LU JUN v. YU QI AND OTHERS

CACV 37/2013 &
CACV 76/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NOS. 37 AND 76 OF 2013

(on appeal from HCCW NO.282 of 2010 )

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JUDGMENT

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Hon Yuen JA (giving the Judgment of the Court):

CACV37/2013

1.  CACV37/2013 is an appeal from a judgment of Recorder Patrick Fung SC given on 31 January 2013 ordering the 1^st Respondent Yu Qi (“Madam Yu”) and the 3^rd Respondent Potala Management Ltd (“Potala”) to purchase the 15 shares of the Petitioner Lu Jun (“Mr Lu”) in the 4^th Respondent Astrotec Co Ltd (“the Company”) pursuant to Mr Lu’s application under s.168A Companies Ordinance, Cap. 32. 

CACV 76/2013

2.  On 21 March 2013 the learned recorder gave directions for the valuation of the said shares on the basis that the valuation is to be

(1) by reference to the assets, profitability and future prospects of the Company as at the date of the Petition,

(2) without discount for the fact that Mr Lu’s shareholding was a minority shareholding, and

(3) on the footing that

(a) none of the complaints advanced by Madam Yu in relation to Mr Lu’s alleged wrongdoing had been made out;

(b) Madam Yu had unfairly prejudiced Mr Lu as found in the recorder’s judgment; and

(c) the purported sale of the Company’s subsidiary Shanghai Hanglong had not occurred.

3.  On the same day, the recorder varied the costs order nisi that he had made on 31 January 2013 to an order absolute that Madam Yu and Potala should pay Mr Lu’s costs on an indemnity basis.  

4.  CACV 76/2013 is the appeal by Madam Yu and Potala against the valuation directions and the variation of the costs order nisi.

Background

5.  The material facts relevant to these appeals may be summarized as follows.

Baslow Agreement

6.  Baslow was a BVI company in which Sun Zhongguo (“Mr Sun”) had 60% of the shares, one Trevor Strutt 25% and Madam Yu 15%.  It possessed know-how in the supply and processing of gases, and was interested in finding joint venture partners in the PRC. 

7.  In due course, through Mr Lu’s introduction, 湖南郴電國際發展股份有限公司 (Hunan Chendian International Development Share Co Ltd hereinafter referred to as “HC”) became interested in entering into joint ventures with Baslow. 

8.  Baslow agreed that Mr Lu’s company Shanghai Junrui Investment Management Co Ltd (“JR”) would receive 5% of the shares of each joint venture company to be formed between Baslow and HC, such shares to be paid for by Baslow.  This agreement, signed on 10 September 2004, has been referred to as “the Baslow Agreement”. 

Replacement of Baslow by the Company

9.  About a month after the Baslow Agreement was signed, it was replaced by an agreement to like effect, but with the Baslow role taken over by the Company, a Hong Kong company incorporated just 2 months before, and the JR role taken over by Brighton Kin International Ltd (“BK”), a Hong Kong company controlled by Mr Lu.

Company’s formation of joint ventures with HC

10.  Shortly after the Baslow Agreement was signed, on 8 October 2004 the Company and HC’s subsidiary 湖南匯銀國際投資公司 (Hunan Huiyin hereinafter referred to as “HH”) entered into a framework agreement with the intention of forming 3 joint ventures (“JV”). 

The Changzhou JV and the Tangshan JV

11.  In due course, on 12 October 2004 and 12 September 2005 respectively, the Changzhou JV and the Tangshan JV were formed.  In both, HH had the majority holding, the Company held 39.5% and Mr Lu’s company BK held 5% of the shares. These joint ventures turned out to be profitable enterprises.  

12.  We would pause here to mention, for the sake of completeness, that the 3^rd JV mentioned in the framework agreement – one proposed for Hefei – did not materialize.

