CHIEN TSAI WAN JUDY v. CHIU TAI LOY AND OTHERS

HCA 1561/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1561 of 2016

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DECISION

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1. This is the substantive hearing of the summons dated 13 June 2016 issued by the plaintiff for an interlocutory injunction against the 1^st and 2^nd defendants to enjoin them from:

(1) acting upon the resolutions purportedly passed by them qua directors of the 5^th defendant, Pristine Cultural International Limited (超越國際文化有限公司) (“Company”), on 16 May 2016, 20 May 2016 and 13 June 2016 which authorised the 2^nd defendant to sell, lease, mortgage or otherwise deal with the Company’s landed properties (collectively “Resolutions”); and

(2) dealing with the funds in the Company’s bank accounts except for payment of the Company’s operational expenses and with the prior written consent of the plaintiff.

2. At the directions hearing before Chung J on 17 June 2016, an interim injunction was granted against the 1^st and 2^nd defendants in substantially the same terms as the summons save that (1) a property (“Workshop 1”) which had already sold by the Company was carved out, and (2) the payment of the Company’s operating expenses was capped at $100,00 per month, with prior written notification to the plaintiff for a transaction exceeding $30,000. 

3. The plaintiff commenced this action on 13 June 2016 as a common law derivative action.  In her statement of claim, the plaintiff alleges that:

(1) the 1^st, 2^nd and 3^rd defendants acted in breach of their fiduciary duties as directors by causing certain loans to be advanced to the 2^nd and 3^rd defendants and their related company and failing to recover them, which led to the Company to become insolvent with net liabilities of $6,758,553.92 as at 31 December 2013; and

(2) the Resolutions were passed by the 1^st and 2^nd defendants in breach of their fiduciary duties in that (a) they preferred their own interests over those of the Company, and (b) there was no need for the Company to sell the landed properties to meet the Company’s expenses. 

4. The present application is made on the basis that there are serious issues to be tried in respect of the validity of the Loans and the Resolutions and that damages are not an adequate remedy to the Company.

BACKGROUND

5. The Company was set up pursuant to a shareholders’ agreement dated 15 July 2008 made between Mr Chieng Sai Yeung Wilson (“Mr Chieng”), the plaintiff’s elder brother, and the 1^st, 2^nd and 3^rd defendants (“Shareholders’ Agreement”).  The shareholdings of Mr Chieng, the 1^st, 2^nd and 3^rd defendants were 30%, 48%, 10% and 12% respectively, and they were appointed as directors of the Company.

6. On 12 November 2009, Mr Chieng resigned as director and transferred his 30% shareholding to the plaintiff, who was also appointed as a director of the Company.  Between 12 November 2009 and 7 July 2014, the plaintiff, the 1^st, 2^nd and 3^rd defendants were the only directors and shareholders of the Company.  On 8 July 2014, the 3^rd defendant resigned as a director and transferred his 12% shareholding to the 2^nd defendant. 

7. There is no dispute that amongst the directors, only the 2^nd defendant has been managing the affairs of the Company on a day-to-day basis including maintaining and keeping the accounting records of the Company, holding the keys to the landed properties of the Company and collecting rent from the tenants for those properties which have been leased out.

8. The 4^th defendant, Chiu Tai Loy Antique and Heritage Ltd (“Related Company”), is a Hong Kong company and its shares are held by the 1^st, 2^nd and 3^rd defendants as to 50%, 15%, 20% respectively and they are its directors.  There is another shareholder holding 15% shares who is also a director. 

9. Mr William Wong SC (leading Mr Justin Lam), counsel for the 1^st and 2^nd defendants, asks the court to consider the following background of the parties and their relationship:

(1) the 2^nd defendant is a “lover of paintings and calligraphy”, who became acquainted with the 1^st defendant in 1980s;

(2) the 1^st defendant is a famous collector who owns a larger number of Chinese antiques and is active in promoting Chinese antique culture and preservation;

(3) the 3^rd defendant is a “Buddhist master”, a director of Po Lin Monastery and holds “various positions in Buddhist organisations around the world”;

(4) the 2^nd defendant became acquainted with Mr Chieng in the 1990s;

(5) as reflected in the Shareholders’ Agreement, the Company was established to operate a museum for cultural relics, rather than to pursue any commercial purpose; and

(6) the plaintiff resides in France and does not have any correspondence address in Hong Kong.  The documents which required her signature were handed to Mr Chieng for his handling, and the 1^st to 3^rd defendants would continue to discuss the affairs of the Company with Mr Chieng.  Prior to this action, the plaintiff never participated in the Company’s operations or attended any of its meetings. 

