NG WAI SANG AND ANOTHER v. HO PO YENG AND OTHERS

HCCW 456/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 456 OF 2005

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J U D G M E N T

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1.  This is a petition presented by two contributories to wind up Hang Sang Engineering Factory Limited (“the Company”) on the just and equitable ground.  Alternatively, they seek relief under section 168A of the Companies Ordinance, Cap. 32, that an order be made for the majority shareholders to buy out their shares, or that they should purchase the shares of the majority.

2.  The 1^st petitioner, Ng Wai Sang, holds 20 out of 100 issued shares in the Company.  The 2^nd petitioner, Kwong Lap Wai, holds 10 shares.  The other 70 shares are held by the 1^st to 4 respondents as follows: the 1^st respondent Ho Po Yeng (20 shares); the 2^nd respondent Ho Wai Man also known as Ho Wei Man (5 shares); the 3^rd respondent Ho Ming Chun (30 shares); and the 4^th respondent Ho Hin Ming (15 shares).

3.  The 2^nd respondent had passed away on 9 July 2005, within a month of the presentation of the petition.  A limited grant of letters of administration ad colligenda bona was made to his widow Madam Lau Chun and on 27 February 2007, an order was made that Madam Lau be joined as a party to these proceedings and the proceedings be carried on as if she had been substituted for the 2^nd respondent.

4.  The 3^rd and 4^th respondents are the sons of the 2^nd respondent.

5.  The Company is the 5^th respondent.

The background and matters not in dispute

6.  I will first set out the background and other matters not in dispute or should not be controversial.

7.  Hang Sang Engineering Factory was set up in 1958 to carry on the business of maintaining machinery.  The 2^nd respondent, the 1^st respondent and Kwong Chok Sam, who was the father of the 2^nd petitioner, were involved in running the business.

8.  On 12 November 1971, the Company was incorporated to take over the business of Hang Sang Engineering Factory.  The authorised capital was and still is HK$1 million, divided into 100 shares of HK$10,000 each.  The 2^nd respondent, the 1^st respondent and Kwong Chok Sam were the subscribers and each took up five shares in the Company.  They were also the first directors.  The articles of association provided that a director of the Company must hold at least five shares in his own right.

9.  After the Company was incorporated, its business was expanded to include the manufacturing of plastic injection moulding machines and a factory was purchased.  The 2^nd respondent was responsible for the administrative and financial matters of the Company, the 1^st respondent was in charge of production and the factory, and Kwong Chok Sam was responsible for sales and marketing.

10.  On 27 January 1972, additional shares were allotted to the three shareholders.  Including the shares taken up by them as subscribers, a total of 60 shares were allotted and they were held as follows: the 2^nd respondent (30 shares or 50%); the 1^st respondent (24 shares or 40%); and Kwong Chok Sam (6 shares or 10%).

11.  On 30 August 1977, the remaining 40 shares in the Company were allotted to the three shareholders.  Their shareholdings became as follows: the 2^nd respondent (50 shares or 50%); the 1^st respondent (40 shares or 40%); and Kwong Chok Sam (10 shares or 10%).

12.  The 3^rd respondent joined the Company as an apprentice in 1974 when he was 17 or 18 years old.  On 26 May 1978, the 2^nd respondent transferred 10 of his shares to the 3^rd respondent.  There were then four shareholders.  Some time between May and December 1978, the 3^rd respondent was appointed the fourth director.

13.  In 1988, the 1^st petitioner, who is the 1^st respondent’s nephew, came to Hong Kong from the Mainland and the 1^st respondent arranged for him to work in the Company as a technician.

14.  In 1990, Kwong Chok Sam suffered a stroke and ceased to take part in the management.  He remained as a director until he passed away in 1993.  In the same year, the 1^st respondent emigrated to Canada.  During his absence, the 1^st petitioner began to take an active role in the management.

15.  The 2^nd petitioner did not join the Company until much later.  During 1976 to 1996, he worked in another company set up by his father and the 1^st respondent known as Patek Industrial Company Limited (“Patek”), which was engaged in the business of manufacturing, dealing and trading in plastic products.  With the passing away of his father and the emigration of the 1^st respondent in 1993, he assumed sole responsibility in running Patek.  In 1996, at the request of the 1^st, 2^nd and 3^rd respondents, the 2^nd petitioner joined the Company and took up the old job of his father as the person in charge of sales and marketing.

16.  In September 1996, the Company entered into a joint venture with a government entity in Mainland China to set up Shenzhen Hang Sang Engineering Company Limited.  The interest held by the Company was 70% initially.  In 2002, the government entity sold its interest in the joint venture to the Company so it has become a wholly owned subsidiary of the Company since 18 June 2002.  Its name was changed to Hang Sang Machinery (Shenzhen) Company Limited.  I will refer to the entity in Shenzhen, before and after it became wholly owned by the Company, as “the Shenzhen Company”.

17.  Since 1996, most of the production and manufacturing processes of the Company had been shifted to and undertaken by the Shenzhen Company.  The business of the Company in Hong Kong was trading of plastic injection moulding machines and letting its properties for profit.  All along, the petitioners played an active role in running the Shenzhen Company.  The 1^st respondent was spending most of his time in Canada at the time the Shenzhen Company was set up, and the health of the 2^nd respondent had started to deteriorate, so it was not possible for them to take charge.

18.  The 3^rd respondent was appointed the chairman of the board of directors of the Shenzhen Company and its legal representative.  It was not in dispute that even before the petitioners were appointed directors of the Company, they were appointed directors of the Shenzhen Company, and, in addition, the 1^st petitioner was appointed the general manager, and the 2^nd petitioner was made an assistant general manager.  There was some dispute if the petitioners were appointed to their managerial positions in the Shenzhen Company in 1996 or 1997, but it is not necessary to resolve this.

19.  On 19 August 1997, a number of transfers of the Company’s shares were made.  The 1^st respondent transferred 20 of his 40 shares to the 1^st petitioner, the 2^nd respondent transferred 20 of his 40 shares to the 3^rd respondent, and the administrator of the estate of Kwong Chok Sam transferred his 10 shares to the 2^nd petitioner.  The 1^st petitioner took his shares as a gift from his uncle the 1^st respondent.  The 2^nd petitioner took his shares as inheritance of his father’s estate.  The shareholdings of the five shareholders became as follows: the 1^st respondent (20 shares); the 2^nd respondent (20 shares); the 3^rd respondent (30 shares); the 1^st petitioner (20 shares); and the 2^nd petitioner (10 shares).

20.  On 1 June 1998, the company secretary of the Company Madam Kwok Yuen Yee resigned and was replaced by the 3^rd respondent.  On the same day, the 1^st and 2^nd petitioners were appointed as additional directors of the Company.  Hence, as at that date, all five shareholders were directors of the Company.

21.  In 2000, the 1^st respondent returned from Canada to live in Hong Kong.

22.  Serious disputes between the shareholders arose in 2002.  The main protagonists were the 1^st petitioner and the 1^st respondent.  The 2^nd petitioner had tried to act as mediator.

23.  On 17 August 2002, the board of directors of the Shenzhen Company (by then the wholly owned subsidiary of the Company) passed a resolution that with effect from 18 June 2002, the 3^rd respondent was appointed the chairman of the board of directors and both the 1^st and 2^nd petitioners were appointed directors.  On 20 August 2002, the 3^rd respondent and the lawyers he engaged in Shenzhen issued a notice stating that the Shenzhen Company had held a ‘temporary’ shareholders’ meeting that day and resolved that the management structure was changed as follows:

(1)     the 3^rd respondent was still the legal representative and chairman of the board of directors, in addition he was appointed the general manager, the position that had been held by the 1^st petitioner;

(2)     the 1^st petitioner was appointed the vice chairman of the board and a director;

(3)     the 2^nd petitioner was appointed a director and the assistant general manager;

(4)     the 1^st and 2^nd respondents were appointed special consultants, and the duties of the 2^nd respondent were to be performed by the 4^th respondent on his behalf.

