LEE KWAN KIT v. LEE SUN LAN TOBACCO CO. AND OTHERS

HCCW 377/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 377 OF 2005

______________________

______________________

______________________

J U D G M E N T

______________________

1.  This petition was presented by Lee Kwan Kit to wind up Lee Sun Lan Tobacco Company Limited (“the Company”) on the just and equitable ground, alternatively for relief under section 168A of the Companies Ordinance, Cap. 32.  The Company is the 1^st respondent, the petitioner, the 2^nd to 5^th respondents are brothers, and the 6^th respondent is their sister.

2.  The petition was presented on 20 May 2005, and it was amended on 16 January 2006.  The 2^nd to 6^th respondents were initially represented by the same firm of solicitors, who ceased to act in about January 2006.

3.  In July 2005, the 2^nd to 6^th respondents filed a notice of intention to oppose the petition.

4.  The main evidence in opposition was the 1^st affirmation of the 2^nd respondent and the 1^st affirmation of the 3^rd respondent, both filed on 29 August 2005.  The 4^th, 5^th and 6^th respondents filed their respective affirmations on 29 August 2005 and on 3 September 2005, each of them confirmed the said affirmations of the 2^nd and 3^rd respondents and sought dismissal of the petition.

5.  On 22 January 2006, 23 January 2006 and 11 February 2006, the 2^nd, 3^rd and 6^th respondents wrote to the petitioner’s solicitors saying that they would agree to wind up the Company and distribute the assets according to the shareholdings and that they are opposed to holding a hearing of the petition.  They also claimed that the petitioner should bear all costs in the proceedings.  However, they made no mention of the evidence that has been filed by each of them to oppose the petition.

6.  At the pre-trial review on 24 March 2006, which only the 3^rd and 6^th respondents among the respondents attended, I mentioned to them that as none of the respondents have withdrawn the evidence filed in opposition, the petitioner might still have to prove his case.

7.  Thereafter, the 2^nd and 4^th respondents wrote to the court on 8 and 10 April 2006, in which they stated that they would agree to wind up the Company, but they have not indicated if they would withdraw the evidence they have filed in opposition.  The 2^nd respondent stated that he is unable to attend the trial today.  The 4^th respondent is residing in Singapore.

8.  The 3^rd and 6^th respondents filed affirmations on 10 April 2006 stating that they would agree to wind up the Company and to withdraw all their evidence in opposition previously filed.

9.  The 5^th respondent has not made any response at all.

10.  The position at the commencement of the hearing is that the evidence in opposition filed by the 2^nd, 4^th and 5^th respondents has not been withdrawn, but as neither the 2^nd, 4^th nor 5^th respondents has attended the hearing today and made themselves available for cross-examination, their evidence in opposition may not be relied on, under the directions I gave on 9 January 2006.

11.  I am left with the evidence filed by the petitioner in support of the petition.  That makes my task a relatively simple one.  I see no reason to reject any of the evidence adduced by the petitioner in support of the allegations in his petition.  On the basis that his allegations are established, I then ask myself if a case is made out to wind up the Company on the just and equitable ground, or for relief under section 168A.  The next question is what is the appropriate relief to be granted.  Lastly, I would need to make an order as to costs.

12.  The petitioner’s case as I have found on the evidence may be summarized as follows.

13.  The Company was incorporated in June 1967 by the late father of the petitioner and the 2^nd to 6^th respondents.  The only business of the Company was and is to hold a shop at No. 15, Maple Street, ground floor in Kowloon (“the Property”), purchased by the Company in August 1967.  After the father’s death in 1968, the mother, Madam Tong King, held 40% of the shares, with the remaining 60% held by the petitioner and the 2^nd to 5^th respondents.  Madam Tong controlled the Company until she passed away in December 2003.  She and the 3^rd respondent were the only directors.  In her will, she bequeathed 600 of her 800 shares to the petitioner and 200 shares to the 6^th respondent.  Although probate of Madam Tong’s will was granted in April 2005, the transfer of the shares in her estate to the petitioner and the 6^th respondent has not yet taken place.  If the transfer had been completed, the petitioner’s shareholding would be increased to 800 shares, making him the largest shareholder, holding 40% of the shares.

14.  The petitioner, the 2^nd to 5^th respondents began to take over control of the Company in 2004.  On 12 March 2004, the 3^rd respondent resigned as a director, and the petitioner and 2^nd respondent were appointed directors.  Almost from the beginning, they had disputes which eventually ended up in a deadlock.

15.  The 3^rd respondent refused to hand over to the new directors for safe keeping the bundle of title deeds of the Property, the rubber chop and common seal of the Company, and the cheque book of the Company (“the Chattels”).  Since May 2004, the petitioner and the respondents had to communicate with each other through their solicitors on the affairs of the Company.  It was after repeated requests that the 3^rd respondent handed over the Chattels to the 2^nd respondent in May 2004, and it was only in July 2004 that the solicitors for the 2^nd respondent provided an inventory of the Chattels to the petitioner’s solicitors.

