LIN YIH FUH AND ANOTHER v. YONG YEOU NAVIGATION CO LTD AND OTHERS

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

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JUDGMENT

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The Background

1. Yong Long Steamship (H.K.) Company Limited (Yong Long HK) was incorporated in May 1989. The shareholding was set up so that the following family groupings held the percentage of shares shown opposite their names -

2. These people were also appointed directors of Yong Long HK.

3. A Panamanian company called Long Sheng Navigation S.A. (Long Sheng) owns a number of ships. The shares are held by the Lin family. A Tai-wanese company called Yong Long Steamship Company Limited (Yong Long Taiwan), controlled by the Lin Family, also owns ships, and manages others. Yong Long HK was incorporated to act as agent for the ships owned by Long Sheng and those managed by Yong Long Taiwan.

4. Yong Yeou Navigation Company Limited (Yong Yeou) was incorporated in August 1988 for the purpose of acting as agent for other ships owned or managed by Yong Long Taiwan. The shareholding of Yong Yeou was the same as that of Yong Long HK. Apart from Mdm Lin, the directors were also the same.

5. There were no written agency agreements. It was intended that Yong Long HK and Yong Yeou would have no other business other than that mentioned above.

6. Yong Long HK and Yong Yeou occupy the same offices and use the same staff. The premises are owned by another company called Lucky Sails Industrial Limited (Lucky Sails). The shares in Lucky Sails are held by Mdm Chen, SW Lin, Mdm Wu, and Mdm Tu, representing the four family units. The property is mortgaged to a bank.

7. Yong Long HK and Yong Yeou are managed by YM Wu as managing director.

8. There is yet another company involved in this matter. Powerich Development Limited (Powerich), which is controlled by the Wu family. Powerich provides stevedoring and transhipment services. There are long standing disputes between Yong Long HK and Yong Yeou in respect of these services.

Appointment of Provisional Liquidators

9. On 25 June 1997, on an ex parte application by the petitioners, this court appointed provisional liquidators to Yong Long HK and Yong Yeou. An inter partes summons for the same relief is now before me.

The Application

10. The petitions to wind up are brought on the basis that it would be "just and equitable" that the two companies be wound up.

11. It seems to me that Yong Long HK and Yong Yeou are the kind of companies, with the established personal relationships between the shareholders, to which it is right that the "just and equitable" ground should be applied. Indeed, in spite of some statements by the respondents in the papers that might indicate to the contrary, Mr Chan accepts this.

Grounds for the Appointment of Provisional Liquidators

12. There is no dispute between counsel as to the proper grounds on which a provisional liquidator should be appointed. I must be satisfied that there is a good prima facie case for the winding up of the companies and that, on the basis of commercial realities, the degree of urgency, need and balance of convenience and justice, a provisional liquidator should be appointed. It is a serious step to appoint a provisional liquidator, and this should be done only where it is shown to be necessary to do so. In particular, it should be avoided if possible where the company is solvent and continuing to trade.

13. It is common ground in this case that the agency agreements have been terminated, and, the agency business being the only business for which the companies were established, it is difficult to see, in spite of some contradictory statements by YM Wu, what business the companies have to conduct.

The Complaints

14. The petitioners base their petitions on a number of grounds. I will deal with these in order.

The Dealing with the Shares of Mdm Tu and Mdm Lin

15. In May or June 1996, when Yong Long Taiwan was considering the termination of the agency agreements, the petitioners became aware that there had been dealings with the shares of Mdm Tu and Mdm Lin. A search of the company returns of Yong Long HK revealed that shares of Mdm Tu and Mdm Lin had been transferred to the fourth respondent (Jimmy), the son of the YM Wu and Mdm Wu, and that Mdm Lin had resigned as a director of Yong Long HK in November 1994.

16. SW Lin spoke to his mother, who told him that she had not transferred or agreed to transfer her shares, nor had she resigned as a director.