The Xinyu JV

13.  Subsequently however the Company formed a subsidiary called Xinyu Bulk Gases Co Ltd (“Xinyu”). On 31 December 2008, Xinyu became a JV between the Company and another subsidiary of HC, called 上海郴電裕旺投資有限公司 (Shanghai Chendian Yuwang Investment Co Ltd hereinafter referred to as “CY”).

14.  However unlike the Changzhou and Tangshan joint ventures, this time the majority shareholder was the Company which held 60% of the shares, with CY holding 40%.

15.  Also, unlike the Changzhou and Tangshan joint ventures, BK did not obtain any shares in this JV.  However Mr Lu had an indirect interest through another company he controlled, viz 上海童旺投資有限公司 (Shanghai Tongwang Investment Co Ltd hereinafter referred to as “TW”).  TW held 17.5% of the shares of CY, i.e. indirectly a 7% shareholding in the Xinyu JV.  Madam Yu denied knowledge of this but this issue is no longer material.

Shareholder loans to Company for its contributions to Changzhou and Tangshan JVs

16.  The Company’s contributions to the Changzhou and Tangshan joint ventures were financed by loans to the Company made by Madam Yu and her associates.  The loans made in the name of Madam Yu herself were evidenced in two documents written in Chinese (which were called “the Loan Agreements”).   

17.  In the first one, dated 15 October 2004, it was stated that Madam Yu was providing a loan to the Company of USD2,607,000 (comprising cash of USD1,287,000 and know-how valued at USD1,320,000) for the Changzhou JV.

18.  It was stipulated to be 長期無息貸款 (a long-term, non-interest bearing loan) and that the Company should repay the loan once it received dividends from the JV.

19.  However it also stated that the lender could, without the consent of the borrower, assign the loan to a third party and vary the terms of interest.

20.  The second document was dated 15 September 2005 and was on identical terms, save that the loan was of USD2,172,500 (comprising cash of USD1,072,000 and know-how valued at USD1,100,000) for the Tangshan JV.

21.  We will return to the terms of these loans later in this judgment.

Mr Lu’s interest in the Company

22.  As noted earlier, under the Baslow Agreement (and the agreement which replaced it) Mr Lu was entitled to minority interests in the Changzhou and Tangshan joint ventures, which he duly received through his company BK.  However it was his case (which the recorder accepted) that in 2005, at Mr Sun’s invitation he started to assist in the management of the Company, which provided consultancy services to the JVs, and Mr Sun invited him to acquire an interest in the Company itself. 

23.  The recorder found that in July 2005, Mr Lu started paying the first instalment of a total sum of RMB3,645,000 for 15 shares (equivalent to 15%) of the Company.  It is common ground that the recipient of these sums was Mr Sun. 

24.  Mr Lu believed that he was paying for shares owned by Mr Sun beneficially.  In due course, he was transferred 15 shares, the transferor being Madam Yu’s father. 

25.  Mr Lu’s evidence (which the recorder accepted) was that he had an understanding with Mr Sun that he would manage and operate the joint ventures, while Mr Sun turned his attention to other projects.  Mr Sun did not give evidence at the trial.

26.  Further, in the Amended Petition (which Mr Lu verified on affirmation) he stated “by agreement with [Madam Yu] he [Mr Lu] became the person primarily responsible for the management of the affairs of the Company”.  We shall return to this piece of evidence later in this judgment.

27.  Madam Yu’s case was as follows:

(1) the 15 shares transferred to Mr Lu belonged to her beneficially throughout, and she had only caused her father to transfer them to Mr Lu’s name under an arrangement to provide an “incentive” to him (Mr Lu);

(2) a total sum of RMB3,645,000 was paid by Mr Lu because she required him to provide an “assurance” (or security) that he would perform his duties to the Company.  The payments were made to Mr Sun and not herself because she happened to owe Mr Sun some money;

(3) the total sum of RMB3,645,000 represented 15% of the Company’s cash injections into the Changzhou and Tangshan joint ventures, which she had loaned the Company.