16.  In the board meeting on 29 March 2004 attended by the petitioner and the 2^nd respondent, the following matters were agreed: the mandate of the cheque account of the Company was to be changed so the account would be operated by the petitioner and the 2^nd respondent jointly; the petitioner was to be responsible for negotiating a new tenancy of the Property as the tenancy was to expire on 31 March 2004; and a safe deposit box in the joint names of the petitioner and the 2^nd respondent was to be opened to keep the Chattels when they were to be delivered up by the 3^rd respondent, and that the 2^nd respondent would be responsible for liaising with the 3^rd respondent on this.

17.  None of the matters decided upon at this board meeting were carried out.  A safe deposit box was never opened and the Chattels were held by the 2^nd respondent from May 2004.  The mandate of the Company’s bank account was never changed.  Despite the petitioner’s requests to hold a board meeting to discuss renewal of the tenancy with the tenant of the Property, a board meeting was not held.

18.  The petitioner had engaged auditors to prepare audited accounts pursuant to the board resolution on 15 April 2004.  The accounts were submitted for the 2^nd respondent’s signature on 23 June 2004, but the 2^nd respondent refused to sign the accounts alleging inaccuracies, although he was unable to provide details or evidence of his allegation.  It was not until February 2005 that the 2^nd respondent signed and returned the audited accounts.

19.  As the petitioner had no response from the 2^nd respondent on the renewal of the tenancy and the opening of the safe deposit box, on 15 September 2004 he requisitioned an extraordinary general meeting to discuss these matters.  A further notice was issued by the petitioner to requisition an extraordinary general meeting on 4 November 2004.  The 2^nd respondent sent a letter dated 15 November 2004 proposing to add various items for discussion in the meeting, and disclosed for the first time that he had renewed the tenancy at the old rent of $32,000.00 a month for two years.  This never received the approval of the board.

20.  The extraordinary general meeting was held on 16 December 2004.  It was attended by all the shareholders including the 6^th respondent who has not had the shares transferred to her, and by the petitioner’s wife.  Various matters were discussed, but no consensus was reached and no vote was taken on any proposal.  The respondents have put forward minutes signed by the 2^nd to 6^th respondents purporting to record the proceedings of the meeting, alleging that a number of resolutions were passed, including the appointment of the 3^rd, 4^th and 5^th respondents as additional directors, the approval of the renewal of the tenancy handled by the 2^nd respondent, and the declaration of dividends for the year ended March 2004.  I find that no such resolutions were passed.  Had any vote been taken on these proposals, the result of voting would not have been valid as these proposals were not stated in the notice of the petitioner to requisition the extraordinary general meeting.  In January 2005, the 2^nd to 5^th respondents withdrew a total of $240,000.00 from the bank account of the Company for distribution of dividends to themselves.  This was improper.  There were other withdrawals from the bank account of the Company which was operated solely by the 3^rd respondent.  The respondents have not provided proper explanation to the petitioner for such withdrawals despite repeated requests.

21.  I find also that the 2^nd respondent had neglected his duties as a director.  He had delayed in signing the audited accounts for the year ended 2004, which resulted in a surcharge imposed by the Inland Revenue Department.  He had failed to file annual returns, and because of his neglect, the Company secretary resigned in July 2005 to avoid personal liability.  No proper board meeting had ever been held since 15 April 2004.  The change of auditors of the Company in March 2005 was done without the proper authority of the board.

22.  I find that the parties have clearly reached a deadlock, and that this was not due to the fault of the petitioner as alleged.  The petitioner has admitted all along that he is holding rental income which he collected on behalf of the Company and he has indicated he would pay the amount into the bank account to be operated jointly by him and the 2^nd respondent, but there was no co-operation from the 2^nd respondent regarding the change of the bank mandate.  I find it justifiable for the petitioner to have lost confidence in the respondents in their management of the Company, and that the petitioner has effectively been excluded from the management due to the refusal of the respondents to co-operate with him.  It is clear that the mutual trust and confidence between the petitioner and the respondents has broken down.

23.  I find that a case is made out for relief.  I have no information on the financial position of the respondents.  The only valuable asset of the Company is the Property.  The appropriate relief in these circumstances is to wind up the Company.  The Property would have to be sold on the winding up, and the net proceeds after discharge of the expenses and liabilities of the Company would be distributed to the shareholders in accordance with their shareholdings.

24.  It is well established that in a dispute involving shareholders, the Company should not bear the costs of the unsuccessful opposition to the petition.  There is no reason why the 2^nd to 6^th respondents should not bear the petitioner’s costs jointly and severally.

25.  I order the petitioner’s costs up to 10 April 2006, when the 3^rd and 6^th respondents filed affirmations clearly stating they would withdraw their evidence in opposition, are to be paid by the 2^nd to 6^th respondents, to be taxed if not agreed.  The petitioner’s costs from 11 April 2006 are to be borne by the 2^nd, 4^th and 5^th respondents, to be taxed if not agreed.