CARGO SERVICES LTD v. HUNDRED HONEST LTD AND OTHERS

HCCW 1028/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1028 OF 2002

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J U D G M E N T

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1. This is a petition presented on 9 September 2002 by a contributory, Cargo Services Limited ("the petitioner"), to wind up Cargo Services Holdings Limited ("the Company") on the just and equitable ground. As the Company was incorporated under the laws of the British Virgin Islands, the petition is presented under section 327(3)(c) of the Companies Ordinance, Cap. 32. The remedies under section 168A are not available to the petitioner. The petition is opposed by the 1st respondent Hundred Honest Limited ("the 1st respondent") and the 2nd respondent Princetonhall Limited ("the 2nd respondent"). The Company is the 3rd respondent.

The corporate information

2. The Company was incorporated on 29 April 1997 with a nominal capital of US$50,000.00 divided into 50,000 shares of US$1.00 each. The share capital was later increased to US$60,380.00. All 60,830 shares are issued and paid up. The shares are at present held by three shareholders as follows: the petitioner holding 16,300 shares (26.8%), the 1st respondent holding 39,530 shares (64.98%), and the 2nd respondent holding 5,000 shares (8.22%).

3. The petitioner was incorporated in Hong Kong on 24 August 1982. Its present authorised capital is HK$200,000.00, divided into 2,000 shares of HK$100.00 each, of which 1,200 shares are issued and paid up. The present shareholding of the petitioner is as follows: Mr Lee King Shun Kingson ("Kingson Lee") holding 800 shares (66.67%) and Ms Lee Lai See Alice holding 400 shares (33.33%). It is not in dispute that Kingson Lee controlled the petitioner at all material times.

4. The 1st respondent was incorporated in Hong Kong on 2 March 1990. The present issued and paid up capital of the 1st respondent is HK$3,636,000.00, divided into 3,636,000 shares of HK$1.00 each. The shareholding of the 1st respondent is as follows: Mr Lau Shek Yau John ("John Lau") holding 1,967,600 shares (54.1%), Mr Ng Chin Hung Barry ("Barry Ng") holding 559,000 shares (15.4%), Mr Yau Cheuk Yuen Vincent ("Vincent Yau") holding 318,000 shares (8.7%), Mr Wong Wing Kuen Gilbert ("Gilbert Wong") holding 318,000 shares (8.7%), Mr Yeung Ping Keung David ("David Yeung") holding 307,000 shares (8.4%), and Mr Li Yun Sang Teddy ("Teddy Li") holding 166,400 shares (4.6%). John Lau is a director and the majority shareholder of the 1st respondent.

5. The 2nd respondent was incorporated in Hong Kong on 6 January 1989. It is owned by Allport Limited ("Allport"), a company registered in the United Kingdom.

6. The main protagonists in these proceedings are Kingson Lee and John Lau. They were appointed the directors of the Company on 6 June 1997. Kingson Lee was nominated to the board by the petitioner. He was a director until he was removed a month before the petition. As the majority shareholder, the 1st respondent had nominated two other directors apart from John Lau. They are Barry Ng and David Yeung. The fifth director, who was nominated by the 2nd respondent, is Mr William Toye ("Will Toye").

7. Among the objects of the Company is to carry on the business of shipping and forwarding agents. The Company does not carry out trading activities but holds shares directly or indirectly in other companies that are engaged in the business of freight forwarding and warehousing.

8. The Company is solvent and its subsidiaries and associates are financially healthy. According to the balance sheet in the management accounts as at 31 May 2002, the total net assets of the Company stood at HK$42,557,697.07 and the total net assets of the group amounted to HK$127,376,796.08.

9. Transfer of shares in the Company is restricted by the memorandum and articles of association. Article 15 of the memorandum provides that "subject to the provisions of Regulation 48 of the Articles of Association ... registered shares in the Company may be transferred subject to the prior or subsequent approval of the Company as evidenced by a resolution of directors or by a resolution of members." Regulation 48 of the articles provides that "subject to any limitations in the Memorandum, registered shares in the Company may be transferred by a written instrument of transfer signed by the transferor and containing the name and address of the transferee, but in the absence of such written instrument of transfer the directors may accept such written instrument of transfer of shares as they consider appropriate."

The history

10. The history of the establishment of the Company began with the personal relationship between John Lau and Kingson Lee.

11. Since 1983, John Lau had been the managing director of United Distribution Services Far East Limited ("UDSFEL"), which carried on the business of freight forwarding and warehousing. Jardine, Matheson and Company Limited ("Jardines") later acquired the controlling interest in UDSFEL.

12. In 1987, John Lau invited Kingson Lee to join UDSFEL as the general manager in the sales and marketing department, working under his supervision. Kingson Lee was then engaged in running his own business in freight forwarding through the petitioner, and the petitioner ceased business after Kingson Lee joined UDSFEL.