28.  The recorder found that there was an understanding between Mr Lu, Mr Sun and Madam Yu that he (Mr Lu) would manage the Company to provide consultancy services for the operation of the joint ventures, and that the 15 shares were Mr Lu’s which he held beneficially.

Nominee Services Indemnity Agreement

29.  After Mr Lu acquired his 15 shares in the Company, he and Madam Yu appointed a service company in Hong Kong, FCP Intersect Services Ltd (“FCPISL”) to provide them with company services.  To this end they both signed a document called a Nominee Services Indemnity Agreement (“NSIA”).  FCPISL would provide a registered office, and render services as company secretary, sole corporate director and corporate shareholder for both the 85 shares held by Madam Yu as well as the 15 shares held by Mr Lu.

30.  One term of the NSIA features significantly in this appeal.  A clause in the Recital provided:

“the Principals [viz Madam Yu and Mr Lu] have requested FCPISL, its associated organizations and any Nominee to act upon the instructions of the person or persons whose name(s) and specimen signature(s) appear(s) in the Second Schedule (“the Authorized Persons”) on the basis set out therein”.

31.  The Second Schedule named Madam Yu and Mr Lu as the authorised persons.  Then under “Special Instructions (eg Single or Joint Instructors, Prevalent Instructor in conflict situations, etc)”, there were the following instructions:

“1. Instructions may be joint or several.

2. In the event of conflicting instructions, the instruction of Yu Qi shall prevail”.

32.  One of the main arguments put forward on behalf of Madam Yu on appeal is that the 2^nd paragraph showed that the understanding between the parties was that Mr Lu had no entrenched right “to manage or to have any say in the Company” (Skeleton Arguments of 1^st and 3^rd Respondents/Appellants, para. 8). 

33.  We will come back to this argument later in this judgment but it is important to note that it is not Madam Yu’s argument that the NSIA itself bound Mr Lu as a matter of law to accept whatever Madam Yu chose to do; the argument is only that the NSIA was evidence of the parties’ understanding that Mr Lu had no right “to manage or have any say in” the Company. 

Mr Lu’s management of the Company

34.  Mr Lu says that he established a comprehensive system of management of the Company which included support, communication and monitoring systems in relation to the Changzhou, Tangshan and subsequently, Xinyu JVs.  

35.  Madam Yu accepted that as the Company was responsible for the operation of the joint ventures, it was necessary for the Company to monitor them and as she was not keen to move and travel extensively at the time, Mr Lu was responsible for supervising the Company’s staff in managing the joint ventures.

36.  In February 2007 Mr Lu was appointed the Company’s representative on the Changzhou and Tangshan joint ventures’ boards. 

Shanghai Hanglong

37.  A few months later, on 23 May 2007 Shanghai Hanglong was incorporated in the PRC.  It was a wholly owned subsidiary of the Company and its business was providing assistance to the Company as well as technical consultancy services to the joint ventures in return for fees from the JVs.

38.  A chart showing the corporate structure of the Company before the events in issue, which was Appendix 1 to the learned recorder’s judgment, is appended to this judgment for ease of reference.  

Events in 2010

39.  In March - April 2010, Madam Yu suggested to Mr Lu that he sell his shares in the Company to a company called Yingde which was associated with Mr Sun.  Whilst Mr Lu was open to selling his shares, no agreement was reached on the price.  Within a few weeks, the following occurred.  

-      Assignment of loans

40.  On 1 April 2010, Madam Yu and her associates assigned loans they had made to the Company (totaling $111m) to Potala, which she controlled.  Subsequently Potala proposed a variation of the terms of the loans, demanding interest at 8% and threatening to call in the loans immediately unless the Company agreed to pay interest at that rate (which it did on 25 June 2010).