24.  The 1^st petitioner engaged lawyers in Guangdong to issue a ‘declaration’ on 23 August 2002 to the effect that the notice and resolutions issued on 20 August 2002 were invalid and had no legal effect and that the 1^st petitioner was still the general manager of the Shenzhen Company.

25.  On 3 September 2002, the 1^st petitioner brought civil proceedings against the 3^rd respondent and the latter’s lawyers in the Baoan District People’s Court, Shenzhen City, alleging that the notice issued by them on 20 August 2002 had infringed his legitimate interest and seeking an order that the same was invalid.

26.  On 12 November 2002, the board of directors of the Shenzhen Company held a meeting to discuss the notice issued on 20 August 2002 and the modification of the organization structure of the company.  The 3^rd respondent and the petitioners attended the meeting.  As no consensus was reached and there was conflict of opinion, the 3^rd respondent proposed to ‘spin off’ the Shenzhen Company from the Company.  The petitioners agreed.  The 1^st petitioner also agreed to settle his litigation with the 3^rd respondent and on 14 November 2002 discontinued his action in the Baoan District People’s Court.

27.  In January 2003, the 1^st, 2^nd and 3^rd respondents and the 2^nd petitioner issued a notice on behalf of the Company to a supplier, Tai Sun International Company Limited.  It was stated that there were some “problems” between the directors of the Company that had yet to be resolved.  Owing to this, the supplier was notified that with immediate effect, all purchase orders of the Company would require the signatures of any two of the five directors of the Company.

28.  On 30 June 2003, the board of directors of the Company held a meeting.  Only the 1^st to 3^rd respondents had attended.  They resolved to carry out a study and make a decision on proposals for a spin-off, a transfer of shares, a sale, a closing down or termination, etc. of the Shenzhen Company, other than a winding up of it.  They also resolved to appoint lawyers and accountants in Hong Kong and the Mainland to carry out an examination of all the accounts and books of the Company and the Shenzhen Company, from the date of commencement of business to present.

29.  On 3 July 2003, a letter was issued on behalf of the Company and the Shenzhen Company to all five shareholders and directors stating that as no proposal was received from the 1^st petitioner by 30 June 2003 to purchase the shares of the others, the Company would advertise in newspapers in Hong Kong, Shenzhen and Guangzhou for sale of the assets of the Shenzhen Company to outsiders.

30.  On 22 August 2003, the Company’s solicitors gave notice to the 1^st petitioner of the annual general meeting to be held on 20 September 2003 and that all directors must retire as required by the articles of association but would be eligible for re-election.  The 1^st petitioner attended the annual general meeting by his solicitor.  A resolution was passed to re-elect the 1^st to 3^rd respondents and the 2^nd petitioner as directors, the 1^st petitioner was not re-elected despite the objection raised by his solicitor.

31.  On 1 December 2003, a notice was issued by the Company and the Shenzhen Company to a supplier in Shunde City stating that the Company had resolved to proceed with the spinning off, termination or liquidation of the businesses in Hong Kong and the Mainland and notice was given to the supplier to terminate the supply of any accessories, spare parts and materials to the Company and the Shenzhen Company with immediate effect.  In respect of all goods supplied and accounts on credit, the supplier was requested to proceed immediately with procedures for collecting payment.

32.  On 20 December 2003, the 3^rd respondent issued a notice to hold a board meeting of the Company on 30 December 2003.  One of the items on the agenda was to discuss and resolve on the composition of the board of directors of the Shenzhen Company.  At the board meeting, which was not attended by the 2^nd petitioner, the directors resolved to remove the 1^st petitioner as a director of the Shenzhen Company and appoint the 1^st respondent in his stead with immediate effect.  The 1^st petitioner was notified of his removal on 31 December 2003 and that the Company would not recognise any business handled by him in the capacity of a director of the Shenzhen Company from 1 January 2004.

33.  The petitioners and the 3^rd respondent had a meeting on 24 February 2004 to discuss a way to resolve their conflict.  It was agreed that a valuation of the Shenzhen Company and the Company would be obtained for the consideration of the shareholders to facilitate a sale and purchase of the shares in the Company.  During March to June 2004, there were negotiations on the proposed purchase by the petitioners of the shares of the others.

34.  On 21 June 2004, the 2^nd respondent transferred 15 of his 20 shares in the Company to the 4^th respondent.  On 26 June 2004, the 4^th respondent was appointed a director of the Company.

35.  On 28 September 2004, the Shenzhen Administration of Industry and Commerce issued a notice stating that it had approved the change of registered particulars of the Shenzhen Company.  Previously, the 3^rd respondent was registered as the chairman of the board of directors and the petitioners were directors.  The change effected was that the 1^st petitioner ceased to be a director and was replaced by the 1^st respondent.  

36.  At the annual general meeting of the Company on 27 October 2004, which was not attended by the petitioners, the 2^nd petitioner was not re-elected as a director, only the 1^st to 4^th respondents were re-elected.

37.  On 18 November 2004, the 3^rd respondent as the legal representative of the Shenzhen Company applied to the Shenzhen Administration of Industry and Commerce for another change of the registered particulars in that the 2^nd petitioner had ceased to be a director.  A notice to this effect was issued on the same day.

38.  On 29 November 2004, the board of directors of the Shenzhen Company held a meeting, which was not attended by the 2^nd petitioner, and resolved to remove the 1^st petitioner from the post of general manager and appoint the 3^rd respondent in his place with immediate effect.  The 3^rd respondent notified the 1^st petitioner of this by a letter dated 1 December 2004.  He also requested the 1^st petitioner to complete the relevant transfer procedure within seven days of receipt of the notice and deliver up the books and records, the chop of the 3^rd respondent as the legal representative and the company chop of the Shenzhen Company.

39.  Another meeting of the board of directors of the Shenzhen Company was held on 4 December 2004, which was attended by only the 1^st to 3^rd respondents.  They resolved to remove the 2^nd petitioner from his post as assistant general manager of the Shenzhen Company and to appoint the 1^st respondent in his stead with immediate effect.  On 6 December 2004, the 3^rd respondent wrote to the 2^nd petitioner to inform him that the board of directors of the Shenzhen Company had resolved to dismiss him as assistant general manager and as a director with immediate effect and to appoint the 1^st respondent to replace him in those positions.  A similar request was made regarding the transfer procedure and the handing over of books, records and chops of the company.

40.  At a board meeting of the Company on 13 May 2005, the directors resolved to appoint the 3^rd respondent as chairman of the board of directors of the Shenzhen Company and the 1^st and 2^nd respondents were appointed directors of that company, all for a term of three years from 18 June 2005.  The 2^nd respondent was made a director notwithstanding he was seriously ill and was admitted into the intensive care unit of a hospital in May 2005.  He passed away in July 2005 aged 79.

41.  This petition was presented on 16 June 2005.

42.  In March 2005, the petitioners brought proceedings against the Company in the Baoan District People’s Court seeking an order that their removal as directors of the Shenzhen Company was invalid.  Judgment was given against them on 30 July 2005.  The petitioners brought an appeal in September 2005.  As there were negotiations with the respondents to buy out their interests in the Company during September to December 2005, the petitioners did not proceed with their appeal in the Baoan District People’s Court.

