is a common problem for laymen not conversant with company law and treating a private limited company as his other pocket.  As for Kelvin, he explained that in or around November 2006, Koo instructed him to issue a cheque of Weizco in the amount of HK$80,000 for purchasing shares from Lo.  Kelvin thought that the payment was related to the Company and hence put down the description “CQ 004503 Lo Siu Hong paid on behalf of China Star Ltd” in Weizco’s ledger under “C/A‑China Star”.  Kelvin said he did so without seeking prior confirmation from Koo as to how this payment should be booked.  Neither had Koo given him any specific instruction on how to record the payment.  In fact, Koo seldom conversed with Kelvin on the subject of accounts entries as he was not familiar with accounting concepts anyway.  He produced the original ledger entry[85] which was the source of the subsequent appearance of the description in the accounts reconciliation document.

76. As for the payment of HK$80,000 by the Company to Weizco on 1 September 2008, Koo stressed that it was unrelated to the transfer of Lo’s shares to him.  Kelvin said he had no recollection of any relation between this payment and the 2006 payment under cheque 004503.  Basing on the Company’s accounting records, he could see that the sum of HK$80,000 received from the Company on 1 September 2008 was transferred to the Shenzhen Office the same day.  He referred again to Weizco’s general ledger[86] crediting the payment as “Transfer from China Star to BC‑CA”.  On the same day, another debit entry in the sum of HK$80,066.67 was made and described as “Remit China Star (80,000)”.  Kelvin pointed out that in those ledger descriptions, one can see no connection between the purchase of Lo’s shares and the 1 September 2008 payment.  He also pointed out Louise’s handwritten acknowledgment on this page of the ledger.  Also related was another debit entry on the same day in the sum of HK$1,210,000 which was also described as “Transfer from China Star to BC‑SA”.  I was then referred to an email from Louise to Kelvin dated 7 September 2008 on the subject of “China Star Budget and Payments for September 2008”.  The email referred to two cheques of HK$1,210,000 and HK$80,000 respectively totalling HK$1,290,000 which was used for defraying operating expenses of the Company.  Kelvin thus concluded that the payment of HK$80,000 from the Company to Weizco on 1^st September 2008 was related to the operational expenses of the Company.  As for the purported description of “Transfer to Weizco支付Lo Siu Hong 轉Weizco” in the accounts reconciliation document, Kelvin said that he had never seen such description for the 1 September 2008 payment of HK$80,000. Koo questioned the authenticity of the accounts reconciliation document purportedly captured from Louise’s computer.  It is the respondents’ case that the said description was made up by Louise and self‑serving.

77. I have considered both sides’ arguments carefully. Hung did not call Louise to attest to the authenticity of the accounts reconciliation document.  The said document adduced by Hung was merely a copy of the computer print‑out made on 29 September 2012.  Hung only adduced it at the 11^th hour in the course of the trial.  The description “Transfer to Weizco支付 Lo Siu Hong轉Weizco” was inconsistent with other contemporaneous documents mentioned and with the evidence of Lo.  I prefer the evidence of Koo and Kelvin and in particular I accept Kelvin’s explanation for his mis-description of the payment of HK$80,000 from Weizco to Lo in 2006 as a payment made “on behalf of China Star”.  I accept B2/356 as recording the true agreement between Koo and Lo for the former to acquire the shares of the latter in the Company.

78. I also disbelieve Hung when he said that he only came to know about Koo’s 2006 acquisition of Lo’s shares in the course of the Labour Tribunal Proceedings in 2012.  As Lo rightly pointed out in his evidence, prior to his departure in November 2006, he regularly attended the Shenzhen Office and Huatong and frequently met Hung.  He also had numerous telephone/email communications with Hung pertaining to the affairs of the Company.  After he sold his shares to Koo, Lo ceased to be concern with the Company’s affairs and all such contacts came to an abrupt stop.  Hung however never contacted him to ask why.  Hung must have known that Lo had left the Company soon after November 2006.  It is most likely that Hung also knew that Lo had sold his shares to Koo well back in 2006.  Hung was unable to provide any cogent explanation to refute such reasonable inference during his cross-examination by Mr Suen.