13. Since 1986, John Lau had also run a business of mid-stream operation and container depot through Hoi Kong Container Services Company Limited ("Hoi Kong"). In November 1989, he sold his shares in Hoi Kong to Jardines. In February 1990, John Lau started a new business in mid-stream operation through another company, Wide Shine Terminals Limited ("Wide Shine"). In February or March 1990, Jardines dismissed John Lau from his employment with UDSFEL, purportedly on the ground that Wide Shine had taken away business from Hoi Kong. After John Lau's dismissal from UDSFEL, Kingson Lee was offered the position of managing director by the management of UDSFEL. Kingson Lee declined this offer and accepted instead John Lau's offer to join the new business started by the latter. There is dispute as to the capacity in which Kingson Lee joined the new business, whether as a "partner" or merely as an employee. Apart from Kingson Lee, six senior staff of UDSFEL also left their employment and joined the new business of John Lau. They were Barry Ng, Ms Ng Chor Sheung Rita ("Rita Ng"), Vincent Yau, David Yeung, Teddy Li and Gilbert Wong.

14. After John Lau left UDSFEL, he set up a firm in early March 1990 known as United Distribution Services Company ("UDSC") to carry on the business of cargo services and freight forwarding. In mid March 1990, John Lau and UDSC were sued by UDSFEL and Jardines for passing off. In view of that litigation, John Lau ceased the business of UDSC almost immediately.

15. To carry on the new business began by UDSC, a limited company was acquired on 17 May 1990. This was Foresail Investment Limited ("Foresail"), with an issued share capital of HK$2,000,000.00 divided into 2,000,000 shares of HK$1.00 each. On that date, 749,999 shares were allotted to the petitioner and 1,249,999 shares were allotted to the 1st respondent. The two subscriber shares in Foresail were transferred. The petitioner held 750,000 shares in Foresail (37.5%) and the 1st respondent held the remaining 1,250,000 shares (62.5%). Also on 17 May 1990, the two subscriber shares in the 1st respondent were transferred and additional shares were issued and the 2,500,000 shares in the 1st respondent were held as follows: John Lau held 1,700,000 shares; Barry Ng, David Yeung, Vincent Yau and Rita Ng each held 200,000 shares.

16. On 30 June 1990, a special resolution was passed to change the name of Foresail to Cargo Services (Far East) Limited ("CS(FE)L"). The change of name became effective on 20 July 1990. The shareholding remained unchanged until 1 June 1991 when 200,000 new shares in CS(FE)L were allotted to the 2nd respondent. As a result of the allotment, the shareholding structure was changed in that the 1st respondent held 56.82% of the shares (1,250,000 shares), the petitioner held 34.09% (750,000 shares) and the 2nd respondent held 9.09% (200,000 shares).

17. On 31 October 1991, a special resolution was passed by the shareholders of CS(FE)L to change the name of the company back to Foresail. The change of name took effect on 7 November 1991. With the change of name, the business was taken over by a newly incorporated company known as Cargo Services Far East Limited ("CSFEL"). Foresail became dormant after this and it was de-registered as a defunct company on 10 August 2001. The reason for the change of name back to Foresail and the formation of CSFEL to take over the business was to protect the name of "Cargo Services Far East" from any litigation that might be brought by Jardines.

18. CSFEL was incorporated in Hong Kong on 28 November 1991. To avoid litigation with Jardines and UDSFEL, it was decided that John Lau, Kingson Lee and the petitioner should not be registered as shareholders in the new entity. According to the annual return of CSFEL made up to 31 December 1992, the 2,300,000 issued shares were held as follows: Barry Ng held 850,000 shares; Rita Ng held 850,000 shares; the 2nd respondent held 200,000 shares; David Yeung, Vincent Yau, Teddy Li and Gilbert Wong each held 100,000 shares. The three directors of CSFEL were Barry Ng, Rita Ng and Will Toye.

19. In early 1994, litigation with UDSFEL and Jardines was over. On 20 April 1994, all the individuals who held shares in CSFEL made transfers of shares to the 1st respondent and the petitioner so that the shareholding became as follows: the 1st respondent held 1,350,000 shares (58.7%), the petitioner held 750,000 shares (32.6%), and the 2nd respondent held 200,000 shares (8.7%).

20. CSFEL was used as the main vehicle to carry on the business until the re-structuring in November 1997. A number of subsidiaries and associated companies were established. John Lau was the managing director of CSFEL. Kingson Lee was the marketing director and he was promoted to be the deputy managing director in January 1994. When Rita Ng resigned in 1994, her shares in the 1st respondent were sold to Barry Ng, Teddy Li and David Yeung. In January 1996, Barry Ng was promoted to become another deputy managing director of CSFEL and he took over the management of some of the portfolios previously under Kingson Lee.

21. In December 1995, there was an increase in capital of CSFEL by the issue of 1,150,000 new shares of HK$2.00 each. The ratio of the shareholding remained unchanged and the shares after the allotment were held as follows: the 1st respondent held 2,025,000 shares, the petitioner held 1,125,000 shares and the 2nd respondent held 300,000 shares.