43.  Notwithstanding the removal of the petitioners from their positions in the Shenzhen Company as directors, general manager and assistant general manager, they have continued to run the Shenzhen Company up to present.

44.  Lastly, it was not in dispute that the financial position of the Company is sound.  Its current directors are the 1^st, 3^rd and 4^th respondents.  The 3^rd respondent accepted in his first affirmation that the Shenzhen Company is solvent and profitable.

The complaints of unfairly prejudicial conduct

45.  The petitioners alleged that when the three founder members – the 1^st respondent, the 2^nd respondent and Kwong Chok Sam – formed the Company in 1971, they did so on the basis of mutual trust and confidence and with the agreement or understanding that all members of the Company would take part in the management.  This understanding had not changed with the transfers of the shares by the founder members to their close relatives, as with the transfer of some of the 2^nd respondent’s shares to the 3^rd respondent in 1978 and 1997, the transfer of some of the 1^st respondent’s shares to the 1^st petitioner in 1997, the transfer by the administrator of Kwong Chok Sam of all his shares to the 2^nd petitioner in 1997, and the transfer of some of the shares of the 2^nd respondent to the 4^th respondent in 2004.  All those who became shareholders were appointed directors of the Company.  There was a legitimate expectation that the members would not be excluded from the management of the Company and its wholly owned subsidiary, the Shenzhen Company.

46.  The main allegation of unfairly prejudicial conduct was that in breach of the above agreement or understanding, the petitioners were removed from their positions in the Company (when they were not re-elected as directors on the retirement of directors at the annual general meetings) and the Shenzhen Company (when they were removed as directors and from their positions as general manager and assistant general manager).

47.  The only other complaint of unfairly prejudicial conduct was that in causing the Company and the Shenzhen Company to issue the notices to suppliers in January and December 2003, these acts had affected adversely the interest of the Company.

48.  At the commencement of the hearing, Mr. Anthony Chan, SC informed the court that the petitioners would not rely on the other allegations of unfair prejudice in the petition, namely, that there was failure to provide to them the audited reports and minutes of meetings of the Company from 1998 to 2005.

The respondents’ case in summary

49.  The 1^st to 4^th respondents denied that there was any agreement or understanding that all the shareholders would be entitled to take part in the management of the Company, whether between the founder members in 1971 or, a fortiori, in 1997 when the petitioners became shareholders.  There did not exist any such degree of mutual trust and confidence among the shareholders as would make the Company a “quasi-partnership”.  They alleged that the appointment of any director was always based on merit; there was no guarantee that a director would be re-elected when he was to retire at each annual general meeting, as required by the articles of association.  As for the dismissal of the petitioners from their positions in the Shenzhen Company, that was entirely a matter of internal management of the Company and within the responsibility of the board of the Company.

50.  Even if there was any agreement or understanding as alleged, which was denied, the respondents contended the petitioners are not entitled to relief as it was the petitioners’ misconduct that had destroyed and undermined any relationship of mutual trust and confidence in that:

(1)     the petitioners had denied the respondents’ access to the financial documents of the Shenzhen Company, including the occasion on 11 October 2003 when the 1^st and 3^rd respondents went to the premises of the Shenzhen Company;

(2)     the petitioners had failed to return to the 3^rd respondent the company chop of the Shenzhen Company and the private chop of the legal representative of the Shenzhen Company;

(3)     the petitioners had brought malicious lawsuits against the 3^rd respondent and the Company in the Mainland courts; and

(4)     the petitioners have continued to run the Shenzhen Company notwithstanding their dismissal.

51.  As for the notices issued to the suppliers in 2003, the respondents claimed they were necessary because the 1^st petitioner had been running the Shenzhen Company without regard to the views of other directors and the notices were sent to prevent the 1^st petitioner from overstocking and unilaterally ordering parts and materials for the Shenzhen Company on credit.

Two broad issues

52.  There were two broad issues in these proceedings – whether there was an agreement or understanding that the shareholders are entitled to take part in the management; and what had led to the breakdown of mutual trust and confidence.

The applicable legal principles

53.  The real disputes in this case were factual ones.  There was not much controversy about the law.  I will first endeavour to state the relevant legal principles, some of which were taken from propositions helpfully summarised in the submissions of Mr. Chan:

(1)     To found relief under section 168A, the court has to be satisfied that the conduct complained of is both unfair and prejudicial to the petitioner (Re Taiwa Land Investment Co. Ltd. [1981] 1 HKLR 297 at 305A; Re Saul D Harrison & Sons plc [1995] 1 BCLC 14 at 31c).  The approach to the concept of unfairness in section 168A runs parallel to the concept of just and equitable as a ground for winding up.  The parallel is not in the conduct which the court will treat as justifying a particular remedy but in the principles upon which it decides that the conduct is unjust, inequitable or unfair (O’Neill v Phillips [1999] 1 WLR 1092 at 1099B to F, 1099H to 1100C).

(2)     The starting point of the enquiry of the conduct in question is the articles of association and the powers of the board of directors (Re Saul D Harrison & Sons plc, supra. at 18a and g, 31e).  Whether a company is large or small, in most contexts, the articles of association and the Companies Ordinance would have provided a “sufficient and exhaustive” definition of the company structure governing the rights, expectations and obligations of the shareholders (Ebrahimi v. Westbourne Galleries Ltd. [1973] AC 360 at 379C).

(3)     Where the basis of association is not adequately and exhaustively laid down in the articles, it may make it unjust or inequitable to insist on strict legal rights or to exercise them in a particular way.  In this situation, equitable considerations may be superimposed on the exercise of legal rights (Re Westbourne Galleries, supra. at 379D; Re Saul D Harrison & Sons plc, supra. at 19a to e, 31i).

(4)     Whilst it would be impossible and undesirable to define the circumstances in which these equitable considerations may arise, there are principles by which those circumstances may be identified.  The superimposition of equitable considerations requires something more which typically may include one or more of these elements:

(i) an association formed or continued on the basis of a personal relationship involving mutual confidence;

(ii) an agreement or understanding that all or some of the shareholders shall participate in the conduct of the business;

(iii) restriction upon the transfer of members’ interest in the company so that if confidence is lost or one member is excluded from management, he cannot take his stake and go elsewhere (Re Westbourne Galleries, supra. at 379E to G).

(5)     Thus the personal relationship between a shareholder and those who control the company may entitle him to say that it would in certain circumstances be unfair for them to exercise a power conferred by articles upon the board or by the company in general meeting.  It often arises out of a fundamental understanding, by words or conduct, between the shareholders which formed the basis of their association but was not put into contractual form.  There may also be later promises, by words or conduct, which it would be unfair to allow a member to ignore.  These relationships need not always take the form of implied agreements with the shareholder concerned, and could enure for the benefit of a third party, such as a joint venturer’s widow (Re Saul D Harrison & Sons plc, supra. at 19f to h; O’Neill v. Phillips, supra. at 1101F to G).

(6)     The presence of a basic understanding between the shareholders may be inferred, and the company’s course of conduct will be relevant for this purpose (Re Taiwa Land Investment Co. Ltd., supra. at 316E).

(7)     It is not necessary to establish that the parties in a quasi-partnership should be equal.  It is possible for a quasi-partnership to arise “where two or more persons agree to work together within a limited company, but the lack of financial resources of the one lead, perhaps in conjunction with other factors, to his having a relatively small interest”.  Thus, the petitioner may be entitled to relief even if he was the ‘junior partner’ in the company (Quinlan v. Essex Hinge Co. Ltd. [1996] 2 BCLC 417), or where his shareholding is relatively modest and he has made no or no substantial financial contribution to the company (Richards v. Lundy [2000] 1 BCLC 376 at 393g to 394a; Re a company (No. 00709 of 1992) [1997] 2 BCLC 739 at 769a to d).

