NINOTRE INVESTMENT LTD AND ANOTHER v. STRONG LIGHT INVESTMENTS LTD AND ANOTHER

HCCW 72/2019

[2021] HKCFI 3095

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 72 OF 2019

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D E C I S I O N

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INDEX

A.     Introduction

1.  The Company the subject of this winding up Petition, L&A International Holdings Limited (“Company”), is incorporated in the Cayman Islands was listed on GEM Board of The Stock Exchange of Hong Kong Limited (“HKSE”) in 2014 (stock code 8195[1]).  According to the description of its business in its annual reports, the Company derives its revenue principally from OEM business in the garment design, manufacturing and retail field, primarily focusing on cashmere.

2.  The Petitioners hold between them 3% of the Company’s issued shares.  The 1^st Respondent, Strong Light Investments Limited (“Strong Light”), holds 23.41% and the 2^nd Respondent, Flying Mortgage Limited (“Flying Mortgage”), holds 10.39% of the Company’s issued shares respectively [2].  I shall refer to the 1^st and 2^nd Respondents as the “Respondents”.

3.  It is the Petitioners’ case that the Respondents are controlled by Wong Kwan Mo (“Wong”) and his Wife, Lau Lan Ying (“Wongs”) and that the Wongs have caused the affairs of the Company to be conducted in a manner, which is dishonest, unfair and prejudicial to the Respondents and that the only fair remedy in the circumstances is a winding up order pursuant to s177(1)(f), s327(1) and 3(c) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“Ordinance”). There is also before the Court an application issued by Flying Mortgage for the Petition to be struck out pursuant to RHC O18 r19.  I explain the basis for the strike out application in [7].

4.  The Petitioners’ case is that the Wongs controlled the composition of the Company’s Board through their collaboration with the Company’s former majority shareholder and chairman of the Board, Yang Si Hang (“Yang”) from early 2016 until his retirement in mid-May 2016, Strong Light’s direct holding in the Company and their indirect interest through their control of Flying Mortgage. This allowed them to appoint their nominees to the Board to facilitate their control of the Company.  Originally this was Ng Ka Ho (“KH Ng”) and Ma Chi Ming (“Ma”), who both resigned on 6 June 2019.  On the same date Lau Chun, Kavan (“Lau”) and Wang Tsz Yue (“Wang”) were appointed.  The Petitioners allege that Lau and Wang (“Executive Directors”) were the Wongs’ nominees.

5.  The Executive Directors have, so suggest the Petitioners, acting at the Wongs’ direction caused five unfair and improper transactions to take place to the prejudice of the Company’s minority shareholders including the Petitioners.  The Petitioners have described them as follows:

(1)  The Red 5 Fraud.

(2)  The fraudulent Share Placement.

(3)  The fraudulent grant of Options and allotment of shares in order to dilute and frustrate the rights of the other shareholders of the Company.  KH Ng and Ma were found to have breached their fiduciary duties in other proceedings: HMCP 2222 of 2016.

(4)  The Board’s frustration of the attempts by minority shareholders to convene a shareholders’ extraordinary general meeting in order to oust them.

(5)  The reconstitution of the Board on 6 June 2019, which followed presentation of the Petition on 7 March 2019, and was, so the Petitioners allege, intended by the Wongs to frustrate the Petition.

I describe these complaints in more detail later in this Judgement.

6.  In addition the Petitioners rely on other misconduct involving the Wongs.  These are:

(1)  The Board’s misconduct leading to the resignation of the Company’s former auditors for reasons including unexplained related party loans totaling HK$40.5 million.

(2)  A number of High Court proceedings involving the Company’s shareholders, the Company and the former Board.

(3)  Investigations by the Securities and Futures Commission (“SFC”).

(4)  The acquisition in December 2017 by the Company of worthless shares in the Wealth Power Group Ltd. (“Wealth Power”), including its 49% interest in Lucky Dessert (China) Holdings Ltd (“Lucky Dessert”) for HK$32.32 million.  The other shareholders in Lucky Dessert were at the time Food Idea Holdings Limited (“Food Idea”), which held 49%. Food Idea is a listed company established by the Wongs and subsequently controlled by the Wongs’ son Ryan Wong Tai Cheong (“Ryan”).  The other shareholder holding the remaining 2% was Ma.  The investment has subsequently to be written off.

7.  On 15 July 2019, Flying Mortgage issued the summons to strike out the Petition (to which I have referred in [3]) on the grounds that it was brought unreasonably as the Petitioners had not pursued the more appropriate alternative remedies to them; primarily an order that their shares be bought by the Respondents.  When the summons came on before me for a call over hearing I ordered it adjourned to the trial.  The issue is subsumed within the subject matter of the trial and I indicated to the parties that I would deal with the issue as part of the trial if I determined the unfair prejudice complaints in the Petitioners’ favour.  I comment further on the application in [51].  The application focuses on an unusual feature of this case and one, which I have found has made it difficult to decide.

8.  It is on the face of the matter surprising that the Petitioners with a relatively modest interest in the Company that only raised HK$43.2 million at its initial public offering (“IPO”) and a further HK$99.96 million in a placement and the exercise of share options in August 2016 and has made a loss in each of the subsequent years (totalling approximately HK$66 million as at 31 March 2020, ignoring the provision for impairment in respect of the Red5 investment, which I explain in [33]) would want the Company wound up.  If they took the view that their financial interests were prejudiced the normal remedy one would expect a shareholder to seek would be a buyout at a price adjusted to reflect the wrong done to the Company, which negatively impacted the value of the shares.  One explanation for this course not being adopted might be that the Company is incorporated in the Cayman Islands.  It is, therefore, not possible for a shareholder to seek unfair prejudice relief under Part 14 of the Companies Ordinance, Cap 622[3]. It would be necessary for the Petitioners to take proceedings in the Cayman Islands and it would not be surprising if they saw this as potentially troublesome, alien and expensive.  However, this does not feature amongst the reasons advanced by the Petitioners for seeking what on the face of it is the more draconian remedy of a winding up, which on the face of the matter might be expected to result in a lower return, because it would involve an expensive fire-sale of such assets as the Company has.  The explanation given by the Petitioners is that the affairs of the Company have gone so far awry and become so murky because of the disguised hand of the Wongs directing the Company’s decision making that the appropriate remedy is a winding up order and the appointment of liquidators to carry out a thorough investigation of the Company’s affairs and pursue claims to remedy the loss caused to the Company by the Wongs and their nominees and proxies; although this position was modified and softened to some extent during the trial, with Mr Barlow advancing an alternative course, namely, the appointment of provisional liquidators, who could investigate the affairs of the Company and report on whether there was a better alternative to a winding up order.

9.  The Respondents’ position is that even if the complaints about the Company’s misfeasance (which they do not actively dispute) is correct and the allegations that the Wongs control the Company and were behind its misfeasance (with is in dispute) are also correct it would still not justify the court making a winding up order.  The majority of independent shareholders have failed to support the Petitioners and the Securities and Futures Commission (“SFC”) despite having been notified of the Petitioners’ complaints has taken no action.  The Respondents ask, rhetorically, how in these circumstances can it be right to make a winding up order when the Petitioners have another remedy open to them: petition for unfair prejudice relief in the Cayman Islands.  The Respondents go further and argue that the Petitioners’ insistence on a liquidation to remedy their complaints is so commercially perverse that it suggests that the Petitioners are not genuine and themselves are motivated by some ulterior motive; albeit the Respondents have not been able to identify what it might be.

10.  The complaints that are made by the Petitioners are very serious.  As I will demonstrate the Company has entered into a number of highly prejudicial transactions.  The character of these transactions does invite consideration of why they were entered into and whether they were the consequence of something more sinister than poor judgment and lamentable corporate governance.  The Respondents have not actively contested the Petitioners’ complaints about the wrongs done to the Company.  They argue first, that the Wongs are not responsible for the matters complained of, and, secondly, that the complaints themselves could never support a winding up order.  However, if the Petitioners’ complaints are largely justified it almost necessarily means that not only do the Wongs control the Board, but that the court will have found that the Wongs’ deception extends to attempting to mislead the court. The court will not, therefore, be faced with having to decide a discrete legal question about the extent to which it can ever be appropriate for the court to order the winding up of a listed company at the behest of a modest percentage of the minority shareholders.  The court will have found that the Wongs have not only manipulated the Company in clear breach of the Listing Rules, but also attempted to deceive at every stage shareholders as well as the court.  There must clearly be a point at which the court concludes that the management of a listed company has become so indifferent to their duties, compliance with the Listing Rules and corporate governance generally, that it is fair and just to liquidate a company.  In an extreme case the public character of a company rather than lean against making a winding up order, instead leans in favour of it because of an imperative, which exists in the case of a public company, which does not in the case of a private company, namely, the need to protect investors and maintain the integrity of the market.  It seems to me that the Respondents have framed their case in a way, which attempts a sleight of rhetorical hand, drawing attention away from the aforesaid considerations by not advancing a positive case in relation to the factual issues, other than those that concern the Wongs’ control.  However, as a consequence for practical purposes the complaints about the misfeasance by the Board can be taken as proved.  What requires careful consideration and determination is the extent of the Wongs’ knowledge and involvement in the complaints themselves.

11.  Determining the extent of the Wongs’ involvement with the affairs of the Company is not easy.  The Petitioners know a considerable amount about some of the matters, which have caused loss to the Company, and proving the complaints is straightforward, because the Respondents have not actively disputed them.  Demonstrating the extent of the Wongs’ involvement with the affairs of the Company is more challenging.  This is ultimately a matter of inference to be drawn from certain transactions and much of the evidence relied on the Respondents to achieve this arises from cross-examination by Mr Barlow of the Respondents witnesses.  This has made determining the case challenging and the process has not be helped by the Respondents and the Company choosing to put in the minimum amount of evidence possible by way of their affirmations in opposition.  This is something I address in more detail later.

B.     Company

12.  As I have mentioned the Company was listed in 2014. Its initial public offering (“IPO”) raised HK$43.2 million.  Since that time the following changes to its capital have taken place:

Date	Description	Amount HK$M	Public Announcement
10.10.14	IPO placing: 100m shares	43.2	9.10.14
4/2015	Share Split: 1:10
20.6.16	Red5 Allotment: 226,022,723 shares	(596.7)
23.6.16	Share Split 1:5
11.8.16	Placing of 2,869,886,385 new shares:	59	21.7.16
22.8.16	Exercise of share options: 1,600m	40.96	22.8.16
9.10.17	Share consolidation wherein 20 shares became 1
		(453.54)

13.  The depletion of the Company’s capital largely arises from the writing off, of the value of the investment in Red5, which I explain in more detail in [32]–[33].  The Company has never made a profit.  Its best year was the financial year ending 31 March 2019 in which it lost HK$10.13 million.  The losses since 2014, which considerably exceed the capital raised on the IPO, take into account the write-off of the investment in Red5. Although Red5 was paid for by shares and it did not involve the depletion of the Company’s cash, it depressed the share price dramatically.  I set out below the losses for the 6 financial years commencing 2014.  This information is largely material because it is the background against, which any assessment of Strong Light and Flying Mortgage’s approach and motivation in buying shares falls to take place.

Year ended 31 March 2015 HK$000	Year ended 31 March 2016 HK$000	Year ended  31 March 2017 HK$000	Year ended  31 March 2018 HK$000	Year ended 31 March 2019 HK$000	Year ended 31 March 2020 HK$000	Total HK$000
Loss	Loss	Loss	Loss	Loss	Loss
(18,391)	(29,302)	(297,016)	(271,246)	(10,131)	(34,015)	(660,101)

C.     The Petitioners

14.  The Petitioners say that they have the support of other creditors and in [10] of the Re-Amended Petition assert that together with other shareholders of the Company, who the Petitioners say they believe support their position, they represent about 10% of the Company’s issued shares.  However, the Petitioners’ evidence at trial failed to establish that any other shareholders supported the Petition.  The one other shareholder, who the Petitioners had asserted supported the Petition, Mr Ge Qingfu, has apparently become uncontactable and no evidence has been filed in the proceedings by him.  In addition it had been the Petitioners’ case that a Mr Sun Ji You, who claimed beneficial ownership of a substantial body of shares of the Company in HCMP 1929 of 2016, supported the Petition.  However, Mr Sun’s claim has proved unsuccessful.  I, therefore, proceed on the basis that the Petitioners are the only shareholders of the Company, who seek a winding up.  I note that it is the Petitioners’ case that the Wongs control 59.8% of the Company.  It, therefore, follows that on the Petitioners’ own case there is a considerable proportion of the Company’s shareholders, who are independent and, who have not supported the Petition.  This is relevant when I come to address the issue of relief.