10. The Company’s paid up capital was and still is $10,000.  Its funding requirement has been met by the $30 million loan advanced by Mr Chieng through his company, Sweetsmile Company Ltd (“Sweetsmile”).  The loan was later reduced to $25 million, after $5 million had been treated as a personal loan to the 1^st defendant. 

11. Between 2008 and 2010, the Company used $7,385,000 to purchase 14 workshops located in 2 industrial buildings in Tuen Mun. 2 workshops were sold in 2012 and the Company continued to hold the remaining 12 workshops (“Current Properties”).  In 2011, the Company also purchased a residential property in Tuen Mun for $3,280,000 and the same was sold in 2014 for $5 million. 

12. There is no dispute that although the parties to the Shareholders’ Agreement intended to use the Company to operate a museum for cultural relics, no such museum has been established. The only business of the Company has been to hold the landed properties, collect the rental income generated by such properties and store the cultural relics acquired  

13. On 28 January 2016 the plaintiff through her solicitors, Wilkinson & Grist (“W&G”), demanded the Company and the 2^nd defendant to make available all the records, accounts and returns of the Company and other records of the Company including its financial statements, directors’ reports, auditors’ reports and summary financial reports from the date of incorporation of the Company for her inspection.  On 18 March 2016, the 2^nd defendant through her solicitors, Messrs Chan & Cheng (“C&C”), provided the audited financial statements and directors’ reports for the 5 years from 2008 to December 2013 (“2008 – 2013 Audited Accounts”) and confirmed that the audited financial statements for the years 2014 and 2015 had not been prepared 

14. The plaintiff says that from the 2008 – 2013 Audited Accounts, she discovered that as at 31 December 2013, an aggregate amount of $8,500,090.93 had been owed by following related parties to the Company (collectively “Loans”):

(1) $636,701.43 owed by the 2^nd defendant;

(2) $7,663,389.50 owed by the 3^rd defendant; and

(3) $200,000 owed by the Related Company.

15. The 2008 – 2013 Audited Accounts also showed that the Company had been suffering losses and had net liabilities as follows:

Period	Losses	Net Liabilities
25/7/2008 – 31/12/2009	$1,522,915.14	$1,512,915.14
1/1/2010 – 31/12/2010	$2,085,809.61	$3,598,724.75
1/1/2011 – 31/12/2011	$1,477,050.47	$5,075,775.22
1/1/2012 – 31/12/2012	$199,947.01	$5,275,722.23
1/1/2013 – 31/12/2013	$1,482,831.69	$6,758,553.92

16. It is however clear from the notes to the 2008 – 2013 Audited Accounts that the landed properties held by the Company were stated at their cost less depreciation and did not reflect their current market value.  This can be seen from the fact that after selling 2 workshops in 2012, a “gain on disposal of land and buildings” in the amount of $1,289,330.15 was recognised as revenue of the Company in that year.  According to the 2^nd defendant, the Current Properties now worth over $35 million.  Even assuming that in December 2013 the Current Properties only worth $20 million, if their market value had been reflected in the audited accounts for the year ended 31 December 2013 (“2013 Audited Accounts”), the financial position of the Company would have been reversed from net liabilities of $6.8 million to net assets in excess of $13 million.  This had not taken into account the gain of around $1.9 million from the sale of the residential property in 2014, which was subsequently reflected in the audited accounts for the year ended 31 December 2014 (“2014 Audited Accounts”).

17. The plaintiff commenced HCMP 625 of 2016 to seek an order to inspect the other documents of the Company which had not been provided by the 2^nd defendant to her (“Inspection Proceedings”). 

18. Thereafter, the 2^nd defendant procured the Resolutions to be passed for the purpose of authorising herself to sell the Current Properties as follows. 

