NG YAT CHI v. MAX SHARE LTD. AND ANOTHER

CW 321/96

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP) NO. 321 OF 1996

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JUDGMENT

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1. This is a petition by Mr Ng Yat Chi ("Ng"), a shareholder, for the winding-up of Max Share Limited ("the Company") under s.177(1)(f) of the Companies Ordinance on the ground that it would be just and equitable for the Company to be wound up, or alternatively that China Resources (Holdings) Ltd ("Ch Res (Holdings)") be ordered to purchase his shares in the Company under s.168A of the same Ordinance on the ground that the affairs of the Company have been conducted in a manner unfairly prejudicial to him.

2. Before I deal with the issues, however, it would be helpful to set out briefly the factual background.

The Company

3. The Company was formed in 1986. Two hundred thousand shares of $1 each were issued and fully paid up, of which 49% were allotted to Mr Ng and 51% were allotted to 3 individuals, Mr Kei Kwong Chuen ("Kei"), Mr Bao Feng ("Bao") and Mr Wang Hong Ling ("Wang"). These 3 individuals held the shares as nominees for a company called Strong Progress Ltd. Strong Progress was a wholly-owned subsidiary of Ch. Res. (Holdings), which was in turn owned by the state.

4. Of the directors, it is clear from the evidence that Mr Ng and Kei had the greater parts to play in the management of the Company. Kei was the Chairman of the board of directors and Mr Ng was the Managing Director.

The Company's business

5. The Company commenced business in 1986. The principal activities of the Company and its subsidiaries were in construction and property development.

6. It would appear from the evidence that the Company operated at substantial losses, although various companies controlled by Mr Ng regularly derived profits from entering into transactions with the Company and its subsidiaries.

7. The Company had a subsidiary called T.S. Wong & Co. which was in the business of building construction. It was the main contractor for a number of building projects. It would sub-contract the project to a company called Vincent Construction Company, a company of which Mr Ng was the proprietor. Vincent would then get sub-contractors to perform the actual construction works, thus enabling Vincent to profit from being interposed between T.S. Wong & Co. and the sub-contractors. However it would appear that at least some sub-contracts were entered into between the sub-contractors and T.S. Wong & Co. itself, so that claims for payment were made from time to time by sub-contractors against T.S. Wong & Co. directly.

8. As for the properties developed by the Company and its subsidiaries, units were in certain instances sold to a company called East Lake Industries Ltd for on-sale to end-buyers at a profit. The shares in East Lake were registered in the names of two persons in Mr Ng's employ, but were held beneficially by him.

9. Similarly, profits were made by a company called Dick Year Ltd., the shares of which were also held by the two employees, and which Mr Ng accepted in cross-examination (Day 4) to be a company under his control. In relation to a unit in Hing Man Street, which the Company had held for some time, Dick Year acquired the unit from the Company in May 1991 and on the same day, on-sold it to a purchaser at a profit of about $1m.

10. Further, the Company appeared to have paid a commission to Hung Wai Company, of which Mr Ng was proprietor, for the sale of units in a building owned by the Company, even though the sale was to the Company's own subsidiary T.S. Wong & Co.

11. It would appear from the evidence that these transactions were known to Kei who received a share of the profits made by Mr Ng's companies

12. As far as the Company itself was concerned, it suffered quite substantial losses and had to be supported by large injections of funds by way of loans from Ch. Res. (Holdings).

Ng's departure from management of the Company

13. In 1988-9, Madam Zhu You Lan became the chairman of Ch. Res. (Holdings) in Hong Kong. In July - August 1990, Mr Zhou Chuan Ru ("Zhou") was appointed by Ch. Res. (Holdings) to supervise the business of the Company. These two persons did not have an amiable relationship with Mr Ng.

14. At the same time, the securities and gold trading businesses in Mr Ng's own Hung Wai group began to suffer serious losses.

15. It is common ground that in November 1990, there was a meeting between Mr Ng and Mr Zhou on behalf of Ch. Res. (Holdings) at which it was agreed that Mr Ng would withdraw his shareholding in the Company. The terms of this agreement, however, have been the subject of dispute.

16. It was one of the terms that a share valuation was to be done. This was presented to the parties at the end of May 1991.

17. In June 1991, after a further meeting of the directors of the Company, Mr Ng left the management of the Company. It is disputed whether he left voluntarily or not.

18. In January 1992, Mr Ng left Hong Kong. Indeed, he was seldom in Hong Kong for nearly 3 years after his departure.

Resolution to increase share capital

19. On 1 May 1992, whilst Mr Ng was absent from Hong Kong, the Company, then effectively controlled by Ch. Res. (Holdings), passed a resolution to increase its share capital by the creation of 50,000,000 additional shares to rank pari passu with the existing 200,000 shares. Mr Ng did not subscribe for the new issue. Ch Res (Holdings) did.

20. On 24 May 1992, a petition was issued on behalf of Mr Ng for the winding-up of the Company on the basis that the increase in share capital resulted in the dilution of his shares, but the petition was struck out for procedural defects.

Ownership of Ng's shares

21. Meanwhile, there had been unrelated litigation between Mr Ng and Mr Bing Choy ("Choy"). In March 1992, Mr Choy succeeded in obtaining a charging order on Mr Ng's shares, which order was made absolute in April 1992.

22. In July 1992, there was an order for the sale of Mr Ng's shares in the Company. On 13 August 1992, they were acquired by Mr Choy. The Company however refused to register Mr Choy as owner of the shares.

23. In the meantime, on 4 August 1992, the Company allotted new shares pursuant to the resolution of 1 May 1992. As no application for subscription to the new shares was made by Mr Ng, his shareholding in the Company fell from 49% to 0.4%.

24. Shortly afterwards, on 28 August 1992, Mr Ng was adjudicated bankrupt. He has not been discharged from bankruptcy yet.

25. In June 1996, the present petition was issued. Various procedural disputes then arose as to Mr Ng's right to present the present petition, his trustee in bankruptcy, the Official Receiver, having disclaimed the shares. These procedural disputes culminated in a decision of the Court of Final Appeal in mid-1998 which held that Mr Ng did have the right to present this petition. It was thus not until late 1999 that this petition was heard.

Ng's case on the Petition

26. Briefly, Mr Ng's Petition was based on allegations that:-

(a) he has been unjustifiably excluded from management,

(b) the Company has failed to disclose its ownership of a property in Hennessy Road;

(c) the Company's accounts did not present a true and fair view of its assets;

(d) by reason of (b) and (c) above, the increase in the share capital in May-August 1992 was unnecessary as the Company had sufficient funds to repay Ch. Res. (Holdings);

(e) the increase in share capital was for the purpose of diluting his shareholding;

(f) the Company has been improperly managed.

Issues

27. The issues joined between the parties may be grouped as follows.

(A) In relation to the management of the Company -

1. Was the Company formed as a quasi-partnership between Ng and Ch. Res. (Holdings) such that Ng was entitled to participate in its management?

2. Did Ng agree to transfer his shares to Strong Progress?

3. Did Ng withdraw from the management of the Company in June 1991?

4. If Ng was excluded from management, was his exclusion justifiable?

(B) In relation to Nos. 297-307 Hennessy Road ("the Hennessy Road property") -

5. Was this property acquired by the Company using Redland Consultants as its nominee?

6. Alternatively, was Redland Consultants a subsidiary of the Company?

(C) In relation to the Company's accounts for y.e. 31-12-1990 and 31-12-1991 -

7. Did these accounts, passed when the Company was effectively controlled by Ch. Res. (Holdings), present a true and fair view when:-

(i) they did not account for $63,674,852, which is said to be the value of properties which had not been included ("the missing properties")?

(ii) the financial expenses for the year ended 1991 were greater than the turnover?

(iii) the Company's individual profit and loss account for the year ended 1991 had not been included?

(iv) the amount of the completed properties for sale of the Company itself exceeded the amount for the group by some $5.3m?

(v) the Hennessy Road property was not disclosed as an asset of the Company?

(vi) T.S. Wong & Co. had uncompleted contracts and claims against the Government and other developers, such that a consolidated loss of $145m was not true and correct?

(D) In relation to the increase in share capital in 1992

8. Was Ng given notice of the meeting called for the increase of share capital?

9. Was the increase in share capital for the purpose of enabling the Company to repay the loans from Ch. Res. (Holdings), or for the purpose of diluting Ng's shareholding?

(E) In relation to relief

10. If Ng had agreed to transfer his shares to Ch. Res. (Holdings) in 1990/1991, is it still open to him now to seek an order to wind up the Company or for the purchase of his shares under s.168A?

11. Should the Court, in the exercise of its discretion, grant any relief to Ng in view of his conduct channelling the Company's profits or business opportunities to companies he controlled ("the clean hands argument")?

12. Should the Court, in the exercise of its discretion, grant any relief when the person who would benefit is Choy?

13. Generally, would it be just and equitable for the Company to be wound up and would there be any surplus on a winding-up ("the tangible interest argument")?