15.  Also relevant to relief is the Petitioners’ motives in seeking a winding up order.  The Petition even in its Re-Re-Amended form[4] is quiet on the precise reasons.  It simply says in [58]: “In the circumstances set out above, Your Petitioners are unable to avail themselves of any process or remedy, other than a winding up of the Company, that would justly or fairly remedy the wrongs that the Wongs and the Board have visited upon the Company’s minority shareholders, including Your Petitioners”.  The affirmation evidence filed by the Petitioners is also imprecise and vague in explaining the Petitioners’ thinking.  So Lung Ying is the operations manager of the 1^st Petitioner.  Ms So tells the court little about the 1^st Petitioner in her affirmations or its reasons for deciding to invest in the Company.  In [13] of her 2^nd affirmation she suggests that the Petitioners seek a winding up because the Wongs control of the Company makes it impossible to oppose their misconduct.  She expands on the Company’s reasons in [21]–[23].  First, given the extent of the complaints and the large loss that they have caused, it would be difficult to quantify the impact on the share price and reach a reasonable buy out price. Selling shares into the market would, of course, provide no remedy for the depressed share price. Secondly, it would not have been practical or appropriate to commence a derivative action because the matters complained of are not a one-off incident, but are a pattern of continuous mismanagement and misconduct, which still continue. In these circumstances the only realistic remedy is a winding up order.  What is surprising is that the Petitioners’ affirmations contain no evidence of the price they paid for their shares or the loss that they believe they have suffered.  Records were adduced at trial through cross-examination by the Petitioners, which show a substantial fall in the share price in July 2016.  On 6 July they dropped from HK$0.38 to HK$0.032 (-91.58%) and presumably it is this massive drop that gives rise to at least part of the Petitioners loss. 

16.  Ms So was cross-examined about the 1^st Petitioner and its reasons for pursuing the Petition.  As was the case with all the deponents her affirmations were short of the kind of background information that one might have expected them to provide.  Ms So told the court that the 1^st Petitioner is an investment company owned by Unity Investments Holdings.  The 1^st Petitioner invests in shares. It started to buy shares in the company in March 2015.  Ms So was not able to say when the 2^nd Petitioner, who did not give evidence, bought shares or at what price. In fact, Ms So could not recall the price at which the 1^st Petitioner purchased its shares. Ms So was not able to explain why the 1^st Petitioner did not commence a derivative action against the directors of the Company for the loss that the matters of which the 1^st Petitioner complains, caused. As I have already mentioned it was initially the 1^st Petitioner’s case that other shareholders supported the Petition.  Ms So was not able to explain why none of them had come forward or provide at least a letter confirming their support.  Ms So also confirmed that she had no first-hand knowledge of the complaints advanced in the Petition.  She did not know Yang or the Wongs.  As I understood Ms So’s evidence her principle reason for concluding that the Board acted as directed by the Wongs was that the Wongs themselves had taken no action to remedy the Board’s serious acts of misfeasance, which had caused the Company, and consequently the Wongs, loss.  The implication being that if the Wongs were not complaining about such serious breaches of duty which caused such substantial loss there had to be a reason.  The most likely explanation given the business relationship between the Wongs and various Board members was that the Wongs were ultimately responsible for the Board’s decisions.

17.  In the case of the Red5 Investment Ms So said that she understood that Ryan had been directly involved in negotiating it on the basis of what she had been told by Wu Di, whose evidence I explain in [55]–[57].

18.  My impression was that Ms So’s evidence was largely based on what she had been told by other members of staff who analysed investments.  It was her evidence that she dealt only with the execution component of investments.  Ms So’s evidence was, therefore, largely inference based on a certain amount of information about the Company gleaned from her personal responsibilities and information given to her by colleagues.  It would have been helpful to the court, and possibly helpful to the 1^st Petitioner’s case, if its evidential case had been more fully set out in an affirmation made by a director or other staff members with greater knowledge of the 1^st Petitioner’s thinking and decision making.

19.  Ms So was unable to explain why the Petitioners had not sought alternative relief.  Her explanation for the Petitioners wanting a winding up seemed to centre on their inability to influence how the Company was managed because they had such a small position and could always be outvoted.  However, as the decision was made, so Ms So told the court, by the 1^st Petitioner’s Board and she is not a director of the 1^st Petitioner her evidence provides little useful information.  I would have expected the 1^st Petitioner’s decision to have involved more sophisticated and informed reasoning than Ms So was able to give.  Ms So was also not able to give an explanation for why the 1^st Petitioner’s directors have not given evidence.

D.     The Petitioners’ Case on the Wongs’ control of Flying Mortgage and ultimately the Company

20.  There is no dispute that the Wongs are the beneficial owners of Strong Light.  In addition to the 23.41% indirect interest this gives them in the Company, they also hold directly 1.77%, giving them a total interest of 25.18%.  Central to the Petitioners’ case is that the Wongs also control Flying Mortgage, which gives them de facto control over the result of general meetings of the Company, and also the Board.  Flying Mortgage has one registered shareholder, Leung Chi Yan (“Leung”).  It is the Petitioners’ case that Leung is the nominee of the Wongs.  The Petitioners contend that the Wongs have a history of using nominees to control businesses.  It is their case that this is demonstrated by an examination of various business transactions, which as well as evidencing the use of nominees also serves to establish that Leung has been one of their nominees of choice.  The Petitioners’ case requires a detailed examination of the change of ownership and control of various companies associated, say the Petitioners, with the Wongs.  I start with Flying Mortgage itself.

21.  Before Leung’s involvement, and in particular prior to 1 August 2016, Flying Mortgage’s shareholders consisted of Ma and Ryan, who as I have mentioned is the Wongs’ son.  Ryan was until 27 May 2013 the majority shareholder of Flying Mortgage owning 95% of its shares with Leung owning the balance.  On 27 May 2013, Ryan transferred all of his shareholding to Ma who was Flying Mortgage’s director from 27 May 2013 until 18 April 2016, which was 10 days before the Wongs nominated and appointed him as an executive director of the Company.  On 18 April 2016, Ma resigned as a director and Leung was appointed as his replacement.  On 1 August 2016 Ma transferred all of his shareholding to Leung, who has since been the sole registered shareholder.

22.  This is not Ryan and Leung’s only business connection. Ryan and Leung are also the shareholders and directors of another company, Dragon Sunny Investment Limited (“Dragon Sunny”).  Leung would also appear to be involved with other businesses operated by the Wongs.  He is also the sole director of a company owned by the Wongs, Happy Credit Limited (“Happy Credit”), which is wholly owned by Food Idea which is a listed company founded by Wong.  Ms Wong Tai Ying, the Wongs’ daughter, was the director of Happy Credit until 1 August 2012, when she resigned and was replaced by Leung.

23.  Similarly, Ma has been involved in other of the Wongs’ businesses, namely, Lucky Dessert.  Ma owns Ample Chance, which holds 2% of Lucky Dessert.  The other shareholders of Lucky Dessert were: (a) Wong Tai Chun (49%) who is a son of the Wongs and the brother of Ryan; and (b) Wealth Power Group Limited (49%), which was held until 23 May 2017 by Wong Yat Tung and Wong Yat Cheung, who the Petitioners allege are both associates of the Wongs.  On 29 April 2015, the Wongs’ son, Wong Tai Chun, transferred 49% of the shareholding in Lucky Dessert to Food Idea.

24.  On 23 May 2017, Wong Yat Tung transferred 49% of Wealth Power to the Company.  The Company had lent HK$29 million to Wong Yat Tung and on 23 May 2017 the loan was converted into the acquisition of 50% of Wealth Power, which as I have explained holds a 49% interest in the Wongs’ company, Lucky Dessert.

25.  The Petitioners alleged that from early 2016 until about January 2017, the Wongs controlled or were able to influence the composition of the Board, through the collaboration with Yang, through his company Yang’s Holding Capital Limited (“Yang’s Holdings”), which, during 2016, was one of the Company’s largest shareholders, and through the Wongs’ control over a HK$128 million loan which the Petitioners allege the Wongs had caused Flying Mortgage to make to Yang’s Holdings.

26.  As a consequence, so the argument develops, the Wongs were able to ensure that a majority of the Board voted in accordance with the Wongs’ instructions or proposals.  In mid-May 2016, Yang retired as the Company’s chairman and executive director and he was replaced as chairman by an executive director, KH Ng, who the Petitioners contend was the Wongs’ nominee.  The import of this is that since December 2016, the Wongs have controlled the processes governing the appointment, retirement and retention of all directors and officers of the Company.  Until their retirement on 5 March 2019, the Board comprised two executive directors, namely the chairman KH Ng and Lau, and three independent non-executive directors (“INED”), including Ma.  I note in passing that KH Ng, was adjudged in HCMP 2222 of 2016 to have committed serious breaches of fiduciary duty while acting as directors of the Company.  I return to this matter in more detail later.

27.  Following the resignation on 5 March 2019 of KH Ng and Lau, Wang Tsz Yue (“Wang”) was appointed as an executive director.  The Petitioners say he is also a nominee of the Wongs.  Further changes in the constitution of the Board occurred in June 2019 with the appointment of Chan Kim Fai (“Chan”), Ng Chi Ho Dennis and Li Kin Ping, but the Petitioners say this did not bring any genuine independence to the governance of the Company and the executive management of the Company continues to be undertaken by the Wongs’ two nominees, the executive directors Lau and Wang.

28.  If the Petitioners are correct that the Wongs are ultimately responsible for Board’s decisions it follows, say the Petitioners, that the Wongs are also responsible for the five serious improper transactions that I referred to in [5]–[6].  It is the transactions referred in [5] that I now consider in more detail.

E.     The Complaints—Red5

29.  On 28 April 2016, KH Ng and the Board publicly announced that the Company had that day entered into a sale and purchase agreement (“Red5 S&P”) with various vendors (“Vendors”), wherein the Company had conditionally agreed to purchase from the Vendors 47.63% of the shares of Red 5 Studios, Inc. (“Red5”), a Delaware, U.S.A. limited liability corporation, for a total consideration of US$76.5 million, which was to be satisfied by the issue and allotment to the Vendors of new Company shares (“Consideration Shares”) which were to be credited as fully paid upon the completion of the Red5 S&P (“Red5 Investment”).

30.  Red5 and its subsidiaries were principally engaged in the development of online games, including an online multiplayer game named “Firefall”.  In the Company’s announcements dated 28 April 2016 and 20 June 2016, it was stated that the Red5 Investment would bring in to the Company licence fees and royalties that would be generated through the “Firefall” game, which the Board estimated at approximately US$171 million over the five years following the commercial launch of the “Firefall” game in the Mainland, which was anticipated to be in late 2016.

31.  However, it was later discovered that the development of the online game “Firefall” was halted before the date of the Red5 S&P.  The Petitioners contend that the Wongs and their nominees on the Company’s Board knew, or should have known, that the Red5 Investment was valueless for the following reasons:

(1)  From 12 March 2016, Red5 had publicly announced the suspension of its “Firefall” online game and all “Firefall” operations and business ceased;

(2)  On 12 April 2016, the exclusive operator of “Firefall” in the Mainland, System Link Corporation Limited, indefinitely suspended the “Firefall” servers, meaning that there was publicly available information that Red5 and “Firefall” were defunct before the Red5 S&P was executed on 28 April 2016. I note that although this is how the Petitioners’ characterise the 12 April 2016 announcement in the translation that I have (the original is in Chinese) it says the server would suspended for an unspecified period while the maintenance and upgrading of the server took place.

The Petitioners argue that by 28 April 2016 KH Ng and the Board must have known of the above matters and that the “Firefall” game had no commercial viability in the Mainland as, consequently, did Red5 and they had an ulterior motive for causing the Company to execute the Red5 S&P.