22. In November 1997, for reasons of tax and risk management, there was a group re-structuring. CSFEL was no longer used as the main business vehicle and its place was taken by the Company. As the ultimate holding company, the Company became the direct or indirect majority shareholder of all the subsidiaries and associated companies including CSFEL. In addition to the Company, four companies also incorporated in the British Virgin Islands were acquired. These companies became the holding companies of the subsidiaries which were incorporated in Hong Kong. All the companies incorporated in the British Virgin Islands did not carry out any trading and derived their income from the dividends declared by the subsidiaries which carried out the trading. The 50,000 issued shares of the Company were held by the 1st respondent, the petitioner and the 2nd respondent in the same ratio as their shareholdings in CSFEL and were as follows: the 1st respondent held 29,350 shares (58.7%), the petitioner held 16,300 shares (32.6%), and the 2nd respondent held 4,350 shares (8.7%).

23. The complaints of the petitioner which formed the basis of its petition for winding up on the just and equitable ground may be grouped under the following heads:

(1) unfair distribution of profits;

(2) dilution of shareholding;

(3) misuse of the funds of the Company by John Lau; and

(4) exclusion of Kingson Lee from management.

The issues and the witnesses

24. It would be convenient to set out the issues in dispute before I consider the evidence in relation to each issue.

25. The first broad issue is whether there was in existence an association between Kingson Lee and John Lau formed and continued on the basis of a personal relationship involving mutual confidence so as to give rise to the imposition of equitable considerations which may make it unjust or inequitable to insist on the exercise of legal rights laid down in the articles of association. The petitioner contends there was the relationship of a quasi-partnership between Kingson Lee and John Lau, whereas the 1st respondent asserts that Kingson Lee had joined the new business merely as an employee. Each side relies on its version of the shareholding structure of the various companies and of the subsequent conduct of Kingson Lee and John Lau to support its contention. The conflicting disputes of fact relating to the first broad issue that I need to resolve are as follows:

(1)	what are the terms of the agreement made between Kingson Lee and John Lau before the various companies were set up; in particular, was there any agreement as to equal sharing of profits between Kingson Lee and John Lau and if John Lau was to have absolute control of the companies set up;
(2)	what assistance, if any, did the petitioner give to the new companies in the early days;
(3)	did John Lau agree to bear the entire loss of capital if the new company or companies should fail in the business;
(4)	if there was agreement that Kingson Lee and John Lau were to hold equal shares in the new company or companies and what were the shareholdings of John Lau and Kingson Lee in the various companies held through the 1st respondent and the petitioner respectively; and
(5)	was the status of Kingson Lee any different from the other senior staff of UDSFEL that had left their employment to join the new company or companies.

26. The second broad issue relates to the distribution of profits. Specifically, the complaints of the petitioner are as follows:

(1)	no dividends were declared for the years of 1996, 1997 and 1998 despite substantial profits made by CSFEL and the Company;
(2)	the bonus schemes for the years ended 1999, 2000 and 2001 were unfair and unjust to the petitioner;
(3)	the stock option schemes for the years ended 1999, 2000 and 2001 were unfair and unjust to the petitioner resulting in the dilution of the shareholding of the petitioner in the Company from 32.6% to 22.33%; and
(4)	the allocation of the distributed net profits of the Company between dividends and bonuses for the years ended 1999, 2000 and 2001 marked a trend of an ever decreasing ratio in respect of dividends and was unfair and unjust to the petitioner.

27. Whilst the figures relating to the distribution of profits by way of dividends, bonuses and stock options are not in dispute, there are these disputes as to fact and law that I need to resolve in relation to the second broad issue:

(1)	if the decision not to declare dividends for the years ended 1996 to 1998 was justified;
(2)	if the decision to give relatively small bonuses to the petitioner and not to give any stock option to the petitioner for the years ended 1999, 2000 and 2001 was justified owing to the performance of Kingson Lee and his lack of contribution to the Company as alleged;
(3)	if the dilution of the petitioner's shareholding would have any significant effect on the petitioner's interest in the Company so as to justify the relief of winding up;
(4)	if the uneven ratio of distribution of profits as between dividends and bonuses was unfair and unjust;
(5)	if the bonus and stock option schemes for the years ended 1999, 2000 and 2001 were approved by the board of directors; and
(6)	if it should be inferred that Kingson Lee had consented to the dividends declared and the bonus and stock option schemes for the years ended 1999, 2000 and 2001.

28. The third broad issue relates to the alleged misuse of funds of the Company by John Lau. The specification allegations are as follows:

(1)	the payment of fees to Llea & Company Limited ("Llea"), a company owned by John Lau, since January 1998, for performing company secretarial work for the Company and for companies in the group, notwithstanding that such work was undertaken by an employee, being Miss Irene Ip, who was secretary to John Lau;
(2)	the payment of HK$30,000.00 to John Lau in October 1998 as compensation for his loss of cash in a burglary in the office;
(3)	the settlement of the rental of the residential car-parking space of John Lau in January 2001 in the sum of HK$31,000.00;
(4)	the purchase of a car in February 2001 at HK$980,000.00 for the use of John Lau;
(5)	the payment of HK$948,000.00 in March 2001 to John Lau being entertainment expenses he had allegedly incurred on behalf of the Company between 1997 to 2000, notwithstanding that such expenses were not supported by receipts; and
(6)	the payment of a monthly entertaining allowance of HK$17,000.00 to John Lau as from March 2001 without the requirement of any supporting documents.