-     Sale of Shanghai Hanglong

41.  Madam Yu also caused the Company to enter into an agreement dated 9 May 2010 to sell its subsidiary Shanghai Hanglong to a company called First Master Investments Ltd (“First Master”), a Hong Kong company also controlled by Madam Yu, for RMB4.5m. Under the terms of the agreement however, payment was deferred for a year after completion.  Nevertheless on 20 June 2010 the Company appointed Shanghai Hanglong its consultant and even paid an increased fee to it. 

-     Removal of Mr Lu from management

42.  Then on 25 May 2010, persons acting for Madam Yu raided Mr Lu’s office in Shanghai and took away documents and chops.  It is common ground that on the following day Mr Lu was removed from the management of the Company.   

-     Rights issue

43.  Then on 7 June 2010, the Company issued a notice calling an EGM to be held on 24 June 2010 to increase the authorized share capital of the Company from $10,000 to $132m by the creation of 131,990,000 new shares at $1 each.  This meant that if Mr Lu were to maintain his 15% in the Company, he would have to come up with $19.798m within 17 days.

-     Directors’ fees

44.  Then on 17 June 2010 the sole directorship of the Company was transferred from the corporate director operated by FCPISL to a BVI company called Exceedor China Services Ltd (“Exceedor”), another company controlled by Madam Yu.  The Company subsequently agreed that directors’ fees of $600,000 pa would be paid to Exceedor.  This was well in excess of the sum previously paid to the corporate director operated by FCPISL.   

45.  Pausing here, it would be noted that all the events above - out of the ordinary events in the history of the Company - occurred one after another within the space of 2 months in the course of Madam Yu’s unsuccessful approach to Mr Lu to sell his shares to Yingde.  

Mr Lu’s response

46.  Mr Lu consulted lawyers who objected to Madam Yu’s acts on his behalf. 

47.  As a result of those objections, on 19 June 2010 a notice was given to Mr Lu for an EGM to increase the authorized share capital of the Company to a reduced sum of $20m.  This meant that if Mr Lu were to maintain his 15% in the Company, he would have to come up with $2.998m.  However Mr Lu’s evidence was that “even if [he] can arrange for the funds within the short period of time, [he] will then be left with no further available funding” (para. 48, affirmation 30 June 2010).  This evidence was not challenged.      

48.  Moreover (as mentioned above) 2 days later, on 21 June 2010 Madam Yu informed Mr Lu that Potala had threatened to call in all loans assigned to it (totaling $111,680,213.38) in 4 days time unless the Company agreed to its demand to pay interest at 8% pa which it did on 25 June 2010.

Petition

49.  On 30 June 2010 Mr Lu presented a petition to wind up the Company on the just and equitable ground, with an alternative claim for a “buy-out” under s.168A.

50.  He also sought an injunction to restrain the holding of the EGM to increase the share capital, which was granted by Chu J (as she then was) on 2 July 2010.

Payment to Shanghai Hanglong of dividend payable to the Company

51.  As mentioned above, Shanghai Hanglong was sold by the Company to First Master under an agreement dated 9 May 2010.  Thereafter it was no longer a subsidiary of the Company. 

52.  However on 16 February 2011 Madam Yu instructed the Changzhou JV to pay the dividend payable to the Company to Shanghai Hanglong.  This sum of RMB15m was received by Shanghai Hanglong on 24 February 2011 and was immediately withdrawn the next day.

53.  When Mr Lu’s solicitors wrote to Madam Yu’s solicitors enquiring about the payment of dividend from the Changzhou JV, the reply received on 11 March 2011 was that the dividend had been declared but had not yet been paid to the Company.

54.  However a week later, on 18 March 2011 Shanghai Hanglong paid RMB15m back to the Changzhou JV.

Hearing

55.  By the time of the hearing before the learned recorder, the issues were essentially:

- who owned the 15% shares in the Company registered in Mr Lu’s name?

- did Xinyu belong to Madam Yu only or did the Company own shares in it?