19. First, by a notice dated 13 May 2016 the 2^nd defendant convened a board meeting to be held on 16 May 2016 to consider and approve a resolution to authorise herself “to sell the Company’s real properties for such consideration as she thinks fit and to give receipts for all or any part of the purchase money or other consideration and to execute any legal documents in connection with the sale”.  The resolution was passed by the 1^st and 2^nd defendants at the meeting on 16 May 2016 (“1^st Resolution”).

20. By another notice dated 17 May 2016 signed by the 2^nd defendant, a further board meeting was convened to be held on 20 May 2016 to consider, inter alia, (1) confirmation and ratification of the 1^st Resolution, (2) payment of the operating expenses of the Company and repayment of the debts owed by the Company, and (3) authorisation to the 2^nd defendant to sell, lease or mortgage the Current Properties. 

21. The plaintiff through W&G’s letter of 18 May 2016 to the 2^nd defendant objected to the 1^st Resolution as she had only received the notice on 17 May 2016.  The plaintiff also objected to the resolutions proposed to be passed at the coming board meeting on the ground that the 1^st and 2^nd defendants had been acting in concert and causing substantial damage to the Company.  She requested the 2^nd defendant to confirm that the 1^st Resolution was invalid and that the board meeting of 20 May 2016 would not proceed.

22. In response, the 2^nd defendant through C&C’s letter dated 19 May 2016 refuted the allegations but agreed not to act on the 1^st Resolution.  She said that the coming board meeting was to discuss the management and operation of the Company.  As regards the proposed resolution to authorise the sale of the Current Properties, she justified the resolution in this way:

“ …as the Company is facing financial difficulties due to the legal proceedings taken out by [the plaintiff], the Company is in urgent need to find ways such as to sell, mortgage or rent out its properties to pay the legal costs and other expenses.”

23. At the board meeting held on 20 May 2016 at which the plaintiff was absent, the 1^st and 2^nd defendants passed resolutions to, inter alia, authorise the 2^nd defendant to sell, lease or mortgage the Current Properties so as to pay the operating expenses, the litigation cost and other expenses (“2^nd Resolution”). 

24. Also on 20 May 2016, the plaintiff proposed to hold another board meeting on 25 May 2016 to reconsider the 1^st and 2^nd Resolutions and to review the Loans.  In response, the 2^nd defendant issued a notice signed by her to convene a board meeting on 13 June 2016 to consider, inter alia, resolutions to (1) authorise the 2^nd defendant to complete the sale of Workshop 1, (2) convene an extraordinary general meeting to be held on 18 July 2016 to approve and ratify the Loans, and (3) to remove the plaintiff as director. 

25. At the board meeting held on 13 June 2016 at which the plaintiff was present, the 1^st and 2^nd defendants refused to discuss the issues raised by the plaintiff and, instead, caused a resolution to be passed to authorise the 2^nd defendant to complete the sale of Workshop 1 despite the objection of the plaintiff (“3^rd Resolution”). 

MERIT OF APPLICATION

26. There is no dispute that in applying for an interlocutory injunction, the plaintiff needs to show that:

(1) there is a serious question to be tried;

(2) damages would not be an adequate remedy; and

(3) if there is any doubt as to the adequacy of the respective remedies in damages, that the balance of convenience is in favour of granting the injunction (Hong Kong Civil Procedure 2017, §29/1/3).

27. Serious question to be tried is not a high threshold. Unless the materials available to the court fails to disclose that the plaintiff has any real prospect of succeeding at trial, the court should go on to consider whether balance of convenience lies in favour of granting the interlocutory relief sought (American Cyanamid Co v Ethicon Ltd [1975] AC 396 at 408A – B).  In considering whether to grant an interlocutory injunction, the court will take the course which is likely to cause the least irremediable prejudice to one party or the other (National Commercial Bank Jamaica Ltd v Olint Corpn Ltd [2009] 1 WLR 1405 §§17 – 19).

28. In the context of a common law derivative action, a plaintiff only needs to establish a prima facie case that the company is entitled to the relief claimed and that the action falls within an exception to the rule in Foss v Harbottle (Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370, §20). 