29. In respect of the above allegations, the disputed issues are:

(1)	whether these expenses were usual and accepted expenses by a company of this size; and
(2)	whether Kingson Lee had approved of or impliedly accepted these expenses.

30. The fourth broad issue relates to the allegation of exclusion of Kingson Lee from the management of the Company. The disputed issues are:

(1)	whether there was an understanding that Kingson Lee would be entitled to participate in the management of the Company; and
(2)	whether he had been excluded from management or had he resigned voluntarily.

31. The fifth broad issue is whether a winding up order should be made in view of such allegations that are found to be established by the petitioner.

32. The sixth broad issue is whether there are any reasons why the court should not grant relief to the petitioner. It is alleged that the petitioner has not come to court with clean hands and that the petition was filed for an ulterior motive. The disputed issues that must be resolved are:

(1)	whether Kingson Lee had misappropriated HK$300,000.00 from the Company in February 2000; and
(2)	if the petition was presented to put pressure on John Lau to force him to pay a higher price for the shares of the petitioner in the Company.

33. All four deponents who had given affirmations on behalf of the petitioner, the 1st respondent and the 2nd respondent were cross-examined on their affirmations. They are Kingson Lee, John Lau, Barry Ng and Will Toye.

34. I find Kingson Lee to be a truthful witness in most of the important facts. He has not evaded or avoided questions where they appeared to be against his interest. I cannot say the same about John Lau. His explanation for not mentioning or addressing quite a number of matters important to his case in his affirmations notwithstanding there was ample opportunity for this does not strike me as convincing. I am sceptical about his explanation in that he has put it down to the advice from his legal advisers as to the amount of salient information that should go into his affirmations and that he could elaborate on details in cross-examination. With his intelligence, I do not accept that he would not mention to his legal advisers matters which appeared important so that an informed decision could be made whether such matters should be dealt with in his affirmations which would stand as his evidence in chief. Barry Ng's evidence does not add very much to the 1st respondent's case. As for Will Toye, he was prepared to say very little and was reluctant to be drawn into matters outside the contemporaneous documents whether prepared by him or addressed to him.

35. I now consider each of the issues, in the order as outlined above.

The initial agreement between Kingson Lee and John Lau

36. It is the petitioner's case that when Kingson Lee agreed to join John Lau in a new business venture in 1990 and acquire a limited company for this purpose, they had orally agreed as follows:

(1)	John Lau and Kingson Lee were to have equal shares in the new company with a share capital of HK$2 million, each was to subscribe to shares in the amount of HK$750,000.00;
(2)	John Lau was to provide the entire share capital in the sum of HK$2 million. Out of this sum, HK$750,000.00 would be a loan to Kingson Lee, repayable with interest to John Lau out of the dividends distributed by the new company;
(3)	five key staff of UDSFEL (Rita Ng, Barry Ng, Vincent Yau, David Yeung and Teddy Li) were to be invited to join the new company and each was to subscribe to shares in the amount of HK$100,000.00 with a loan from John Lau, also repayable with interest out of the dividends distributed by the new company; and
(4)	Allport was to be invited to join and to take up a 10% stake in the new company.

37. It is implicit in the initial agreement as alleged that John Lau and Kingson Lee should share in the profits of the company equally in view of their equal shareholdings in the company.

38. The 1st respondent's version of the terms of the initial agreement, which John Lau had made with Kingson Lee and six other senior staff of UDSFEL, being Rita Ng, Barry Ng, Vincent Yau, David Yeung, Teddy Li and Gilbert Wong, is as follows:

(1)	apart from the agreed salary and sales commission, Kingson Lee would be entitled to 37.5% of the net profits of the new company whereas the other senior staff would each be entitled to 5% of the net profits;
(2)	there would be two shareholders in the new company, being the 1st respondent and the petitioner, and their shareholding ratio would be 62.5% and 37.5% respectively;
(3)	the shareholding ratio in the 1st respondent would be 68% to John Lau and 8% each to four senior staff, being Rita Ng, Barry Ng, Vincent Yau and David Yeung;
(4)	John Lau would put up the funds for the share capital of the new company and of the 1st respondent and the other shareholders would repay him for the loans advanced for the subscription of their shares out of the dividends distributed by these companies; and
(5)	John Lau would have "absolute control" over the new company.

39. I pause here to point out that John Lau made no mention as to what agreement or understanding was reached as regards Teddy Li and Gilbert Wong who were among those invited to join the new company but were not given any shares in the 1st respondent in 1990. Also, he has not made clear if the other senior staff who would each be entitled to 5% of the net profits would include Teddy Li and/or Gilbert Wong.

40. Was there an agreement or understanding between Kingson Lee and John Lau that they should have equal shareholding in the new company? To give credence to his own case, each has pointed to the shareholding structure of the companies subsequently acquired, Foresail (with a change of name to CS(FE)L) and CSFEL.

41. When Foresail was acquired on 17 May 1990, 750,000 (37.5%) of the shares were held by the petitioner and the remaining 1,250,000 shares (62.5%) were held by the 1st respondent. As all the shares in the petitioner were held by Kingson Lee or for his benefit, it can be regarded that he had an interest of 37.5% in Foresail. John Lau was a majority shareholder in the 1st respondent. As on 17 May 1990, he held 1,700,000 out of 2,500,000 shares in the 1st respondent, which was 68%. His indirect interest in Foresail was 42.5%, which would appear to be greater than Kingson Lee's interest. The subsequent allotment of new shares in CS(FE)L to the 2nd respondent in 1991 did not alter the position. On the face of the documents, this would appear to support the 1st respondent's case.

