RE CHINA INTERNATIONAL BUSINESS DEVELOPMENT (HONG KONG) LTD

CACV 94/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 94 OF 2005

(ON APPEAL FROM HCCW NO. 603 OF 2001)

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REASONS FOR JUDGMENT

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Hon Woo V-P:

Introduction

1. The petitioners are two minority shareholders of China International Business Development (Hong Kong) Limited (“the Company”) Mr Hui Ming Yeung (“Mr Hui”) and Mr Chong Chi Yeung (“Mr Chong”).  At all material times, each of them held 2,000 shares of the 10,000 issued shares in the Company, and the remaining 6,000 shares were held by Like Grand Holdings Limited (“Like Grand Holdings”), which was controlled by Mr Lee Wing Kee (“Mr Lee”).  Mr Chong was holding his 2,000 shares as nominee for his father (“Mr Chong senior”).

2. The petitioners sought an order from the court that the Company be wound up on just and equitable grounds, alternatively for relief under section 168A of the Companies Ordinance, Cap 32.  On 14 February 2005, Kwan J gave judgment and ordered the winding-up of the Company.  Against the judge’s decision, the respondents, Mr Lee and Like Grand Holdings, appealed. 

3.  At the conclusion of the hearing on 8 November 2005, we dismissed the appeal with costs to be borne by Mr Lee and Like Grand Holdings.  My reasons appear below.

Background

4. The Company was incorporated on 30 January 1992 with a total authorised share capital of HK$10,000 which had all been paid up by Mr Lee.  The Company was dormant until 1995. 

5. In October 1995, Mr Lee caused to be transferred to the petitioners 2,000 shares each, retaining 6,000 shares held by Like Grand Holdings.  The judge found as a fact that Mr Hui and Mr Chong or Mr Chong senior had not paid for the transferred shares.  The transfer was for the obvious reason that Mr Hui and Mr Chong senior had worked in the China Travel Service Hong Kong Limited for many years and had vast experience and expertise in the tourism industry and connections with their native Fujian Province.

6. On 8 February 1996, Mr Hui signed on behalf of the Company a joint venture agreement with a Chinese partner to set up Xiamen Yongshun Sightseeing Car Limited (“Yongshun”) for a term of 30 years.  The business of Yongshun was to provide electricity-run coaches (which the judge described as electric buggies) as the sole means of transportation for tourists on the ring roads on Gulangyu, a famous scenic spot in Xiamen, Fujian.  The business of Yongshun has ever since been the only business activity undertaken by the Company.

7. Under the joint venture agreement, the Company was responsible for providing all the capital and operating expenses and for the day-to-day administration of Yongshun.  Of the five members of the board of directors of Yongshun, the Company was entitled to and did nominate three, one of whom was the principal director or the chairman of the board.  Although Mr Hui was nominated as the chairman of the board of Yongshun by the Company, the judge found that he had authorised Mr Lee to carry out his duties for him, and thus from October 1996 to May 1999 Mr Lee was in charge of Yongshun. 

8. During this period when Mr Lee was in charge of Yongshun, Yongshun printed and sold tickets for the transportation service, which had not been authorised by the local tax authorities.  The judge called these tickets unauthorised or counterfeit tickets.  This conduct resulted in the under-reporting of the revenue of Yongshun to the tax authorities and as a result Yongshun was charged to pay penalties amounting to over RMB 100,000.

9. As a result of the discovery of the unauthorised act of Yongshun, Mr Hui resumed control and management of Yongshun from May 1999 to November 2000.  

10. On 6 May 2000, two additional directors were appointed to the board of the Company and Mr Lee was nominated as the chairman of Yongshun in place of Mr Hui.  However, Mr Hui refused to vacate the office of chairman of Yongshun until November 2000.  

11. On 3 May 2001, Mr Hui and Mr Chong were not re-elected as directors of the Company.  On 15 June 2001, they presented the petition herein.  

The findings by the judge

12. The judge found that when Mr Lee was in control of the management of Yongshun, counterfeit tickets were issued and sold and the proceeds were kept secret from Mr Hui and Mr Chong, the Chinese partner of Yongshun and the tax authorities of Xiamen. 

13. Regarding various sums allegedly misappropriated by Mr Lee from the takings of Yongshun, for the purpose of repaying sums owed to Mr Lee and his control companies as claimed by Mr Lee after the petitioners discovered the misconduct, the judge did not make any specific finding as to which sum was improperly misappropriated, save for an amount of RMB 785,212.71, alleged to be payment of interest to Mr Lee or Like Grand Holdings, calculated at 15% per annum from October 1997 to September 1998.  The judge found that the interest payment at that rate was not based on any agreement.  

14. The judge found that for the amounts allegedly repaid to Mr Lee and Like Grand Holdings, there was a failure to provide proper information to the board of the Company when Mr Lee sought ratification of the payments in January 2001.  Thus, the judge found for the petitioners on the complaint of misappropriation of funds that there was conduct in the affairs of the Company unfairly prejudicial to the minority. 