Serious questions to be tried

29. Mr Norman Nip, counsel for the plaintiff, submits that it is indisputable that the Loans were owed by the 2^nd and 3^rd defendants and the Related Company as they were recorded in the 2013 Audited Accounts.  By virtue of s 157H(2) of the former Companies Ordinance (Cap 32)[1], the Company was prohibited from making a loan to its director or a company in which one or more of the directors hold a controlling interest.  The exception provided in s 157HA(2) has no application as the Loans have never been approved by the Company in general meeting.  The 1^st, 2^nd and 3^rd defendants abused their powers as directors in advancing the Loans to themselves and the Loans constituted misappropriation of the Company’s funds and a fraud on minority (Anglo-Eastern (1985) Ltd and anor v Karl Knutz & ors [1988] 1 HKLR 322 at 327 – 328, per Silke VP; Melvin Waxman v Li Fei Yu, unreported HCA 1973/2012, 23 August 2013 at §48 per To J; Tan Eng Guan and anor v Southland Company Ltd & ors [1996] 2 HKLR 117 at 121G – 122F). 

30. Mr Nip points to the various explanations proffered by the 1^st and 2^nd defendants on the Loans which, he submits, are fundamentally incompatible with each other in that:  

(1) in C&C’s letter dated 30 May 2016, the 2^nd defendant stated that the Loans had been made with the knowledge and consent of Mr Chieng and the plaintiff was merely a nominee and trustee of Mr Chieng;

(2) in her 1^st affirmation, the 2^nd defendant said that the Loans were ordinary expenses incurred in supporting cultural activities, and were not used for personal purposes;

(3) in C&C’s letter of 12 July 2016, the 2^nd defendant stated that in order for the court to fully understand “the Company’s financial situation in that there was no misappropriation of funds by the Defendants”, it was necessary to exhibit the 2014 Audited Accounts and the audited accounts for the year ended 31 December 2015 (“2015 Audited Accounts”) and sought extension of time to file her further affirmation;

(4) in her 2^nd affirmation, the 2^nd defendant asserted that Union Link CP Ltd (“Union Link”), the former auditor of the Company, had failed to remind the directors that they should convene a board of directors’ meeting to approve the Loans;

(5) in her 3^rd affirmation, the 2^nd defendant alleged that:

(a) the plaintiff had signed (or Mr Cheing had forged her signature) the minutes of board of directors’ meeting and extraordinary general meeting of the Company both dated 15 August 2014 (“Board Minutes” and “EGM Minutes” respectively) in which she acknowledged the Loans as at 31 December 2013;

(b) $636,701 was not owed by her but was payment for expenses the supporting documents of which were found missing but Union Link recorded them as the amounts owed by her.  She said that all shareholders and directors including Mr Chieng had agreed that the Company would bear the renovation and miscellaneous expenses of 法華淨園but owing to the fault of Union Link, such expenses were treated as loan owed by the 2^nd defendant;

(c) in 2009, all shareholders and directors including Mr Chieng agreed that the Company would pay the renovation expenses for converting光留院 into趙泰來宗教藏品館 at which the 1^st defendant exhibited his Buddhist related artefacts for the purpose of promoting Buddhism.  Such expenses were recorded as the amount owed by the 3^rd defendant;

(d) in July 2011, the Related Company was established for the purpose of making an application to the Government in Hong Kong to revitalise the Haw Par Mansion (虎豹別墅) and the $200,000 was used for such purpose.  As the 1^st defendant and the Related Company did not want others to think that he had taken advantage of the Company, the amount was treated as a loan owed by the Related Company.  This loan had been approved by all the shareholders at the time including Mr Chieng and was repaid in full on 2 April 2014; and

(6) in the 2014 Audited Accounts and 2015 Audited Accounts provided to the plaintiff under cover of C&C’s letter of 28 September 2016, the 2^nd defendant and the Related Company no longer owed any amount to the Company.

31. Mr Wong on the other hand submits that there is no serious question to be tried as the Loans were authorised by all the shareholders of the Company and could not constitute misappropriation of the Company’s assets.  His argument runs thus:

(1) By the Board Minutes it was unanimously resolved that the Loans “be and are hereby confirmed as correct”.  As the Board Minutes were signed by the plaintiff, the 1^st and 2^nd defendants who were the directors of the Company, they show that the Loans had been authorised by all the shareholders.