14. If Ch. Res. (Holdings) is ordered to purchase Ng's shares, on what terms should that order be made?

(A) In relation to the management of the Company

Company formed as a "quasi-partnership"

28. I find that the Company was formed as a "quasi-partnership" between Mr Ng of the one part and Ch. Res. (Holdings) of the other part, using that term only as a matter of convenience to describe a company where equitable considerations personal to the parties should be superimposed (Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, 379H).

29. In Ebrahimi, it was held that elements which gave rise to the superimposition of equitable considerations might include one or more of the following :- (i) an association formed or continued on the basis of a personal relationship involving mutual confidence; (ii) an agreement or understanding that all or some of the shareholders would participate in the conduct of the business; (iii) restriction on the transfer of the members' interests in the company (p.379E-G).

30. All these 3 features are present in this case. First, although Ch Res (Holdings) was owned by the state, Mr Ng had had a special relationship with the persons who controlled its management. He had an important political background. In Mr Ng's oral evidence, he related how he had been encouraged by the then head of the New China News Agency to form the Company, and he was also able to take his complaints after 1991 all the way to the top of the state leadership. This part of his evidence was not challenged in cross-examination.

31. Mr Ng had also had a close business relationship with the China Resources group for some 4 years by reason of dealings through Hung Wai Company, his steel business. He was close to a Mr Cheung Kin Wah, then the head of Ch Res (Holdings). Before the Company was formed, he had known Kei, Bao and Wang when they were with the China Resources group's metal and steel companies. As proof of his special relationship, Mr Ng recounted how Hung Wai had favoured China Resources even when the quality of their goods was unsatisfactory. This part of his evidence was also not challenged in cross-examination.

32. Ch. Res. (Holdings)'s account of the relationship can be seen in the minutes of a meeting on 1 June 1991, when Kei recounted the history of the parties' relationship and the establishment of the Company thus :-

" Looking back at the history of co-operation with Hung Wai Company, as from 1982, Hung Wai Company and China Resources Metals and Minerals Company Limited established business relations in steel products. Regardless of fluctuations in market prices, Hung Wai Company performed contracts for steel products signed by the two parties, and issued letters of credit according to schedule. There were instances in which certain branch offices of delivery ports in the Mainland delivered insufficient quantities of goods, or delivered steel products which were bent or rusty or damaged and could not be sold in Hong Kong. This led to Hung Wai Company incurring substantial losses. Where attempts to recover compensation proved futile, Mr Ng of Hung Wai Company has shown a friendly attitude".

33. This lends support for Mr Ng's case that there was a special relationship of mutual confidence between Mr Ng of the one part and the leaders of China Resources of the other part, which led to the formation of the Company when the latter decided to participate in the construction and development businesses in Hong Kong. There was no evidence from Ch Res (Holdings) which offered any other explanation why and how it chose to go nearly fifty-fifty into business in Hong Kong with an individual such as Mr Ng.

34. The second feature of a "quasi-partnership" was also present. Both parties took part in the conduct of the business. Mr Ng was the Managing Director and Kei, a representative of Ch. Res. (Holdings), was the Chairman of the Board. Of the Company's shares, 51% had been taken up by Strong Progress and 49% by Mr Ng. The number of directors on the board was more or less allocated equally between them. In 1990-1, the directors were Mr Ng and his son of the one part and Kei, Bao and Wang of the other. It is also apparent from the documents adduced in evidence that Mr Ng and Kei were both involved in the day to day operation of the Company's business.

35. Finally, it has not been disputed that the third feature of a quasi-partnership - restriction of transfer of shares - was also present.

36. Although Mr Ng has sometimes referred to himself and Ch. Res. (Holdings) as being "partners to a joint venture", and I accept the submission of Mr Reyes, counsel for the Respondents, that it would be wrong to generalize a joint venture as being equivalent to a "quasi-partnership", I find from the three features discussed above that in this case, there was that "something more" in the joint venture that rendered it a "quasi-partnership" (Ebrahimi, p.379F; Re Saul D. Harrison & Sons plc [1995] 1 BCLC 14, 19f-20b).

37. As to Mr Reyes' submission that Mr Ng's real objective was not to further the Company's prosperity but to obtain his own advantages by siphoning off profits, there is no evidence that that was his intention when forming the Company. It is clear from Mr Ng's unchallenged evidence described above that when the parties embarked upon the formation of this Company, it was done on the basis of a personal bond of mutual confidence and with the intention that both parties would participate in the conduct of the business.

38. Thus I find that the Company was formed as a "quasi-partnership" between Mr Ng and Ch. Res. (Holdings) by reason of the above features and that Mr Ng had a legitimate expectation that he would be entitled to participate in its management.

Ng's agreement to transfer his shares to Strong Progress

39. I find on the evidence that Mr Ng had in November 1990 agreed to transfer his shares to Strong Progress on 31 December 1990 with the intention that from 1 January 1991, Strong Progress would be the sole shareholder of the Company. However, I find this agreement was subsequently terminated.

- The agreement

40. The agreement is evidenced clearly by the minutes of the meeting of 29 November 1990 signed by Mr Zhou on behalf of Ch. Res. (Holdings) and Mr Ng on behalf of Hung Wai Company.

41. The minutes state that from 1 January 1991, the Company and T.S. Wong & Co. would be operated solely by Strong Progress and that Hung Wai would withdraw from its shareholding completely. Three sets of professional advisers (accountants, valuers and solicitors) were appointed with immediate effect to value the Company's assets up to 31 December 1990 and to carry out the necessary legal procedures. Whatever were the profits or losses so ascertained would be shared or borne by the parties according to the proportion of their shareholdings.

42. The minutes showed that the parties had entered into an unconditional agreement. This was also accepted by Mr Ng in cross-examination (Day 4) when he admitted that the agreement was unconditional, and that the agreement was for the transfer of his shares at a price by reference to the valuation. He also admitted in cross-examination (Day 5) that he had entered into the agreement voluntarily, and not as a result of any representations that Kei had made to him.

43. However, Mr Ng also sought to suggest in his oral evidence that he had only agreed to sell his shares if he was satisfied with the value so assessed. I do not accept that evidence, which is contradictory to his admission that the agreement was unconditional.

44. Further, Clause 1 of the minutes expressly provided the date by which Mr Ng would withdraw from holding shares in the Company. There is no room for any argument that that was simply a valuation date. I find that there was a binding obligation on Mr Ng's part to transfer his shares to Strong Progress on 31 December 1990.

45. However as events transpired, there was no transfer of the shares on 31 December 1990. It would appear from the minutes of the November meeting that the parties had thought that the professional consultants would be able to present the parties with the valuation before the transfer date. This was confirmed by Mr Zhou in his oral evidence.

46. The valuation proved to take much longer and the Share Valuation Report was not presented to the parties until the end of May 1991. The Share Valuation Report revealed that the Max Share Group was financially unstable and recommended that the shares be transferred at a nominal value of $1. It further recommended that since the transferee would be obliged to take over the financial burden of the group, it (the transferee) should be compensated by the transferor for the capital deficiency plus/minus an agreed negative/positive goodwill, if any.

47. On 1 June 1991, there was a meeting of the directors of the Company at which the valuation of the shares was discussed. Mr Ng was dissatisfied with the valuation in the Report, and he and his son Ng Fuk Wah attempted to persuade the representatives of Ch. Res. (Holdings) that the valuation was wrong, in that amongst other things, the valuation of properties had been too low by $30m. and that the valuation of the shares should have included a value for T.S. Wong & Co.'s contractors' licence which Ng Fuk Wah estimated at $30m. Mr Ng had also made a lengthy plea for recognition of his past loyalty to the China Resources group.

48. Notwithstanding Mr Ng's dissatisfaction with the valuation in the Report however, it is clear from the minutes of this meeting, signed by Mr Ng and Kei on behalf of Ch. Res. (Holdings), that both parties still proceeded on the basis that Mr Ng had agreed to transfer his shares to Strong Progress.

49. Nowhere in the minutes did Mr Ng withdraw or seek to withdraw from the agreement. Mr Ng is recorded as having said:-

"now that I [Ng] transfer my shares to Strong Progress Ltd, I hope that there would be a fair and reasonable solution. ... My health is not that good and I need a lot of rest. As for concrete problems in relation to the transfer of shares, Ng Fuk Wah will be my representative in the negotiations"
(Emphasis added).

Ng Fuk Wah is recorded as having said :-

"Max Share Ltd and T.S. Wong & Co. Ltd have paid a price for its losses. After China Resources (Holdings) Co Ltd takes over, it can learn from that experience. ..."
(Emphasis added).

50. The resolution recorded was that Mr Ng would transfer his 49% shares in the Company and T.S. Wong & Co. to Strong Progress with effect from 1 January 1991, i.e. retroactively. (The transfer is not strictly accurate because Mr Ng personally had no shares in T.S. Wong & Co., which was a wholly-owned subsidiary of the Company). It also recorded that the deficit per share, according to the Share Valuation Report, was $1,011.

51. However the resolution also recorded that the parties would sign an agreement on the transfer of shares "as soon as possible based on the principles of fairness and reasonableness, friendly negotiations and observance of the law". The parties were to continue negotiations after studying the issues raised by Mr Ng and his son. In other words, the parties were to review the valuation in the light of their objections and grievances.