79. In his Opening, Hung originally asserted that there was no board resolution approving the transfer of Lo’s shares to Koo.  Mr Suen was quick to point out that it was blatantly erroneous.  He referred me to the Company’s Board Written Resolution dated 15 December 2008 bearing the signatures of all three parties including Hung[87].  This document clearly evidenced the Board’s approval of Lo’s transfer of 5,000 shares in the Company to Koo.  When shown this document, Hung changed his complaint to a lack of formal board meeting. His argument was preposterous.  The whole purpose of having a written resolution executed by all directors is to avoid the necessity of carrying out a formal meeting.  In any event, this Written Resolution flatly contradicted Hung’s case that Lo’s shares were purchased by the Company.  Furthermore, Koo’s case is that after the formalization of Lo’s transfer of shares to him, and as a gesture of goodwill, he transferred 1,000 shares by way of gift to Hung on 29 December 2008.  This was corroborated by another Written Resolution of the Board[88] which again bore the signature of Hung.  This latter Written Resolution also contradicted Hung’s version of facts.  If the making of Koo as 60% majority shareholder was a mere face-saving exercise agreed to between Koo and Hung, why was it not simply stated in the 15 December 2008 Written Board Resolution that Lo would transfer 4,000 shares to Koo and 1,000 shares to Hung?  Hung’s case is extremely artificial and plainly unbelievable in the light of all the evidence and the contemporaneous documents.  I have no difficulties in rejecting Hung’s evidence and find that Koo did not and does not hold 10% shareholding in the Company on trust for Hung.

Koo misappropriated HK$2 million from the Company

80. In his Opening Submissions, Hung alleged that in early July 2009, Koo borrowed HK$2 million from the Company and promised to repay it in the same month[89]. This was not disputed by Koo.  It is Koo’s case that he had eventually repaid the sum through off-setting RMB1,700,000 of debts owing from the Company to Huatong.  After taking into account exchange differences, the remaining balance of HK$76,000 was remitted to the Company through Hung.  Koo said that his position was already explained at a board meeting on 22 November 2009[90]. I was also referred to a detail breakdown of the off‑setting. Confronted by these documents, Hung merely put up a bare denial saying that the meeting minutes were prepared by Koo’s side and should not be relied upon.  He further stated that the expenses charged by Huatong were exaggerated.  Other than providing a table on what he suggested to be over‑charging of management fees and pointing out a lack of formal contracts for making of moulds, Hung did not condescend on particulars.  When Hung was being cross‑examined, I asked him the question: “If the expenses charged by Huatong were genuine, the off-setting should not be a problem.”  Hung disagreed, unreasonably in my view. 

81. Hung provided his revised table of “Management Fees Overcharged”[91] which amounted to merely a total of HK$385,740.40.  Mr Suen also provided Koo’s table[92] making references to underlying supporting documents: (1) agreement on rates[93] bearing Hung’s signature; and (2) attendance sheets signed by workers[94].  In cross‑examination, Hung agreed that he was bound by the agreement on rates.  The dispute thus turned onto headcounts.  Hung apparently relied on an email[95] suggesting that his headcounts had previously been agreed upon.  That email however related only to several months in 2007. Another subsequent email[96] dated 25 September 2009 indicated that there was still disagreement on headcounts generally.  Furthermore, Hung did not produce any credible evidence to rebut the underlying supporting documents provided by Koo.  He merely questioned the authenticity of the signatures of certain workers on the attendance sheets.  On this state of the evidence, I am unable to say that Koo’s calculation was definitely wrong.  There could very well be genuine accounting differences between the parties.  I accept Mr Suen’s submission that Koo could not in any event be said to have “misappropriated HK$2 million of Company’s money”.  Furthermore, Mr Suen stressed that Hung had not made such accusation in his letter‑before‑action or the Petition.  I agree with Mr Suen and find that there is no merit in Hung’s complaint under this head.