(2) Although the plaintiff and Mr Chieng both say that they have never seen or been provided with the Board Minutes, it is a bare allegation.  If the plaintiff intends to challenge the authenticity of her signature, she bears the burden of proving forgery or fraud (To Pui Kan v Ng Kwok Pui, CACV 281/2012, unreported, 21 August 2012 at §31) but the plaintiff fails to do so.   

(3) The plaintiff’s contention that the Board Minutes only reflect the decision of the board, rather than the shareholders’ decision in general meeting is devoid of merit as the directors and shareholders are the same. 

(4) In any event, a technical breach falls outside the scope of “fraud on the minority” or “abuse of power” and cannot give rise to a common law derivative action (Law of Companies in Hong Kong, 2^nd ed, §10.021).  It is well established that a shareholder is not entitled to complain of a mere informality or irregularity which can be cured by a vote of the company in general meeting and where the intention of the majority shareholders is clear (Law of Companies, op cit,§10.014; Re Hong Kong Sailing Foundation [2010] 1 HKLRD 801 at §§41 – 43).

(5) Given that the plaintiff has signed the Board Minutes, her act in complaining about the Loans constitutes inequitable conduct which bars the plaintiff from pursuing the action as she does not come to the court with “clean hands” (Law of Companies in Hong Kong, op cit, §10.039).

(6) The plaintiff “is accustomed to making bare allegations of unauthorised dealings on behalf of the Company” against the 1^st and 2^nd defendants which are “later disproved by documentary records” containing her or Mr Chieng’s signature. 

32. Mr Wong also argues that the action is improperly constituted insofar as it relates to the loan advanced to the 3^rd defendant, as the 3^rd defendant is no longer a shareholder or director of the Company and, as such, cannot be a wrongdoer in control of the Company. 

33. As for the loans advanced to the 2^nd defendant and the Related Company, Mr Wong points to the following explanations given by the 2^nd defendant:

(1) the payment of $200,000 to the Related Company had been authorised by Mr Chieng and was already repaid by her on behalf of the Related Company on 2 April 2014;

(2) the $636,701.43 were expenses of the Company for which the receipts were lost but were booked as the amount owed by the 2^nd defendant as a result of an accounting treatment by the Company’s “ex-accountants”; and

(3) the 2014 Audited Accounts showed that the 2^nd defendant no longer owed any amount to the Company as she had retrieved the medical insurance receipts which accounted for $183,327, the renovation fees for the Buddhist garden in the amount of $253,000 had already been reimbursed and the 2^nd defendant had agreed to set-off the amount for which receipts could not be retrieved against the rental payment she was entitled to receive from the Company.

34. In my view, there is a serious question to be tried as to whether the 1^st, 2^nd and 3^rd defendants had abused their power in causing the Company to make the Loans and whether the Loans constituted misappropriation of the Company’s assets for the following reasons. 

35. First, as is clear from the different explanations put forward by the 2^nd defendant in respect of the Loans, they are inherently inconsistent with one another.  Given that the 2^nd defendant has been in charge of the day-to-day management of the Company including its accounting and financial matters, she must be aware of the true nature of the Loans when the issue was first raised by the plaintiff in correspondence.  It is inconceivable that the 2^nd defendant would have given erroneous instructions to her solicitors to acknowledge the Loans but sought to justify them on the basis that they had been made with the knowledge and consent of Mr Chieng.    

36. Secondly, I am unable to accept the 2^nd defendant’s assertion that the Loans were expenses incurred by the Company but erroneously recorded as loans owed to the Company.  Such assertion is inconsistent with the manner in which the Loans were recorded in the 2008 – 2013 Audited Accounts.  Although the 2^nd defendant tries to blame Union Link for the alleged erroneous accounting treatment, her allegation does not sit well with the fact that Union Link was the auditorof the Company, not its accountant as Mr Wong contends.  Indeed, it was stated in each of the auditor’s reports to the 2008 – 2013 Audited Accounts that the directors were responsible for the preparation of the financial statements and that they had implemented internal control to ensure that the financial statements were free from material misstatements, whether due to fraud or error.  All the 2008 – 2013 Audited Accounts were approved by the 2^nd defendant alone or in conjunction with the 1^st defendant. 