(8)     Rights and expectations to participate in the management which are based on the exercise of personal skill and judgment of a shareholder may not be capable of transmitting to a successor of the shares (Re Sharpart Co. Ltd., HCCW No. 858 of 1999, 15 November 2000, Chu J, pages 11 to 12).

(9)     Where special circumstances exist to render it unfair to remove a shareholder as a director, the unfairness lies not in the exclusion alone but in exclusion without a reasonable offer (O’Neill v. Phillips, supra. at 1107C).

(10)   Where a matter of management is within the responsibility of the directors, it would be wrong for a court to substitute its opinion for that of the management or question the correctness of the decision, if bona fide arrived at.  But when a dispute arises whether the directors made a particular decision for one purpose or for another, or whether one or another purpose was the substantial or primary purpose, the court is entitled to look at the situation objectively to estimate how critical or pressing or substantial an alleged requirement may have been, or whether it may have reason to doubt or discount the assertions of individuals (Howard Smith Ltd. v. Ampol Petroleum Ltd. [1974] AC 821 at 832E to G).

(11)   If the petitioner’s misconduct was causative of the breakdown in trust and confidence of which he complains, the court will refuse a winding-up order as the petitioner must come to court with ‘clean hands’ (Re Westbourne Galleries, supra. at 387G).

(12)   Misconduct of the petitioner in a petition under section 168A may be relevant in a number of ways.  It may render conduct of the respondent, even if prejudicial, not unfair (Re RA Noble & Sons (Clothing) Ltd. [1983] BCLC 273 at 292a to b).  Even if conduct of the respondent is both prejudicial and unfair, the petitioner’s misconduct may affect the relief which the court thinks fit to grant (Re London School of Electronics Ltd. [1985] BCLC 273 at 279e to f).  And if unfairly prejudicial conduct of the respondent substantially outweighed the petitioner’s misconduct, it will not prevent him from obtaining relief (Re London School of Electronics Ltd., supra. at 280f to g).

(13)   Where the petitioner’s misconduct was not causative of the breakdown in confidence on which the petition is based, as when it took place long after all confidence had irretrievably gone, this would not be a bar to relief (Vujnovich v. Vujnovich [1990] BCLC 227 at 231h to 232b).  A petitioner can obtain relief if he can show that it is the respondent’s conduct which has been the substantial cause of the destruction of mutual confidence involved in the personal relationship between them (Re RA Noble & Sons (Clothing) Ltd. [1983] BCLC 273 at 290b to c).

The witnesses

54.  The 1^st and 2^nd petitioners each made five affirmations in these proceedings.  The 1^st respondent made two affirmations and the 3^rd respondent made three.  The 1^st and 4^th respondents adopted the affirmations of the 3^rd respondent.  The 4^th respondent and the personal representative of the 2^nd respondent did not make any affirmation of their own.  All four deponents were cross-examined on their affirmations.

55.  The petitioners’ case would stand or fall depending on whether they managed to establish there was an agreement or understanding that the shareholders would have a legitimate expectation to take part in managing the business of the Company, including its wholly owned subsidiary.  They were not privy to the circumstances in which the Company was established in 1971 and the appointment of first directors, or of the circumstances in which the 3^rd respondent became a director in 1978.

56.  I have a generally favourable view of the 2^nd petitioner as a witness.  He appeared to be straightforward and did not seek to embellish his evidence.  The 1^st petitioner did not make as good an impression on me.  He did not answer questions directly on occasions and did not seem to follow the questions at times.  On the whole, I do not attribute this to a lack of candour.  It may be that he is an unsophisticated person.

57.  The 1^st respondent is 76 years old.  He is not in any way handicapped by his age or his lack of formal education when giving evidence.  As the only surviving member of the subscribers, he was in the position to speak from his personal knowledge regarding the relationship of the subscribers before and at the time the Company was formed.  In a number of instances, his answers would seem to defy common sense or did not agree with evidence that was not or could not be disputed.  He came across as a person who adheres firmly to his views, and at times appeared to be giving an account of what he believed to be the case rather than an unembellished account of the incidents.  He was not forthcoming when he perceived his answers might be used against him and was plainly reluctant to give anything away.  Some of his answers in cross-examination were even contradictory to what he had deposed to earlier in his affirmations.

58.  The 3^rd respondent did not strike me as an impressive witness either.  His evidence seemed contrived in places and tended to lose credibility when taken too far.

59.  I propose to look at the evidence in chronological sequence in considering whether there was any agreement or understanding on joint management as alleged.

The unincorporated business during 1958 to 1971

60.  The 1^st respondent said that in 1958, the 2^nd respondent set up Hang Sang Engineering Factory as the sole proprietor to carry on the business of maintaining machinery.  He and subsequently Kwong Chok Sam were employed by the 2^nd respondent to assist, as the 2^nd respondent worked full time elsewhere.  They built up and expanded the business over more than ten years of hard work.  It was the 1^st respondent who mainly ran the business.  I see no reason to reject this part of the 1^st respondent’s evidence.

The formation of the Company in 1971

61.  The 1^st respondent gave evidence that it was the 2^nd respondent who decided to transfer the business of his firm to the Company, incorporated in November 1971.  He and Kwong Chok Sam each received five subscriber shares from the 2^nd respondent as a gift.  When subsequent allotments were made in January 1972 and August 1977, he and Kwong Chok Sam received additional shares in that their respective shareholdings were increased to 40% and 10% of the issued share capital.  The allotments were made in cash, but neither he nor Kwong Chok Sam had paid cash for the shares allotted to them.  The money injected into the Company as share capital came from a loan raised from a bank.  Later, equipment of the old firm was sold over five years and the proceeds were used to repay the bank.  I accept the above evidence given by the 1^st respondent.

62.  I do not accept his denial that the 2^nd respondent allotted shares to him and Kwong Chok Sam to reward them for their efforts in building up the business, and to make them even more committed to the business in future.  I find the contrary to be the case.  As admitted by the 1^st respondent, the three founder members had become good friends after working together for over ten years.  I find that the 1^st respondent was given 40% shares in recognition he had made a greater contribution.  His claim that he merely earned his salary and concentrated on his work without ever giving any thought to the substantial stake he held in the Company and that he did not discuss with the other two their aspirations to develop the business jointly does not accord with commercial reality.  He professed not to understand what was mutual trust and confidence and said that although he trusted the 2^nd respondent and Kwong Chok Sam, he could not tell if the others likewise trusted him.  His answers here simply lack credence.  His differentiation between the thinking behind when the 2^nd respondent made him a gift of shares and when he made the 1^st petitioner a gift of shares seems to me unconvincing.

63.  I find it inconceivable it was only after he had served as a director for more than ten years that he came to know what it meant to be a director.  He knew of the provision in the articles of association concerning the directors’ power to decline registration of a transfer of shares without giving any reason and that such power had existed in 1971.  He also had a clear understanding of the manner in which share capital was injected and paid up.  Contrary to his assertion, I find that he was aware of what was going on when the Company was formed.