15. The judge concluded:

“The lack of probity of Mr Lee in the matter of the counterfeit tickets was ample justification for the petitioners to lose trust and confidence in the majority in the management of the affairs of the Company.  The concealment of the profits made by Yongshun, which was the only business activity undertaken by the Company, was conduct unfairly prejudicial to the minority shareholders of the Company.” (para 30 of the judgment)

“I also find for the petitioners on the complaint of misappropriation of funds that there was conduct in the affairs of the Company unfairly prejudicial to the minority and that the misconduct of Mr Lee, which was to cover up his tracks or to explain away the unaccounted for proceeds in the fraud perpetrated in the counterfeit tickets, was sufficiently grave to warrant a winding-up order on the just and equitable ground.” (para 43 of the judgment)

Grounds of appeal

16. On behalf of the respondents, Mr Simon Lam has raised five grounds of appeal.

17. Ground (1) asserts that the judge erred in holding at paragraph 81 of her judgment that the rule in Re Rica Gold Washing Company (1879) 11 Ch D 36 should not apply.

18. It is contended by Mr Lam under this ground that winding-up proceedings are the most severe action against a limited company and any ground which has not been pleaded in the petition should not be considered by the court.  First, it is alleged that there was an absence of allegation in the petition of failing to provide any documents or accounts.  Secondly, there was clear evidence that the business of the joint venture, and hence the Company, has been profitable and that the Company would be insolvent if wound up.  It is further contended that the judge’s reliance on Re Wessex Computer [1992] BCLC 366 to reject the respondents’ submission that there would be no tangible interest in the winding-up of the Company was flawed because the principle in Re Wessex Computer applies to a petition which is only based on failing to provide accounts/documents which is not the case here.

19. The relevant parts of the judgment are set out below:

37. According to the minutes of that meeting, Mr Lee informed the meeting that before Yongshun was put into operation, he, Mr Hui and Mr Chong (presumably Mr Chong senior) had agreed ‘many times in business meetings’ that as the working capital of Yongshun was financed by bank loans, the Company should pay interest of 15% per annum to ‘the creditor’, calculated from the time the investments were made by the Company in Yongshun.  It was then resolved by the directors that the Company should pay interest of 15% per annum to ‘the creditor’ from September 1997.

38. As I have mentioned earlier, despite repeated demands of the petitioners, no documents were ever disclosed of any bank loan, which was the justification to charge interest at the said rate … .  In all the auditors’ reports of the Company for the financial years from March 1995 onwards, the Company’s auditors have made a disclaimer that because of the limited information made available to them on various matters, including the existence and validity of the interest liability aforesaid, they are unable to form an opinion whether the financial statements gave a true and fair view of the state of the Company’s affairs.

39. I do not accept the allegation that there was agreement to pay interest at 15% per annum before or even at the time the liability was incurred.  Although it was agreed in principle by Mr Hui and Mr Chong senior with Mr Lee that the Company could obtain loans to invest in Yongshun, it did not mean Mr Lee would have carte blanche to raise funds on whatever terms he saw fit, this was a matter emphasised in the directors’ meeting of the Company on 2 December 1999, a record of which was signed by Mr Lee.  Not only was there no contemporaneous record of the alleged agreement to pay interest, I regard it as significant that in the minutes of the meetings attended by Mr Hui and Mr Chong senior in May and December 1999, there was no record of any agreement to pay interest mentioned by any one in these meetings, when the parties had discussed the amount for which Like Grand Holdings had been repaid in respect of the capital investment in Yongshun.  On the contrary, in the hand-written minutes of the directors’ meetings of the Company on 6 to 12 May 1999, it was recorded that on the basis that Like Grand Holdings would not charge interest on the amount advanced for the capital invested in Yongshun, it was agreed that Like Grand Holdings would be permitted to recover out of the profits of Yongshun the capital investment in priority to other distributions.”

29. Ground (2) has no substance.

Ground (4)

30. It is convenient to deal with ground (4) at this juncture as it also relates to the interest payment to Mr Lee at 15% per annum. 

31. This ground challenges the judge’s reliance on the record of the board meeting in May 1999 because it is contended that what was said at the meeting had never been a binding agreement according to all the parties.  It is incorrect to say that the judge had said that what was said at that meeting was a binding agreement between the parties.  It is only necessary to read paragraph 39 of her judgment (cited above), which did not bear out the allegation that the judge had made such a finding.  

32. Ground (4) also relies on the resolutions passed by the board on 10 June 2000 and 12 January 2001 that interest at the rate of 15% per annum was to be paid to Mr Lee.  The simple answer is, as I have said, that these board meetings were not attended by Mr Hui and Mr Chong.  Moreover, the judge had found that the board resolutions had not been made on the basis of truthful and proper information placed before the board.  Indeed, the passing of these resolutions was clearly to the advantage of Mr Lee and detrimental to the interests of the petitioners.  