Huatong failed to account for tax rebates to the Company

82. Hung complained that Huatong failed to account to the Company for tax rebates.  Gudy’s evidence was that Huatong had already rendered proper accounts to the Company in the current account maintained between them[97]. Gudy explained how the issue of tax rebate arose.  From time to time, the Company would sell products through Huatong to customers in the PRC.  Such sales were subject to PRC VAT for which the Company (as seller) should be responsible.  On the other hand, the Company would buy materials through Huatong from suppliers in the PRC and would have to pay VAT.  The latter amount of VAT paid for the acquisition of materials could be offset against the VAT payable upon the sale of finished products.  Accordingly, Huatong  produced a table[98] demonstrating that there was an ultimate balance of RMB123,733.63 due and owing from the Company to Huatong after carrying out an off‑setting exercise.  Hung was unable to point out in what way Huatong’s calculation was flawed.  No evidence was adduced to challenge the veracity of Huatong’s table.  I prefer and accept the evidence and explanation of Gudy.  In any event, I consider that Hung’s complaint was fundamentally misconceived.  At most, he could show that there existed an accounting dispute between Huatong and the Company.  It requires a quantum leap to treat this dispute as evidence of any oppression or unfair prejudicial conduct exerted by Koo in his capacity as majority shareholder of the Company.  I find that there is no merit in Hung’s complaint under this head.

The Company did not declare dividend

83. I had previously found that Hung and Louise persistently failed to provide truthful and accurate books of accounts and financial information to Koo and his staff.  Consequently, no proper financial statements could be produced.  In the absence of proper financial statements, no prudent director could legitimately propose declaration of dividends.  I see absolutely no merit in this head of Hung’s complaints.

Huatong overcharged the Company for mound-making fees and rentals

84. Hung first complained that there was overcharging of rental fees. Mr Suen relied on Hung’s written agreement on the rate of rental fee chargeable[99].  In cross‑examination, Hung admitted signing this agreement.  I accept Mr Suen’s submission that Hung was bound by the written agreement and find that Hung’s complaint has no merit.

85. Hung then complained that in the past, where the Company engaged Huatong to make moulds, it would issue formal contracts. Hung referred me to a sample contract[100].  Hung’s complaint was that not all of the fees charged by Huatong for mould‑making were supported by such formal contracts.  Mr Suen pointed out that this was not a complaint raised in the Petition.  This matter was also not put by Hung to Koo in the latter’s cross‑examination.  Hung did not condescend on particulars as to which specific amount/amounts he disputed.  In the circumstances, I agree with Mr Suen that at most there existed another accounting dispute between Huatong and the Company.  Similarly, I cannot make the quantum leap to find that Koo had exerted oppression or unfair prejudicial conduct in his capacity as the majority shareholder of the Company.

Loss of substratum

86. Hung argued that the business of the Company had stopped for more than two years.  The Company had completely lost its reputation and could not be revived.  Hung said that he could no longer cooperate with Koo by reason of the latter’s prejudicial conduct giving rise to a total loss of trust and confidence.  Mr Suen reminded me that the jurisdiction to make a winding‑up order on just and equitable ground is not wider than the jurisdiction to grant unfair prejudicial remedy and that the statutory regime does not give rise to an entitlement to “no‑fault divorce”.  Mr Suen relied on the dictum of Jonathan Parker J. in Re Guidezone Ltd[101] which I fully accept.  I have already found that Hung did not come with clean hands and he was the real cause for the loss of trust and confidence.  I have also found against Hung in respect of each and every allegation of unfair prejudicial conduct made against Koo.

87. Mr Suen further argued that despite the devastating blow caused by Hung, there were still recent enquiries and orders received by the Company during the period from late 2012 to June 2013.  Gudy had given evidence about such enquiries which I have no reason to doubt.  Gudy explained that the Company still benefits from its goodwill and clientele and is the beneficial owner of various intellectual property rights and product certifications pertaining to solenoid pumps.  I accept his evidence.  I find that it remains open to the Company to pursue its business and take advantage of its goodwill, clientele, and technical knowhow.  Koo and Gudy (a new director) have been making efforts to revive and maintain the Company’s business.  I find that there has not been a loss of substratum even if Hung now chooses not to actively cooperate with them.  Hung is after all bound by the Agreement until 26 April 2015.

Conclusion

88. In the premises, for reasons explained above, I dismiss the Petition with an order nisi that the petitioner do pay to the respondents costs of this Petition (including all orders of costs reserved) to be taxed if not agreed on party‑and‑party basis.