32.  The Petitioners further argue that the ulterior motive was the dilution of the value of the Company’s pre-completion shares, so as to provide the opportunity for the Wongs to acquire control of the Company cheaply, anticipating that the Vendors would following completion dump the Consideration Shares.  This is what happened causing the trading prices of the Company’s shares to collapse by 91.58% in one day.  On 20 June 2016, the stipulated completion date of the Red5 S&P, KH Ng and the Board caused the Company to complete the Red5 Investment with the 226,022,723 Consideration Shares in the Company being issued and allotted to the Vendors, and credited in the records of the Company as fully paid up at a notional issue price of HK$2.64 per share.  On 6 July 2016, about two weeks after the completion of the Red5 Investment and immediately after the Vendors deposited their shares into the securities houses, the trading price of the Company’s shares fell from HK$0.38 to HK$0.032 per share, as a result of the Vendors or their nominees disposing in unison of their Consideration Shares.

33.  On 14 November 2017 the Board published the Company’s 2017 interim report, which announced a loss of HK$596.7 million, which resulted from the writing off of the entire Red5 investment.  In the announcement the Board claim that the Board only found out of that Firefall had been suspended in July 2017.  Although evidence was filed by Lau on behalf of the Company, no evidence was forthcoming from the Company concerning the due diligence carried out in relation to the Red5 Investment or, which explains why the Board, despite the size of the investment and its importance to the Company, were not aware in April 2017 that Firefall had been suspended.  I accept that the Board’s conduct was either incompetent or motivated by some ulterior purpose.  Determining to the civil standard of proof, which explanation is to be preferred, is a matter of inference to be drawn from the facts and matters that I find proved.  I address the principles that guide the court when drawing inferences in [106].

34.  In order to determine that the Wongs engineered the Red5 Investment it is necessary for the court to find that on the balance of probabilities the Wongs’ controlled the Board and probably directed either the acquisition or the strategy that it formed part of.

F.     Fraudulent Share Placement

35.  Following the collapse in the trading price of the Company’s shares on 6 July 2016, minority shareholders of the Company became extremely dissatisfied with the Board’s mismanagement and began to explore proposals for reconstituting the Board.  The Petitioners argue that KH Ng (who was the Chairman of the Board at the time and who appears as the signatory on the public announcements at this time) and the Board became aware of those proposals and initiated measures to avoid this.

36.  On 21 July 2016, KH Ng and the Board caused the Company to enter into a share placing agreement with FP Sino-Rich Securities and Futures Ltd (“FP Sino-Rich”) in respect of 2,869,886,385 new shares in the Company, which was approximately 11.96% of the issued share capital of the Company as enlarged by the allotment and issue of placing shares, purportedly in order to raise HK$59 million for the Company.

37.  On 22 July 2016, Favourite Number Limited (“FNL”) notified the Board that FNL intended to make an offer for a voluntary conditional securities exchange, comprising one share of the publicly listed WLS Holdings (“WLS”) plus HK$0.28 in exchange for every 20 shares in the Company.

38.  On 5 August 2016, KH Ng and the Board caused the Company to seek from the SFC a “put up or shut up” ruling pursuant to Rule 31.1(b) of the Takeovers Code and requested a deadline to be set for FNL to announce a firm intention to make a General Offer. The SFC issued their ruling on 15 August 2016.  On 18 August 2016, FNL and WLS issued a public announcement stating, inter alia, that subject to conditions, FNL would offer 57 new shares in WLS plus HK$5.6 in cash in exchange for every 400 shares in the Company in a bid to acquire all the issued shares of the Company (“FNL General Offer”).  On 19 August 2016, the Board caused and publicly announced the suspension of trading in the Company’s shares (“August Suspension”).

G.     Fraudulent Options

39.  On 23 August 2016, KH Ng and the Board released a public announcement stating that, on 22 July 2016, 2 billion allotment options (“Options”) had been granted to 10 eligible participants (“Grantees”), who were all closely connected to KH Ng and the Board.

40.  On 24 August 2016, KH Ng and the Board publicly announced that the FNL General Offer had failed to comply with the Hong Kong Takeovers Code because FNL and WLS had failed to take into account or extend the FNL General Offer to all the holders of shares in the Company (including shares allotted as a result of the exercise of subscription rights) and purported share options (including the Options).  In that announcement, KH Ng and the Board for the first time claimed that the Company had a total of 25.6 billion issued shares as a result of an additional allotment of 1.6 billion new shares to eight of the Grantees after they had exercised the Options.

41.  Later the same day, (24 August 2016) and shortly after the resumption of trading, KH Ng and the Board publicly announced that the Options had been exercised on 21 August 2016 and as a result the 1.6 billion shares (“Shares”) had been converted and issued on 22 August 2016.

42.  The Petitioners later discovered that, during the August Suspension, the Grantees had collected the share certificates for their Shares and deposited them with FP Sino-Rich (the employer of three of the Grantees) and Emperor Securities Ltd—all of which were sold in unison immediately following the resumption of trading announcement, earning the Grantees and those assisting them a total profit of around HK$30 million after deducting the placement price for the Shares.

H.     HCMP 2222 of 2016

43.  On 26 August 2016, three shareholders of the Company, Ge Qingfu, Li Quan and Liu Longcheng (“OS Plaintiffs”) issued their originating summons in HCMP 2222 of 2016 (“HCMP 2222”) advancing claims against each of the directors (who was on the Board during 2016) and the Grantees.  On the same day, the HCMP 2222 Plaintiffs also applied ex parte for an urgent interlocutory injunction to restrain the Board and the Company inter alia from recognising or giving effect to the Options.

44.  On 27 August 2016, the HCMP 2222 Plaintiffs sought and obtained an ex parte interim injunction restraining FP Sino-Rich and Emperor inter alia from disposing of the remaining Shares until the return day hearing on 31 August 2016 and on the return day, the Company and the Board provided undertakings in lieu of the interim injunction.  Throughout those proceedings, the directors (the 3^rd to 7^th Defendants), who were ordered to pay damages of about HK$18.6 million to the Plaintiffs, were represented by the same legal team as they had caused to represent the Company.

45.  The trial of the HCMP 2222 took place between      12–21 July 2017 before Recorder Pow SC, who handed down his judgment on 17 December 2018, in which he rejected the evidence of KH Ng and Ma as unreliable and untruthful, holding that:

(1)  The Options were not granted on 22 July 2016 and KH Ng and the other Board Defendants (except Yang who was found not to have participated) had decided to effect the grant of the Options to the Grantees sometime between early to mid-August 2016.

(2)  The documentation, relied upon by KH Ng in his evidence, purportedly pertaining to the grant of the Options to the Grantees, had been forged and fraudulently backdated to 22 July 2016.

(3)  The Grantees were all proximately connected to the management of the Company, especially KH Ng, whose evidence about the Grantees’ past and future contributions to the Company was “contrived and not credible”.

(4)  The Options were not granted in accordance with the terms and conditions of the Company’s Share Option Scheme.

(5)  Even if the Options had been granted on 22 July 2016, that grant would have breached Rule 23.05 of the GEM Listing Rules and KH Ng’s evidence on this issue was rejected as being “contrived and incredible”.

(6)  The participating Board Defendants had deceitfully concocted their story about having granted the Options on 22 July 2016 with the improper purpose of blocking the FNL General Offer, which constituted a breach of their fiduciary duties.

(7)  The participating Board Defendants were liable to pay the HCMP 2222 Plaintiffs damages in the sum of HK$18,669,420 plus interest and costs.

46.  On 23 August 2016, the HCMP 2222 Plaintiffs (who together held 10.21% of the Company’s shares) served a letter on the Board calling for an EGM for the purpose of considering and, if thought fit, passing resolutions to remove and replace the Board with proposed replacement directors (“1^st EGM Requisition”). On 9 September 2016, KH Ng and the Board, refused to act upon the 1^st EGM Requisition, on the basis of an assertion that the HCMP 2222 Plaintiffs held less than 10% of the issued shares of the Company, taking into account the Options and the consequential allotment mentioned above.

47.  Following the purchase on 5 September 2016 by one of the HCMP 2222 Plaintiffs, of more shares in the Company, the HCMP 2222 Plaintiffs issued a fresh requisition to remove and replace the Board.  However, at the EGM held on 15 November 2016, the proposed resolutions to remove and replace the Board were all voted down.  The Petitioners contend that this was the result of the Wongs causing the voting rights attaching to the shares of Strong Light, Flying Mortgage and the shares issued as a result of the Options being exercised to be voted against the resolutions.

I.     Wongs changing their nominees

48.  It is the Petitioners’ case that following the service of the Petition in March 2019, the Wongs caused their nominee directors on the Board to create the false impression that the Company had purged itself of its former tainted directors and replaced them with other directors.  The Wongs caused KH Ng and Ma to resign their directorships and other positions with the Company on 7 May 2019.  They then caused the Company to convene an EGM on 6 June 2019 to remove the then directors and to re-appoint or appoint directors.  At that EGM, shareholders controlled by or influenced by the Wongs voted their shares to achieve the following outcome.  The Company’s remaining two executive directors, Lau and Wang, were re-appointed as the Company’s only executive directors.  Li was re-appointed as an independent non-executive director (“INED”). Guo Yan Xia was removed as an INED and Chan and Dennis Ng were appointed as INEDs.

49.  The Petitioners complain that in addition to the complaints that I have explained in the preceding paragraphs the Board’s misconduct has led to:

(1)  the resignation of the Company’s former auditors inter alia in relation of the above matters and also in respect of unexplained related party loans in 2017 and 2018 which do not appear to be in the best interests of the Company;

(2)  multiple High Court proceedings involving the Company’s shareholders, the Company, and the former Board; and

(3)  Hong Kong investigations by regulators, which the Petitioners understand to still be underway.

J.     The Central Issues

50.  Mr Barlow submitted that the following are the central issues, which require determination:

(1)  Does the Petitioners’ evidence prove on the balance of probabilities the controversial allegations on which the Petitioners rely?

(2)  Is it reasonable for the Petitioners to seek the winding up relief, which they ask the Court to grant?

(3)  Would it be just and equitable to wind up the Company?

(4)  If the court it is satisfied that the Petitioners have demonstrated that a winding up would be justified, should the court defer making an order until after a report is prepared by court appointed provisional liquidators?

51.  Strong Light, however, invite the court to approach the matter differently.  As I mentioned in the introduction the 1^st Respondent has issued a summons to strike out the Petition, which I was invited by Mr Maurellet and Ms Cheung to determine first as it might dispose of the Petition.  I did not do that as it seemed to me that the issues raised by the strike-out application, namely, whether or not there is any reasonable prospect of the Court finding that it is just and equitable to wind up this solvent listed Company incorporated in a foreign jurisdiction, namely, the Cayman Islands, at the request of a shareholder holding 3% of the Company’s shares, were subsumed within the issues raised by the Petition.  Put shortly, the Respondents argue that it is unreasonable for the Petitioners if they feel aggrieved not to seek the conventional alternative remedy of a buy-out order at a share price adjusted to reflect the impact on the value of the Company of the wrongs of which they complain in the Cayman Islands.  It is the Petitioners’ case that what they seek is an investigation into the Respondents’ wrong-doing and its impact on the Company, which by virtue of its public character, engages broader considerations than might be the case if were private.  I consider this issue in detail in [118]–[128] after I have dealt with the factual issues.

52.  An unusual feature of this case is that the Respondents approach has not involved a conventional engagement over the truth and characterisation of the Petitioners’ complaints of breach of duty by the Board.  The Respondents have not advanced a positive case at all other than to challenge the claim that the Wongs through their nominees control the Board.  The Wongs’ position is that they themselves are victims of any wrongs done to the Company as a result of breaches of duty by its directors.  In the 1^st Respondent’s closing submissions there is no attempt to challenge the allegations of breach of duty by the directors of the Company, which I have described earlier in this decision.  The 1^st Respondent only challenges the allegations that it controls the Board and is consequently responsible for the matters of which the Petitioners complain.  The allegations of control are central to the Petitioners’ case, because they are a critical stage in the development of Petitioners’ argument that this is an appropriate case to wind up a solvent listed company. Therefore, I address first the question of the Wongs’ control and influence over the Board.

K.     Wongs alleged control of the Board

53.  The Petitioners’ case altered during the course of the trial.  On Day 3 during the cross-examination of Mrs Wong the Petitioners applied for leave to re-re-amend the Petition.  This introduced a new element to the Petitioners’ case on control.  Mr Barlow argued that Mrs Wong’s evidence demonstrated that the Wongs’ son, Ryan, had in conjunction with his Parents exerted control over the Company.  I allowed the amendment de bene esse following completion of Mrs Wong’s evidence.