33. It is also untrue to say that the petitioners had not made the charge of 15% interest as a ground for the petition.  Para 9(b) of the petition specifically referred to the sum of RMB 785,212.71 was misappropriated by Mr Lee to his benefit as interest payable from October 1997 to September 1998.  Para 12 of the petition sums up that the affairs of the Company had been and are being conducted in a manner which is unfairly prejudicial to the petitioners.

34. Ground (4) has no substance either.

Ground (3)

35. Ground (3) states that in querying that Mr Lee had injected RMB 5.2 million in the joint venture for the Company, the judge erred in having overlooked the following important documentary evidence and the facts stated therein: in the auditor’s report prepared by the auditor appointed by the petitioners when they were in power the total capital was confirmed to be RMB 5.2 million without any query.  

36. Whether the judge was correct or not in this respect, this ground does not affect the outcome of this appeal.  I therefore propose not to deal with it. 

Ground (5)

37. Ground (5) alleges that in finding that there was a total loss of trust and confidence in the majority in the management of the affairs of the Company due presumably to counterfeit tickets and misappropriation by Mr Lee in the period from 1997 to May 1999, the judge erred in overlooking the important fact that even after the petitioners discovered the misconduct, they went on to take over the running of the business of Yungshun for almost 2 years, which totally rebuts the allegation of loss of trust and confidence by them due to the misconduct. 

38. This is another contention without substance.  The contention merely relies on the fact that Mr Hui was back in charge of the control and management of Yongshun between May 1999 and November 2000 after discovering Mr Lee’s misconduct in the counterfeit tickets and misappropriation, without taking into account the entirety of the circumstances.  The important circumstances to which Mr Lam has turned a blind eye are that on 6 May 2000, two additional directors were appointed to the Company’s board and Mr Lee was appointed as the chairman of Yongshun in place of Mr Hui and that in another meeting on 3 May 2001 Mr Hui and Mr Chong were not re-elected as directors of the Company.  The petitioners being minority shareholders of the Company, when Mr Hui was replaced from continuing to be the chairman of the board of Yongshun, the mistrust or lack of confidence in Mr Lee on the part of petitioners in his management of Yongshun’s affairs, which was the only business activity of the Company, could not be over emphasised.  As the judge found, the counterfeit tickets as well as the misappropriation of the earnings of Yongshun by Mr Lee amply justified the petitioners in losing trust and confidence in the majority management of the affairs of the Company and foreshadowed grave misconduct in future.  Since the petitioners had lost control of the management of Yongshun’s affairs and had been excluded from the board of the Company in May 2001, there was ample justification for their not trusting Mr Lee in the future management of the affairs of the Company and of the affairs of Yongshun.  

39. Ground (5) fails.

Conclusion

40. The above are my reasons for dismissing the appeal with costs.  Mr Lam readily accepted that the costs should be paid by the respondents and it was so ordered.

Hon Yeung JA:

41. I agree with the judgment of the Vice-President and the judgment of Stone J.

Hon Stone J:

42. I agree with the judgment of the Vice-President.

43. In my view this was an appeal transparently without merit.

44. The learned judge below has written that which, if I may say so, is a carefully considered judgment and appears to have had no difficulty, on the facts as found, in deciding that the case was made to justify an order for winding up.

45. In my view her reasoning cannot be faulted.  It strikes me that the criticism levelled at the judgment on the basis of a suggested misapplication of Re Rica Gold Washing (1879) 11 Ch D 36 was clearly inappropriate in the particular circumstances of this case, wherein on the evidence the majority shareholder appears to have used the company as his personal fief, wherein the audited accounts had been heavily qualified, and wherein (as the learned judge specifically found) it was impossible on the state of the information made available to form a view as to the solvency of this company.

46. Given that a salient (if not the sole) element within the factual matrix upon which this petition was based was a failure to supply information to the minority shareholders – I note that the judgment records that “the petitioners had repeatedly requested source documents from Mr Lee on the amounts allegedly advanced to the Company and had raised questions and requested information from the auditors, without any success” – it strikes me as ambitious to attempt to argue, as Mr Lam sought to do on this appeal, that the learned judge below should not have applied the implied qualification to the general rule in Re Rica Washing adumbrated by Pennycuick J in Re Newman & Howard Ltd [1962] Ch 257 at 262, to the effect that where it is by reason the company’s own default that a petitioner is unable to tell whether or not there will be a surplus available to contributories, a petitioner’s failure so to verify that fact on oath should not constitute a bar to the relief sought.

47. Clearly each case must depend on its own facts, but the rule in Re Rica Gold Washing is not to be slavishly applied so that, in effect, it constitutes a straitjacket for the exercise of judicial discretion, a discretion which, in my view, the learned judge exercised entirely appropriately in the circumstances of the present case.

48. In my judgment the conclusion of the learned judge below was correct, and the only criticism that possibly could be made was as to the time that it took to issue the judgment.  This, perhaps, was the only observation of Mr Lam with which I had any sympathy.