LEUNG YEE MEI CONNIE AND OTHERS v. LEUNG NGAI HUNG BILLY AND ANOTHER

HCCW 98/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 98 OF 2005

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REASONS   FOR   JUDGMENT

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1.  This petition was presented by Leung Yee Mei Connie, Leung Ka Chun and Lam Hoo Ming, who are contributories of X-Dive Centre Limited (“the Company”).  I shall refer to them as the 1^st, 2^nd and 3^rd petitioners respectively.  The petitioners seek to wind up the Company on the just and equitable ground.  Alternatively, they seek relief under section 168A of the Companies Ordinance, Cap. 32.

2.  The 1^st respondent, Leung Ngai Hung Billy, is also a contributory.  He has acted in person in these proceedings.  He filed one affirmation in Chinese to answer some of the allegations in the petition.  Notwithstanding leave was given to him to file a supplemental affirmation, he did not file any further evidence.  Nor did he comply with the directions to file a list of documents.  He was absent at the trial.  As I was satisfied he had received due notice of the hearing and that all relevant notices and documents had been served on him at his last known address, I proceeded with the hearing of the petition in his absence.

3.  The Company is the 2^nd respondent.  It has not taken any part in these proceedings.

4.  At the hearing, counsel for the petitioners, Mr. Alan Ng informed the court that the petitioners would not pursue the relief under section 168A, having regard to the fact that the Company is no longer a going concern and is probably insolvent.

5.  I made an order to wind up the Company at the end of the hearing and these are the reasons for judgment.

The Company

6.  I will first set out the basic facts relating to the Company, its shareholders and directors.

7.  The Company is a small private company incorporated on 12 March 2003 with an authorised share capital of $10,000.00, divided into 10,000 shares of $1.00 each.  The business of the Company was organising diving trips in Hong Kong and overseas, providing diving courses and selling diving equipment.

8.  The name of the Company was changed to its present name on 10 June 2003.  On 24 June 2003, the registered office of the Company was changed to 154 Pak Sha Wan, Sai Kung, New Territories and eight shares were allotted, seven to the 1^st respondent and one to Siu Chun Ming Kenneth (“Siu”).  They were appointed the directors of the Company.

9.  On 30 December 2003, 9,990 shares in the Company were allotted in the following manner: 2,492 shares to the 1^st respondent, 1,998 shares to Siu, 2,000 shares to the 1^st petitioner, 2,000 shares to the 2^nd respondent, 1,000 shares to the 3^rd petitioner, and 500 shares to Paul Raymond Tasem (“Tasem”).

10.  On 8 April 2004, a notification of change of directors was filed with the Companies Registry stating that the petitioners were appointed as additional directors with effect from 31 March 2004.

11.  The above changes were effected due to the petitioners investing in the Company at the invitation of the 1^st respondent.  Unfortunately, differences soon arose between them within six months of the petitioners joining the Company.

The oral understanding

12.  In December 2003, the 1^st respondent invited the 2^nd petitioner to invest in the Company and to expand its business.  The 1^st respondent came to know the 2^nd petitioner as the 2^nd petitioner, who is a lifeguard, had helped him out occasionally as a diving instructor.  The petitioners are friends.  The 3^rd petitioner is also a lifeguard, the 1^st petitioner is an accountant.

13.  There followed a discussion between the 1^st respondent and the petitioners on the proposal for them to invest in the Company.

14.  I accept the petitioners’ evidence that the petitioners and the 1^st respondent had arrived at an oral understanding on, inter alia, the matters set out below when the petitioners agreed to become shareholders of the Company.  I reject the denials in the 1^st respondent’s affirmation, which were controverted by the affirmation of Siu filed on behalf of the petitioners.  The relevant matters on which the petitioners and the 1^st respondent had arrived at an understanding are as follows:

(1)     according to an inventory provided by the 1^st respondent, the Company had assets valued at $509,799.00 and such assets included a 16-metre fibreglass diving boat bearing licence number 35986 valued at $350,000.00 by the 1^st respondent (“the Old Diving Boat”);

(2)     the Old Diving Boat, which was registered in the name of the 1^st respondent, would be transferred to the name of the Company;

(3)     the petitioners were to inject $360,000.00 to the capital of the Company, part of which would be used to rent additional shop premises in Sai Kung for the expansion of business.  In return, the petitioners would be allotted shares in the Company that would amount to 50% of the total issued shares;

(4)     the petitioners would be appointed additional directors of the Company;

(5)     the 1^st respondent and the two shareholders who were employees, namely, Siu and Tasem, would be responsible for the daily management of the Company.  The 1^st petitioner would help with the accounts, and the 2^nd petitioner would help with the diving courses or trips when called upon to do so.  Other than Siu who had been employed by the Company all along, none of the directors would receive remuneration for their work done for the Company; and

(6)     the bank mandate of the Company was to be changed to require joint signatures of either the 1^st respondent or Siu and the signature of one of the petitioners for any payment exceeding $20,000.00.

15.  The petitioners duly contributed $360,000.00 to the working capital of the Company from 15 December 2003 to 23 February 2004.

16.  I find that the above matters were sufficient to give rise to an inference that the association between the petitioners and the 1^st respondent was formed on the basis of a personal relationship involving mutual trust and confidence.  There was agreement that the petitioners, who held collectively 50% of the issued shares, should participate in the affairs of the Company.  There is restriction on the transfer of shares so if mutual trust and confidence is lost, the petitioners are unable to dispose of their shares freely.  The court is entitled in this situation to subject the exercise of legal rights to equitable considerations. 