54.  In its closing submissions Strong Light objects strongly to this change of case; or what I think is more accurately characterised as shift of emphasis.  Mr Maurellet argued that generally amendments are not permitted at trial, which introduce an allegation of fraud or serious misconduct.  This is correct.  However, the Petitioners have not introduced for the first time an allegation of misconduct.  This has always been the Petitioners’ case.  It has always been their case that the Wongs control the Company and their denials are dishonest.  The only difference in the revised formulation of the Petitioners’ complaint is that it is now alleged that Ryan was involved, who is, of course, the Wongs’ son.  It is correct that Ryan is not a party, but Strong Light could have insisted that he be given the opportunity to defend himself and if they had required an adjournment to allow this I anticipate that I would have agreed.  The fact is that Strong Light did not ask for an adjournment and that the introduction of express reference to Ryan was, in my view, an understandable decision in the light of Mrs Wong’s evidence.  I, therefore, allow it.  From this paragraph of the Judgment onwards reference to the “Wongs” includes Ryan.

55.  The case against Ryan emerges as follows.  First, from the affirmation of Wu Di, on which the Petitioner’s had by a summons dated 3 February 2020 sought leave to rely.  As the Respondents had had a considerable time to consider it I allowed the evidence to be adduced.  Wu is an executive director of Asia-Pac Financial Investments Company Limited, which is listed on the GEM.  In his affirmation made on 4 July 2020 he gives evidence that he was a personal friend of Ryan.  He recalls Ryan telling him towards the end of 2015 that he controlled the Company through his Family. At about the same time  Ryan told Wu that he was interested in investing in some projects, which were creative but did not involve a large amount of money. As a result, toward the end of 2015 Wu introduced Ryan to Zhu Jun the owner of Red5.  Zhu came to Hong Kong to discuss the sale/purchase in 2016.  Wu says that it was his impression from what he heard from Zhu about the acquisition that the Company did not carry out proper due diligence.  He was also surprised that Zhu could sell the Company for US$76.5 million in April 2016 given that by this time it was known that the gaming server used by Red5 in the Mainland would be shut down.

56.  A certain amount of Wu’s affirmation is unhelpful because it contains evidence about matters, which he presumably only became aware of subsequently and the drafter has unhelpfully produced an affirmation, which is clearly crafted to support a case rather than as it should limit itself to evidence that the witness can properly give, which would be what he knew at the time.  An example is the reference to the Red5 announcement about its suspension.  There is nothing in the affirmation to explain whether or not Wu knew about it at the time (and there is nothing to suggest that he would have had a reason to do so) and its seems to have been included simply to bolster the 1^st Petitioner’s case.

57.  Mr Maurellet was heavily critical of Wu’s evidence suggesting that it has been fabricated largely on the basis that having said he was a very good friend of Ryan, Wu seemed surprisingly ignorant of the number of children Ryan has and the fact that despite saying that he stayed in Ryan’s flat at the Coronation in Kowloon for a year he had not produced any documents to prove this.  Mr Maurellet submitted that Wu was an evasive witness and his evidence had no probative value as he could not say how Ryan controlled the Company.  I disagree.  It was not put to Wu that he did not know Ryan or that his evidence was fabricated.  Clearly, the 1^st Respondent had access to Ryan and if Wu’s evidence was a complete fabrication I would have expected the 1^st Respondent to have been able to advance a positive case, most obviously by calling Ryan, to demonstrate it to be so.  The precise details of what Wu was told are not of great importance.  However, his evidence that Ryan was holding himself out as controlling the Company is.  Even if Ryan was exaggerating it would still be consistent with the thrust of the Petitioners’ case.  No reason has been advanced by the Respondents for Wu giving dishonest evidence for the Petitioners.  I find that Ryan did tell Wu that he controlled the Company and that Ryan had a central role in the Red5 Investment being made by the Company.

58.  In January 2020 the Petitioners had also sought leave to rely on the evidence of Jia Minghui (“Jia”).  Mr Jia is a director of AMCO United Holdings Limited, which is listed on the Main Board of the Hong Kong Stock Exchange.  He says in his affirmation that he was told in late 2017 by a friend Ms. Chen Nanna (“Chen”) that she had been able to obtain a loan for HK$20,000,000 from L&A Solutions Limited, which is a subsidiary of the Company, secured by a 2^nd mortgage on a property she owned at the Cullinan in West Kowloon, which is borne out by the documents exhibited by Jia.  Chen already had given the flat as security for an all monies facility given to her by Lei Shing Hong Credit Limited.  Jia says in his affirmation that Chen told him that the loan by the Company’s subsidiary was arranged by Ryan.  During his cross-examination Jia said that Chen told him that Ryan was in control of the Company.  Mr Maurellet submitted that Jia was a dishonest witness, who was simply bolstering the Petitioners’ case.  He was particularly critical of Jia saying for the first time in cross-examination that Chen had told him that Ryan was in control of the Company and Jia insisting that he had mentioned this in his affirmation when cross-examined about the omission of this evidence from his affirmation.  Although Jia does not say that Chen told him she understood Ryan was in charge in his affirmation he does clearly say that she told him that Ryan arranged the loan, which was for a substantial sum with limited, if any, security; the implication being that clearly Ryan had some involvement with the affairs of the Company.  The Respondents have not been able to point to any matter that suggests that Jia has a reason to come to court to give perjured evidence.  The 1^st Respondent and the Company had had Jia’s affirmation for some time and if what he said was untrue they had the opportunity to say so.  They did not.  I, therefore, conclude that at least what is said in Jia’s affirmation is correct and that Ryan was involved in the affairs of the Company in late 2017.  This being the case the suggestion that the Wongs had no influence in the affairs of the Company is untrue.

59.  In addition to Ms So, the Petitioners called Lam Chin Cheung Raymond (“Lam” a businessman, who had been a business partner of Yang), who made an affirmation dated 11 July 2019.  Lam’s evidence is short.  He says in his affirmation that he was asked by Yang in about July 2015 to assist in the disposal of Yang’s Holdings shares in the Company.  Lam says that at this time he was told by Yang, that he in turn had been told by Gary Choy Sheung Ki, who appears to have worked for Yang’s Holdings, that at this time the Wongs were in control of the Company.  As it transpired during Lam’s cross-examination it became apparent he had no independent knowledge of any of these matters.

60.  Ms So was cross-examined on her knowledge of the matters of which the Petitioners’ complain, the reason why the Petitioners have not sought a buy-out order and the reason why the Petitioners did not attend and vote at the EGM.  As I have explained Ms So had no first-hand knowledge of the first two categories of matters.  In the case of the choice of relief she said that this was a matter determined by the 1^st Petitioner’s directors.  So far as the lack of attendance at the EGM on 6 June 2019 was concerned, she explained that there was no point in attending because the 1^st Petitioner did not expect to be able to influence the outcome of the vote to reconstitute the Board.  I note that if one looks at the voting, the 1^st Petitioner’s assumption appears to have been correct as a clear pattern emerges from the voting at the meeting, which is recorded in the 2^nd affirmation of Lau.  The resolutions all passed by either 96% or 100% of the votes cast and looking at the numbers the Petitioners’ votes would have made no difference to the outcome.  I have no evidence as to why particular directors were nominated or why the shareholders, who attended and voted might have thought them suitable candidates.  The notice of the EGM gives no details about the candidates.  The Company has filed no evidence, which provides any information, which assists in understanding the constitution of the Board.  The Company appears to have thought it unnecessary to provide information that might have helped the Court to determine this Petition.  The three affirmations made by Lau, together run to 10 pages including the first pages and the jurats.

61.  Wong and Mrs Wong gave evidence on behalf of the 1^st Respondent. Wong was cross-examined after his Wife.  It became clear during his cross-examination that Wong’s role in the 1^st Respondent’s investment was peripheral and that he understood that it was his Wife, who had initiated it and largely managed it.  What was perhaps more surprising was that Wong claimed not to be aware that in 2016 he and his Wife acquired a chain of eight restaurants from Food Idea, while Wong was the Chairman of Food Idea.  He said that all along the restaurants had been under “our operation”.  This suggests that Wong paid little attention to, or had little understanding of, the corporate structure and legal ownership of the food and restaurant business that he was running. Wong also claimed not to be aware of the holding of an extraordinary meeting of the Company on 15 November 2016 at one of the restaurants Wong and his Wife had bought, namely, Arome in the Zenith in Wan Chai.  There had been reports in the press that entry to the meeting had been interfered with by the presence of triad members.  Wong said he was not aware of this.

62.  I did not understand the Petitioners to question Wong’s evidence that he had little involvement in the investment and corporate side of his Family’s business interests.  Mr Barlow argued that he must have known of the convening of the meeting on 15 November and the reports of triad involvement interfering with the conduct of the meeting.  It is possible, although not likely, that Wong took so little interest in the affairs of the Company that he was personally unaware of the holding of a meeting of the Company in which even on his own case he and his Wife have a substantial interest. However, if he was not aware of these matters it suggests, as Mr Barlow submitted, that it was Mrs Wong and Ryan who were managing the Family’s interests in the Company.  It is Mrs Wong’s evidence which I address next.

63.  As in the case of her Husband’s affirmation, Mrs Wong’s affirmation denies the Wongs involvement in any of the matters of which the Petitioners complain or the suggestion that they through nominees control the affairs of the Company. Also, as in the case of her Husband’s affirmation, there is no explanation of why or in what circumstances the Wongs came to acquire in excess of 25% of the Company’s shares or their attitude to their significant investment in it.  The impression, to the extent that much of any significance in this regard can be gleaned from her affirmation, is that the Wongs were entirely passive investors.

64.  On 4 April 2019 the solicitors acting for the both the 1^st and 2^nd Respondents, Bond Ng, wrote to K&L Gates, who at the time acted for the Petitioners, informing them that their clients shared the Petitioners’ concerns about the conduct of the Board, whilst denying that they had control over it, and informing them that they intended to requesting an extraordinary general meeting at which the board could be reconstituted.  They proposed that the Petitioners nominate a candidate to stand for election.  This the Petitioners did not do.

65.  The 1^st and 2^nd Respondents did not vote at the meeting in, it is their case, the interests of making it clear that they were neutral.  Although this might superficially seem an act of laudable altruism, having regard to the fact that the Company is a purely commercial venture it is difficult to see why the majority shareholders would have felt that they had no need to take an active interest in the composition of the Board.  It is the Petitioners’ case that this was because they were able to control the outcome through other means.  The presence of men, who restricted access to the 2016 EGM held at one of the Wongs’ restaurants is consistent with this.

66.  Mrs Wong was cross-examined extensively on the following matters:

(1)  The Wongs’ business and investment background;

(2)  The Wongs’ acquisition of shares in the Company;

(3)  Why the investment has been made; and

(4)  her reaction to the matters of which the Petitioners’ complain.

L.     Wong’s Business and Investment Background

67.  The Wongs had established a restaurant business, which was eventually listed and called Food Idea.  Wong was the Chairman and Mrs Wong was the chief executive officer.  Mrs. Wong confirmed that she had overall responsibility for strategic planning, management, finance, human resources and marketing.  This would suggest that she would take an interest in a company in which her Family had made a substantial investment.  It was, however, her evidence that this was not the case.

M.     Wong’s Acquisition of Shares in the Company

68.  Mrs Wong told me in answer to questions from Mr Barlow that she bought the shares over time simply because they were cheap.  It is her evidence that Strong Light borrowed the approximately HK$50,000,000 that it paid for its shares from the Hang Seng Bank.  The Company has never made a profit or declared a dividend.  Mr Barlow asked about this it was Mrs Wong’s evidence that she paid no attention to whether the Company made a profit or not.  She said that she had not intended to become the biggest shareholder and that she intended to make a profit out of movements in the share price.  Mrs Wong told me that she had accumulated the shares overtime.  She could not remember the dates or at what prices.  She recalled she probably started acquiring shares she said in 2015.  Mr Barlow drew to Mrs Wong’s attention that the annual report for 2017 shows that as at 31 March 2016 the Wongs had an interest of 25.18% and that the percentage has remained exactly the same up until the date of her affirmation made in June 2019 in which she deposes to the 1^st Respondent’s shareholding. Mrs. Wong conceded that her evidence that she had been buying and selling shares in the Company was incorrect.  She seemed to suggest that she bought a lot of shares in various companies and might have been confused.