37. Thirdly, although much reliance has been placed by the 2^nd defendant on the various agreements said to have been made by all the shareholders and directors of the Company, not a single document has been produced by the 2^nd defendant to substantiate her assertions.  Indeed, neither the 1^st and 3^rd defendants nor the Related Company has made any affirmation to corroborate any of the assertions made by the 2^nd defendant. 

38. Fourthly, in respect of the Board Minutes and the EGM Minutes, the plaintiff confirmed in her affirmation that she had never seen or signed such Minutes.  I do not agree with Mr Wong that the plaintiff has to adduce other evidence to prove that she did not sign these Minutes as it requires the plaintiff to prove a negative, which is not possible.  Of course, whether the plaintiff’s assertion is to be believed is not an issue which can be resolved without cross-examination.

39. Fifthly, as Mr Nip points out, even if the Board Minutes and EGM Minutes were genuine, they did not constitute authorisation of the Loans because:

(1) the Board Minutes only stated that the board had confirmed the figures of the Loans, not approved the Loans;

(2) under s 157HA(2), only the shareholders in general meeting have the power to approve the Loans made to the 2^nd and 3^rd defendants and the Related Company;  

(3) a director is precluded from self-dealing or entering into engagements in which his duties may conflict with his personal interest.  Appropriation of company’s money by a director is not a matter which can be ratified by shareholders even unanimously (Burland v Earle [1902] AC 83 at 93 – 94, Cook v Deeks [1916] 1 AC 554 at 564); and

(4) the EGM Minutes merely recorded that the shareholders had agreed to provide financial assistance to the Company to maintain it as a going concern, which statement also appeared in the 2013 Audited Accounts. 

40. Sixthly, although the 2^nd defendant has on behalf of the Related Company repaid $200,000 to the Company, this does not provide a complete answer to the plaintiff’s claim as the questions remain whether the loan to the Related Company was valid or constituted an abuse of power by the 1^st, 2^nd and 3^rd defendants and whether the 1^st, 2^nd and 3^rd defendants are liable to pay compound interest accrued on the loan, which is often awarded against a fiduciary who has misapplied the money for his own benefit (Wallersteiner v Moir (No 2) [1975] 1 QB 373 at 388C – D; Typhoon 8 research Ltd v Seapower Resources International Ltd & anor [2002] 2 HKLRD 660 at §24). 

41. Lastly, I do not think that the action is improperly constituted simply because the 3^rd defendant is no longer a director or shareholder of the Company.  The requirement of wrongdoer control is met as the 1^st and 2^nd defendants constituted the majority both at the board meeting and the general meeting of the Company.   

42. I turn to consider whether there is a serious question to be tried in respect of the validity of the Resolutions. 

43. It is well established that in considering whether the directors have abused their fiduciary powers for an improper purpose, the court would approach the matter in the way expounded by Lord Wilberforce in Howard Smith Limited v Ampol Petroleum Limited [1974] AC 821 at 832F–H, 835F–H:

“ … when a dispute arises whether directors of a company made a particular decision for one purpose or for another, or whether, there being more than one purpose, one or another purpose was the substantial or primary purpose, the court, in their Lordships’ opinion, is entitled to look at the situation objectively in order to estimate how critical or pressing, or substantial or, per contra, insubstantial an alleged requirement may have been. If it finds that a particular requirement, though real, was not urgent or critical, at the relevant time, it may have reason to doubt, or discount, the assertions of individuals that they acted solely in order to deal with it, particularly when the action they took was unusual or even extreme.”