The petitioners’ complaints

17.  Notwithstanding the 1^st respondent’s earlier promise that the contribution made by the petitioners to the working capital should be sufficient for the expansion of business, the petitioners soon found that was not the case.  In February 2004, the 1^st respondent requested the petitioners to pay decoration fees of $157,520.50 due to the contractor for work done to the new shop premises.  In the end, the 1^st petitioner made a director’s loan of $120,000.00 to the Company in February and March 2004 to settle in part the decoration fees.

18.  In January 2004, the 1^st respondent suggested to the petitioners to purchase a new speedboat (“the New Boat”) at the price of $120,000.00 for the expansion of business of the Company.  It was verbally agreed that the 1^st petitioner would pay the purchase price and the New Boat would be transferred to the name of the 1^st petitioner.  The 1^st petitioner agreed to lend the New Boat to the Company for its business and she would transfer it to the Company if the Company should pay her the sum of $120,000.00. On this understanding, the 1^st petitioner provided the funds for the purchase of the New Boat in January and February 2004 and the Company took possession of it in April 2004.

19.  The petitioners made three main complaints against the 1^st respondent.

20.  Firstly, despite the oral understanding and subsequent requests by the petitioners to the 1^st respondent to transfer the Old Diving Boat to the Company, the 1^st respondent refused to do so in April 2004.  After the petition was presented, the 1^st respondent informed the petitioners’ solicitors he had sold the Old Diving Boat and this was transferred to the name of the purchaser on 28 February 2005.  The 1^st respondent has not accounted for the proceeds of sale to the Company.

21.  The second main complaints are in relation to the New Boat.  Contrary to the oral agreement when the 1^st petitioner agreed to put up the funds for the purchase of the New Boat, the 1^st respondent failed to arrange its transfer to the Company in the beginning.  I accept the petitioners’ evidence that the notice of transfer of ownership of the New Boat dated 5 February 2004 first produced by the 1^st respondent to the 2^nd petitioner in late April 2004 had the name of the 1^st respondent as the transferee.  It was only upon the demand of the 2^nd petitioner that the 1^st respondent produced another notice of transfer of ownership dated 29 April 2004 in favour of the 1^st petitioner.  Later, the 1^st respondent through his then solicitors issued a letter to the 1^st petitioner on 30 June 2004 wrongfully alleging that the 1^st petitioner had forged the notice of transfer of ownership of the New Boat to her.  He followed this up with a wrongful report to the police in August 2004 that the New Boat was transferred to the 1^st petitioner by forged documents.

22.  Further, contrary to the oral agreement that the New Boat would be lent by the 1^st petitioner for the business of the Company, and notwithstanding a written memorandum signed by the 1^st respondent and the 2^nd petitioner in the presence of the police on 29 June 2004, the 1^st respondent used the New Boat to generate income for himself without seeking the consent of the 1^st petitioner or the other directors and he has failed to account for the profits derived from the use of the New Boat to the Company.

23.  Thirdly, the 1^st respondent had wrongfully drawn money from the Company’s funds and diverted the income of the Company to his personal accounts or had otherwise failed to account to the Company of monies he had received on its behalf.  The petitioners are able to point to the following instances in support of this allegation:

(1) According to a list of expenses of the Company provided by the 1^st respondent to the petitioners in June 2004 in the total sum of $498,413.00, the 1^st respondent had drawn an amount of $30,000.00 as his salary (which was contrary to the oral understanding that all directors, with the exception of Siu, were not to draw remuneration from the Company) and an amount of $30,000.00 for his “personal use” (which was not particularised and without the consent of the board of directors).

(2) According to the list of expenses aforesaid, the Company had paid $14,000.00 as electricity deposit.  In July 2004, China Light & Power had refunded the said sum by cheque.  The 1^st respondent has failed to account for this to the Company.

(3) On 9 January 2004, the 1^st respondent sold diving equipment to a customer and issued an invoice of the Company in the amount of $4,315.00.  He did not account for this to the Company.

(4) On 14 March 2004, the Company issued an invoice to a customer for charges of a diving trip package to Borneo Divers Mabul in April 2004 in the amount of $14,830.00.  In the space for “Remarks”, the customer was asked to make full payment on or before 16 March 2004 to a bank account in the name of the 1^st respondent.

(5) On or about 28 May 2004, the Company issued a receipt to a customer for the amount of $3,500.00 being the fees for a diving course organised in May 2004.  Pursuant to the instruction of the 1^st respondent, the customer made payment by cheque for the personal bank account of the 1^st respondent.

(6) In July and August 2004, the 1^st respondent advertised on the Internet for diving trips to be held in Hong Kong waters by the Company.  For the trip on 4 July 2004, customers were asked to make full payment on or before 1 July 2004 to two bank accounts which were not the accounts of the Company.  The 1^st respondent did not account to the Company the income generated from these two diving trips.

24.  I find all the above complaints proved.  There are other complaints against the 1^st respondent of a less serious nature, which I do not propose to set out.

25.  The matters complained of, which showed a lack of probity on the part of the 1^st respondent in the conduct of the Company’s affairs, led to a total breakdown of the mutual trust and confidence between the 1^st respondent and the petitioners.  In these circumstances, it is just and equitable that the Company should be wound up.  I ordered that the petitioners’ costs in this petition are to be paid by the 1^st respondent, to be taxed if not agreed.