52. Consistent with Mr Ng's acceptance that the agreement to transfer shares still held good, there was no disagreement from Mr Ng to the withdrawal of executive functions from him and his son with effect from 8 June 1991.

53. I find on the basis of the above that there was an agreement reached on 29 November 1990 that Mr Ng would transfer his shares to Strong Progress and the parties were still proceeding on the basis of an extant agreement on 1 June 1991.

54. As a matter of completeness, I should deal with the contention made on Mr Ng's behalf that he had not agreed to transfer his shares because between November 1990 and June 1991, he had signed a number of guarantees for the Company in respect of loans from Strong Progress.

55. In my view, that does not, without more, amount to evidence that the parties had, during that period, by conduct terminated or varied the unconditional agreement for the transfer of shares. The fact was that contrary to the parties' expectations, the Share Valuation Report was not ready until the end of May 1991, and during this period, the parties had simply carried on with the status quo, which included Mr Ng signing guarantees for amounts in a proportion referable to his shareholding.

56. Further there is no evidence that these loans were for new projects commenced only after 1 January 1991. The loan agreements referred to the loans as being for "liquid funds", without differentiating between projects started before or after 1 January 1991.

57. As to the price for the transfer, it would appear from the minutes of the meeting of 1 June 1991 that after Mr Ng's objections to the valuation, Ch. Res. (Holdings) did not insist on proceeding in accordance with the Report but was indicating that it was prepared to continue negotiations.

58. Indeed, it would appear that certain concessions were made to Mr Ng subsequently, as set out in a draft Sale and Purchase Agreement prepared by Ch. Res. (Holdings)' solicitors in about June-July 1991. As an example, the draft provided for a capital deficiency of $168m., a reduction from the $202m in the Report. It is not clear from the evidence how this reduction came about, or whether this amounted to a variation of the agreement. The evidence of Mr Brumen Li, Mr Ng's assistant at the time, was that he and Mr Ng's friends advised Mr Ng not to sign the Sale and Purchase Agreement in that form. Mr Ng denied having seen it altogether, something which is unlikely, given Li's evidence in this regard which I accept. It should however be said that Mr Ng's recollection of documents written in English may be unreliable as he cannot read that language.

- Termination of the agreement

59. What is more important to the present proceedings is the evidence that, although the parties had originally agreed to the transfer of shares, eventually both parties treated the agreement as having been terminated.

60. The legal analysis might be that there was a mutual rescission of the agreement by conduct. Alternatively, Mr Ng had repudiated the agreement by not transferring his shares to Strong Progress, and Ch. Res. (Holdings) accepted that repudiatory breach.

61. As to the latter scenario, whether Mr Ng was in breach or not would depend on whether the valuation was correct, which was arguable in the light of the evidence that Ch. Res. (Holdings) had on 1 June 1991, after hearing Mr Ng's objections to the valuation, promised to continue negotiations, and the evidence of the subsequent reduction in the capital deficiency as shown in the draft Agreement sent in June-July 1991.

62. However what is important is that I find that the subsequent conduct of both parties showed clearly that both regarded the agreement for the transfer of shares as having been aborted.

63. As far as Mr Ng was concerned, he never transferred his shares to Strong Progress or Ch. Res. (Holdings) or even went back to them with counter-offers on the draft agreement. Nor did he ever seek specific performance of the agreement, at whatever price.

64. As for Ch. Res. (Holdings), it did not follow up with the transfer after sending the draft in June-July 1991 and not getting any reply from Mr Ng. It took no further step towards asking Mr Ng to transfer his shares to it and it would appear that the proposal to acquire Mr Ng's shares was abandoned.

65. This is supported by what happened later. When Bing Choy came onto the scene first by charging Mr Ng's shares and then by acquiring them at public auction, Ch. Res. (Holdings) and Strong Progress did not assert any prior interest in the shares as a purchaser under the agreement of November 1990 or June 1991, nor did it contend that Mr Ng was still bound to transfer the shares to it.

66. When the Company invited subscriptions for the rights issue, Ch. Res. (Holdings) was content to proceed on the basis that Ng was the owner of the shares. It did not seek to assert any beneficial ownership of the shares as against Mr Ng so as to acquire the benefit of the rights issue. All this conduct is consistent with an acceptance that the agreement for transfer of shares was no longer extant.

67. I find therefore that although there had been an agreement for Mr Ng to transfer his shares to Ch Res (Holdings) or its wholly-owned subsidiary Strong Progress, that agreement had been terminated.

Ng withdrew from management of the Company in June 1991

68. It is common ground that Mr Ng (and his son Ng Fuk Wah) had their executive functions withdrawn with effect from 8 June 1991. Soon after the meeting of 1 June 1991, the Company was moved from Melbourne Plaza to China Resources Building, where no office was provided for Mr Ng or his son.

69. Although Mr Ng said he had wanted to but could not take part in management because no office was provided, I find that if he had wanted to take part, he would have protested and done something about it, as it is obvious from the way he gave his evidence in Court and his action in bringing his protests to the highest levels of the state that he was not a timid man.

70. It is clear from the evidence that Mr Ng accepted that he would not participate in the management of the Company. Between June 1991 and January 1992, when he was in Hong Kong periodically, he was heavily pre-occupied with the financial difficulties of his own group of companies. Further when he met the leaders on the mainland, he complained about corruption and the valuation of his shares, but no complaints were made about his non-participation in management.

71. After January 1992, Mr Ng was seldom in Hong Kong and there was no evidence that when he was in Hong Kong, he made any attempt to return to the Company or seek to take part in its management. I find therefore that he accepted that after the meeting of 1 June 1991, he would no longer participate in the management of the Company.

No exclusion from management

72. It follows from the above finding that Mr Ng was not excluded from management against his will by Ch. Res. (Holdings). I find that by reason of his personal financial circumstances and possibly also his ill health, he did not remain in Hong Kong and agreed to give up his previous role in the management of the Company.

73. In conclusion, therefore, I find that Mr Ng is not entitled to any relief from the Court on the ground of exclusion from management but that does not exclude him from seeking relief under s.177(1)(f) on other grounds (Ringtower Holdings plc (1989) 5 BCC 82, 91).

(B) In relation to the Hennessy Road property

74. The properties known as 297-303 Hennessy Road were purchased on 8 November 1991 and 11 November 1991 by Redland Consultants Ltd. Subsequently, the property was developed into a commercial building.

75. It is Mr Ng's case that the Company either owned the Hennessy Road property beneficially or owned the shares in Redland Consultants, so that the Company was not in need of funds from Ch Res (Holdings) and therefore did not require the increase in capital that led to the reduction of the proportion of his shareholding.

76. The 1st issue between the parties is whether Redland Consultants was only a nominee holding the beneficial interest on resulting trust for the Company. The 2nd issue is, even if Redland Consultants was itself the beneficial owner of the property, whether it was a subsidiary of the Company.

77. It is only if the answer to either is 'Yes' that the issue of the Hennessy Road property is related to the Company and thus of relevance to this Petition.

Redland Consultants not a subsidiary of the Company

78. I shall deal with the 2nd issue first. I find that Redland Consultants was not the Company's subsidiary. The evidence is clear that Redland Consultants was a wholly-owned subsidiary of Redland Concrete Ltd. which was in turn a wholly-owned subsidiary of Strong Progress. Strong Progress, the majority shareholder of the Company, was a wholly owned subsidiary of Ch Res (Holdings). Mr Ng had no interest in Strong Progress

79. The shares in Redland Consultants were held by Wang and Bao. Each made a Declaration of Trust of his share stating that the shares were held on trust for Redland Concrete. The Declarations of Trust were dated and stamped on 1 November 1991, prior to the acquisition of the Hennessy Road property by an Agreement for Sale and Purchase dated 8 November 1991 (it would appear that there were no provisional agreements and no deposits had been paid for the property prior to 8 November 1991).

80. Consistently with the Declarations of Trust in favour of Redland Concrete, Redland Consultants had never appeared in the financial statements of the Company as a subsidiary.

81. Whilst I note that the list of subsidiaries in the financial statements was only of "principal" subsidiaries, a subsidiary holding a valuable property such as the Hennessy Road property would be expected to be a principal subsidiary.

82. Further, whilst I note that Kingsfavour Industrial Ltd ("Kingsfavour"), clearly a subsidiary of the Company, was omitted from the list of `principal subsidiary companies' in the Company's financial statements for the year ended 31 December 1991, it had been included in the financial statements for the previous year.

83. Redland Consultants never appeared in the Company's financial statements as a subsidiary, whether before or after its acquisition of the Hennessy Road property.

84. Thus there was no or no sufficient evidence adduced on behalf of Mr Ng to support his case that Redland Consultants was a subsidiary of the Company.

Hennessy Road property not held on trust for the Company

85. The other issue was whether the property had been acquired with the Company's funds so that Redland Consultants was a nominee or trustee holding the beneficial interest on resulting trust for the Company.