17. On 13 March 1997, the petitioners wrote to Jimmy regarding the transfer of Mdm Lin's shares demanding rectification of the share register. There has been no answer to this letter. There was no answer, but there was an apparent reaction. On 1 April 1997, Yong Long HK, by the hand of YM Wu, arrested one of Long Sheng's ships, and, later, containers shipped by Yong Long Tai-wan were detained by Powerich. This caused a great deal of trouble to Long Sheng and Yong Long Taiwan. SW Lin spoke to YM Wu about this. As one of the considerations for the release of the ship and the containers, YM Wu required SW Lin to sign a "deed of undertaking" in which SW Lin stated that he had witnessed the sale of Mdm Lin's shares to Mdm Wu at a price of $600,000, and undertook to give evidence to this effect if Mdm Lin commenced any proceedings regarding the sale. Unusually, the ship was released without any security being provided.

18. It seems to me that, far from this deed providing any comfort to the respondents, it tells against them. Clearly, the deed was extracted from SW Lin by applying economic pressure. If the dealings by YM Wu with the shares were above board, it would not have been necessary to apply this pressure, and YM Wu would not have been so anxious to get this "evidence" that he saw the need to apply this pressure.

19. A solicitor employed by the petitioners searched the books of Yong Long HK and Yong Yeou in June 1997. He discovered that -

20. It is also clear that there is no evidence of any formal notice to the petitioners, as directors or shareholders, regarding the possible transfer of shares that would dilute their holdings as against the other family groupings.

21. YM Wu says that Mdm Tu sold her shares in Yong Long HK to Mdm Wu in 1991 or 1992, and these were later transferred to Jimmy and Jannie. He produces the transfer documents. He says nothing about Mdm Tu's shares in Yong Yeou. He says that in 1993 he purchased Mdm Lin's shares in Yong Long HK and Yong Yeou and he paid her by bank draft in the sum of $600,000. He says that the petitioners knew about these sales. There is nothing said by him about proper notification of the sales of the shares. The directors have the right to decline to register the transfer of any shares. They cannot exercise that right unless they are informed of such possible transfer.

22. It is, of course, highly unlikely that the petitioners would have agreed to the transfer of shares that would upset the carefully planned balance of shareholding originally agreed. They might not have been able to secure the passage of a resolution declining to register the transfer, but they should have been allowed their say.

23. I am satisfied that there is a strong prima facie case, in his dealings with these shares, YM Wu demonstrated a cavalier attitude to the rights of the petitioners as shareholders and directors.

The Appointment of Jimmy and Jannie as Directors

24. The petitioners also complain that Jimmy and Jannie were not properly appointed as directors. YM Wu says he believes that the proper procedures were followed, but he does not produce any documents establishing that this was so. He says that the petitioners knew about their appointments. This is hardly likely. There is no obvious reason why the petitioners should acquiesce in the appointment of directors that would upset the balance of power on the board to their detriment.

Longgang Container Terminal Limited

25. There is a company called Longgang Container Terminal Limited in which Yong Long HK holds 50% of the shares. SW Lin was the general manager of this company. On 8 April 1996, YM Wu wrote to the board of Longgang saying that Jimmy had been appointed general manager of Longgang pursuant to a board resolution of Yong Long Hong Kong. SW Lin wrote immediately complaining about this, saying there was no valid board resolution. YM Wu has not, and does not, deny that there was no board resolution. He says only that SW Lin agreed to the appointment. It is hardly likely that SW Lin did so agree if he complained about this immediately. And it is not likely that YM Wu thought he had agreed, otherwise he would have responded to the letter of complaint saying that there had been the agreement.

Loan to Mdm Wu

26. According to the financial statements of Yong Yeou for the years ending 31 March 1993 and 1994, the company made a loan to Mdm Wu of $3.336 million, apparently without any provision for repayment, interest or security. There is no evidence that the proper approval had been given for such a loan to a director. In the financial statement for the year ending 31 March 1995, a sum of $3.666 million becomes a loan to Long Sheng, and the reference to the loan to Mdm Wu disappears.

27. YM Wu fails to deal with this matter properly. He simply denies that there was a loan to Mdm Wu, and says that the loan was to Long Sheng. He makes no attempt to explain the entries in the financial statements for the years 1993 and 1994.