69.  On the second day of her cross-examination Mr Barlow took Mrs Wong through various disclosure statements to demonstrate how the Wongs had acquired shares in the Company using corporate nominees.  In particular he showed Mrs Wong the record of Yang’s company, YWH Investment Holding Limited, selling in December 2016 3,000,000,000 shares in the Company for HK$0.008 and the purchaser being the Wongs.  Mr Barlow pointed out to Mrs Wong that this appeared to be inconsistent with her evidence that she had bought the shares in the Company in tranches overtime. Mrs Wong said that she had no idea that shares had been acquired in 2016 from Yang.  She also appeared unable to explain why she would have bought 11.73% of the Company’s shares in December 2016, which was after the Red5 transaction, which led to a collapse of the Company’s share price.  I note that Mrs. Wong did not say that she bought, for example, because she was aware the share price had been depressed.  She also appeared to be unaware when asked by me that the price of HK$0.008 was significantly below the market price.  She clearly could not recall what the market price had been or that in December 2016 she had purchased a large number at a discount.  Although her answers were unclear it appeared to be Mrs Wong’s evidence, again in answer to questions from me at the end of her cross-examination, that it has been her broker’s (Foo Tai) suggestion that buying a large tranche was a good idea.  Mr Barlow suggested to Mrs Wong that she had no idea how Strong Light came to acquire shares in the Company and that the reason was because this was dealt with by her son Ryan, which she denied.  Mrs Wong also said that she did not know, as was suggested to her, that Yang had needed to sell shares because Ryan had caused Flying Mortgage to foreclose on a loan it had made to Yang.

70.  In response to Mr Barlow’s questioning of why she would have acquired more than 25% of the Company’s share capital, which in practice commonly gives a shareholder de facto control of a listed company with a large number of smaller shareholders, and not wanted board representation, Mrs Wong said that the investment was not much money for her as she had many investments in property and shares.  As the Company never declared a dividend and there is no evidence of the Wongs ever selling any of their shares this answer is unconvincing.  On the contrary if Mrs Wong is an active investor making, so she said, over HK$20,000,000 a year from rental income, more than HK$10,000,000 a year from her business (which I take to be the restaurant business) and additional income from dividends in bonds and shares, one would have expected the performance of the Company and the dividend it yielded to have been a prime consideration for her particularly as she had borrowed the money used to buy them.

71.  It seems to me clear that Mrs Wong’s evidence about Strong Light’s acquisition of shares in the Company is untrue.  Her explanation for her approach to acquiring shares is unconvincing, namely, she simply bought shares because they were cheap to trade, but it is also plainly false.  Either Mrs Wong knows why shares were purchased, but was not prepared to tell the truth or she did not know and her evidence is a front for whoever was making the decisions.  Mr Barlow put it to Mrs Wong that it was Ryan, who directed the Company’s affairs, which she denied. 

72.  Mr Barlow cross-examined Mrs Wong on the acquisition by Food Idea (at a time when it was called Gayety Holdings Limited) of 49% of a company called Lucky Dessert for HK$100,000,000.  Another 49% of Lucky Dessert was owned by a company called Wealth Power, apparently owned by two men called Wong, who Mrs Wong said were unrelated to her Husband.  The remaining 2% was owned by Ample Chance Ltd (“Ample Chance”).  Mrs Wong said she knew nothing about the company.  Ample Chance was owned by Ma Chi Ming, who was a director of the Company.

73.  Wealth Power was subsequently purchased by the Company and later written off.  Mrs Wong was aware of the purchase by Food Idea of a 49% interest in Lucky Dessert, but not the subsequent acquisition by the Company.

74.  On 6 December 2017 the Company issued an announcement detailing the following transaction.  Some seven months earlier on 23 May 2017 the Company, through a subsidiary, agreed to buy from Wong Yat Tung (“YT Wong”) his shareholding in Wealth Power for HK$31,320,000.  The background to this would appear to be that in April 2016 the Company raised HK$59,000,000 by way of a placement.  In August 2016 the Company lent YT Wong HK$29,000,000.  The consideration was to be set-off against the loan.

75.  Mrs Wong appeared to be unfamiliar with this transaction including not apparently recognising the name Wealth Power despite it being the other major shareholder of Lucky Dessert, of which as I have explained the Wongs company Food Idea has bought 49%.  Unsurprisingly, she also said she was not aware of the Company’s acquisition of Wealth Power’s interest in Lucky Dessert.

76.  Mrs Wong also said she was not aware that in its audited financial statement for the period ending 31 March 2020 the Company had made a provision of HK$14,000,000 in respect of its investment in Wealth Power reflecting the fact that it had no management involvement in Lucky Dessert’s business and was not able to assess the value of its investment.  Mrs Wong said that Lucky Dessert was run by a colleague in Food Idea called Richard Wong Tin Keng (“Richard Wong”), who she told me was Food Idea’s chief financial officer, who subsequent involvement with the Company I explain later.

77.  Mrs Wong said she was not aware that the Company’s annual general meeting held in October 2016 took place at a restaurant operated by the Wongs in Yuen Long.  Mrs Wong also appeared to be unaware of an extraordinary general meeting that took place on 15 November 2016 at the requisition of a dissatisfied shareholder to reconstitute the board and also the judgment of Recorder Pow SC against KH Ng and Ma. Mrs Wong said it was not until she saw a letter of May 2019, which I took to be a reference to a letter from the Petitioners’ solicitors, threatening legal action that she began to find out what had happened. Mrs Wong said that she did not know, and had not met, either KH Ng or Ma, she accepted that as Ma owned Ample Chance, which has shares in Lucky Dessert, the Wongs in that sense had dealing with him.

78.  Mrs Wong also said she had she knew nothing about Flying Mortgage other than that Ryan had established it a long time ago and that it was now owned by Leung.

79.  Mrs Wong acknowledged that she was aware that her Husband and her had transferred to Ryan approximately half their interest in Food Idea in the 2016 financial year.  This passing of a significant proportion of their interest in Food Idea coincides in time with the investment in the Company.

80.  Mrs Wong said that after the Petition had been served she asked Richard Wong to deal with it, although surprisingly she said he was not working for her by this time and she did not know who he worked for.  She said that he had originally been introduced by a financial consultancy firm specialising in listing, the name of which she could not recall.  Richard Wong had dealt with the listing of Food Idea.  He was also involved in the acquisition by Food Idea of Ryan’s interest in Lucky Dessert and the sale by Food Idea to the Wongs personally of eight restaurants owned by Food idea in August 2016.  Richard Wong also arranged for a letter to be sent by solicitors acting for Strong Light to the Board of the Company on 6 May 2019 requesting that an extraordinary general meeting be convened to consider the removal of KH Ng and Ma.  On 8 May 2016 the Company published an announcement recording that KH Ng and Ma had resigned on 7 May 2016.  Mr Barlow took Mrs Wong through the minutes of the meeting of the board of the Company on 10 May 2016 at which the board decided to convene an extraordinary general meeting.  Four directors attended.  Mrs Wong said that she did not know any of them although she thought she recognised the name of one, Li Kin Ping, who she recalled had worked in the accounts department of Food Idea at one time.

81.  It seems clear to me that Mrs Wong evidence was untrue.  Mrs Wong either had little role in the decision to invest in the Company and was not prepared to admit this, or she did but was not prepared to explain honestly and accurately the reasons why the investments were made and the role she played in the affairs of the Company.

82.  The next witness to give evidence was Lau[5] on behalf of Strong Light, although Lau is an executive director of the Company and says in his affirmation that he was authorised to give evidence on behalf of the Company and the back-sheets to his three affirmations show them having been prepared by the Company’s solicitors.  It is normal for a company not to take an active role in a shareholders dispute.  It is, therefore, unclear precisely what function his evidence was thought by Strong Light and the Company to serve. Strong Light and the Company having decided that he should give evidence on behalf of Strong Light voluntarily (he could have insisted on being subpoenaed) it seems to me that I am entitled to proceed on the basis that he would be expected to deal with allegations, albeit in an impartial manner, made in respect of the Company’s affairs, which are relevant to the issues to be determined at trial of which the Company has knowledge.  An example is the evidence of Jia, which I dealt with in [58].

83.  Lau’s three affirmations told me little other than the result of the extraordinary general meetings held on 6 June 2019 and that on 2 July 2019, that the Company had formed an investigation committee consisting of Ng Chi Ho Dennis, Chan Kim Fai Eddie and a barrister, Richard Yip.  His evidence served to demonstrate the amateurishness of the Company’s management. In answer to questions from Mr Barlow he explained that the Company has (at the time of his cross-examination) no chairman, chief executive officer or chief financial officer.

84.  Lau himself has a background in fashion design.  It was his evidence in cross-examination that he was approached in the middle of 2018 by Cyrus Yuen a senior financial manager at the Company, who was known to his Wife, and told that the Company was looking for an executive director.  He was hired by KH Ng.  He explained that he spent two or three days a week working at the Company and is paid HK$20,000 per month.  He is able to spend his free time undertaking other projects on his own account.  He has also been a director of a number of the Company’s subsidiaries.  He was the chairman of the remuneration committee, although his knowledge of who were the Company’s highest paid employees appeared to be non-existent.  For example, the audited financial statement for the year ending 31 March 2020, shows that one of the Company’s employees earned between HK$1,500,000 and HK$2,000,000.  Lau appeared to have no idea who that might be.

85.  Lau’s lack of knowledge of the Company’s affairs became increasingly apparent as his cross-examination continued.  When pressed on why he did not know how much senior staff were paid he said that the relied on the Finance Department, whose manager was Cyrus Yuen and the Company’s adviser, Cheung Ting Kei (“Cheung”).  However, Lau said Cheung did not work for the Company and he did not know who owned the company (Ah Bui Lung, probably Akron in English) that Lau said Cheung was “with”.  He was also asked to explain why despite the criticism of him by Recorder Pow SC, Cyrus Yuen had been allowed to keep his job.  He could not explain why.

86.  Lau said he did not know the Wongs.  He said he did not know that Richard Wong had worked for the Wongs.  He had no idea of whether Cheung was representing any shareholder’s interests.  He appeared to have given no thought to who, if anybody, influenced how and by who the Company is run.  He did not appear to think that he needed to take any action in the light of the highly critical findings of Recorder Pow SC in respect of his fellow directors KH Ng and Ma.  He said he was not aware of the attempt in May 2019 of a shareholder to have them removed.

87.  Mr Barlow took Lau to the result of the voting at the EGM on 6 June 2019 and asked him if it had not struck him as odd that the 10 shareholders present voted in a consistent pattern: 87,538,400 for or against a resolution to remove or appoint a director or 3,776,000 for or against a resolution to remove or appoint a director.  In other words votes were cast in a block.  He said no.

88.  It is clear from Lau’s entirely unsatisfactory evidence that he was a director in name only.  Clearly he had no material role in the running of the Company and his evidence does not suggest who was it who guided its affairs.  Presumably he has some idea and had no intention of revealing it.  I find his evidence unreliable and unhelpful except to the extent that it serves as an illustration of the absence of proper corporate governance in the Company or probity on the part of those charged with looking after its affairs.  The Company’s board and those behind them have made the conscious decision to limit the Company’s evidence to a nominal director in an attempt to stymie a meaningful assessment of the Petitioner’s complaints.  The Company has made no effort to put before the Court, as it should have been easy for it to do, any evidence explaining how the Board has come to be constituted over time, who are the prime movers behind its operations and planning and the progress of its investigation committee.  No meaningful effort has been made by the Board to demonstrate that the Petitioners’ concerns about the management of the Company are overblown.  This is a matter, which I take into account in deciding what relief to grant.

89.  Flying Mortgage’s evidence was given by Leung.  I have explained the background to Flying Mortgage in [20].  Leung is an accountant, although not a certified public accountant.  He has his own company, which provides company secretarial services.  He has been providing company secretarial services to the Wongs for more than a decade.  He seems to have dealt with Richard Wong and says he has no recollection of dealing with the Wongs direct other than maybe on public occasions.  Ma he had known for about five years.  He estimated his annual income in about 2010 was HK$200,000 to HK$300,000. 

