SHAM HOO FAT v. CHEUNG KWOK HING AND OTHERS

HCA 1373/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 1373 OF 2002

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REASON FOR DECISION

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Introduction

1. This is the plaintiff's application for an interim injunction order. At the end of the hearing on 19 April 2002, I granted an order essentially in terms of paragraph 1 of the plaintiff's application, namely,

"An order restraining the 1st, 2nd and/or the 3rd Defendants, whether through themselves or their agents, servants, officers, Golden Dragon Food Company Limited, Golden Dragon Food Enterprises Limited or otherwise, from howsoever engaging directly or indirectly in any business for the manufacture of siu mai until judgment in this action or further order".

I indicated that reasons for the decision would be handed down later. They are as follows.

The Plaintiff's Case

2. The plaintiff's case in this action is essentially this. The plaintiff, the 1st defendant ("D1") and 2nd defendant ("D2") have been the directors of the 4th defendant ("Gold Way"). The 3rddefendant ("D3"), although not a director on the record, has been a de facto director of Gold Way. D1 and D2 are brothers and the plaintiff's brothers-in-law. Gold Way's shareholders are the plaintiff, D2 and a Golden Dragon Food Ltd ("G D Food").

3. G D Food was incorporated in September 1991 with D1 and D2 as its first directors and shareholders. It has been carrying on the business of the sale and distribution of packaged Chinese dim sum known as "siu mai" (燒賣). In November 1995, the plaintiff's brother and the father of D1 and D2 also became the directors and shareholders of G D Food. Since August 2000, D3 has been helping D1 and D2 to manage G D Food's business. There have been changes to the directorship and shareholdings of G D Food. By the time of the commencement of this action, D1 and D2 were effectively in control of G D Food. The sale and distribution of siu mai has been G D Food's principal business. For convenience, unless otherwise stated, D1, D2 and D3 will be collectively referred to as "the defendants" in the paragraphs below.

4. Gold Way was incorporated in May 1996 to manufacture siu mai so as to ensure a steady supply (at a steady price) to G D Food. There were also changes in the directorship of Gold Way. As at the commencement of this action, the shareholders of Gold Way were G D Food, the plaintiff, D2 and another individual. Its directors were the plaintiff, D1 and D2. Because D1 and D2 were in control of G D Food, and coupled with their shareholding and directorship in Gold Way, they were in effective control of Gold Way as well.

5. In a winding-up petition based on what is commonly known as "just and equitable grounds", the plaintiff complains of the following misdeeds of the defendants (including Gold Way) since December 2000:-

(1) allowing substantial debts owed by G D Food to Gold Way to accumulate;

(2) obstructing Gold Way from pursuing G D Food for the repayment of the said debts.

As a result, profits which would have accrued and realised by Gold Way were substantially reduced. It is also alleged that the defendants did not distribute dividend to the plaintiff. Consequently, the plaintiff's right as a minority shareholder to receive dividend from Gold Way has been prejudiced.

6. The plaintiff's complaint against the defendants in this action is in gist that they have breached their fiduciary duties by competing with the business of Gold Way. The plaintiff alleges herein that since October 2001, D1 to D3, through G D Food and a Golden Dragon Food Enterprises Ltd ("G D Enterprises"), have engaged in the business of manufacturing siu mai.

The Defendants' Case

7. The part of the plaintiff's case about the closeness between G D Food and Gold Way is in essence undisputed by the defendants. It is also undisputed that G D Food has been Gold Way's main customer.

8. The plaintiff's complaint of misdeeds on the defendants' part (which is more relevant to the petition than this action, or this application) is denied by the defendants.

9. The defendants accept that G D Enterprises has been set up and has engaged in the manufacture of siu mai, and that G D Food has purchased machinery to manufacture siu mai. They give different reasons for doing so. There are also differences between the plaintiff and the defendants as to when and how the manufacture business was commenced. The more important matters will be summarised below.

10. First, the defendants say that the machines purchased by G D Food was only delivered in about mid-December 2001. Manufacture workers were only recruited in about January 2002. By the time of the trial production (20 February 2002), they claim that D2 and D3 have already resigned as Gold Way's directors.