64.  As for the constant refrain in his evidence that throughout he and Kwong Chok Sam were just ordinary employees and could be dismissed by the 2^nd respondent from their positions (he steadfastly refused to accept that he held a management position, and would only say he took part in “management work”) if their performance was not up to standard, this could not adequately explain why not only were they given half of the issued shares but they were made directors of the Company from the start.  He made no attempt to explain in his evidence why he and Kwong Chok Sam received a substantial portion of the shares except to say that he did not expect the 2^nd respondent to be so generous.  I think it is telling that he eventually acknowledged it was his belief (he refused to say it was his “expectation”) that his directorship would continue unless he breached the trust and confidence of the other shareholders.  This was borne out by subsequent events that all three founder members continued serving as directors notwithstanding their retirement (in the case of Kwong Chok Sam), emigration (in the 1^st respondent’s case) and reduced participation (in the 2^nd respondent’s case).

65.  The 3^rd respondent said in his evidence in chief that until the 2^nd respondent passed away in 2005, all along it was the 2^nd respondent who made decisions about the Company, after consulting the 1^st respondent and Kwong Chok Sam, and that the 2^nd respondent appointed the 1^st respondent and Kwong Chok Sam to implement his decisions.  Under cross-examination, he accepted that the Company was jointly run by the three persons and the 2^nd respondent did not dictate to the others.

66.  As mentioned earlier, the petitioners had no personal involvement in the formation of the Company.  The only evidence on their part came from what the 2^nd petitioner was allegedly told by his late father Kwong Chok Sam, and from what the 1^st petitioner had allegedly learned from the 1^st respondent when they were still on good terms.

67.  The 2^nd petitioner mentioned in his very first affirmation he was told by his father that the 1^st and 2^nd respondents were good friends of his father and they set up the Company on the basis of their mutual trust and confidence.  His father told him it was agreed by the three of them that all the shareholders should manage the business of the Company jointly so that each shareholder would be appointed a director.  At all material times, the three shareholders had divided up their responsibilities in running the Company.  He could also tell from his own observation when he attended the Company from time to time to report to his father and the 1^st respondent on the business of Patek that his father, the 1^st and 2^nd respondents had all taken part in the joint management of the Company.

68.  The 1^st petitioner said in cross-examination (this was not mentioned in any of his affirmations) that when he was living in the 1^st respondent’s home, the 1^st respondent had talked to him about the business of the Company from time to time and he was told by the 1^st respondent that it was agreed among the three subscribers they were to manage the Company jointly and be appointed directors.  The 1^st petitioner could not recall specifically when or during which year the 1^st respondent had given him this information.

69.  The 1^st respondent adamantly denied he had ever spoken to the 1^st petitioner about the background of the Company when their relations were good.  He added for emphasis he did not even talk to his own family members about this.  I do not find this credible.  I am inclined to accept the 1^st petitioner’s evidence, but even without his evidence, on the basis of the 2^nd petitioner’s evidence, and on the findings I made concerning the 1^st respondent’s evidence as related earlier, I am able to find and infer that when the Company was formed, it was founded on the basis of a personal relationship of the three founder members involving mutual trust and confidence and with the understanding that they would become directors and take part in the management.  The fact that the 1^st respondent and Kwong Chok Sam did not pay for the shares allotted to them in cash was immaterial.  Nor would it be right to say that they had made no financial contribution, as it was through their joint efforts (and the 1^st respondent had made a greater contribution) that they built up the business of the 2^nd respondent’s firm when the latter was working full time elsewhere, and it was ultimately from the proceeds of the equipment of the old firm that capital was injected into the Company.

70.  Mr. Peter Ng, SC submitted on behalf of the 2^nd to 4^th respondents that the petitioners’ case of the alleged understanding is inconsistent with the articles of association.  When the Company was formed, it had adopted most of the provisions of Table A in the First Schedule to the Companies Ordinance in force at that time, including clause 72 in Table A which provided that the office of director shall be vacated in one of these situations: if he ceases to be a director by virtue of section 155; if without the consent of the company in general meeting he holds any other office of profit under the company except that of managing director or manager; if he becomes bankrupt; if he becomes prohibited from being a director by reason of any order made under section 223 or 275; if he is found lunatic or becomes of unsound mind; if he resigns his office by notice in writing to the company; or if he is directly or indirectly interested in any contract with the company or participates in the profits of any contract with the company.  Further, it was expressly provided in article 10 of the articles of association that all directors shall retire from office at each annual general meeting and be eligible for re-election.  That a director could become disqualified in one of the circumstances envisaged in clause 72 would mean that a shareholder would not be allowed to remain a director even though he has not done anything in breach of the mutual trust and confidence of the shareholders.  The requirement of re-election at each annual general meeting would suggest a deliberate decision to confer a right on the majority shareholders to decide if it is suitable for any director to remain in office.

71.  I do not agree with these submissions.  There was no evidence as to how the provisions in Table A, as modified or varied, came to be adopted as the articles of association for the Company.  It would not be appropriate to draw any inference of the kind as suggested by Mr. Ng.  Nor are we concerned with any of the situations envisaged in clause 72 in the petitioners’ complaint of their exclusion from management.  Any inconsistency between the basic understanding of the shareholders and clause 72 is irrelevant for present purpose.  As for article 10, if special circumstances were found to exist for equitable considerations to be superimposed, the majority shareholders would not be allowed to insist on the exercise of strict legal rights in the articles of association.

The joining of the 3^rd respondent in 1978

72.  The 3^rd respondent worked as an apprentice in the Company from 1974 to 1977.  He accepted that when he became a shareholder and director in 1978, the way in which the Company had been operating did not change.  He also accepted that the four shareholders and directors had mutual trust and confidence in one another and this state of affairs had continued up to the time when new shareholders were admitted in 1997.

73.  The 3^rd respondent claimed he had been appraised by all the directors for a year before he was appointed a director.  I am sceptical if appraisal of performance in work was a criterion for his appointment.  The date on which he was appointed a director was not known.  Shares were transferred to him on 26 May 1978.  According to the annual return, he became a director sometime between May and December that year.  Any appraisal of the 3^rd respondent’s performance after he became a shareholder would have been relatively short.  Compared to the other directors, he did not have much relevant experience.  He was aged 21 or 22 at the time, with only four years’ experience of work, three of which he served as an apprentice.  I find that he was appointed a director after he received a transfer of shares from his father, in accordance with the basic understanding of the shareholders that they would all become directors.

The events from 1988 to 1996

74.  The 1^st respondent had a good relationship with the 1^st petitioner when the latter came to Hong Kong in 1988 and was arranged to work in the Company as a technician.

75.  In 1990, Kwong Chok Sam retired from the Company but continued to serve as a director.  During 1993 to 1995, the 1^st respondent spent half of his time in Hong Kong and half of his time in Canada.  This was also the case in 1998 and 1999.  In 1996 and 1997, he was in Canada the whole time.  Despite the time he spent away from Hong Kong, he remained as a director.

76.  It is not necessary to resolve how much control the 1^st respondent exercised over the affairs of the Company in the years when he was abroad.  The important thing was that the 1^st petitioner was appointed to the important position of general manager of the Shenzhen Company with the agreement of 1^st to 3^rd respondents.

77.  The 1^st petitioner said that between 1993 to 1997, the 1^st respondent had told him on the telephone he was concerned about the working ability of the 2^nd and 3^rd respondents and that this might affect his interest in the Company, so the 1^st respondent wanted to make the 1^st petitioner a director.  He testified that on another occasion in early 1996 before the Shenzhen Company was set up, the 1^st respondent said to him on the telephone that in future it would be left to the 3^rd respondent, the 2^nd petitioner and him to manage that company.  These telephone conversations with the 1^st respondent were not mentioned in his affirmations.  The 1^st respondent has denied these conversations with the 1^st petitioner.  I find it more probable than not that the 1^st respondent would have spoken to the 1^st petitioner when the latter was given more important responsibilities in the Company.  I am inclined to accept the 1^st petitioner’s evidence. 