90.  Leung had been a director of Happy Credit to assist it in getting a money lenders licence, although he said that he understood that it had no business and was established for future use.

91.  Leung was cross-examined about various of the companies established by Ryan of which he was the company secretary.  Nothing turns on the details of most of them.  One of them was called Dragon Sunny.  Ryan was the sole director.  He held 9,500 shares.  Leung held 500 shares.  It owned the property at 2209 Tuen Mun Central Square in which Leung has his office.  Leung says that he is the beneficial owner of those shares and he paid HK$100,000 for them, the property having cost HK$2,000,000.  Flying Mortgage used the Tuen Mun address.  Leung was a director of Flying Mortgage, which was owned by Ryan at the time, because it was a money lender and he dealt with the application for a licence.

92.  In 2013 Ma acquired Ryan’s shares in Flying Mortgage. Leung says he did not know how much Ma paid for them.  It was his evidence that he understood Ryan decided to sell his interest because he thought not much money could be made from the money lending business.  Leung disagreed, although he said he could not recall how much the business earnt estimating it with surprising lack of precision as around HK$1,000,000 or several hundred thousand.  It seems unlikely to me that given his own modest income he would not recall with greater precision what profit Flying Mortgage was making in 2013.

93.  Ma resigned as a director of Flying Mortgage on 18 April 2016 and became a director of the Company 11 days later. Leung said that he was not aware that Ma had become a director of the Company. Mr Barlow asked Leung what he knew about Ma, in particular whether he understood him to be wealthy.  He said that he assumed so as he had been able to buy Ryan’s shares and he was also the one who put money into Flying Mortgage when he needed it.  It was apparent from Leung’s answers that he did not know the source of Ma’s financial resources.  It seems unlikely that Leung would have effectively been in a business partnership with Ma and not known more about Ma’s business and financial interests.  On 1 August 2016 Leung acquired Ma’s 9,500 shares in Flying Mortgage.  Leung confirmed that this was after Flying Mortgage had lent HK$128,000,000 to Yang’s Holdings.  Leung said that he borrowed the HK$128,000,000 from a friend in Macau, Chan Kwok Kong (“Chan”), whose business involved gambling.  Leung said that he understood that Yang required the money in order to complete the purchase of a property in Central.  The loan was to Yang’s Holdings for 1 month at an annualised rate of 20% secured by a charge over Yang’s Holdings 840 million shares in the Company.  If the share price dropped by 15% or more, as I understood Leung’s evidence, Yang had to provide additional security.  Although Leung’s evidence was a little difficult to follow, I understood him to be saying that Chan knew Yang because he gambled in Macau and that Chan negotiated the loan, but needed it to go through Flying Mortgage, because Chan is in Hong Kong and does not have a money lender’s licence in Hong Kong.  However, it appeared from his evidence that Chan was lending the money to Leung (presumably Flying Mortgage), who paid interest to Chan, which was lower than the interest Flying Mortgage charged Yang.  Towards the end of a long answer to a question from Mr Barlow Leung said that they would also take a mortgage over the property in Central, which made no sense.  Mr Barlow questioned Leung closely on why Yang would have needed to borrow from him to buy property in Central at a rate much higher than a bank would charge.  Leung speculated that a bank would offer to lend only 30-40%.  Leung was also asked why he was prepared to borrow, with the inherent risks involved from a Macau gambling businessman in order to lend money to Yang.  Leung said that Chan was reasonable and not a loan shark.

94.  As it transpired Yang’s Holdings defaulted on the loan.  On 16 May 2016 Leung filed a disclosure of the contingent interest Flying Mortgage acquired on 21 April 2016 of 840 million shares in the Company by way of security for the loan.  A further disclosure statement of the same date shows that Flying Mortgage sold the shares off-market on 11 May 2016 at a price of HK$0.152.  Leung described this as recording the confiscation of Yang’s shares because of the default. Chan acquired them by way of repayment of the loan and the price of HK$0.152 was calculated by reference to the amount of the loan and the number of shares.

95.  Leung’s said that in the middle of 2018 he bought about 10% of the Company’s shares in 8 to 10 batches.  Mr Barlow asked Leung the obvious question: why buy shares in the Company when it had been making losses each year and had never paid a dividend?  Leung replied that he had attended investments seminars, which had explained to him forms of technical analysis and they showed the Company was worth buying.

96.  Flying Mortgage joined as the 3^rd Defendant to HCMP 1929 of 2016 (“HCMP 1929”), proceedings brought by various shareholders against the Company and Yang’s Holdings.  Yang filed an affirmation on behalf of Yang’s Holdings in those proceedings, with which Leung confirmed he was familiar.  Yang says this in [6]: “I was informed by the Plaintiffs’ solicitors that Mr. Leung Chi Yan (“Mr Leung”, the sole director of Flying Mortgage filed an affirmation dated 23 August 2016 on behalf of Flying Mortgage in support of FM’s Summons (“Leung’s Affirmation”). In Leung’s Affirmation it was alleged that the 840 share certificates (including the 309 share certificates acquired by the Plaintiffs) recording a total number of 840,000,000 shares in the Company (which were subdivided into 4, 200,000,000 shares in the 2016 Share Subdivision (as defined in paragraph 16 below)) were lost and suspected to have been misappropriated by illegal means. However such allegations of misappropriation are wholly untrue. In this affirmation, I will explain to this Court to the true state of affairs to the best of my knowledge, and, I believe these matters would demonstrate that FM’s Summons is completely unmeritorious and ought to be dismissed.”  Leung accepted that he had said what Yang alleged.  He tried to explain away the obvious inconsistency between the evidence he had given in cross-examination before me and the evidence in HCMP 1929 by saying that some of the shares he understood to have been lost and he felt under some kind of moral obligation to help Chan. Self-evidently this is not a justification for making an affirmation, which clearly contained serious and false allegations.  However, it is consistent with my view of Leung, namely, that he is a wholly dishonest witness.

97.  Leung said that he had invested HK$7 to 8,000,000 in the Company, which he said came from profit he had made trading shares.  He had paid Ryan HK$9,500 for his shares in Flying Mortgage and give him the amount he had invested in the Company, which Leung said was about HK$1,000,000, which he paid in the June or July following Ryan leaving Flying Mortgage in April 2016. The reason he did not pay Ryan in April was he did not want to use his cash in hand and instead sold shares.

98.  The letter written by Bond Ng Solicitors dated 4 April 2019 to which I have already referred, was sent on behalf of both Strong Light and Flying Mortgage.  Leung explained that he used the same firm as the Wongs because he happened to know Richard Wong and he had suggested that he use the same firm as the Wongs.  He denied that it was because Flying Mortgage was the Wongs’ company and he was their nominee.

99.  Leung’s evidence is not credible.  On the one hand he described his company secretarial business in terms that suggested it was a modest and not very profitable making only HK$200,000 to 300,000 per year as recently as 2010 and on the other he would have the Court believe that as a result of technical analysis based share trading he was in a position to invest HK$7-8 million in the Company in 2018, trusting his understanding of charts of share price movements to buy 11.89% of the Company, which was loss making—an investment, which unsurprisingly proved unprofitable.  At no point in his evidence did Leung suggest that he bought or sold the shares of the Company because of discussions he had had about its business with Ryan, Richard Wong or Yang or that until April 2016 he had any discussions with any of them about the Company.

100.  Leung evidence also demonstrates a consistent pattern of involvement with transactions involving Ryan and also the Company.  It is difficult to believe that this is simply a series of coincidences.  At no point in his evidence did Leung give any concrete examples of him being involved in any similar kinds of transactions, which had no connection at all with Ryan or businesses in which he or his Family had some interest.  One might have expected, for example, if making loans of in the order of HK$100 million was common for Flying Mortgage Leung would have mentioned it.

101.  In my view it is clear that Leung’s evidence is unreliable and fabricated.  I think it is a compelling inference that he acted as a nominee for the Wongs, in practice probably at Ryan’s suggestion, when required.  Flying Mortgage was a front for the Wongs, again probably Ryan, and was used by them to hold additional shares in the Company without having to disclose this.  This explains why there has been no evidence from the Company explaining who influences the Company’s decisions.  The fact that the Company saw fit to have Lau give evidence on its behalf is consistent with a conscious decision to hide the truth from the Court.  Lau has no relevant experience for appointment as an executive director of a listed company.  He seemed to have no knowledge of who was behind the Company.  I agree with Mr Barlow that the idea that the Company exists in some kind of vacuum managed by a board elected by shareholders, who know nothing about the directors and who leave them to get on and run the Company as they see fit is simply not credible.  The fact that, to add to what Strong Light would have the Court believe are more coincidences, that the directors involved in the most controversial business decisions have connections to the Wongs, and the Company has bought businesses from those associated with the Wongs speaks to the truth of what has been going on.

102.  There are other examples of people connected with the Company being connected with the Wongs.  Li Kin Ping, an accountant formerly employed in the accounts department of Food Idea being appointed to the Board of the Company on 20 April 2017.  Cyrus Yuen, who was found by Recorder Pow SC to have been involved in the fraudulent options misfeasance (who remains with the Company and apparently is dealing with the SFC’s investigations) recruiting Lau.  Gary Choy Sheung Ki, who was also found by Recorder Pow SC to have been involved in the fraudulent options misfeasance, who is the sole director of Mega Step Capital Limited, which according to Leung is Chan of Macau’s company and from whom Leung borrowed the HK$128 million, which was to be lent on to Yang’s Holdings.  The involvement of Sino Rich Securities and Futures Ltd in the placement and option misfeasance.  Sino Rich were also Mrs Wong’s long time brokers.  Both the Company’s annual general meeting on 28 October 2016 and the EGM on 15 November 2016 being held at the Wongs’s restaurant on the 2^nd floor of the Zenith in Wanchai Road.  The recurring cropping up in the evidence of Richard Wong, who left Food Idea in late 2018 where he had been chief financial officer to become the company secretary at the Company.

103.  It is not possible to say with precision when the Wongs decided to try to take control of the Company.  Mr Barlow submitted that it was probably in mid-2015 when Yang decided to resign from the Board of the Company and began to dispose of Yang’s Holdings shares (Yang’s Holdings owned 75% of the issued shares at the time of the IPO).  At that time it probably became known to the Wongs, probably Ryan, that control of the Company was available.  It was Mrs Wong’s recollection that she had begun to buy shares in 2015.  From then argued Mr Barlow we have a series of transactions (the placement, options, Red5 transaction and the loan to Yang’s Holdings by Flying Mortgage), that were part of the process by which the Wongs began clandestinely to acquire control of the Company.

N.     Principles that guide the Court in drawing inferences of wrong-doing

104.  I am mindful that the case against the Wongs requires me to draw an inference of impropriety and that a disciplined approach to doing so is required.  I explain this and the guiding principles in Convoy Global Holdings Ltd. v Cho Kwai Chee Roy[6].

“9. The claims made against Kevin Cho are serious. He is said to be a knowing party to a scheme involving breach of fiduciary duty by amongst others his brother and both unlawful and lawful means conspiracy. Mr Wong accepts that no facts or matters demonstrating direct involvement are pleaded against Kevin Cho. The case is based on inference to be drawn from the facts and matters to which I have referred in [3]. Cases in which the court is invited to infer serious misconduct need to be approached with care. In Nina Kung v Wong Din Shin (2005) 8 HKCFAR 387 Ribeiro PJ explains the correct approach:

‘InHKSAR v Lee Ming Tee & Securities and Futures Commission (2003) 6 HKCFAR 336, Sir Anthony Mason NPJ acknowledged the need for such a disciplined approach to the drawing of inferences and in particular for inferences of fraud or serious misconduct to be drawn only where such inferences are compelling. Dealing with an allegation that senior SFC officers had deliberately and improperly terminated an investigation in order to avoid compromising the standing of the subject of the investigation who was acting as an expert witness in a criminal trial in which the SFC was interested, his Lordship stated:

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

10. As Sir Anthony Mason explains (quoting Lord Nicholls in Re H [1996] AC 563) in Lee Ming Tee at [71]:

‘When assessing the probabilities the court will have in mind as a factor, to whatever extent is appropriate in the particular case, that the more serious the allegation the less likely it is that the event occurred and, hence, the stronger should be the evidence before the court concludes that the allegation is established on the balance of probability.’