86. Mr Ng's case that the Hennessy Road property belonged beneficially to the Company was based primarily on :-

(i) the existence of a memorandum written on the Company note paper dated 30 September 1991;

(ii) the passing of some funds for the purchase of the property through the accounts of the Company and Kingsfavour, its subsidiary;

(iii) an alleged confirmation by the property manager of the Company in 1992 that the property belonged to the Company.

87. I shall deal with these matters in detail below. Taking all the factual circumstances into account, I find that on this issue, Mr Ng has failed to show on the balance of probabilities that the Company owned the beneficial interest in the property by way of resulting trust.

- The Company's practice

88. A number of facts point against beneficial ownership by the Company. First, Mr Ng's own evidence in cross-examination (Day 4) was that it had never been the practice of the Company to purchase properties through companies which were not its own subsidiaries. As I have found above, Redland Consultants was not the Company's subsidiary, but a subsidiary of Redland Concrete, a fact affirmed before the acquisition. (As noted above, the Agreement was made on 8 November 1991 and the Declarations of Trust had been dated and stamped on 1 November 1991). So it would have been out of the ordinary for the Company to acquire the property using Redland Consultants as its trustee or nominee. No reason has been suggested by Mr Ng as to why the Company would have taken this unusual step.

The timing of the purchase

89. Further, I note from the timing of the purchase that it would have been most unlikely for Ch. Res. (Holdings), which was funding the purchase, to cause the property to be bought by the Company, as opposed to Redland Consultants.

90. The property was acquired in early November 1991. This was at a time when Mr Ng was no longer useful to the Company because he had already withdrawn from executive functions. This was also a time when Ch. Res. (Holdings) and Mr Ng were hostile to each other - Mr Ng did not proceed with the transfer of his shares to Strong Progress and he had not signed the draft Sale and Purchase Agreement for the shares which had been sent to him in June-July 1991, even though the draft had incorporated some concessions to him. Further, Mr Ng was complaining to Beijing about Ch Res (Holdings).

91. Therefore, it would have been unlikely for Ch. Res. (Holdings), which was funding the acquisition and which was in sole control of the Company, to arrange for this company (in which Mr Ng was still a 49% shareholder) to acquire such a valuable and potentially profitable asset. As far as Ch Res (Holdings) was concerned, there was nothing to gain from involving the Company in the project, and 49% of the profits to lose (to Mr Ng).

92. Although Kei was still chairman of the Company and even if it is assumed that he was benevolent to Mr Ng, Mr Zhou was Kei's superior and he had been especially designated by the chairman of Ch Res (Holdings) to supervise the Company's operations, so Kei's authority was circumscribed. More importantly, the funds for the purchase came from Ch Res (Holdings), so it was not up to Kei.

93. Having noted the above, it is necessary to consider such of the contemporaneous documents as are available to see if Mr Ng's case of a resulting trust can be established.

(i) The memorandum

94. In alleging that the Hennessy Road property was the Company's property, Mr Ng relied on a memorandum dated 30 September 1991 discussing the property's potential. This memorandum had been written by Tang Pui Hung, the Company's deputy property manager. It was addressed to Kei, and sent on by Kei with comments written thereon to Mr Zhou, who gave instructions on it to Kei.

95. Kei was the chairman of both the Company and of Redland Concrete, and Mr Zhou was responsible at Ch. Res. (Holdings) for supervising both companies. The contents of the memorandum by themselves do not indicate which company was to acquire the property.

96. What Mr Ng relied on was the fact that Tang was an employee of the Company, and that the memorandum was written on the Company's notepaper.

97. In my view, the weight of this evidence is minimal. This was only a handwritten internal memo - the contents show that it was intended only by Tang to provide insignificant background information about the property. It was passed on by Kei to Mr Zhou. Indeed the notepaper was outdated. It bore the Melbourne Plaza address, when the Company had already moved to China Resources Building 3 months earlier.

98. Further, even if an employee of the Company had been asked by Kei (who was chairman of both the Company and of Redland Concrete) to find out details of the property in late September, that is not to say that when the time came for purchase in early November, more than 1 month later, it was the Company (and not Redland Consultants) which acquired the property through this method of purchasing it through a trustee or nominee, inconsistently with its usual practice.

99. In this respect I accept the evidence of Mr Zhou that he had instructed Kei that the property should be acquired by Redland Consultants. Mr Zhou said that it would not have been appropriate for the Hennessy Road property to be acquired by the Company because the Company was heavily in debt, and the Hennessy Road property project was a substantial project, requiring redevelopment over a number of years at substantial cost.

100. The Share Valuation Report in May of the same year had confirmed that the Max Share group (which did not include Redland Consultants) was "heavily tied up by a substantial amount of external debts." Indeed, the Financial Review section of the Report showed that the Group was indebted to its bankers in the sum of nearly $255.5m as at 31 December 1990, and had warned that unless the shareholders injected additional capital or loans to finance interest payments, the [Max Share] Group would be "exposed to a risk of compulsory winding up by bankers and creditors".

101. Therefore, it was commercially sound for Mr Zhou to have instructed Kei that the Hennessy Road property should be acquired by Redland Consultants, not the Company.

102. It is also consistent with the reasons set out above as to why Ch. Res. (Holdings) would not have caused this valuable asset to belong to the Company, when Mr Ng was a 49% shareholder but without any further value to management.

(ii) Passing of funds through accounts of the Company and Kingsfavour

103. Apart from the memorandum, Mr Ng relied also on the fact that funds for the acquisition of the property had passed through the accounts of the Company and its subsidiary Kingsfavour.

104. Before I deal with the evidence that was adduced on this issue, it should be noted that in equity, for there to be a resulting trust, funds used for the acquisition of property must have been provided by the payer in the character of purchaser, and not as lender.

105. Thus, it is necessary to consider not only the movement of funds but also contemporaneous records e.g. the books of the various companies, showing how the funds were treated. I find that, taking all these factors into account, the funds were not provided by the Company in the character of purchaser.

106. The Hennessy Road property was acquired by virtue of two Sale and Purchase Agreements in favour of Redland Consultants, one dated 8 November 1991 for Nos. 297-303 Hennessy Road and one dated 11 November 1991 for Nos. 305-307 Hennessy Road. Apparently, no deposits had been paid prior to the Sale and Purchase Agreements, nor were there any provisional agreements.

107. The purchase price under the 1st Agreement was $97m. This was to be paid as to $14.55m (15%) on the date of the Agreement, $9.7m (10%) by 30 November 1991 and another $9.7m (10%) by 31 December 1991, with the balance on completion.

108. The purchase price under the 2nd Agreement was $51.4m. This was to be paid as to $12.85m (25%) on the signing of the Agreement, $5.14m (10%) by 30 November 1991 and another $5.14m (10%) by 31 December 1991, with the balance on completion.

109. The combined 1st tranche was thus $27.4m. ($14.55m under the 1st Agreement + $12.85m under the 2nd Agreement), the combined 2nd was $14.84m, and the combined 3rd tranche, also $14.84m.

The 1st tranche

- The movement of funds

110. On 2 November 1991, 6 days before the money was due to be paid to the vendors under the 1st Agreement and 9 days before it was due to be paid to the vendors under the 2nd Agreement, Ch. Res. (Holdings) drew a cheque for $27.4m in favour of the Company.

111. On the same day, the Company, having banked the cheque, drew a cheque in the same amount in favour of Kingsfavour, its subsidiary.

112. Kingsfavour then deposited the money in its bank account until 8 November 1991 when it drew 2 cheques (both dated 2 November 1991) in favour of Kao, Lee & Yip, solicitors acting for Redland Consultants in the purchase. Kingsfavour earned interest of about $9,000. It would appear that it did not account for this interest to any other company.

- Records in the books of account

113. No receipt was issued by the Company for the cheque from Ch. Res. (Holdings).

114. Kingsfavour did issue a receipt to the Company but it only described the money as being in payment of "funding T/F", which is equivocal and which by itself does not lend support to Mr Ng's case that money was being provided by the Company in the character of purchaser through Kingsfavour to Redland Consultants as its trustee or nominee.

115. The receipt vouchers of both the Company and Kingsfavour particularised the payments as "loans" - the Company referred to it as a "loan from [Ch. Res. (Holdings)]" and Kingsfavour referred to it as a "loan from [the Company]".

116. The payment voucher of Kingsfavour referred to the payment to the solicitors as "loan to Redland Consultants". In Kingsfavour's audited accounts for the year ended 1991, these funds (together with other amounts) which had passed through Kingsfavour from the Company were treated as "amount due to immediate holding company", and the amounts which it had passed on to Redland Consultants were treated as "amount due from a related company".

117. It would thus be seen that apart from the interest of $9,000, the funds for the 1st tranche had been treated as loans - from Ch. Res. (Holdings) to the Company, and from the Company to Kingsfavour and ultimately from Kingsfavour to Redland Consultants, respectively.

118. Hence the movement of funds and the records in the books of account do not support a case that the Company had provided the money in the character of purchaser. The Company was no more than a conduit for funds passing from Ch Res (Holdings) to Redland Consultants, the nature of the transfer of funds being treated as loans throughout. As far as the interest earned by Kingsfavour was concerned, there was nothing unusual in Kingsfavour employing the money, while it was in its hands, to earn interest. It did not need to account to anyone for the interest because the series of loans were all interest-free.