- were the Company’s affairs being conducted in a manner unfairly prejudicial to Mr Lu, by reason of 

- Mr Lu’s exclusion from management of the Company

- Madam Yu’s attempts to dilute Mr Lu’s shareholding

- the Company’s sale of Shanghai Hanglong to First Master

- the payment of the Changzhou JV dividend to Shanghai Hanglong. 

Judgment

56.  After a 7-day trial at which viva voce evidence was given by Mr Lu and Madam Yu, the learned recorder held that Mr Lu was the beneficial owner of the 15% shares in the Company and that Xinyu did not belong beneficially to Madam Yu only.  These decisions are not challenged on appeal.

Appeal

57.  What is challenged on appeal are the recorder’s findings of unfair prejudice by reason of the 4 matters set out above. In this regard it is common ground that a s.168A order may be made if Mr Lu succeeded in proving any one of the 4 matters.

(1)   Mr Lu’s exclusion from management of the Company

58.  The first question was whether Mr Lu was entitled to participate in management.  The recorder accepted his evidence of his understanding with Mr Sun that he would manage the Company.  Mr Sun was not a witness in the proceedings and the recorder was entitled to disregard a “confirmation letter” from him which was not affirmed on oath.

59.  As for Madam Yu, it was submitted before us on her behalf that any agreement between Mr Lu and Mr Sun with regard to management was not binding on her.  However this was not an issue taken below.  If it had been taken, there may well have been further evidence from Mr Lu.  Accordingly we take the view that this point cannot be taken on appeal.  In any event, the Amended Petition (which Mr Lu verified on affirmation) stated that “by agreement with [Madam Yu] he [Mr Lu] became the person primarily responsible for the management of the affairs of the Company”.  Therefore there was evidence of the understanding with Madam Yu as well.  She now complains that that was a “bare assertion” but she did not make this a live issue before the recorder. 

60.  Further Madam Yu herself acknowledged that as she was not keen to move and travel extensively at the time, Mr Lu in factsupervised the Company’s staff in managing the joint ventures.  Her case was only that he was doing so as her employee, an issue which she has not re-opened on appeal.   

- Instructions to service company

61.  However what was advanced before this court was that the instructions given by Madam Yu and Mr Lu to the service company in the NSIA – that in the event of conflict her instructions shall prevail – showed there was “no entrenched right on the part of [Mr Lu] to manage or to have any say in the Company”.

62.  As noted earlier, it is not Madam Yu’s argument that the NSIA bound Mr Lu as a matter of law to accept whatever Madam Yu chose to do; the argument is only that the NSIA was evidence of the parties’ understanding that Mr Lu had no right to manage or to have any say in the Company.  As such, those instructions were one piece of evidence which the recorder could take into account when considering the issue whether Mr Lu was entitled to participate in management and it was for the recorder to decide what weight to give to this particular piece of evidence. 

63.  Further it is notable that instructions under the NSIA could be joint or several - indicating that Mr Lu could give instructions to the corporate director on his own. 

64.  As for the point on prevalent instructions in the event of conflict, the service company was representing the interests of both shareholders, so a conflict of interests was obviously a possibility, for which those instructions presented a practical solution for the service company.  Since generally a majority shareholder can outvote a minority shareholder, the instructions could hardly be said to be exceptional.  As Madam Yu said, it gave her the “last say” (2^nd affirmation, para. 15).  But, given Mr Lu’s oral evidence which the recorder accepted, the instructions did not compel the court to hold that Mr Lu had “no say” in the management of the Company.

65.  Moreover the reality of the situation was that the business of the Company was the operation of the JVs and Mr Lu was a director of the JV companies.  It was not therefore surprising that the sole corporate director of the Company was a service company as the management of the Company was effectively done by Mr Lu at the lower, JV level.     

- Payment of RMB3.051m to JR

66.  The second question in this aspect is Madam Yu’s argument that she was entitled to exclude Mr Lu from management because of his “embezzlement” of a sum of RMB3.051m.     