78.  The 2^nd petitioner said that in about May 1996, he was approached by the 1^st and 3^rd respondents to join the Company to take up his father’s former responsibilities and on the basis he could inherit his father’s shares.  The 1^st respondent contacted him by telephone and the 3^rd respondent went to see him at his old factory.  By then, he had known the 1^st to 3^rd respondents for twenty years and was on friendly terms with them.  He claimed that it was just a matter of time for him to be appointed a director, as there was common understanding that a shareholder would be a director.  The 1^st respondent also accepted in cross-examination that if the 2^nd petitioner should inherit his father’s shares, he would become a director subject to formalities.

79.  I do not accept the 1^st respondent’s evidence that in 1996 he did not contemplate the 2^nd petitioner might inherit his father’s shares.  His oral testimony here was contrary to the 3^rd respondent’s first affirmation (which was made with the 1^st respondent’s authorisation) wherein it was stated that in 1996, it was believed and contemplated that the 2^nd petitioner might be one of the persons to inherit Kwong Chok Sam’s shares.  In any event, he could not recall what he had said to the 2^nd petitioner on the telephone in 1996.

80.  Where the 2^nd petitioner’s evidence differed with the evidence of the 1^st and 3^rd respondents as to how he was approached in 1996 to join the Company, I accept the evidence of the 2^nd petitioner.  I reject the contention made on behalf of the respondents that the 2^nd petitioner was approached in 1996 with the view of taking up a job in the Company and no more.  The assertion of the 3^rd respondent that the 2^nd petitioner was recruited as an employee purely on merits, and had nothing to do with Kwong Chok Sam, is not inherently credible.  The 1^st to 3^rd respondents must have an interest to see to it that the shares of Kwong Chok Sam would be transferred to a person they approved of, someone they thought would make a contribution to the Company.  The 2^nd petitioner gave up his work in operating Patek to his younger brother when he joined the Company.  Not long after he joined, he was appointed to the important position of assistant general manager in the Shenzhen Company.

The transfers of shares in 1997 and appointment of directors in 1998

81.  Mr. Yang-Wahn Hew submitted on behalf of the 1^st respondent that when the petitioners became shareholders in 1997, there was no evidence of any agreement or understanding of all of the shareholders that the petitioners should be appointed directors after they received their shares.  Mr. Ng made a similar submission.  The respondents relied on these matters:

(1)     The petitioners were not appointed directors until June 1998, ten months after they received their shares.  There was no evidence the petitioners had complained of delay in appointing them.  The time gap supported the respondents’ claim that the petitioners were assessed in their performance after they became shareholders for the appointment of directors to be made.

(2)     As the 2^nd petitioner did not give evidence he had similar conversation with the 2^nd respondent notwithstanding he was approached by the 1^st and 3^rd respondents to join the Company, there was no evidence that the 2^nd respondent had shared any alleged understanding that the 2^nd petitioner might have reached with the others.  The same applied to the 1^st petitioner, who gave evidence of his conversations with the 1^st respondent (which were denied by the 1^st respondent); there was no evidence that the 2^nd and 3^rd respondents had shared the alleged understanding between the 1^st petitioner and the 1^st respondent.

(3)     There was no evidence of close ties or social contact between the 1^st petitioner and other shareholders, apart from the 1^st respondent, before or after he joined the Company.  There was likewise no evidence of any close ties or social contact between the 2^nd petitioner and the 1^st to 3^rd respondents, although he was known to them for a long time.  So there never existed the degree of trust and confidence among the five shareholders in 1997, which might have existed among the founder members in the early days.  Whatever expectations there might have been in the beginning had changed over time, and any relationship of quasi-partnership or of mutual trust and confidence had ended in 1997.

(4)     The petitioners did not pay for their shares or make any financial contribution to the Company or the Shenzhen Company.

82.  It is a fact that in 1997 the second generation took over more of the responsibilities of the elder generation.  In that year, the 2^nd respondent transferred more of his shares to his son the 3^rd respondent.  The 1^st respondent had allowed his nephew the 1^st petitioner to carry out his management duties in his place after he emigrated in 1993 and transferred some of his shares to the 1^st petitioner, to increase the latter’s power in the Company.  As mentioned earlier, the 2^nd petitioner had joined the Company in 1996 to take up the former responsibilities of his late father and he subsequently inherited his father’s shares.  This would seem to accord with the letter of the 1^st respondent to the petitioners dated 25 May 2004 in which he described how the operation of the business was passed to the second generation in 1997.

83.  By 1997, the 1^st petitioner had been with the Company for nine years and was familiar with the business of the Company.  As for the 2^nd petitioner, his working ability was known to the 1^st respondent from the days when he managed Patek and he had integrated well into the Company.

84.  The 1^st respondent said he was satisfied with the 1^st petitioner’s performance when he decided to give some shares to the 1^st petitioner and had discussed this with the 2^nd respondent, leaving it to the 2^nd respondent to discuss with the 3^rd respondent.  In his first affirmation he said he believed in the 1^st petitioner’s abilities and it was his desire and wish to promote his nephew as a director.  He also said he had “actively campaigned, recommended and supported” the 1^st petitioner for this position.

85.  I do not think it mattered that there was not the same degree of friendship or trust among the five shareholders in 1997 as compared to the situation in 1971.  The fact remains that the shareholders came from a very small circle, those who took transfers of shares in 1997 were the sons and nephew of the three founder members, and had the confidence of one or more of the existing shareholders before they were permitted to take up shares in the Company.  It was immaterial that the petitioners did not make any financial contribution when they joined as shareholders.  Nor did it matter that each petitioner did not have discussion with each of the shareholders before they received their shares.  What mattered was that the petitioners did speak to some of the respondents, and had acquired the understanding that as shareholders, they would take part in the management, as I have found earlier.  When the existing shareholders and directors approved the transfers of shares to the petitioners, there was nothing to suggest that they had departed from this basic understanding which had existed since the Company was formed.  The 3^rd respondent accepted that the petitioners would be entitled to manage the Company so long as they did not breach the trust and confidence of the other directors.

86.  The 3^rd respondent alleged in his second affirmation that on 1 June 1998 a board meeting was held during which the 1^st respondent made the recommendation to appoint the 1^st petitioner as a director and the board had assessed his performance and found it satisfactory.  No minutes of any such board meeting allegedly held on 1 June 1998 were exhibited.  No explanation was given by the respondents for this omission.

87.  I reject the assertion that after the petitioners became shareholders, their performance was assessed before they were appointed directors.  The 3^rd respondent’s evidence on this was unconvincing and contradictory.  At one point, he said he did not trust the 1^st petitioner, and had voiced his mistrust to his father when shares were transferred to the 1^st petitioner.  In another place, he claimed that even though the 1^st petitioner had the 1^st respondent’s backing and recommendation, the 1^st petitioner still had to be assessed and judged by the other directors and he was found to have achieved satisfactory performance when the board of directors decided to make him a director in 1998.  He was unable to say specifically what he learned about the 1^st petitioner during the ten-month period that he did not know before.

88.  The petitioners claimed that the delay in appointing them as directors was due to the inefficient handling by the company secretary Madam Kwok Yuen Yee who had failed to prepare the relevant documents and that they had acted as de facto directors of the Company and managed the business jointly with the 1^st to 3^rd respondents shortly after they took the transfer of their shares.  I am inclined to accept the petitioners’ evidence.  I note that the documents for registration in the Companies Registry to effect the change of company secretary and the appointment of the petitioners as additional directors were dated the same day and took effect on the same day.  The ten-month gap did not in any way weaken the petitioners’ case.  I find that once the petitioners were accepted as shareholders, it was a matter of course they would be made directors.