119. Having said that, it is not clear why the funds were passed from Ch Res (Holdings) to Redland Consultants' solicitors through the Company and its subsidiary Kingsfavour, instead of through Redland Concrete.

120. Mr Zhou was unable to explain the way the funds were passed on because he was simply not aware of it. He had decided at the executive level that the Hennessy Road property should be bought by Redland Consultants and then had left it to his subordinates to put it in funds. The signatories to the cheque are persons who do not otherwise figure in these proceedings and they have not provided any evidence as to why the cheque was made out in favour of the Company.

121. Evidence was given by Mr Lok Yu Cheong, an accountant who had joined the Company 3 months before the purchase of the Hennessy Road property. He did the bookkeeping for the Company. He did not know why Ch Res (Holdings) had made out the cheque to the Company. He thought it had been arranged by Kei who was also chairman of Redland Concrete. I accept his evidence that when he received the cheque from Ch Res (Holdings), it had already been written out in favour of the Company and he did not question it.

122. His evidence was that Redland Consultants did not have a bank account, and so a direct payment to Redland Consultants could not be effected. As far as Redland Concrete was concerned, its office was in Kowloon and Mr Lok suggests that it could simply be for convenience that the cheque was made out to the Company as its office was in the same building as Ch Res (Holdings). He also speculated that Ch Res (Holdings) might not have had an account with a 3rd-tier company such as Redland Concrete, although it did have a direct account with the Company, which was also a 3rd-tier company.

123. These suggested explanations are not entirely satisfactory because it would not have taken long for a bank account to be opened by Redland Consultants and there is no evidence that its directors were not in Hong Kong during the relevant period. Further, as has been seen above, the cheque from Ch Res (Holdings) was provided some 6 days in advance of the payment to the solicitors. Logistics such as the location of Redland Concrete's office should not have been a problem given that period of time. Finally there was no evidence that there was no direct account between Ch Res (Holdings) and Redland Concrete.

124. Notwithstanding the inability of Ch Res (Holdings) to explain why the cheque was written in favour of the Company, the ultimate issue is whether the evidence shows on a balance of probabilities, that the Company was providing the money in the character of purchaser. In the light of (i) the fact that the Company had never previously acquired property through a non-subsidiary; (ii) the fact that Ch Res (Holdings) was funding the purchase and it would not have wished to benefit the Company and thereby share the profits with Mr Ng; (iii) Mr Zhou's evidence, which I accept, why he did not want the property to be acquired by the Company, given its debts to creditors outside the group; and (iv) the contemporaneous book entries which showed that the money was passed from one company to another as "loans", I find that the Company had not provided the money for the property in the character of purchaser, so there was no resulting trust in favour of it.

The 2nd tranche

- The movement of funds

125. On 29 November 1991, a day before it was due, Ch. Res. (Holdings) drew a cheque for this amount directly in favour of Kao Lee & Yip who, as recounted above, were solicitors acting for Redland Consultants in the purchase.

- Records in the books of accounts

126. The Company issued a receipt to Ch. Res. (Holdings) for this amount, as payment of "loan from you [Ch. Res. (Holdings)]".

127. Evidently, the amount was treated as on-lent by the Company to Kingsfavour, because the Company's Journal Voucher of the same day (having recorded crediting Ch. Res. (Holdings) for that amount) debited Kingsfavour for the same amount as "loan from CRC [Ch. Res. (Holdings)] to Kingsfavour".

128. Kingsfavour's own Journal Voucher recorded the amount as a loan from the Company and debited Redland Consultants as "loan to Redland" for further deposit of the Hennessy Road property.

129. Thus although the funds did not go through the bank accounts of the Company, they had been treated as loans respectively from Ch. Res. (Holdings) to the Company, and from the Company to Kingsfavour and ultimately from Kingsfavour to Redland Consultants. Mr Lok's evidence, which I accept, was that the records in the books of accounts were done in this way solely to maintain consistency with the 1st tranche.

130. I would not repeat my conclusion that such evidence does not show that the Company had provided the money in the character of purchaser. Again the Company was just a conduit from Ch Res (Holdings) to Redland Consultants, this time not even passing through the bank accounts, but only through book entries, with the nature of the transfer of funds being treated in the books as loans throughout.

The 3rd tranche

131. The combined 3rd tranche under the 2 agreements was again $14.84m due on 31 December 1991. However, commission in the sum of $1m was payable to a company called Kamley Trading Company. It is not however clear by which date commission was due.

- The movement of funds

132. On 9 December 1991, the Company drew a cheque for $1m. in favour of Kamley.

133. On 30 December 1991, Ch. Res. (Holdings) transferred to the Company a sum of $15,840,000, which amount corresponded to the 3rd tranche of $14.84m. together with commission of $1m.

134. On the same day, the Company transferred $14.84m. to Kingsfavour. On the same day, Kingsfavour drew a cheque for the same amount in favour of Kao Lee & Yip.

- Records in the books of accounts

135. In respect of the commission of $1m, the Company issued a Debit Note to Kingsfavour for "commission on purchase of 297-307 Hennessy Road (on behalf of Redland)". The Company's Payment Voucher also recorded the commission as being paid "on behalf of Redland" and debited Kingsfavour. On 31 December 1991, Kingsfavour's Journal Voucher credited the Company and debited Redland Consultants with the same amount, and described it as commission on purchase of the property "(on behalf of Redland)".

136. It would thus be seen that the commission was paid by the Company on behalf of Redland Consultants and it was reimbursed by Ch Res (Holdings). I accept that the book entries were again done to maintain consistency with the 1st tranche.

137. As for the $14.84m., the Company's Receipt Voucher for the $15.84m from Ch. Res. (Holdings) recorded it as a loan from Ch. Res. (Holdings) "for Hennessy Road". There was no Payment Voucher in respect of the transfer of the $14.84m to Kingsfavour.

138. Kingsfavour's Receipt Voucher for the $14.84m recorded a loan from the Company "for third deposit Hennessy Road" and on the same day, a Payment Voucher was made recording a loan to Redland Consultants "for third deposit Hennessy Road". So, again, these transfers were in the character of loans of money, although the loan was for a specific purpose.

139. It would thus be seen that for all 3 tranches, Redland Consultants was treated as having borrowed these amounts as loans from Kingsfavour. This is supported by Kingsfavour's audited accounts for the year ended 1991. The amounts which it had transferred to Redland Consultants were treated as "amount due from a related company". This is a claim to money, not real property. This shows that the funds were not provided by the Company or any other company in the character of purchaser with Redland Consultants holding the Hennessy Road property as nominee or trustee only.

140. In fact, soon after, in January 1992, Ch Res (Holdings) gave instructions for Redland Consultants to open a bank account at the Harbour Road branch of the Bank of China (where the office of Ch Res (Holdings) is situate) so that dealings regarding the purchase price would thenceforth be carried on directly with Redland Consultants and not through the Company. This was followed by a "reversal" of loans in the books of account of the Company and Kingsfavour so that Redland Consultants would become directly indebted to Ch Res (Holdings) for the 3 tranches.

(iii) Property Manager's confirmation that property belonged to Company

141. Mr Ng sought to draw support from an incident in April or May 1992 in which the property manager of the Company Mr Daniel Kwan ("Kwan") had 'confirmed' to an estate agent that the property belonged to the Company.

142. Mr Ng called as his witness a Mr Shum Sui On, also known as Samson Shum, who had in 1991 set up a company known as Hamcorn Co Ltd to carry on the business of estate agents, although he had previously worked at an accountants firm which had done auditing work for the Company.

143. Mr Shum said that in April or May 1992, he had heard from an architect called Josiah Cheung, who had done architectural work for the Company but who had not been retained for the Hennessy Road project, that the property was owned by the Company and that it was for sale. However, there were no advertisements and Mr Shum did not know whether any estate agents had been retained. He knew Mr Kwan socially and asked Mr Kwan if the property belonged to the Company. He said Mr Kwan confirmed it.

144. Mr Kwan had at first denied this but there was subsequently disclosed by the Respondents a "Subject to Contract" letter written by Hamcorn to himself in May 1992. His evidence was that he would not have confirmed that the Company owned the property because he was only involved on the technical side and he did not know which company owned the property. That was a matter that only management was familiar with. He had not been given any instructions concerning the sale of the property. Therefore his evidence was that he would not have given any specific response to an inquiry whether the property belonged to the Company or whether it was for sale.

145. Having seen and heard Mr Shum and Mr Kwan, I believe they were both truthfully trying to recall the events which had happened 7 years ago. As to whether Mr Kwan had 'confirmed' that the property belonged to the Company and was for sale, I prefer his evidence that he would not have given any specific response, which non-denial might have impressed upon Mr Shum as a 'confirmation'. Nothing came of the matter because he had no instructions concerning the property. There was nothing to indicate that Daniel Kwan (or Josiah Cheung for that matter) had any personal information as to the ownership of the property which could be said loosely to be an asset of the group of companies with Ch Res (Holdings) at its head. In my judgment, nothing of value to Mr Ng's case is gained from this incident.