42. When CSFEL was incorporated on 28 November 1991, no shares were issued to the 1st respondent and the petitioner owing to unresolved litigation and shares were issued instead to six individuals: Rita Ng and Barry Ng, each holding 850,000 shares; and Vincent Yau, David Yeung, Teddy Li and Gilbert Wong, each holding 100,000 shares. After the litigation was resolved in 1994, all six persons transferred their shares to the 1st respondent or to the petitioner so that the former held 1,350,000 shares and the latter held 750,000 shares.

43. Kingson Lee has alleged that of the 1,250,000 shares held by the 1st respondent in Foresail, 500,000 of which were held for the benefit of five key staff, not just four as alleged by the 1st respondent, Teddy Li being one of the five. Hence, Kingson Lee and John Lau each had an interest in 750,000 shares in Foresail. Teddy Li had joined the new business at the same time as other key staff. The shareholding within the 1st respondent was a matter entirely up to John Lau and the staff to work out. As for the shares in CSFEL issued to Rita Ng and Barry Ng in 1991, they each held 100,000 shares on their own behalf and 750,000 shares on trust for Kingson Lee and John Lau, so again the shareholding of Kingson Lee was equal to that of John Lau. When the shares held on trust were transferred to the 1st respondent and the petitioner in 1994, all six employees also transferred their own shares to the 1st respondent as they had yet to repay John Lau their loans for share subscription. From then onwards, until the stock option scheme was introduced for the Company in 2000, Kingson Lee's interest in CSFEL and later in the Company had remained at 32.6% and John Lau's interest was of the same percentage. Kingson Lee also pointed to e-mail from John Lau issued on 18 February 2000 at 1:12 pm to support his version. This set out the shareholdings of the Company and of the 1st respondent for the bonus and stock option schemes for the year ended 1999 and it was stated that the 1st respondent's shareholding in the Company was 58.7% and John Lau's shareholding in the 1st respondent was 55.57%, so John Lau's indirect interest in the Company was 32.6%, which was the same as that of Kingson Lee.

44. John Lau claims that all the shares held by Rita Ng and Barry Ng in CSFEL were held on trust for the 1st respondent and the petitioner without any specific designation as to how many of the shares were held on trust for him personally. As for Teddy Li, he was not one of the shareholders of the 1st respondent in the beginning and only became one when John Lau transferred 100,000 of his shares to Teddy Li in November 1991. Reliance was placed on a letter dated 28 April 1990 by John Lau on the letter head of CS(FE)L to Allport offering a share option to the latter to purchase 10% of the shares in CS(FE)L within a year. It was stated that the prinicipal shareholders of that company were John Lau and Kingson Lee, through their own nominee companies, and they had allowed four key staff, Rita Ng, Barry Ng, Vincent Yau and David Yeung, to participate in the company to the extent of 5% each. There was no mention of Teddy Li.

45. I prefer the evidence of Kingson Lee here, notwithstanding that he did not have a ready answer to all the queries put to him to cross-examination. He could not give a satisfactory answer to some of the questions concerning Teddy Li because he was not concerned with when and how John Lau should allot shares in the 1st respondent to the key staff (a matter not disputed by John Lau). I accept his evidence that 500,000 shares in Foresail/CS(FE)L were reserved for five staff equally, including Teddy Li. Further, it seems to me it would have been too much of a coincidence that from 1994 down to the time the bonus and stock option schemes were introduced in 2000 that the percentage interest of Kingson Lee in CSFEL and later in the Company should be the same as that of John Lau, down to the decimal point, if it was not due to an understanding that both should have an equal interest in the company used as the business vehicle.

46. I find that there was an initial agreement or understanding between Kingson Lee and John Lau that they were to hold equal shares, whether directly or indirectly, in the company used to operate the new business and that this was brought into effect in the shareholding structure of the various companies they used until the stock option scheme was introduced in February 2000. The implicit agreement that they should share profits equally in the business on account of their equal shareholdings also ties in with the fact that John Lau and Kingson Lee received the same amount from their remuneration packages on account of their posts. John Lau drew the same amount from CSFEL in the nature of allowances equivalent to the salary received by Kingson Lee. For the years ended 1994 and 1995, he drew the same amount of commission as the commission received by Kingson Lee during that period. When the remuneration package was changed in January 1996 from salary with commission to a fixed salary, the monthly salary of Kingson Lee was fixed at HK$138,870.00, of the same amount as the monthly remuneration package of John Lau. Further, in July 1999, John Lau queried why Kingson Lee had received an amount of HK$12,498.00 more than he did in terms of monthly management payment. When it was explained to him that although the total monthly package of both was of the same amount, Kingson Lee had HK$55,000.00 paid to him as salary and this attracted a provident fund contribution of 9%, and John Lau was not in the provident fund scheme as all his drawings were in the form of allowances, John Lau insisted that he should be paid the difference owing to the contribution of provident fund for Kingson Lee as the principle was that he should receive the same figure of payout as Kingson Lee. The provident fund contribution for Kingson Lee since 1990 was calculated and the amount of HK$339,597.35 was paid to John Lau.