The events from 1998 to 2004

89.  Since 1999, the 2^nd respondent reduced his involvement in the Company due to old age and ill health.  After the petitioners were appointed directors in 1998, things went on quite well until 2000 when the 1^st respondent returned to Hong Kong and had disagreements with the 1^st petitioner.  He was then the most senior and the last of the active founding members.  I do not believe he never felt the 1^st petitioner had behaved towards him in an ungrateful manner.  The most important event in the disagreement was the notice issued on 20 August 2002 to replace the 1^st petitioner by the 3^rd respondent as the general manager of the Shenzhen Company, and the 1^st petitioner reacted to this strongly within a few days with a declaration issued by his lawyers.

90.  The 1^st respondent alleged that the 1^st petitioner had made some mistakes when the notice was issued in August 2002 to replace him as general manager.  He accepted that at the time, the 1^st petitioner had made no serious mistakes.  There was no contemporaneous document in support of any allegation of misconduct of the 1^st petitioner.  There was also no complaint at that time that the 1^st petitioner was running the Shenzhen Company as if he owned it to the exclusion of others.  Nor was any complaint raised by the 3^rd respondent of any mistakes of the 1^st petitioner in managing that company at the meeting on 12 November 2002, as recorded in the minutes, which the 3^rd respondent accepted to be an accurate record of the meeting.  I find that the 1^st petitioner had not done anything wrong to deserve his displacement by the 3^rd respondent in the notice in August 2002.

91.  The 4^th respondent became a shareholder on 21 June 2004 when the 2^nd respondent transferred 15 of his shares to him and was appointed a director five days later.  The respondents sought to make some mileage out of this and contended that the petitioners could not have reached an agreement or understanding with all the shareholders on joint management as the petitioners had little contact with the 4^th respondent and that the 4^th respondent was assessed in his performance before he was made a director.  I cannot see how any matter relating to the 4^th respondent would affect the petitioners’ case.  The 4^th respondent only became a shareholder after there was serious deterioration, if not a breakdown, in the relationship of the petitioners with the other shareholders.  The circumstances in which the 4^th respondent joined the Company were immaterial.  Nor do I accept the evidence there was any or any proper assessment of the 4^th respondent’s performance before he was appointed a director.

Was there an agreement or understanding as alleged

92.  I find that there was an understanding among the founder members in 1971 that the shareholders were entitled to participate in the management of the Company.  This basic understanding was not departed from when subsequent shareholders were admitted in 1978 and 1997, as reflected in the words and conduct of the shareholders.  All of them eventually became directors of the Company.  Other than the subscribers, the other three were appointed directors not long after they became shareholders.

The exclusion from management

93.  Notwithstanding the minutes of annual general meetings showing that all the directors had retired at the end of the year, they had offered themselves for re-election and were invariably re-elected, until 2003 and 2004 when the 1^st and 2^nd petitioners were not re-elected at the annual general meetings.  Even in the case of Kwong Chok Sam who had retired for health reasons in 1990, he remained a director until he passed away three years later.  That was also the case of the 2^nd respondent.

94.  I accept the 1^st respondent’s evidence that the 2^nd petitioner had abstained from voting on the resolution not to re-elect the 1^st petitioner as a director at the annual general meeting on 20 September 2003.  I reject the 3^rd respondent’s evidence to the contrary.  He did not even have a clear recollection of what actually happened notwithstanding he chaired the meeting.

95.  The 1^st respondent admitted frankly there was no discussion at that meeting whether the 1^st petitioner should be re-elected.  Further, he had no discussion of this matter with the other respondents before the meeting (the 3^rd respondent also gave contrary evidence here, he said there was prior discussion between the 1^st and 2^nd respondents).  The 1^st respondent acknowledged it was the first time in the history of the Company that a director was not re-elected.

96.  I find there was no justification for not re-electing the 1^st petitioner as a director in September 2003.  None were put forward at the time to justify this course of action.  I have already found he had committed no serious misconduct to warrant his displacement by the 3^rd respondent as general manager in August 2002.  Nor was any justification advanced for this major complaint of exclusion from management in the petition in two rounds of affirmations filed by the respondents, other than an assertion there was no entitlement of any shareholder to remain as a director.  Some specific allegations of mismanagement were made against the 1^st petitioner only in the last paragraph in the 3^rd respondent’s last affirmation filed less than a week before trial, after the petitioners had filed their last affirmations.  The 1^st petitioner was said to have committed “many misdeeds” in his management of the Shenzhen Company, which was the reason why the directors resolved to change the management structure of the Shenzhen Company in August 2002 and later dismissed him as a director and general manager of that company.  These alleged misdeeds were largely unparticularised and unsupported by contemporaneous documents and were only explored with the petitioners in cross-examination.  I will deal with the allegation of overstocking in a subsequent part of this judgment.

97.  No justification was put forward by the respondents to exclude the 2^nd petitioner from management and there could be none.

98.  I find that the complaint of unjustifiable exclusion from management was made out.  I turn to consider the other allegation of unfairly prejudicial conduct, being the notices issued to suppliers.

The notices issued to suppliers in 2003

99.  According to the 1^st petitioner, other than the two suppliers who were sent the notices in January and December 2003, he had seen notices to like effect sent to other suppliers of the Company and the Shenzhen Company.  His evidence in this respect was not challenged.  He claimed that the notice in January 2003 had caused some suppliers to wonder about his position in the Company, as he was not among the directors who authorised the notice.  After the notices were issued, some suppliers began to chase him for payment and some required payment in cash before they would supply.  People in the trade told him they learned of the dispute among the directors from the notice and this had affected their confidence in the Company and its products.  He claimed that sales had gone down as a result.

100.  Although the 2^nd petitioner had agreed to issue the notice in January 2003, he said he did so because he did not have courage to refuse the proposal of the other directors.  He had reservation as to the timing of the notice (it was approaching Chinese New Year) and whether it was necessary to do so.  He was worried that the notice might cause confusion among the suppliers as it stated there were some problems between the directors of the Company that had yet to be resolved.

101.  The 2^nd petitioner did not agree to issue the second notice in December 2003 and had no part in it.  He explained that word would spread quickly among people in the industry as it is not a big one, and damage would be done to the Company.  He maintained that in December 2003, the Shenzhen Company should continue to obtain supplies for production, notwithstanding that at the annual general meeting of the Company on 20 September 2003, he had agreed to a resolution to cease business of the Shenzhen Company and proceed with “account clearance”.  He explained that for the cessation of business and account clearance, it must be done in accordance with the laws in the Mainland and the articles of association of the Shenzhen Company.  It was provided in article 60 of the articles of association that the duration of the operation of the Shenzhen Company was for ten years commencing on the date the business licence of the company was issued.  According to article 63, early termination of the operation of the company would need to be reported to the original approving authority for approval.  When the notice was issued to suppliers in December 2003, no approval had yet been obtained from the relevant authority.

102.  I find it likely that these notices to suppliers would adversely affect the interests of the Company and the Shenzhen Company.  Business might be jeopardised if suppliers should perceive that there were unresolved problems among the directors leading to instability in the management level, or that the businesses were about to be closed down.  Unless there was proper justification for issuing them, these notices were acts unfairly prejudicial to the shareholders including the petitioners.