146. Finally I should mention one piece of evidence concerning this property. Mr Ng said in his evidence that sometime in 1991, probably mid-1991, Kei had taken him to the property for a view. Kei had also talked about buying the property before and about 8-10 days after the visit. Thereafter, however, he had not heard Kei mention the property again.

147. Mr Ng's evidence on this visit was vague. But even if Kei had been considering acquiring this property for the Company in mid-1991, it was not in fact purchased until November 1991 and the funds for the purchase came from Ch Res (Holdings) and were lent through the Company and Kingsfavour to Redland Consultants. There was no evidence of any trust relationship between Redland Consultants and the Company.

148. In conclusion, therefore, I find that Mr Ng has failed to prove on the balance of probabilities that Redland Consultants was a subsidiary of the Company or was its nominee or trustee. His case based on the Company's non-disclosure that it owned this property therefore fails.

(C) In relation to the Company's accounts for y.e. 31-12/90 and 31-12-91

149. Mr Ng's case is that the Company's accounts for these years did not present a true and fair view, that there was false accounting and manipulation of the accounts and that they hid the fact that the Company had sufficient assets to repay its indebtedness to Ch Res (Holdings).

150. Part of this case is based on his allegation that the Company owned the Hennessy Road property, the value of which has not been reflected in the accounts. In the light of my findings that the Company did not own any interest in this property, that part must fail.

151. Mr Ng however had a number of other complaints about the accounts. The Respondents have sought to explain them by adducing the evidence of Mr Roger Best, a partner in Deloitte Touche Tohmatsu International. I should first note that Mr Best could not be called in the capacity of an expert witness because his firm had merged with Kwan Wong Tan & Fong, the firm of accountants which had audited the financial statements of the Company for the year ended 1991. However the Respondents sought to adduce his evidence simply as a witness qualified in accountancy reporting on fact, rather than adducing opinion evidence, and on that basis Mr Simon Yip, counsel for Mr Ng, did not object to the admissibility of Mr Best's evidence. In the light of that position taken by Mr Ng, I have considered Mr Best's evidence on that basis only.

152. I should also note that the purpose of the inquiry into the accounts was not to detect errors for their own sake, but to see if there was false accounting and manipulation as alleged and if there were in fact substantial assets such that the Company did not need an excuse for an increase in capital.

(i) Was there a failure to account for $63,674,852, said to be the value of properties which had not been included ("the missing properties")?

153. Mr Ng's first complaint was that $63,674,852 being the value of "missing properties" had not been accounted for. The matter arises this way.

154. For the year ended 1990, the value of properties for sale (combining the properties under development account with the completed properties for sale account) was $166,606,000. For the year ended 1991, that value was $44,236,000. The difference was $122,370,000 (for present purposes, I have rounded off figures to the nearest $1,000).

155. Mr Ng accepts that of this amount, $54,250,000 was the value of properties sold during the year, and $4,545,000 was the value of property transferred to fixed assets. These add up to $58,795,000.

156. Deducting $58,795,000 from $122,370,000, Mr Ng says there is $63,575,000 worth of properties "missing". (In fact, there is an arithmetical error in the Re-Amended Petition which refers to $63,675,000 - the correct figure should be $63,575,000).

157. The Company says that is not so, and that the difference is due to the following:-

(a) the cancellation of various agreements that the Company had entered into in 1990 for units in Max Share Centre which the Company had purchased from a wholly owned subsidiary for $62,890,000; and

(b) relatively smaller adjustments in relation to a development called Tong Yan Sun Tsuen required by reason of the incurring of additional costs incurred during 1991 and the valuation of the property by property valuers.

158. Mr Ng's focus was on the $62,890,000. In relation to this, the Company has adduced documentary evidence that in 1990, it had entered into agreements to buy a number of units in a new development called Max Share Centre from Mount Land, a wholly owned subsidiary of the Company. After entering into these agreements in 1990, the Company entered into cancellation agreements in 1991 in relation to properties which had been bought for about $62,890,000. This explained the change in the properties for sale accounts.

159. Cancellation agreements for all these units were available except for 3 units (viz. Units 6A, 20C and 20D). For these 3 units, instead of cancellation agreements, sub-sale agreements had been entered into by the Company for their sale to sub-purchasers. The Company had bought these properties for about $5.9m and had sub-sold them for about $5.7m. The loss that the Company made as a result of these sub-sales was $152,000.

160. In cross-examination relating to these sub-sales, Mr Best agreed that the financial statements were misstated. The Company's loss should have been increased by $152,000 and the turnover should have been increased by $5.9m. But these errors are small and the cancellation of the purchases from Max Share explains the bulk of the $62,890,000 said to be "missing".

161. By reference to the Tong Yan Sun Tsuen adjustments and by producing the cancellation agreements relating to the units in Max Share Centre, excluding the 3 units which were sub-sold, the Company has in my judgment sufficiently explained the change in the figures in the financial statements and I reject Mr Ng's contention that there was false accounting or that the Company was in fact richer by any substantial amount and certainly nothing as substantial as $63,575,000.

(ii) Financial expenses for y.e. ended 1991 greater than turnover

162. Mr Ng also drew attention to the fact that the Company's financial expenses were greater than its turnover. I find that that in itself is not an indication that there has been false accounting or manipulation of the accounts.

163. In relation to financial expenses, the Company was heavily in debt as it was financed by loans rather than by capital. For y.e. 1991, it was indebted to its ultimate holding company in the tune of $404.8m. Its share capital was only $200,000. Moreover, the Company was not only financing its own business but also the business of its subsidiaries. Therefore, it would not be surprising for its financial expenses to be greater than the turnover of just the Company itself.

164. In my judgment therefore no conclusions of false accounting or manipulation can be drawn from this fact.

(iii) Company's individual P/L account for y.e. 1991 not included

165. Mr Ng has also pointed to the lack of an individual Profit and Loss account for the Company in the consolidated audited accounts for the Max Share group for the year ended 1991.

166. In his Report originally, Mr Best had suggested that s.123(5) of the Companies Ordinance exempted the Company from having to lay a profit and loss account before the annual general meeting. This section provided that a profit and loss account of an individual company would not be required if:-

"(a) the company has subsidiaries; and

(b) the profit and loss account is framed as a consolidated profit and loss account dealing with all or any of the company's subsidiaries as well as the company and -

(i) complies with the requirements of [the Companies] Ordinance relating to consolidated profit and loss accounts; and

(ii) shows how much of the consolidated profit or loss for the financial year is dealt with in the accounts of the company".

167. However Mr Best agreed in his oral evidence that in fact, the Company had failed to comply with s.123(5)(b)(ii) in that it did not specifically disclose the loss dealt with in its accounts in the consolidated financial statements. He said however that the loss made by the Company could be calculated from the item "Profit and Loss Account - Deficit" in the Balance Sheet of the Company, which was part of the same financial statements.

168. That is so, but technically the directors have failed to comply with s.122(1) which provides that "the directors of every company shall lay before the company at its annual general meeting a profit and loss account ...". The profit and loss account would have shown the Company's turnover and operating profit or loss.

169. The question was whether there was any intention to "conceal" this information from Mr Ng, being a shareholder of the Company. It is true that no-one from the Company was called to explain the omission, but I am not satisfied on the balance of probabilities that this was part of any scheme to conceal information from him. A draft of the Profit and Loss Account of the Company had already been included in an exhibit filed by the Company in June 1992 in the May 1992 proceedings. The directors' report and financial statements was signed in November 1992, well after that draft Profit and Loss Account had been seen by Mr Ng or persons acting for him. Mr Ng was therefore provided with some information in the draft Profit and Loss Account, and concealment was unlikely to be the motive for the non-disclosure.

(iv) Amount of Company's completed properties for sale exceeded that for the Group

170. Ng also pointed to a difference of about $5.3m between the balance of completed properties for sale of the Company and that of the Group.

171. The Company has explained this by reference to a consolidation adjustment made to eliminate unrealised profits arising from the sale of units in Max Share Centre from Mount Land to the Company. Unrealised profits are profits arising from transactions between companies within the same group, where properties have not been on-sold to outsiders.

172. The Company had bought Units 1A and 1B of Max Share Centre from Mount Land, its wholly owned subsidiary. Mount Land had made a profit on these sales, but only within the group. So, in order to eliminate the unrealised profits from the consolidated financial statements, a percentage (representing the sales values of these 2 units expressed as a proportion of the total sales made by Mount Land) was applied to the gross profits earned by Mount Land.

173. The need for that elimination exercise was not really disputed by Ng. However what was disputed at the hearing was the adjustment to the gross profits earned by Mount Land.

174. The gross profits of Mount Land as per its financial statements were $51,485,000. However, this was adjusted by amounts including nearly $24m "management fees" charged to Mount Land by T.S. Wong & Co. and the Company in the sums of $13m and $11m respectively. These were disputed by Ng.

175. As for T.S. Wong & Co.,

(i) there is a journal voucher dated 30 April 1991 evidencing a project management fee of $3m for 1990; and

(ii) there is also an undated agreement in which Mount Land agreed to pay $10m to T.S. Wong & Co. upon the latter agreeing to provide project management services for the year 1.1.1991 - 31.12.1991 for the construction of the proposed building. It would appear from some banking documents that $10m was transferred to T.S. Wong & Co.'s bank account from Mount Land in October 1991.