11. Secondly, the defendants say that the manufacturing business was commenced only because of the plaintiff's winding-up petition. Since the time of the petition, Gold Way's bank accounts have been frozen. This seriously affected Gold Way's business. Payments into and out of the accounts could not be made, and some suppliers refused to continue to supply materials and the like to Gold Way.

12. Thirdly, the defendants point out that written notices were sent by Gold Way to its customers in mid-October 2001 stating that Gold Way would cease business very soon. They also allege that the plaintiff gave written notices to Gold Way's employees telling them Gold Way would be wound-up in about February 2002.

13. The defendants allege that between early October 2001 and March 2002, there were complaints against the quality of the dim sum produced by Gold Way. They also explain that the decrease in the sales volume of Gold Way since January 2002 has nothing with them, but was caused by the Lunar New Year holidays and the inferior/unsteady quality of Gold Way's dim sum.

14. It is also alleged that the plaintiff's brother has been operating a competing business called "Gold Raising Foods Company Limited".

The Plaintiff's Reply

15. Because of the shortness of time, the plaintiff's reply was contained in a draft 2nd affirmation of the plaintiff. Counsel for the plaintiff undertook on the plaintiff's behalf to file and serve an affirmation in the same terms as the said draft at or before noon on 20 April 2002.

16. The plaintiff denies that he has ever been notified of the defendants' resignation from Gold Way. He also referred to a solicitors' letter written on D1 and D2's behalf (after the date of the alleged resignation) asking for an inspection of Gold Way's books and accounts and points out that only company directors have the right to make such request.

17. He asserts that Gold Way is still carrying on business since the time of the petition. As regards the allegation that Gold Way's bank accounts have been frozen because of the winding-up petition, the plaintiff contends that it does not lie in the defendants' mouth to rely on this matter because, when the plaintiff requested them to agree to a "validation order" pursuant to s. 182, Companies Ordinance, Cap. 32, the defendants refused to do so.

18. The plaintiff alleges that the written notices sent to Gold Way's customers were sent on the defendants' behalf with the intention to drive the customers away.

19. The defendants' case about the decline in quality of the dim sum and other relatively minute matters is denied by the plaintiff.

Serious Question to be Tried

20. In view of the above, I conclude that there is a serious question to be tried on the plaintiff's claim. It is impossible, and not desirable, for the court to investigate the merits and demerits of the parties' allegations and cross-allegations which have been deposed to on oath in this action. The matters raised cannot properly be described as trivial, inherently implausible or frivolous or vexatious.

Balance of Convenience

21. An important consideration relating to the balance of convenience is the relative prejudice to the parties between granting and refusing the injunction order sought. I agree with the plaintiff's submissions that the balance of convenience is favour of granting the order because:-

(a) it is not the plaintiff's case that there was an express agreement between Gold Way and G D Food that G D Food is obliged to order its dim sum only from Gold Way. Hence, this is a case where, if the plaintiff should succeed in his claim, it may be difficult to assess the damages suffered by Gold Way (and therefore the plaintiff) because the sale and distribution business of G D Food cannot automatically be treated as Gold Way's business;

(b) the injunction order only enjoins the defendants from competing with the plaintiff. It is not intended to, and will not, affect legitimate business of G D Food or G D Enterprises;

(c) the defendants' allegation that a bank officer threatened to withhold the bank's approval of a loan to G D Food is unsubstantiated by documents. It is also implausible because, first, there was no apparent reason why any bank should know about this application and, secondly, why any bank loan should depend on the grant or refusal of an injunction order. There may be cases where banks become concerned when they learn of pending civil actions against their customers but that is an entirely different matter (and not one relied upon by the defendants).

(d) it has not been suggested by the defendants that they would otherwise be prejudiced by the order sought.

Conclusion

22. In view of the above, my discretion should be (and was) exercised in granting the order sought. Defence counsel has no submission to make regarding the form of the order when requested to do so.

23. In accordance with the usual practice of many modern-day interim injunction applications, the costs of this application should be in the cause of the plaintiff's claim.