103.  The respondents claimed that the 1^st petitioner had placed orders with suppliers without regard to market demand.  This caused substantial overstocking of “finished machineries” and the Company had suffered from liquidity problems with substantial overdrafts from the banks.  That was the reason for the notice in January 2003.

104.  Other than the management accounts of the Shenzhen Company, there was no contemporaneous document regarding the complaint of overstocking.  As mentioned earlier, it was first raised in writing in the affirmation of the 3^rd respondent filed a week before trial.

105.  The 1^st petitioner was cross-examined on overstocking with reference to the financial statements of the Shenzhen Company and another licensed factory known as Song Gang Hang Sang Machinery Factory also operated by the Company between 1991 and 2003.  He explained that the figure for the year-end stock in 2000 was the accumulated stock carried over from previous years from 1991 to 2000 when no accounts were prepared for this.  Further, stock recorded in the accounts included finished products, semi-finished products, materials and parts.  Although just by looking at the figures for stock in the accounts the figures might appear to be high, the figure for 2000 was arrived at as the cumulative figure over the years.  The stock accumulated included raw materials and parts which could not be used on new machines and had only limited use for the repair and maintenance of old machinery.  He claimed that the high figures for stock were due to this historical reason, he had tried to keep down the level of stock but was not successful as some of the raw materials and parts could not be disposed of.  It was unreasonable for the respondents to attribute the entire problem of overstocking to him.

106.  The 2^nd petitioner accepted that one of the reasons for issuing the notice in January 2003 was because the other directors felt that the 1^st petitioner was running the Shenzhen Company without regard to their views.  He was not sure if overstocking was another reason for the notice.  He agreed with the 1^st petitioner that the complaint of overstocking should be considered in the light of problems in the past.

107.  The 1^st respondent acknowledged that if the 1^st petitioner had talked to him instead of choosing not to attend board meetings in 2002 and 2003, there was a possibility that the notices to suppliers in 2003 could have been avoided.

108.  I am entitled to look at the matter objectively to ascertain if the management decision to issue the notice in January 2003 was to counteract the problem of overstocking as asserted by the 3^rd respondent.  Its timing was awkward, as pointed out by the 2^nd petitioner.  Both the 2^nd petitioner, and to a lesser extent, the 1^st respondent, had doubts whether it was really necessary.  I do not think the 1^st petitioner’s explanation on the problem of overstocking was unreasonable.  I am inclined to agree with Mr. Chan that the notice was really to show the 1^st petitioner who was in control of the business. 

109.  The notice issued in December 2003 would probably have caused even greater damage.  I accept the 2^nd petitioner’s evidence that even though there was a resolution to proceed to “account clearance” of the Shenzhen Company, it was inadvisable to terminate its business without the approval of the relevant authority in compliance with the Mainland laws and the articles of association.  Further, the notice stated that the board of directors/the shareholders had decided to proceed with the termination/liquidation of all businesses in Hong Kong as well.  There was in fact no general meeting or board meeting to discuss and resolve upon winding up the Company.

110.  The 3^rd respondent said in his evidence in chief for the first time (after the 1^st respondent was cross-examined about the statement in the notice to terminate or liquidate the business in Hong Kong) that there were two errors in the notice issued in December 2003.  Firstly, the Chinese characters meaning liquidation (清盤) were wrongly used; the correct characters should be “account clearance” (清算), meaning the procedure for the termination of business in the Mainland.  Secondly, the characters for “Hong Kong and” should not be there at all.  He said there was no intention to terminate the business in Hong Kong or put the Company into liquidation.  He claimed these were typing errors by clerical staff and he failed to spot the errors notwithstanding he had read the notice before it was issued.

111.  I reject the 3^rd respondent’s evidence of clerical errors.  This seems to me to be an afterthought.  He was not the person who gave instructions to the clerical staff to type the notice.  The 1^st respondent did not say there was any error when he was pressed for an explanation regarding that statement in the notice.  The 3^rd respondent did not mention any error in the notice in his latest affirmation, even though he dealt with the notices specifically and mentioned that the language used in the notices was “not so clear” to evidence his alleged intention in issuing them.

112.  I am satisfied that the complaint of unfairly prejudicial conduct was made out in respect of the notices issued to suppliers in 2003.

If the petitioners had destroyed mutual trust and confidence

113.  It was not in dispute that the financial documents of the Shenzhen Company and its chops were kept in that company and that the petitioners did not deliver up the documents and chops despite the requests to them by letters dated 1 and 6 December 2004.  As for the chop of the legal representative, the 1^st petitioner claimed that it was kept in the Shenzhen Company at one time but the staff could not find it.  It was after the commencement of the trial that the 1^st petitioner eventually instructed the staff to deliver the financial documents and the chops to the respondents in Hong Kong.  The 3^rd respondent did not accept he had received all the chops and books of account of the Shenzhen Company.

114.  There was an incident on 11 October 2003 when the 1^st and 3^rd respondents went to the Shenzhen Company with a representative of their Hong Kong solicitors and a Mainland lawyer.  The respondents were not refused entry but their legal representatives were.

115.  As mentioned earlier, the petitioners had continued to run the business of the Shenzhen Company after they were removed from their positions.  They operated the business without a bank account after the respondents changed the bank mandate of this company in early 2005.

116.  The petitioners had brought civil proceedings against the 3^rd respondent and the Company in 2002 and 2005.  I do not accept these were malicious lawsuits merely because one action was withdrawn and another was dismissed.

117.  I reject the respondents’ submission that it was the above acts of the petitioners that had destroyed mutual trust and confidence.  None of these acts of the petitioners were causative of the breakdown in trust and confidence.  These acts took place after there was already serious deterioration in the relationship of the shareholders.  The recalcitrance of the petitioners in holding on to their control over the Shenzhen Company was in reaction to their wrongful exclusion from management.

The relief

118.  All parties have asked the court not to make a winding-up order in case the petitioners should establish their complaints of unfair prejudice.

119.  Mr. Hew submitted that an appropriate order is for the petitioners to purchase the 70% shares held by the other shareholders.  He contended that whether the petitioners would have the financial resources to pay should become apparent only after a valuation of the shares has been made.

120.  I cannot see how that could be the right approach.  The parties were engaged in protracted negotiations in a buy-out of the shares of the majority by the minority since 2004.  There was no major disagreement on the value to be paid.  The petitioners are unable to pay the consideration within a relatively short period.  The parties failed to reach agreement on the time for instalment payments, and on what security or guarantee should be furnished by the petitioners for their obligation to pay.  I was not given to understand that the financial position of the petitioners has changed.  It would be pointless to make an order for the petitioners to buy out the majority.

121.  I understand that the 1^st respondent would not consider buying out the petitioners even though he is financially capable of doing so.  His only reason was because he is too old to run the business on his own.  The 1^st respondent would not be required to run the business on his own, there was no suggestion he could not co-operate with the 3^rd and 4^th respondents.

122.  The 3^rd respondent stood by his evidence in his second affirmation that he is confident when new management is put in place, the Company and the Shenzhen Company would experience further growth in profits.  He said the new management would consist of very qualified professional staff.  He also confirmed that he, the 2^nd respondent’s estate and the 4^th respondent are in a financial position to buy out the minority shareholders.

123.  In these circumstances, I make an order for the 1^st to 4^th respondents to purchase the shares of the petitioners in the Company.  I give leave to the parties to restore the hearing with an estimated length of two hours for consequential directions to be given to facilitate a purchase of the shares.  The parties are to submit draft directions three days before the hearing.

124.  I make an order nisi that the costs of the petitioners in the petition should be borne by the 1^st to 4^th respondents, jointly and severally, to be taxed if not agreed.