47. John Lau has sought to explain this by saying that he had adopted a policy that he would not have a larger monthly remuneration than any other staff in the Company to show the staff that he was willing to share hard times with them and it was "understood" by the staff that the policy would change once the Company could afford to pay him a monthly remuneration that would match his contributions and responsibilities, and that this policy had continued until 1999. I reject his evidence on this. There was no mention of this policy and the reason for the change of policy in any contemporaneous document.

48. I also reject John Lau's evidence that Kingson Lee had joined the new business as a mere employee and that his status was no different from the other senior staff of UDSFEL that were persuaded to leave their employment. Kingson Lee's position and contribution was different from the other senior employees. I find that Kingson Lee, through the petitioner, had given assistance in the initial stages of the business. Whatever might have been the truth as regards the petitioner's assertion that it had established a branch office for the use of Foresail, which is denied by the 1st respondent, it is not disputed that Kingson Lee did allow the name and facilities of the petitioner to be made used of in a number of ways in the early days because of litigation or the threat of litigation with Jardines and UDSFEL. The bank accounts of the petitioner were used in the running of the new business; Foresail was changed to a name similar to that of the petitioner; the petitioner issued invoices for Foresail and collected payment on its behalf. Allport had traded with the petitioner from March to July 1990 until CS(FE)L was in operation. As acknowledged by John Lau in his letter to Allport dated 28 April 1990, Kingson Lee and he were the principal shareholders of CS(FE)L, through their respective nominee companies; the key staff who had been allowed to participate in the company did so through the nominee company of John Lau, unlike Kingson Lee who did so through his own nominee company.

49. I do not regard it as material that John Lau was Kingson Lee's superior in UDSFEL; that there was no partnership relationship between the two before they left UDSFEL; that the first business entity set up to operate the new business was UDSC, of which John Lau was sole proprietor; or that the capital for the business was initially provided by John Lau.

50. I should mention that it was initially suggested by John Lau that as he had put up the funds for the capital of the new business and those who were invited to subscribe for shares did so with a loan from him, this meant that if the business failed, none of the others would lose any money except him. He later accepted that the loans would have to be repaid with interest, although it was envisaged that the other shareholders would repay at a time when the company was making a profit. I do not find this a matter of significance.

51. As for the assertion that it was agreed that John Lau was to have "absolute control" in the new company, John Lau has qualified this in cross-examination that this meant he was to exercise "majority control" via the 1st respondent as the majority shareholder and that it was still necessary for the board of directors to endorse his proposals such as the bonus and stock option schemes.

52. I do not however accept the evidence of Kingson Lee under cross-examination that there was an agreement or understanding that he and John Lau would be equal in all respects. It is evident from the outset that the two-tier shareholding structure in Foresail and subsequent companies (that the 1st respondent as John Lau's nominee company was to hold shares in these companies not only for him but also on behalf of the other key staff) was designed to ensure that John Lau would have controlling power over these companies.

53. I find that there was a relationship involving mutual trust and confidence between John Lau and Kingson Lee and it was on that basis that a succession of companies were acquired to operate the business. Among the rights and obligations of the members not submerged in the company structure are the right or expectation of Kingson Lee to enjoy the same level of monetary reward as John Lau and to participate in the conduct of the business. I do not regard it as significant that the initial agreement alleged by the petitioner was not contained in writing or that it was not mentioned by the petitioner's solicitors in the letter before proceedings there was an agreement or understanding there was to be equal sharing of profits between Kingson Lee and John Lau. The initial agreement alleged by John Lau was likewise not contained in writing. The other two typical elements identified by Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd. [1973] AC 360 at 379E to G are also present here. There was an agreement or understanding that some of the shareholders should participate in the conduct of the business and there is restriction upon the transfer of the members' interest in the Company under the provisions of the memorandum and articles of association I have set out.

The distribution of profits

54. Before I deal with the contentious issues, I set out the facts which are not in dispute.

55. Dividends for the years ended 1990 and 1991 were distributed to the shareholders of CS(FE)L in accordance with their shareholdings. The dividends were used by Kingson Lee to pay off the loan from John Lau for the subscription of his shares in CS(FE)L.

56. For the years ended 1992, 1993 and 1994, no dividends were declared because of substantial losses incurred due to investments in Mainland China. In December 1995, CSFEL had to raise capital by the issue of new shares and the petitioner subscribed to 375,000 shares at a premium of HK$2.00 per share.

57. Profits were made by CSFEL and/or the Company for the years ended 1996 (HK$5 million odd), 1997 (HK$11,839,028.00) and 1998 (HK$7,367,561.00). No dividends were declared for any of these years. It should be noted that investments in the Mainland were still suffering a loss in 1997. Up to the end of 1997, the losses amounted to about HK$13 million. The performance of the business there only improved since 1998 as a result of the appointment of Zhenhua International Shipping Agency Limited which had a Class A forwarders' licence in China. In June 1999, a subsidiary of the Company was granted a Class A forwarders' licence in Shanghai.