Funds obtained from Lucky Sails

28. Unprompted by any complaint by the petitioners, because they did not know about it, YM Wu says that there was a debt of $20 million due by Long Sheng to Mdm Wu which was paid by Lucky Sails. He says "I mention this debt because a subsequent mortgage was taken out by Lucky Sails on the Property to raise the said sum of $20 million to repay the 3^rd Respondent." He gives no explanation at all for why he thought it appropriate that Lucky Sails should pay a debt due by Long Sheng. He also does not explain how it was that Lucky Sails assumed this liability. There is no evidence of the board of Lucky Sails so agreeing.

Removal of Bank Signatories

29. In May 1994, the petitioners and Mdm Chen were, without their consent, removed as bank signatories for Yong Long HK and Yong Yeou. There is no evidence of any board resolutions permitting this.

30. YM Wu admits this. He says this was done because YF Lin and Mdm Chen did not return specimen signatures. He does not explain why such specimen signatures were required when they were already signatories.

Formation of New Companies

31. The petitioners complain that in 1991 YM Wu, Mdm Wu, Jimmy and Jannie formed a company called Brightwell Shipping Limited. This company has its registered office at the same offices as Yong Long HK and Yong Yeou. The suggestion is that these respondents have been competing for business with Yong Long HK and Yong Yeou. However, this evidence emerged late in the day. The respondents concerned have not had the opportunity of answering the allegations so I take no account of them.

32. YM Wu complains that the petitioners have formed a new company. I do not understand the basis for this complaint. I can see nothing wrong in the petitioners conduct.

The Smuggling

33. The petitioners make allegations against YM Wu about him using a ship to smuggle cigarettes from Japan into China. This happened in 1991. There are allegations and counter-allegations here, and there are some unsatisfactory aspects of the explanations by YM Wu, but it happened a long time ago. I take no account of this.

Failure to Provide Accounts and to Hold Meetings

34. The petitioners make general allegations about the failure to provide accounts and hold meetings, but I attach no importance to this in my assessment, except in so far as they relate to a failure to give proper notice to the petitioners and hold meetings when it affected the petitioners' interests. It is common ground that the petitioners left YM Wu in charge of Yong Long HK and Yong Yeou. They trusted him to run the businesses. Of course they were entitled to be informed of matters when it affected their interests, but I do not think there is any substance in a complaint that they were not routinely provided with accounts or given notice of meetings. If they wished to be kept fully in the picture, they should have requested this.

Assessment

35. YM Wu has sought to disturb the original and agreed balance of power in Yong Long HK and Yong Yeou in favour of his own family and against the petitioners. There is a strong prima facie case that he has done so by riding roughshod over the rights of the petitioners. By these means, he now has, or purports to have, control of Yong Long HK and Yong Yeou. It would be wrong, in my view, to allow YM Wu and his family to retain the control acquired by these means until the winding up petitions are considered. The petitioners have justifiably lost confidence in YM Wu and his family. On this basis alone, I would order that the provisional liquidators remain in office. When one takes into account the good prima facie evidence of other wrongful conduct by YM Wu in relation to Longgang Container Terminal Limited, the apparent improper loan to Mdm Wu, the taking of money from Lucky Sails to pay a debt unconnected with Lucky Sails, and the removal of the petitioners as bank signatories, the petitioners' case that there is an urgent need to replace YM Wu with provisional liquidators becomes all the more persuasive.

Complaint against the Liquidators

36. Mr Chan suggests that, if there are to be provisional liquidators, new ones should be appointed. He says this on the basis of some evidence that the liquidators passed some blank forms in the possession of Yong Long HK and Yong Yeou to Yong Long Taiwan. It appears that this was unwise, but it was not done by the liquidators themselves, but by a member of their staff. This is a storm in a teacup. It certainly does not justify any loss of confidence in the provisional liquidators, or the cost of appointing new liquidators to start again.

The Result

37. In the result, taking into account all the relevant factors, I believe that the continuation in office of the provisional liquidators is necessary. Accordingly, I make orders in terms of the summonses.

The Costs

38. The matter of costs has not been argued. The petitioners ask that I order costs be in the cause. I agree that this seems to be the appropriate order. I make an order nisi that the costs be in the cause, with a certificate for two counsel.