176. As for the Company,

(i) a memo of the Company dated 15 June 1990 showed that it would charge Mount Land $3m as management fees for 1989;

(ii) there are debit notes showing that for the year 1.1.1990 - 31.12.1990, $6m was charged as "management fees" (it would be noted that this is on top of the $3m "project management fees" paid by Mount Land to T.S. Wong & Co); and

(iii) there are debit notes showing nearly $2m charged as "management fees" for the months 1.1.1991 - 30.4.1991 (again, this is on top of the $10m "project management fees" paid by Mount Land to T.S. Wong & Co).

177. On the face of it, there is no distinction between the management services provided by the Company and those provided by T.S. Wong & Co. It is not clear why Mount Land was paying twice for the same services.

178. Further as to the payment of $10m to T.S. Wong & Co for "project management services for the construction of the proposed building" for 1.1.1991-31.12.1991, Mr Lok was cross-examined as to why Mount Land still had to pay $10m to T.S. Wong & Co. for "project management for construction of the proposed building" well past April 1991, when the building had already been completed with the Occupation Permit being granted in April 1991. His first answer was that Mount Land was expected to make a profit from the sales of the units in the building, so he thought he would reduce its tax liability by providing for a payment to T.S. Wong & Co. which was operating at a loss.

179. Mr Lok was also cross-examined as to whether an amount of $20m paid by Vincent to T.S. Wong & Co. by way of set-off for management fees was a duplication of the management fees paid by Mount Land to T.S. Wong & Co. There was however no evidence as to when this set-off took place and Mr Lok's evidence was that this was a different set of management fees.

180. It may well be that the exercise in tax avoidance referred to by Mr Lok should not have been undertaken, but that is not the point of the present proceedings. Ng's complaint in the Re-Amended Petition was that there was an `accounting manipulation' in that the amount of the Company's completed properties for sale exceeded that for the Group. This has been explained by reference to a consolidation adjustment. One of the ingredients of the adjustment was the adjustment relating to the payment of management fees.

181. Whether or not an exercise of tax avoidance ought to have been undertaken, those fees were paid. That payment is supported by contemporaneous documentary evidence evidencing the payment of funds. The motive behind the payment is irrelevant. Analysed in this way, there is in my judgment no accounting manipulation.

(v) I have dealt with the Hennessy Road property in (B) above and will not repeat it here.

(vi) T.S. Wong & Co.'s claims against Government and developers

182. Ng's case was that a consolidated loss of $145m was not true and correct because T.S. Wong & Co. had uncompleted contracts and claims against Government and other developers.

183. It would appear from the evidence that the position regarding T.S. Wong & Co. and its operations was extremely confusing. The evidence of Mr Brumen Li himself was that T.S. Wong & Co. faced heavy losses, and one of the reasons for that could have been the irregularities in its management particularly concerning Vincent. Vincent (acting through the Official Receiver as trustee of Mr Ng in bankruptcy) has apparently made claims against T.S. Wong & Co. and the latter has apparently counterclaimed, but little is known of these proceedings or their outcome.

184. If there is one thing that is clear, it is that T.S. Wong & Co.'s true financial position is far from clear. In the circumstances, Ng has completely failed to show that the Company has engaged in any false accounting or manipulations to conceal the value of any claims that T.S. Wong & Co. had against the Government or other developers.

185. In the premises, therefore, I find that Ng is not entitled to any relief from the Court on the basis that there has been any false accounting or manipulation of the Company's financial statements.

(D) Increase in share capital

186. To recapitulate a little, in June 1991, Mr Ng left the management of the Company after the agreement to transfer his shares to Ch Res (Holdings) which agreement was later terminated as acknowledged by the conduct of both parties. In January 1992, Mr Ng, then known to be in difficult financial circumstances, left Hong Kong, returning only for brief visits.

187. In March 1992, Mr Choy obtained a charging order on Mr Ng's shares in the Company. The charging order was made absolute on 9 April 1992. The beneficial control of Mr Ng's 49% shareholding in the Company thereby became vested in Mr Choy, a stranger to Ch Res (Holdings).

188. Within less than 1 month of the charging order absolute, the Company resolved to increase its share capital 250-fold. The effect of the increase was to reduce Mr Ng's 49% shareholding in the Company to 0.4%.

Notice of meeting

189. The first issue is whether Mr Ng was given notice of the meeting calling for the increase in share capital. I find that he was. There is a declaration of Wong Wai Yin made on 21 April 1992 to the effect that the notice had been sent to Mr Ng at an address in Kotewall Road. Mr Ng had since 1978 lived in an apartment in Kotewall Road. He said he lived there until early 1992 when he left Hong Kong and it was repossessed by a bank. He accepted that that was the address in the register of members of the Company. By sending the notice to that address, therefore, the Company has properly given him notice of the meeting.

Purpose of increase to dilute Ng's shareholding

190. The second issue is to consider the purpose of the increase in capital. In my judgment, the evidence shows clearly that the purpose of the increase in capital was to dilute Mr Ng's shareholding at a time when he would have been unable to subscribe for more shares and to render the shares unattractive and worthless to Mr Choy.

191. Mr Zhou has proffered a number of reasons for increasing the capital of the Company. Obviously the Company's interest liability would be reduced. Banks would have greater confidence and the Company could continue operations, which would be to the benefit of employees and the reputation of Ch Res (Holdings).

192. However, those were all factors which had existed for some time. Why was it that the proposal to increase the capital did not come earlier, but immediately after Mr Choy's charging order over Mr Ng's shares? The key in determining the real purpose of the proposal to increase capital is, in my judgment, in the timing.

193. For many years prior to May 1992, the Company had been under a substantial debt burden to Ch Res (Holdings). However no steps had ever been taken to capitalise the loans. Although Mr Zhou said that he had discussed this matter with Mr Ng on 9 November 1990, this was not referred to at all in the minutes dated and signed 29 November 1990. There were no contemporaneous documents evidencing such a discussion and Mr Ng was not cross-examined on any such discussion. Accordingly I do not accept the evidence that there was such a discussion.

194. Further, as early as May 1991, the Share Valuation Report recommended amongst other things that in order to strengthen the financial position of the Max Share Group, Strong Progress should inject additional capital through a capitalization of the loans advanced after the share transfer, which was then expected to take place. As has been seen above, there were obstacles in the way of the proposed share transfer due to Mr Ng's objections to the price. However, Ch Res (Holdings) took no steps to propose any increase in the share capital.

195. In the 1 year that followed after the Share Valuation Report, nothing was done by Ch Res (Holdings) or the Company towards effecting a capitalization of the loans from Ch Res (Holdings) and an increase in share capital, until right after the introduction of Mr Choy into the Company when he obtained beneficial control over Mr Ng's shares.

196. There was no satisfactory evidence adduced by the Company or Ch Res (Holdings) to show what had prompted this proposal to increase the share capital at that point in time, if it was not the charging order over Mr Ng's shares.

197. Nothing is known of the Company's decision to call an EGM to consider the increase in share capital. Although Mr Zhou said it was his idea, that was in the context of his evidence that he had discussed the issue with Mr Ng in November 1990.

198. There was no meaningful documentary evidence which might have shed some light on the Company's decision to propose an increase in share capital at that time. Mr Zhou in his cross-examination said a directors meeting would have been called to discuss whether to present the proposal to the shareholders in general meeting, but no evidence has been adduced by way of notices of directors meeting, agenda, minutes, etc.

199. The proposed increase (subsequently effected) was to increase the capital 250 times from $200,000 to $50.2m. but no internal memoranda discussing this important matter were produced.

200. There was no extraneous evidence that the Company had at that time found itself in any new financial circumstances requiring additional capital. Ch Res (Holdings) had always supported the Company with shareholders loans. There was no evidence that Ch Res (Holdings) had threatened to withdraw its support at that time. Indeed Ch Res (Holdings) had been in sole control of the Company's operations for nearly a year (since the withdrawal of executive functions from Ng and his son in June 1991). There was no evidence that there was any loss of confidence by outsider creditors then and the addition of capital went entirely towards repayment of Ch Res (Holdings)'s loans.

201. There was also little meaningful oral evidence. None of the directors of the Company present at the EGM, Kei, Bao and Wang gave evidence. Mr Zhou was not appointed a director until August 1992. Although he was supervising the Company, he could not recall if anyone had mentioned to him any proposal to increase share capital between January and May 1992. His evidence was that he was often out of Hong Kong and he did not learn of the increase until after the meeting had taken place.

202. The decision to propose an increase in share capital, taken apparently without any considered discussion, after years of inertia and in the absence of any evidence explaining the timing and reason for it, points clearly to the conclusion that the purpose was to dilute Mr Ng's shareholding.

203. If he was to keep his shareholding at 49%, Mr Ng would have had to come up with nearly $25m. It was most unlikely that he could have done that at a time when he had had to leave Hong Kong because of his personal financial difficulties. The only alternative he could have had was to offer to sell his shares to Ch Res (Holdings). But since there had already been a dispute with Ch Res (Holdings) over the true value of his shares, there would have been little to be gained.