67.  This was a dividend payable by Xinyu to the Company.  Mr Lu accepted that the sum went from Xinyu to his company JR’s account in February 2008, but his evidence was that Madam Yu told him he could keep it there as an advance payment of dividends, wages or bonus, subject to the Company calling for the money back if it needed it.  

68.  The recorder found Mr Lu a credible witness and that he was unshaken in cross-examination (judgment para. 115).  Further the recorder took into account the fact that the sum was transferred from Xinyu to JR more than 2 years before Mr Lu’s exclusion from management.  Throughout that time Madam Yu had full access to the accounts of both the JV companies as well as the Company, and the recorder held that she “was very much involved in the accounts of the Company” (judgment para. 116). The instruction from the Company to Xinyu to pay the sum to JR (which was to receive the sum “on its behalf”) was documented and the bank documents from Xinyu showing payment to JR were produced by Madam Yu.  Given that this was a payment of dividend and that it was not a small sum, the recorder was entitled to find that Madam Yu must have known about the payment to JR but had been content with it, which is consistent with Mr Lu’s evidence.      

69.  As for Madam Yu’s fallback argument that she would have been entitled to remove Mr Lu from the management on “suspicion” of embezzlement only, this was not a point taken below and it is one on which relevant evidence may well have been called. Accordingly it is not a point which is open to Madam Yu now.

(2) Madam Yu’s attempts to dilute Mr Lu’s shareholding

70.  A theme running through the submissions made on behalf of Madam Yu was that she had made substantial loans to the Company and she was entitled to call them in.  If the Company had insufficient cash, then it could raise it by way of an increase in capital. 

71.  By itself, there is nothing wrong with that statement, but the court must carefully examine all the circumstances of each case to see whether or not what Madam Yu was doing really was attempting to dilute Mr Lu’s shareholding as conduct unfairly prejudicial to Mr Lu’s interests as a shareholder.

72.  It was held in the judgment of this court (Rogers VP, Stock and Le Pichon JJA) in Ng Yat Chi v Max Share Ltd & Another [2001] 1 HKLRD 561 that the court cannot look simply at one factor, such as the motive of the majority shareholder, or the minority shareholder’s financial ability, but must consider all the circumstances. 

73.  As shown in Max Share, one important factor is whether the company objectively required further funding by way of capital.  Unlike the company in Max Share the Company in these proceedings was in a healthy financial state.  It received regular, substantial dividends from its nearly 40% shareholding in the Changzhou and Tangshan JVs and its 60% shareholding in the Xinyu JV.  Its profit for the year ended 31 March 2010 was more than $80m and its retained profits before taxation for that year amounted to more than $167.5m, a sum in excess of the total loans of $111m.  And yet the course proposed by Madam Yu was an increase in capital, instead of discussing alternatives with Mr Lu, such as getting in the Company’s funds (wherever they were) or obtaining finance from institutions on the strength of the Company’s healthy financial state.

74.  More importantly, the evidence showed that she engineered the Company’s need for funds because of her perceived imbalance of the shareholders’ contributions (as she regarded her financial contributions to be greater than Mr Lu’s management contributions). As noted previously, the Loan Agreements stated that her loans to the Company were long-term, interest-free loans, with the parties’ understanding being that repayment would be made from dividends, which is of course income, not capital (see Mr Lu’s affirmation 30 June 2010, para. 13).  The Company’s understanding with the other creditors was also that their loans would be repaid from dividends or income, an understanding reached by Madam Yu herself with the creditors (as she acknowledged in oral testimony, see Transcript 2, p248-D). It was therefore never the understanding that the loans would be paid from capital.

75.  Even if she was entitled to call in the loans on demand, the question is why she decided to do so at that point in time, just when Mr Lu was being asked to sell his shares in the Company at a price he found unacceptable.