Consistent with this principle the commentary in the White Book states that generally ‘an allegation of fraud must be pleaded distinctly and with the utmost particularity.’[7] Necessarily in my view it follows that if the court is invited to infer serious impropriety facts and matters must be pleaded, which if proved at trial would be capable of supporting an inference of serious impropriety. A defendant to a claim of fraud or serious misconduct is entitled to require a plaintiff to plead the case against him in detail not only in order that he is able to understand the case he has to meet and prepare to oppose it, but also because he is entitled to require the plaintiff to demonstrate that the plaintiff can assert facts and matters capable of supporting the claim and that the claim is not merely a fog of conjecture, speculation and suspicion.”

O.     Findings of Fact

105.  The first stage of this process involved the court making clear finding of fact.  I find the following facts proved on the balance of probabilities:

(1)  The Wongs began to acquire shares in the Company during 2015.

(2)  At some time prior to 12 December 2016 Strong Light agreed to acquire from Yang’s Holdings, its 23.41% interest in the Company.  As the acquisition was off-market it is possible that the Wongs had agreed to buy Yang’s Holdings shares much earlier in 2016.

(3)  The share placement (July 2016) and issue of options (July/August 2016) were introduced by the Board in order to prevent FNL taking over control of the Company from whoever it was that at that time was directing its affairs.

(4)  The EGM held on 15 November 2016 was managed by the Board and those influencing its decision, so as to avoid the Board being reconstituted by dissatisfied shareholders.  This included holding the EGM at a restaurant owned by the Wongs to which some shareholders had difficulty attending because their entrance was blocked by, according to press reports, men who intimidated shareholders.

(5)  The Board in 2016 was clearly determined to block FNL’s offer despite it obviously being attractive to some minority shareholders (hence action HCMP 2222) and on the face of the matter Yang as it would have provided a convenient opportunity for Yang’s Holdings to sell their shares at a time when it appears clear that Yang wished to exit the Company.

(6)  That Red5 acquisition (April to June 2016) was not a transaction initiated by members of the Board.  It was introduced to the Company by Ryan.

(7)  The Board either were aware, or should have been aware, that Firefall was suspended prior to signing the Firefall S&P on 28 April 2016.

(8)  The Board did not make any inquiries to determine the impact of the suspension of Firefall.

(9)  A Board genuinely concerned with the value and commercial viability of Firefall would have inquired into the impact of the suspension of Firefall and there would be records of those inquiries and the results of them.  There are none.

(10)  Flying Mortgage and Leung were at all material times nominees for the Wongs.

(11)  Ma was an associate of the Wongs.

(12)  KH Ng was an associate of the Wongs.

(13)  The Wealth Power acquisition by the Company was instigated by the Wongs.

(14)  A loan was made to Chen Nana by the Company at the instigation of Ryan.

(15)  A loan was made by the Company to Wong Yat Tung, who owned 49% of Lucky Dessert at the time when 49% of Lucky Dessert was owned by Wong Tai Chun, who is the Wongs’ son.

(16)  Both the resignation of KH Ng and Ma and the convening of the 2019 EGM were directed by the Wongs.

(17)  The matters referred to in [102], which are not coincidences, but occurred because of the relationship between the Wongs and the Company.

(18)  Mrs Wong and Leung were dishonest witnesses, who consciously lied to the court about the relationship between the Wongs including Ryan and the affairs of the Company and also Flying Mortgage.

(19)  Lau is a director in name only and was an unreliable witness.  He was unwilling to tell what he knew if he thought it was prejudicial to the Respondents and probably to some degree ignorant of relevant matters, because his involvement in the high level management of the Company was consciously kept by the Company’s guiding minds so minimal that he did not know what was going on.

P.     Inferences

106.  The second stage involves the drawings of inferences from the factual findings.  In this section I set-out what in my view can be inferred from the facts that I have found and the context in which they arise, which I have explained earlier in this Judgment.

107.  The Wongs, probably principally through Ryan, controlled the Company from sometime in early 2016.  The Board acted at the direction of the Wongs when it was in their interests that it did so, the most straightforward example being the acquisition of Wealth Power for which no explanation has been forthcoming from the Respondents or the Company.  The acquisition must have been introduced by the Wongs, probably Ryan, to KH Ng or Ma.  There is no explanation for why the Board would have agreed to it and it was clearly of no benefit to the Company.  It seems to me to be a compelling inference that the Board did so, because KH Ng and Ma did as requested by the Wongs and the remainder of the Board either understood that they were expected to do as the Wongs wanted or were indifferent to their responsibilities as directors: as I think it is clear is Lau.

108.  In my view the evidence demonstrates that the Wongs are without scruples in how they do business and have had no hesitation in lying to the Court.  I find that the Wongs have caused the affairs of the Company be conducted so as to advance their own interests at the expense of such independent shareholders as the Company may have.

109.  It seems to me clear that the Company is simply a vehicle for the Wongs to advance their personal financial interests carry, which is managed by their nominees.  The Respondents and the Company point to the fact that the SFC and a purportedly independent investigation committee set up by the Board have not found any problems with the Company since the historical ones of which the Petitioners complain, which they say have been remedied.  This is in my view unsurprising.  Presumably the Company conducts some genuine, albeit unprofitable business, in the garment industry.  That is not, however, where the problem lies.  What I am satisfied the Wongs have done is take control of the Company through Strong Light and Flying Mortgage and put in place nominees within the Company who can facilitate the Company’s use whenever the Wongs need it.  This is not something that is likely to be documented; and it is not the kind of problem directors like Lau would necessarily be aware of or would do anything about if they were; in fact it is a compelling inference that this is exactly why Lau was approached to become an executive director and why the Board chose him to give evidence.  If the Board was genuinely independent and concerned about the complaints the Company faced I would have expected it to have adduced far more comprehensive evidence and not allowed a director, who clearly was not in a position to provide the Court with much assistance to be the one to give evidence on its behalf.

110.  The Board in my view is indifferent to its duties to act in the best interests of all its shareholders.  The Company’s status as a public company in which members of the investing community can invest and expect its affairs to be conducted in accordance with the Listing Rules and established principles of good corporate governance is a sham.  The conduct of its affairs has been anathema to a properly regulated public company.

Q.     Should the Company be wound up?

111.  It is unusual for the Court to wind up a solvent, listed company.  On the face of the matter one would expect a shareholder to try and remedy the loss done to his investment by a means, which was more focused and less inclined to destroy value.  As I understand the Petitioners’ reasons for seeking a winding up, they are as follows.  The Company public persona, namely, a listed company with a sizable independent shareholding managed by a professional Board unaligned with any particular shareholder or group of shareholders, is a sham.  It is unrealistic to expect the Company to take action against those who have done wrong against it, namely, the Wongs because the Board is their proxy.  This in my view is correct.  The fact that KH Ng and Ma remained on the Board long after Recorder Pow SC’s decision finding that they had behaved improperly and even now the continued employment of Cyrus Yuen, serves to demonstrate this.

112.  The substance of the Petitioners’ complaint is that the Company has been consistently mismanaged.  They do not make one or two discrete complaints of misconduct that can be remedied by a derivative action.  Mr. Barlow submitted that the nature of their complaints fall clearly into that category, which justifies shareholders taking action to bring the prejudice caused to them qua shareholders to an end.  I agree.

113.  It was open to the Petitioners to commence proceedings for unfair prejudice relief in the Cayman Islands.  Given my findings it follows that one would have expected such proceedings to have resulted in an order in the Petitioners’ favour for the Respondents to buy-out the Petitioners at a price adjusted to take into account the loss caused to the Company by the Respondents’ conduct.  The Respondents argue that this was the correct course for the Petitioners to take and it was, and remains unreasonable for the Petitioners to insist on a winding up.  If it is unreasonable then s180(1A) of the Ordinance is engaged and the Court would be justified in declining to order a winding up despite having found that the Petitioners had been prejudiced in a manner and to a degree that would otherwise justify it.

114.  The Company is incorporated in the Cayman Islands.  The Cayman Islands’ company legislation has provisions in substantially the same form as Part 14 of the Ordinance, which gives the Court the power to make remedial orders for a buy-out and such other relief as the Court considers would remedy the wrongs complained of.  In Scanty Investment Company & Anor v Brilliant Functions Ltd & Others[8] I explain the principles, which will guide the Court if a petition is commenced in Hong Kong by shareholders complaining that a wrong has been done to them, which requires the intervention of the Court if the shareholder is to obtain a satisfactory remedy.

“9. …In my view unless it can be demonstrated that the respondents would be unlikely to be able to finance the purchase of the petitioner’s shares or there is some other compelling reason not to require the petitioner to litigate his complaint in the place of incorporation, the petitioner should be required to do so. In my view it would generally be unreasonable for a shareholder, who has agreed to participate in a business using a foreign incorporated company to insist on seeking relief in Hong Kong, which would not normally be granted for the reasons explained in Re Wong To Yick.

10.  Generally, it will be consistent with the philosophy underlying Hong Kong’s own legislation, that a shareholder dispute should be resolved in a jurisdiction which can grant either a buy-out order or a winding-up order.  It follows that if a company is incorporated in a jurisdiction such as the BVI, which has a similar unfair prejudice regime to Hong Kong and the company does not have a place of business here generally the dispute between shareholders should be litigated in the place of incorporation, because the petitioner is behaving unreasonably in seeking exclusively a winding-up.”

115.  Generally, the Court views a winding up of a solvent company as a remedy of last resort.  This is particularly so if the order might adversely affect the financial interests of innocent shareholders[9].  The Respondents argue that it is prima facie unreasonable to seek to wind up a solvent listed company because a shareholder can go into the market and sell their shares[10].  That is a relevant consideration if there is reason to think that it provides a fair and pragmatic resolution of a dispute, but if the share price is depressed because of mismanagement it is not.  Clearly, expecting the Petitioners to be satisfied with selling their shares at the present price with no adjustment for the impact on their value for the matters, which I have described is both unrealistic and unreasonable.

116.  The Respondents argue that the principle purpose advanced by the Petitioners for winding up the Company is the need for a detailed investigation of the matters of which the Petitioners complain by independent professionals and action to remedy the wrongs suffered by the Company.  The Respondents argue there is nothing left to investigate.  Recorder Pow SC dealt with the placement and the options in HCMP 2222.  The SFC has instigated an investigation and this to date has revealed nothings that the SFC has felt justifies action.  Further the Company established on 2 July 2019 an investigation committee consisting of two INEDs (who are accountants by profession) and a barrister Richard Yip, who have investigated the matters complained of in the Petition and have concluded that no further action is required and that the Company is not controlled by the Wongs.  The Report in my view is not convincing for reasons that I explain in [123]–[128]. Before dealing with that matter I will address some of the Respondents other objections to the Court ordering a winding up.

117.  Mr Maurellet argued in closing that the Court should draw an adverse inference from the failure of the 1^st Petitioner to call a director, and the 2^nd Petitioner to give evidence at all, explaining why they sought a winding up order.  The Respondents also point to the Petitioners failure to attend the EGM in 2019 at which only 6.83% of shareholders voted on resolutions to reconstitute the Board as indicating some, albeit unidentified, ulterior motive for seeking a winding up order.  However, this argument if founded on the assumption that it is obviously unreasonable for the Petitioners to be seeking a winding up order.  If, as I have found, there are objectively sensible reasons for the Petitioners seeking a winding up order it seems to me this point loses its force.

118.  The Respondents emphasise the rarity of the Court winding up a solvent public company.  Loch v John Blackwood[11] is a rare exception, but it is clear from the decision (p786) that it was a public company rather than a listed one and I accept that it provides little guidance when assessing the circumstances in which a listed company should be wound up.  Mr Maurellet argued that it would probably only be in cases of continuing misconduct by directors that it would be justified.

119.  Although a real risk of continuing misconduct might be the circumstance, which most obviously justify the court making a winding up order against a solvent, listed company it does not seem to me that it is the only one.  If the court is satisfied that the affairs of the company, albeit historical by the time the matter comes on for trial, justify a thorough independent investigation, which is likely to result in valuable claims being pursued to the benefit of a company and its shareholders, and the result is as likely ultimately to benefit the shareholders as cause them loss, and the investigations will not be pursed unless the Company is wound up, that would justify the order.  As will become apparent in the following paragraphs that in my view is the situation in the present case.  It also seems to me that there are substantial reasons given the way in which the affairs of the Company have been conducted, to doubt the competence and impartiality of the current Board, which at the date of the trial indicated no interest, for example, in pursuing claims for what on the face of the matter appears to be the bogus and probably fraudulent acquisition involving Wealth Power.