204. In my judgment, the Respondents' conduct in engineering the resolution to increase the capital, thereby diluting Mr Ng's shareholding, was unfair and prejudicial. In my judgment, it warrants an order to wind up the Company on the ground that it would be just and equitable to do so (cf Re a Company [1986] BCLC 362 applied in Tseng Yueh Lee Irene v Metrobilt Enterprise Ltd [1994] 2 HKC 684).

(E) In relation to relief

Agreement to transfer shares

205. It has been submitted by counsel for the Company and Ch Res (Holdings) that it would not be right for the court to grant Mr Ng any relief because he had agreed to transfer his shares in the Company to Ch Res (Holdings).

206. However, as I have found above, the agreement had been terminated prior to May 1992 with both parties treating the agreement as no longer extant after July 1991 or at the latest January 1992 when Mr Ng left Hong Kong.

The "clean hands" submission

207. It has also been submitted on behalf of the Company and Ch Res (Holdings) that the Court should not, in the exercise of its discretion, order the Company to be wound up because of Mr Ng's activities whilst a director of the Company, activities which have been described as corrupt by the Respondents.

208. The activities, on which Mr Ng has been cross-examined at length, pertain to the making of profits by companies controlled by him which were interposed between the Company and third parties. I accept that the evidence on the way that Vincent, East Lake and Dick Year were used by Mr Ng (briefly described at the beginning of this judgment) shows a prima facie case of breach of fiduciary duties.

209. Mr Ng has sought to explain or excuse his activities by alleging that Kei was the representative of Ch Res (Holdings) and that Kei was aware of his activities, had condoned them and had indeed profited from them. Those excuses might have been acceptable had Kei only directed Mr Ng to transfer the profits to an entity which Mr Ng thought was another arm of Ch Res (Holdings). However the 2nd Affirmation of Mr Brumen Li, who had been Mr Ng's assistant although made at a time when Mr Li's allegiance was to Mr Choy, shows that Mr Ng was aware that Kei was not simply channelling those profits back to Ch Res (Holdings), a state-owned corporation but to private entities including Kei and others. Mr Ng's denial of those parts of Mr Li's Affirmation were hollow and I reject them.

210. However, the fact that a petitioner has been guilty of misconduct is not conclusive against the granting of a winding-up order. What the court should consider is whether that misconduct was causative of the breakdown in the relationship on which the petition was based. In Vujnovich v Vujnovich (1989) 5 BCC 740 (PC), Lord Oliver held:-

"What Mr Temm [counsel for the party resisting winding-up] seeks to do is to extract from this the reference to coming to court with clean hands as if it stood alone and to suggest that, since both Henry J and the Court of Appeal were of the view that the respondent had misconducted himself in diverting business away from the company, that should have concluded the case against the making of a winding-up order. The same submission was made to the Court of Appeal who rightly rejected it. It is quite clear that Lord Cross [in Ebrahimi v Westbourne Galleries, at p387F] was considering the position in which the petitioner's misconduct (and thus the relative uncleanliness of his hands) was causative of the breakdown in confidence on which the petition was based. ... Whether the Court of Appeal was right to regard it [the misconduct] as a consequence of the breakdown, it was clearly right in saying that it was not the cause of it and in regarding it as being no bar to a winding-up order if such an order was otherwise appropriate."

211. Mr Reyes counsel for the Respondents has not sought to argue against the law as expressed in the above passage. If, therefore, one has to consider what was the cause of the breakdown in this company, it was not Mr Ng's misconduct, of which the Respondents appeared to be tolerant for reasons which have not been explored at the hearing. The Company or Ch Res (Holdings) never sought to pursue any claims of misconduct against Mr Ng until they were raised in this petition.

212. I cannot accept Mr Reyes' submission that Mr Ng is complaining of an equitable wrong because he was not allowed to continue making money out of "related party transactions". He has not sought winding up solely because of the withdrawal of his executive functions. He has petitioned for winding-up because Ch Res (Holdings) has diluted his shareholding, reducing it substantially at a time when it knew that he had no resources with which to subscribe for additional shares and when a previous agreement for sale had broken down. That conduct, I have found, was unfair and prejudicial and warrants the grant of winding-up relief.

Effect of Choy's position

213. The Respondents further submitted that the Court should not grant relief by reason of the fact that it is in reality being sought not by Mr Ng but by Mr Choy.

214. Insofar as this is similar to a "tangible interest" argument, I will deal with that below. Apart from that argument, I do not see any reason why Mr Choy's position should be a ground against the grant of relief, at least in this case. The right to petition, as has been found by the Court of Final Appeal in these proceedings, is a right for the protection of the shares [1998] 1 HKLRD 866. Where the shares have been diminished in value as a result of the increase in capital, it would be wrong to withhold relief purely on the ground of the personalities interested in the shares.

The "tangible interest" submission

215. I then come to the submission that Mr Ng has not proved that he has any tangible interest in the Company which entitled him to petition, in particular, whether there would be a surplus on winding-up. The Company has produced financial statements and management accounts which show that it has suffered substantial accumulated losses.

216. It has long been established in England that a petitioning contributory had to show some surplus available for distribution amongst contributories for the company to be wound up (Rica Gold Washing Co (1879) 11 Ch D 36).

217. In a case in the Court of Appeal of Hong Kong, In the Matter of DJH Consultants Ltd Civ App 164/84, counsel for both the petitioner and the company had agreed that the English position applied in Hong Kong. In the event, the Court of Appeal did not have to determine that point as the case was dealt with in another way. However, the Court of Appeal considered s.180(1) Companies Ordinance which provides:-

"On hearing a winding-up petition the court may dismiss it, or adjourn the hearing conditionally or unconditionally, or make any interim order, or any other order that it thinks fit, but the court shall not refuse to make a winding-up order on the ground only that ... the company has no assets".

218. The Court of Appeal stated its preliminary view that the language of the section was "unambiguous and peremptory", and that it might "present a formidable hurdle to adherence to the doctrine in Rica Gold.

219. However the Court of Appeal did not deal with the case law in England which continued to apply Rica Gold after the introduction of a statutory provision identical to s.180(1). It has been held that that provision had been introduced only because companies were avoiding winding-up by pleading their own insolvency.

220. In Cirtex Co Ltd [1987] 3 HKC 13, Jones J held that a contributory does not have to establish before he is entitled to present a petition that there will probably be a surplus available for distribution or that he has some other tangible interest. However the likelihood of assets being available for distribution was a factor to be taken into consideration when the court exercises its discretion as to whether a winding-up order should be made. I would adopt that position as it seems to be the most consonant with the wide discretion vested in the court under s.177(1)(f).

221. In my judgment, in deciding whether a winding-up order ought to be made under s.177(1)(f), the court should consider the gravity of the conduct which has led to the petition, and measure that against factors that may point against a winding up order being made, such as the lack of any material gains that may be obtained upon liquidation and the time and costs of a liquidation. Of course there is also the consideration whether a buy-out order would be more appropriate, a matter dealt with below.

222. In my view, the dilution of a person's shareholding by the proportion, at the time and in the circumstances disclosed in this case is amongst the types of conduct that call for an order for winding-up. It was obvious that Ch Res (Holdings) acted as it did when it thought Mr Ng was powerless to subscribe for additional capital and to render the shares unattractive to Mr Choy.

223. Mr Ng may have been delinquent as a director, but if the Respondents had wished to redress any wrong that Mr Ng may have done to the Company during his tenure, the proper conduct would have been to issue proceedings against him for breach of fiduciary duties. In my judgement, two wrongs do not make a right, and for the reasons stated above, it was in my view wrong for the Respondents to in effect seize the Company exclusively for Ch Res (Holdings) by diluting Mr Ng's shareholding in the way they did.

224. In exercising my discretion to order a winding up, I have taken into account the fact that the current financial statements show that the Company has suffered substantial accumulated losses. However the evidence has shown that the Company had been run by Mr Ng and Kei in an unusual manner, with profits that ought to have been received by the Company or its subsidiaries being diverted to other entities. There was no evidence as to any efforts made by the Company to recover those profits or the likely results of any such efforts. There is also a great deal of distrust between the parties.

225. In the circumstances, although I realize that liquidation will be time-consuming and costly, I take the view that it would be in the best interests of all parties for a liquidator to be put in place to establish the Company's true financial position.

No buy-out order

226. I have considered the alternative relief of an order that Ch Res (Holdings) purchase Mr Ng's shares. It is clear that that is not an appropriate relief in this case. A valuation of the shares would prove extremely difficult given the uncertainties surrounding the Company's financial position, particularly taking into account the possibility of recovering profits diverted to other entities. There is also so much distrust between the parties that it would be difficult for any valuer to gain any consensus as to the facts that would have to form the basis of any valuation. In the light of the above, it is unnecessary for me to decide the issue of the terms for a buy-out order.

Order

227. Accordingly, I order that the Company be wound up. I will hear the parties as to any ancillary orders and I will give an order nisi that the costs follow the event, i.e. that the Respondents bear the costs of the Petition.