“ In their Lordships’ opinion it is necessary to start with a consideration of the power whose exercise is in question, in this case a power to issue shares. Having ascertained, on a fair view, the nature of this power, and having defined as can best be done in the light of modern conditions the, or some, limits within which it may be exercised, it is then necessary for the court, if a particular exercise of it is challenged, to examine the substantial purpose for which it was exercised, and to reach a conclusion whether that purpose was proper or not. In doing so it will necessarily give credit to the bona fide opinion of the directors, if such is found to exist, and will respect their judgment as to matters of management; having done this, the ultimate conclusion has to be as to the side of a fairly broad line on which the case falls.” (emphases added)

44. As stated in Howard Smith, at 834F–H, where self-interest of the directors is involved:

“ … they will not be permitted to assert that their action was bona fide thought to be, or was, in the interest of the company; pleas to this effect have invariably been rejected (e.g. Fraser v. Whalley, 2 Hem. & M. 10 and Hogg v. Cramphorn Ltd. [1967] Ch 254)—just as trustees who buy trust property are not permitted to assert that they paid a good price.

But it does not follow from this, as the appellants assert, that the absence of any element of self-interest is enough to make an issue valid. Self-interest is only one, though no doubt the commonest, instance of improper motive: and, before one can say that a fiduciary power has been exercised for the purpose for which it was conferred, a wider investigation may be have to be made…” (emphasis added)

45. Mr Nip submits that there are sufficient grounds to doubt the 1^st and 2^nd defendants’ assertions that there was an urgent need for the Company to raise fund and it was in the best interests of the Company to sell the Current Properties, in light of the following matters:

(1) there was plainly no need or justification for the Company to sell the Current Properties, as the Company’s annual operating expenses were less than $100,000.  Amongst the administrative expenses recorded in Audited Accounts, $552,000 were salaries, allowance and rent paid to the 2^nd defendant and her daughter and only $200,000 per annum were administrative expenses incurred by the Company; and

(2) the Loans remained due and payable to the Company and 1^st and 2^nd defendants should procure the Company to demand repayment from the 2^nd and 3^rd defendants, rather than deciding to sell the Current Properties. 

46. Mr Wong submits that the 1^st and 2^nd defendants made the decisions to sell the Current Properties in what they honestly believed to be in the best interests of the Company and the court should apply the “business judgment rule” and refrain from acting in a supervisory role over the board’s management decisions honestly arrived at.  This however begs the question as to whether the 1^st and 2^nd defendants’ decisions to pass the Resolutions were made bona fide, which is the very issue dividing the parties. 

47. Applying the principles in Howard Smith, where as here there is a dispute as to the bona fide of the directors’ decisions, the court is entitled to look at the situation facing the Company objectively to see if the alleged need to raise fund was real or pressing.  In this regard, I have no hesitation in holding that there is a serious question to be tried as to whether the 1^st and 2^nd defendants honestly believed that there was an urgent need to raise fund and that it was in the best interests of the Company to sell the Current Properties:

(1) I agree with Mr Nip that the matters identified in §45 above show that the Company was not in urgent need to raise fund.  To the extent that the 1^st and 2^nd defendants’ decisions were motivated by the self interest to pay the remuneration and allowance to the 2^nd defendant and her daughter, the 1^st and 2^nd defendants are not permitted to assert that their decisions were bona fide in the interests of the Company (Howard Smith, at 834F – H). 

(2) As stated in §16 above, the fact that in the 2013 Audited Accounts, the Company was stated to have net liabilities as at 31 December 2013 does not mean that it was insolvent, let alone in financial difficulties.

(3) The 1^st and 2^nd defendants’ assertion that the Company was in urgent need to raise fund owing to the Inspection Proceedings could not be true.  Upon this court’s enquiry, Mr Wong confirms that the Inspection Proceedings were not contested and the only remaining issue is costs.   

Adequacy of damage and balance of convenience

48. Mr Nip submits that the 11 remaining properties (“Remaining Properties”) are the most valuable assets of the Company.  As most of the Remaining Properties have been used by the Company for storing cultural relics, if they are sold, the Company’s business would be affected and such loses are difficult to quantify (High Fashion Media Corp Ltd v Leong Ma Li, unreported, HCA 1953/2014, 5 December 2014 §28).  Mr Wong on the other hand emphasises that 3 of the Remaining  Properties are vacant and it would not affect the Company’s operation to sell these vacant Properties. 