58. For the year ended 31 December 1999, the net profit of the Company was HK$16,181,617.00. Dividends of HK$5 million were declared at the directors' meeting held on 16 February 2000 and were distributed in accordance with the shareholdings. In addition to the dividends, distribution of profits was made to various individuals by way of a bonus and stock option scheme as follows:

(i) Bonus Scheme 1 of HK$2 million

Recipient	Amount (HK$)	Percentage
John Lau	652,000	32.6%
Barry Ng	600,000	30%
Kingson Lee	180,000	9%
Gilbert Wong	180,000	9%
Vincent Yau	134,000	6.7%
David Yeung	112,000	5.6%
Teddy Li	102,000	5.1%
Laura Mak	40,000	2%

(ii) Bonus Scheme 2 of HK$1,406,000.00

Recipient	Amount (HK$)	Percentage
John Lau	351,500	25%
Barry Ng	351,500	25%
Kingson Lee	98,420	7%
Gilbert Wong	98,420	7%
Vincent Yau	98,420	7%
David Yeung	98,420	7%
Teddy Li	98,420	7%
Laura Mak	112,480	8%
Ron Huen	98,420	7%

The total amount distributed under Bonus Scheme 2 was subsequently increased to HK$1,540,000.00 in that an additional amount of HK$134,000.00 was distributed to the 2nd respondent under this scheme.

(iii) Stock Option Scheme

A stock option of 2,500 shares was granted only to the 1st respondent, to be exercised on or before 30 June 2001 at HK$40.00 per share.

59. The effect of the above bonus and stock option schemes for the year ended 1999 may be stated as follows:

(1)	John Lau had received a total of HK$1,003,500.00 by way of bonuses whereas Kingson Lee had received only HK$278,420.00 by way of bonuses.
(2)	When the bonuses awarded are expressed by reference to the shareholdings in the Company, the position is as follows:

	Bonus received (HK$)	Percentage of bonus received	Shareholding in the Company
the 1st respondent	2,876,680	81.26%	58.7%
the petitioner	278,420	7.86 %	32.6%
the 2nd respondent	133,980	3.78%	8.7%
Laura Mak	152,480	4.31 %	- - -
Ron Huen	98,420	2.78 %_	- - -
Total:	3,540,000	100%

(3) After the 1st respondent had exercised the stock option, the shareholding of the Company was changed as follows:

	Number of shares	Percentage of shareholding
the 1st respondent	31,850	60.7%
the petitioner	16,300	31%
the 2nd respondent	4,350	8.3%
	Total:	100%

60. For the year ended 2000, the net profit of the Company was HK$30,778,545.00. Dividends in the sum of HK$1,575,000.00 were declared and distributed in accordance with the shareholdings. In addition, the net profits were distributed under a bonus and stock option scheme as follows:

(i) Performance Bonus of HK$4 million

Recipient	Amount (HK$)
John Lau	2 million
Barry Ng	1 million
Gilbert Wong	300,000
Vincent Yau	260,000
Kingson Lee	200,000
David Yeung	160,000
Laura Mak	80,000

(ii) Special Bonus Scheme 1 of HK$1,192,000.00

Recipient	Amount (HK$)
John Lau	333,760
Barry Ng	333,760
Gilbert Wong	71,520
Vincent Yau	71,520
Kingson Lee	59,600
David Yeung	59,600
Laura Mak	81,060
Ron Huen	77,480
the 2nd respondent	103,700

(iii) Special Bonus Scheme 2 of HK$3 million

Recipient	Amount (HK$)
the 1st respondent	2,589,000
the 2nd respondent	261,000
the petitioner	150,000

(iv) Stock Option Scheme

A stock option at HK$50.00 per share to be exercised on or before 30 June 2002 was granted to the 1st respondent (7,680 shares) and the 2nd respondent (650 shares) only.

61. The effect of the bonus and stock option schemes for the year ended 2000 is stated below:

(1)	John Lau received in his personal capacity HK$2,333,760.00 as bonuses. If the dividends paid out by the 1st respondent (made up of the dividends distributed by the Company to the 1st respondent in the sum of HK$955,500.00 and the bonus paid to the 1st respondent under special bonus scheme 2 in the sum of HK$2,589,000.00) are also taken into account, the total amount received by John Lau was HK$4,333,920.00. The total amount received by Kingson Lee by way of bonuses and as dividends distributed to the petitioner was HK$898,600.00.
(2)	After the exercise of the stock option by the 1st and 2nd respondents, the shareholding in the Company was altered as follows:

	Number of shares	Percentage of shareholding
the 1st respondent	39,530	64.98%
the petitioner	16,300	26.8%
the 2nd respondent	5,000	8.22%
Total:	60,830	100%

62. For the year ended 2001, the net profit of the Company was HK$30,593,595.00. Dividends in the sum of HK$1 million were declared and distributed in accordance with the shareholdings. In addition, profits were distributed by way of a bonus and stock option scheme as follows:

(i) Performance Bonus of HK$4,530,000.00

Recipient	Amount (HK$)
John Lau	2.5 million
Barry Ng	1,125,000
Gilbert Wong	375,000
Vincent Yau	280,000
David Yeung	170,000
Laura Mak	80,000