76.  There was no or no satisfactory evidence that Madam Yu (or the other creditors related to her) required funds for a particular investment at that time.  As noted earlier, there was no evidence that she ever approached Mr Lu to raise funds for the Company.  In these circumstances the recorder was entitled to find that her assignment of the loans to Potala, a company she controlled, was a tactic employed to create unexpected cash liabilities for the Company and based on that, to create a need for a rights issue in order to dilute Mr Lu’s shareholding.

77.  The $600,000 pa directors’ fees for Exceedor was also imposed as an unexpected cash liability for the Company.

(3)   The Company’s sale of Shanghai Hanglong to First Master

78.  This was, in our view, the most transparent piece of evidence of unfairly prejudicial conduct.  On 9 May 2010 Madam Yu signed an agreement on behalf of the Company selling Shanghai Hanglong to her company First Master for RMB4.5m with payment deferred for one year.  Quite apart from the evidence of undervalue (there being evidence that the value of this company for the year ended 31 December 2009 was RMB6.9m), the “smoking gun” lies in the fact that Madam Yu deferred First Master’s payment of consideration for one year – right after she had engineered the Company’s need for cash by assigning the loans to Potala the month before, no doubt with the plan (duly executed) of Potala’s imminent demand for repayment of the loans or payment of interest.  

79.  In fact First Master never even paid the consideration when due.  Instead on 31 May 2011 Madam Yu sought a validation order for the Company to buy back Shanghai Hanglong.     

80.  Further, the excuse that the disposal of Shanghai Hanglong was agreed to by Mr Lu was a poor one. What he was recorded as saying on 8 March 2010 was that it would be up to Madam Yu when and how to close the company and to start a new one.  Quite apart from the fact that the recording was made when Madam Yu had not started on her course of actions increasing the Company’s cash liabilities, Mr Lu’s words cannot in any event be construed to mean that he condoned a transaction which was clearly contrary to the Company’s interests. 

81.  It is therefore clear that the disposal of Shanghai Hanglong for a deferred payment was part of Madam Yu’s pincer movement against  the Company – on one side, causing Potala to unexpectedly demand substantial amounts of cash from the Company, and on the other, causing the Company to suffer a reduction in income by the disposal of Shanghai Hanglong.

(4) The payment of the Changzhou JV dividend to Shanghai Hanglong

82.  The reduction of the Company’s income was compounded when Madam Yu caused the Changzhou dividend payable to the Company to be diverted to Shanghai Hanglong (by that time of course, already sold to First Master).                   

83.  The fact that Mr Lu could have easily discovered this diversion of funds (notwithstanding the incorrect information given by Madam Yu’s solicitors) does not detract from its impact on the Company at the time.  Nor is it an excuse that – after complaints from Mr Lu’s solicitors – the payment was subsequently reversed.  The fact that unfairness is subsequently remedied does not cancel out what was unfairly prejudicial conduct.  

84.  In light of the above, the recorder was clearly entitled to find that there was unfairly prejudicial conduct justifying a s.168A application.  As a matter of completeness we would add that even if the payment of the RMB3.051m to JR was questionable, that would at most have justified removing Mr Lu from management while investigations were carried out, but in any event after having seen and heard the witnesses the recorder was not satisfied that Madam Yu had a legitimate complaint.

Order in CACV 37

85.  For the reasons given above we would dismiss the appeal in CACV37 with an order nisi that the Appellants pay the costs of the appeal with certificate for 2 counsel.

Valuation

86.  The issues raised on this appeal are whether the valuation should be:

(1) by reference to the assets, profitability and future prospects of the Company as at the date of the Petition or just the net asset value,

(2) with or without a discount for the fact that Mr Lu’s shareholding was a minority shareholding, and

(3) on the footing that

(a) none of the complaints advanced by Madam Yu in relation to Mr Lu’s alleged wrongdoing had been made out;

(b) Madam Yu had unfairly prejudiced Mr Lu as found in the recorder’s judgment; and

(c) the purported sale of the Company’s subsidiary Shanghai Hanglong had not occurred.

87.  Unfortunately the recorder did not give reasons for his decision so we have had to look at these issues afresh and without the benefit of his thoughts.