49. In my view, damages would not be an adequate remedy to the Company if the 1^st and 2^nd defendants were allowed to act on the Resolutions.  It is obvious from the notices for convening the board meetings and the Resolutions that the decisions made by the 1^st and 2^nd defendants were to sell all the Current Properties and no consideration was given to the fact that the Company had been using some of them for its purpose.  Without the injunction, the 1^st and 2^nd defendants would be able to sell all the Remaining Properties thereby affecting the Company’s operation.  As the Remaining Properties are by their nature real properties, they are not readily replaceable.

50. I consider that balance of convenience is in favour of continuing the interim injunction with a variation to allow the Company to sell the Remaining Properties with the written consent of the plaintiff for the following reasons. 

51. First, the evidence shows that the Company is not short of cash fund.  According to the information provided by the 1^st and 2^nd defendants, by August 2016, the Company had cash and bank balances in excess of $778,000 which was reduced to around $217,000 by the end of February 2017.  More importantly, upon completion of the sale of Workshop 1, more than $3 million had been realised which was paid into court.  If the Company requires fund to meet its ongoing expenses, an application can be made to allow the Company to withdraw part of the fund paid into the court.   

52. Secondly, there is no immediate need or justification to sell the Current Properties.  Although the 2^nd defendant asserts that there would be a potential capital loss of 20% if the Current Properties were not sold back in June 2016, such assertion is not supported by any objective evidence, such as valuation report or published statistics.   

53. Thirdly, the interim injunction permitted the 1^st and 2^nd defendants to spend up to $100,000 per month in the ordinary course of the Company’s business.  The Company's business and operation, which are fairly limited, have not been affected.  So long as the Company remains able to use its cash fund in its ordinary course of business, its interests would not be adversely affected by the continuation of the injunction.   

54. Fourthly, the injunction only enjoins the 1^st and 2^nd defendants from acting on the Resolutions.  It does not restrict the ability of the directors to consider whether any of the Remaining Properties should be sold taking into account the present and future situation of the Company.  The directors including the plaintiff will be able to consider whether it is in the interests of the Company to sell any of the Remaining Properties.  Given that the plaintiff represents the interests of Mr Chieng, who is also a substantial creditor of the Company, I would expect the plaintiff to act rationally and consider whether there are good reasons to sell any of the Remaining Properties, should the opportunity arise in future. Indeed, as a director, the plaintiff owes fiduciary duties to the Company, which requires her to act in its best interests. 

55. Lastly, with the variation to the injunction discussed in §50 above, the 1^st and 2^nd defendants will be able to act on the Resolutions so long as they obtain the written consent of the plaintiff to the proposed sale of the Remaining Properties. 

CONCLUSION

56. For the above reasons, I grant an interlocutory injunction on substantially the same terms as the interim injunction granted by Chung J on 17 June 2016 save for the variations described in §50 above and the matters which have become spent as follows:

“ Until determination of the action or further order of the Court, the 1^st and 2^nd defendants:

1.1 be restrained or prohibited from acting upon or in furtherance of the resolutions purportedly passed by the board of directors of the 5^th defendant on 16 May 2016, 20 May 2016 and 13 June 2016 insofar as they authorise the 1^st and/or 2^nd defendants to sell, lease, mortgage or otherwise deal with the 5^th defendant’s landed properties or any of them, the particulars of which are set out in Schedule 2 hereto, including signing any sale and purchase agreement, assignment, lease, mortgage or other relevant document for that purpose. The aforesaid restriction does not apply if the 1^st and 2^nd defendants have obtained the written consent of the plaintiff to their act(s);

1.2 same as §1.2 of the interim injunction;

2.  There be liberty to apply.”

57. As for costs, the 1^st and 2^nd defendants fail in their opposition and should bear the costs incurred as a result.  I make a costs order nisi that:

(1) the costs of and occasioned by the plaintiff’s summons dated 13 June 2016 up to and including the costs of the hearing before Chung J on 17 June 2016 be the plaintiff’s costs in the cause, to be paid by the 1^st and 2^nd defendants in the event that the plaintiff succeeds in the action; and

(2) the costs of and occasioned by the plaintiff’s summons dated 13 June 2016 after 17 June 2016 be paid by the 1^st and 2^nd defendants to the plaintiff, to be taxed if not agreed and be paid forthwith.