120.  Mr Maurellet also argued that in so far as it was suggested the liquidators could investigate the connection between the Company and the Wongs it was inherently unlikely that the Company would have any documents which shed light on the relationship between the Wongs and those members of the Board, who it is suggested are their nominees.  I do not accept that it is that simple.  As I have noted one of the matters of obvious relevance in assessing the Petitioners’ case is who influences the decisions of the Board.  How, for example, did the members of the Board appointed in 2019 come to be chosen?  The absence of any evidence from the Company about this and similar matters is as I have already observed a striking omission.  If liquidators investigating the Company can find no documents recording any exchange of information between members of the board about the choice of new directors or the various others matters of which complaint is made, this will tend to support the conclusion that the reality is that decisions were made by a limited number of directors on the basis of what the Wongs either expressly requested (for example the Wealth Power acquisition) or which the directors understood were consistent with the Wongs objectives.

121.  As I have already mentioned on 2 July 2019 the Board resolved to form an investigation committee to investigate and compile a report concerning, principally, the matters of which complaint is made in the Petition.  A copy of the resulting report is exhibited to the 3^rd affirmation of Lau.  So far as the Red5 transaction is concerned the committee appear to have assumed that the Company did not suffer any loss as a result of the Red5 transaction because it paid for Red5 in shares. This is wrong.  The Company issued the shares as fully paid up and has not been paid for them.  It may not have depleted cash, but it negatively impacted its balance sheet and caused loss to shareholders as a result of the massive drop in the share price.  The Report goes on to consider the due diligence that was undertaken.  It explains that on the face of it thorough legal due diligence was carried out by reputable law firms.

122.  In the section on financial due diligence the committee explain that Red5 Studios Singapore Pte. Ltd had entered into two licence and distribution agreements, which indicated significant future earnings.  One of these, which I take by way of example, was for distribution in Greater China and provides for minimum guaranteed royalties of US$150,000,000 over five years.  Self-evidently the assumptions, which are said to have justified the acquisition of Red5 were unsound and it quickly became apparent that Red5 was valueless and the only thing that the transaction had achieved was the issue of fully paid up shares, which the vendor quickly sold at a significant profit. The Report purports to explain what went wrong with the transaction in section C4 of the Report.  Paragraphs 59 to 61 tell the reader this:

“59. Unfortunately, Red 5 Studios was unable to make the commercial launch of ‘Firefall’ in the PRC. On 5 July 2017, Red 5 Studios announced on its website that it would suspend its online game ‘Firefall’ but that it would develop a mobile game.

60. On 15 August 2017, Mr Ng Ka Ho sent an e-mail to representatives from Red 5 Studios asking if they would negotiate with System Link and Garena to enter into sub-agreements to cover the licensing and distribution of the mobile game of ‘Firefall’. In the same e-mail, Mr Ng Ka Ho also asked if Red 5 Studios would try to find another distributor for the mobile game and the status and management plan for the mobile game of ‘Firefall’.

61. In response, Mr George Lai from the Guarantor, presumably Mr Lai Kwok Ho, the Chief Financial Officer of The9 Limited, replied that due to Red 5 Studios’ current financial difficulty stemming from the ‘worthless L&A shares exchanged last year’ and that, crucially, ‘Red 5 does not have any plan for “Firefall” mobile now’. Mr Lai then asked the Company for ideas on how to move on with the ‘Firefall’ mobile game.”

123.  What the Report does not explain is why Red5 could not be launched.  In [70] of the Report it says that the Petitioner had not filed any evidence in support of [22]–[24] of the Petition in which it is alleged that on 12 March 2016, Red5 Studio had publicly announced the suspension of its Firefall game and that the exclusive Mainland operators of Firefall had suspended the operation of its servers.  However, the Report does not record the committee independently checking whether this was true or asking the Petitioners to provide documents to evidence this.  Wu exhibited to his affirmation an announcement dated 12 April 2016, which records Red5 announcing the suspension of the gaming servers.  There is nothing to suggest that the Board took steps to clarify how long the suspension would last and its possible impact on Firefall, which would be essential information in determining whether or not to proceed with the acquisition.

124.  Clearly the Red5 acquisition was highly questionable and adversely effected the Company’s shareholders’ interests.  It is extraordinary in my view that an independent committee of the Board apparently tasked with investigating the Red5 transaction did not think it necessary given the accusations that the Petitioners have made to try and determine both (A) who introduced the deal and why the Board thought it was attractive given the Company is in the garment industry not technology or gaming and (B) what went wrong.  All the reader finds is [74] and [82]–[83]:

“74. As to the Red5 investment, we are of the view that it was a genuine arm’s length commercial transaction, but unfortunately, it failed to live up to its promise.”

“82. With the benefits of hindsight, it seems that Red 5 Studios was in serious financial difficulties when the Red5 S&P was entered into. In entering into the transaction, it seems that The9 Limited was hoping to sell some of the Consideration Shares and used the proceeds to resuscitate Red 5 Studios and the development of ‘Firefall’. The solution seems promising originally as the Company’s share price did increase by 10-15% after the MOU (defined below) was announced. However, for reasons unknown, the Company’s share price dropped substantially afterwards, first in May 2016, then in late June 2016. As a result, The9 Limited’s plan to resuscitate Red 5 Studios faltered and the development of ‘Firefall’ was suspended in July 2016.

83. It could be said that the Relevant Directors should have conducted further due diligence on the development status of ‘Firefall’ instead of just replying on representations and financial projections provided by Red 5 Studios and The9 Limited.  However, one may say the Red5 Investment was a gamble on both sides of the transaction that did not work out as planned.  If it had worked out, that is, the Company’s share price did not drop and Red 5 Studios was able to obtain funding from The9 Limited through the sale of the Company’s shares, ‘Firefall’ might have seen a full commercial release and brought in substantial revenue for both the Company and The9 Limited.”

This would suggest that no effort was made by management to understand the business, its prospects and risks.

125.  The committee conclude that there is no evidence that the Wongs controlled the Company or had engineered the Red5 deal with a view to picking up shares cheaply.  This is because they assume that Strong Light bought Yang’s Holdings shares in the Company in December 2016, which was sometime after the Red5 S&P was signed.  It is perhaps understandable that the committee were not aware that Mrs Wong started buying shares in 2015 and that they did not appreciate that since the acquisition of Yang’s Holdings shares was off-market the record date might be later than the date the Wongs and Yang started discussing and agreed to the sale.  It suggests a lack of the awareness of the areas that needed to be investigated and a lack of the healthy degree of scepticism, which an effective investigator generally requires.  If they had it might also have occurred to them to investigate why the Board had thought it necessary or desirable to instigate the placement and the options and what it suggested about who was behind the Company, which is not considered at all in the report despite it being a central theme of the Petitioners’ complaints.

126.  The report concludes that nothing is required to be done other than improve corporate governance and address the pitfalls identified by the SFC in relation to the Red5 transaction.  The Respondents argue that there is, therefore, nothing more for liquidators to investigate or claims for them to pursue.  This seems to me to be wrong.  As I have explained the report does not deal comprehensively or satisfactorily in my view with the totality of the complaints advanced by the Petitioners before me.  Similarly, the SFC statement has been produced without the benefit of the more thorough exploration of the background to the Red5 transaction of which I have had the benefit.  It also seems to me wrong to assume, as do the Respondents, that there are no claims worth pursing, although a cynic might note that this is unsurprising as most of them concern the Wongs in some shape or form.  I have already explained that the investigation committee’s assumption that there is no financial claim available as a consequence is of the Red5 transaction is probably wrong.  There are also other claims that might be available:

(1)  In HCMP 2222 Recorder Pow SC awarded damages of approximately HK$18 million to the Plaintiffs, which suggests that a further claim may be available as this was the quantification of the loss suffered only by the 10% of shareholders, who brought the action.

(2)  A claim in respect of what appears likely to have been the wrongful acquisition of Wealth Power.

(3)  Claims for related party loans.

127.  More generally in my view there is force in Mr Barlow’s submission that given the extent of the misfeasance and loss caused to the Company by the machinations of the Wongs and their nominees and proxies it would be difficult if not impossible to quantify the adverse impact of their conduct on the value of the Company and its shares.  This points to this being one of the rare cases in which the appropriate remedy is to wind up a solvent, listed company.

128.  The Respondents and the Company say such a course would damage the interests of independent shareholders.  However, it is striking that although in this Petition, HCMP 2222 and by requisitioning an extraordinary general meeting in 2016 to remove directors minority shareholders have expressed serious dissatisfaction with the management of the Company no minority shareholders have come forward to object to the Petition.  One might have expected at least a letter to have been produced by a shareholder expressing concern about the relief that the Petitioners’ seek.  This is made all the more surprising by the following facts.

129.  First, that on the Respondents’ own case they only control 43.8% of the issued shares.  The Petitioners hold 3% and at one time the Petition was actively supported by Ge Qingfu, who owned about 7%.  It follows that approximately 46% of the shares are held by independent shareholders.  I would have expected some of them to have taken enough of an interest in their investment to have expressed a view at least by writing to the Company recording their concern at the prospect of the Company being wound up.

130.  Secondly, that at the EGM in November 2019 the proposed reconstitution of the Board proposed by the Board itself received near unanimous endorsement by the shareholders, who attended and voted; all of whom should have been independent.

131.  It is also far from clear that winding up the Company would be to independent shareholders’ disadvantage.  They would presumably be prevented from selling their shares, other than perhaps on the grey market. However, the most recent published financial statement available at the time of the trial recorded the net asset value of the Company as HK$49.9 million producing a net asset value per share of HK$0.039.  If the potential claims are added a winding up might benefit independent shareholders substantially.

132.  There is also in my view another significant consideration.  It cannot be in the interests of investors or the maintenance of the integrity of the market for companies to remain listed whose affairs display the disregard for proper corporate governance that those of the Company do.  It seems to me clear from the way matters have progressed that the public status of the Company is a sham and that the Wongs have had no difficulty in ensuring that its affairs are managed in their interests and that it is not difficult as the investigation committee report demonstrates to arrange things in such a way that their misfeasance and those of their nominees remain hidden or when attention is drawn to them little is done to remedy them.  It will be recalled that even after Recorder Pow SC’s decision KH Ng and Ma remained as executive directors for another two years.  Clearly the present Board has no appetite for pursuing fairly obvious claims for, by way of example, the acquisition of Wealth Power, a transaction which smacks of simple dishonesty.

R.     Conclusion

133.  The Petitioners issued shortly before trial a summons for the appointment of provisional liquidators, which I adjourned for consideration in the event that I agreed after trial that winding up the Company is the appropriate remedy.  The Petitioners explanation for making the application is explained as follows in [102] of its Supplemental Opening Submissions: “In the unusual circumstances of this case, one such possible course of action may be to propose a scheme of arrangement that is designed to redress the imbalances which the Wongs’ frauds have caused (eg to cancel all improperly issued shares in the Company) to the severe detriment of the Company’s minority shareholders, including the Petitioners.”  This assumes that it is in the interests of the minority shareholders that the Company remains alive and listed.  However, I have difficulty seeing how a change in the capital structure of the Company, which the suggestion that I have quoted assumes, could be achieved by a scheme of arrangement, which would presumably have to be introduced in the Cayman Islands and, regardless of whether it was introduced in the Cayman Islands or in Hong Kong, would necessitate voting in separate classes, with Strong Light and Flying Mortgage voting in a separate class and therefore having a de facto veto on the scheme.

134.  It seems to me that the only practical relief available to the Petitioners is that sought in the Petition, namely, a winding up order. I will, therefore, make the following order:

(1)  The Company be wound up on 1 November 2021 on which date the order will be made in open court.

(2)  There be general liberty to the Petitioners, the Respondents, the Company and shareholders of the Company to apply.

(3)  A costs order nisi that the Respondents pay the Petitioners costs of the proceedings with a certificate for two counsel such costs to be taxed if not agreed.

135.  Unless a party wishes to make any application on 1 November 2021 there is no need for the parties to be represented in court on that day.