88.  First it was submitted on Madam Yu’s behalf that the valuation should simply be on the net assets basis.  No reasons have been given as to why that should be so.  We see no ground for disturbing the recorder’s order that profitability and future prospects should also be taken into account.  It is clear from the evidence that Madam Yu has always intended that the Company should continue to carry on business and the price should therefore be based on the value of the company as a going concern (CVC/Opportunity Equity Partners Ltd and anor v Demarco Almeida [2002] 2 BCLC 108 para. 38).

89.  Secondly, as for the issue over whether there should be a minority shareholding discount, it was argued on Madam Yu’s behalf that although the recorder had found unfair prejudice, it was only in cases of a quasi-partnership that the discount did not apply, relying on the decision of Blackburne J in Irvine and anor v Irvine and anor [2006] 4 All ER 102 which quoted Re Bird Precision Bellows Ltd [1984] Ch 419 and CVC, paras. 39-42.

90.  It seemed to be Madam Yu’s submission that because Mr Lu only held a 15% shareholding, the Company was not run as a quasi-partnership.  We are not persuaded that that is so.  Mr Lu did not acquire his 15% shares purely as an investment.  He acquired the shares on the understanding that he would play an important part in the affairs of the Company and he in fact did so.  The evidence was that until Mr Lu’s exclusion, he was in charge of the Company’s operations and Madam Yu was in charge of financial matters.  Theirs was a relationship in which the parties had a duty of good faith to each other, and in conducting the affairs of the Company in a way unfairly prejudicial to Mr Lu, Madam Yu has breached that obligation.  Mr Lu did not instigate the sale of his shares to Madam Yu and he was prepared to continue to participate in the management of the Company.  It was her conduct in excluding him from management, seeking to dilute his shareholding and managing the Company contrary to its interests (including the sale of Shanghai Hanglong) that drove him to seek a buy-out.  In this situation, normally the shares should be valued without any discount (CVC para. 40).  

91.  Further, the recorder having found that Madam Yu has failed to prove that Mr Lu’s exclusion was justified, it cannot be said that he had brought it upon himself. 

92.  It follows from the matters discussed above that the recorder was right to order that the valuation should be on the footing that

(a) none of the complaints advanced by Madam Yu in relation to Mr Lu’s alleged wrongdoing had been made out;

(b) Madam Yu had unfairly prejudiced Mr Lu as found in the judgment; and

(c) the purported sale of the Company’s subsidiary Shanghai Hanglong had not occurred.

93.  As for Madam Yu’s arguments that the valuation should be on the basis that her loans were to be treated as capital, that would be completely contradictory to the finding that the proposed rights issue was simply a tactic employed to sideline Mr Lu.  If the recorder were to accede to that basis, he would be rewarding Madam Yu for conduct which in his first judgment he had held to be unfairly prejudicial (ie the corollary of the situation in Wong Man Yin v Ricacorp Properties Ltd and others [2003] 3 HKLRD 75).

94.  Lastly, as to the treatment of the RMB3.051m paid to JR, we consider that given the paucity of evidence as to how this sum was treated in the accounts, it would not be safe for this court to make the order sought by Madam Yu and the best course would be to leave this issue to the accountants when they perform the valuation exercise after inspecting the Company’s accounts. For this purpose we think the parties should be given liberty to apply, in the first instance to the recorder or another judge of the court of first instance if the recorder is not available.   

Order in CACV 76

95.  Subject to that direction, we would dismiss the appeal in CACV76 as well with an order nisi that the Appellants pay the costs of the appeal with certificate for 2 counsel.

Costs below

96.  Finally, the order of costs below on an indemnity basis was a matter for the recorder’s discretion. It is well established that an appellate court would not interfere with it unless he had applied wrong principles or unless the decision was “plainly wrong”.  Neither ground has been shown by Madam Yu and accordingly it would not be appropriate to interfere with that order.