(ii) Special Bonus Scheme 1 of HK$274,305.00

Recipient	Amount (HK$)
John Lau	76,805
Barry Ng	76,805
Laura Mak	18,650
Ron Huen	19,200
Gilbert Wong	16,460
Vincent Yau	16,460
David Yeung	13,715
Kingson Lee	13,715
the 2nd respondent	22,495

(iii) Special Bonus Scheme 2 of HK$4 million

Recipient	Amount (HK$)
the 1st respondent	3,550,820
the 2nd respondent	449,180

(iv) Stock Option Scheme

A stock option of HK$50.00 per share to be exercised on or before 31 May 2003 was granted only to the 1st respondent (11,140 shares) and the 2nd respondent (1,030 shares).

63. The effect of the above schemes for the year ended 2001 may be stated as follows:

(1)	John Lau received in his personal capacity a sum of HK$2,576,850.00 by way of bonuses. In addition, he received dividends declared by the 1st respondent (made up of the dividends distributed to the 1st respondent by the Company of HK$649,800.00 and the bonus received by the 1st respondent under special bonus scheme 2 of HK$3,550,820.00). There is no evidence as to how the dividends declared by the 1st respondent were distributed for that year, but assuming that dividends were distributed in accordance with the shareholdings in the 1st respondent, John Lau would have received at least HK$2 million from the 1st respondent. The amount received by Kingson Lee by way of bonus was HK$13,715.00 and the amount received by way of dividends distributed to the petitioner was HK$268,000.00.
(2)	Upon the exercise of the stock option by the 1st and 2nd respondents (I understand this has not been exercised at the time of the hearing of the petition), the shareholdings in the Company would be altered as follows:

	Number of shares	Percentage of shareholding
the 1st respondent	50,670	69.41%
the petitioner	16,300	22.33%
the 2nd respondent	6,030	8.26%
Total:	73,000	100%

64. The allocation between dividends and bonuses in the net profits distributed for these three years showed a marked decrease of the amount allocated for dividends. The figures are set out below:

Year ended	Dividends	Bonuses	Total amount distributed (HK$)
1999	HK$5 million (59%)	HK$3,406,000.00 (41%)	HK$8,406,000.00 (100%)
2000	HK$1,575,000 (16%)	HK$8,192,000.00 (84%)	HK$9,767,000.00 (100%)
2001	HK$1 million (10%)	HK$8,804,303.00 (90%)	HK$9,804,303.00 (100%)

65. I turn to the contentious issues. The complaint regarding the non-declaration of dividends for the years ended 1996, 1997 and 1998 may be disposed of quickly. I do not think there is substance in this complaint. I have already noted the losses incurred owing to the investments in China. As explained by John Lau, the Company needed capital to support and expand its business in China and other parts of the world in those periods and had no spare cash to declare dividends. It is difficult to make out a complaint of this kind particularly as those in control had not benefited themselves in some way by the decision not to declare dividends. This complaint was not touched upon in the closing submissions of Mr Kenneth Chan, who appeared on behalf of the petitioner.

66. I approach the allegation as to the unfair distribution of profits for the years ended 1999 to 2001 by looking at the circumstances in which the decisions were made.

67. According to the minutes of the meeting of the board of directors on 3 February 2000, it was announced by John Lau that a dividend would be distributed to the shareholders out of the profits for the year ended 1999. It was recorded that it was agreed that a "staff stock option scheme" should be implemented to "reward those staff who performed well so that they would feel a greater affinity towards the Company". Will Toye, who had attended the meeting, had made more detailed notes of what was said and his notes were circulated to John Lau, Kingson Lee and Barry Ng in March 2000. Although Will Toye's notes are not a complete record of all that was said, as far as what was put down in his notes, I find the contents accurate, there being no challenge from any party after the contemporaneous notes were circulated and I accept his evidence that he would not have missed out anything of major importance from his notes.

68. It was not mentioned in the official minutes how much was to be distributed as dividends out of the profits for the year ended 1999. However, it was stated in Will Toye's notes that there was to be a distribution of HK$6 million. This sum included HK$1 million that would be distributed "amongst the senior management staff" and that HK$5 million would be distributed to the shareholders by way of dividends. Will Toye's response to this, as recorded, was that he welcomed the prospect of a dividend for 1999 and expressed the view that the Company should work to the principle of proposing a dividend of at least 50% of its profits each year.

69. The petitioner does not complain about the amount of dividends declared for the year ended 1999. The complaint is as regards the amount of bonus distributed to the petitioner and the stock option scheme denied to the petitioner.

70. The bonuses announced by John Lau by e-mail on 18 February 2000 were in the total amount of HK$3,406,000.00 (increased to HK$3,540,000.00 on 25 February 2000), far in excess of the HK$1 million which was envisaged to be distributed to the senior management staff at the meeting on 3 February 2000. There was no prior consultation by John Lau save that he had sent e-mail to Barry Ng on 17 February 2000 setting out what he had in mind for the bonus and stock option scheme "for the senior management staff". The only explanation John Lau offered as to the criterion or basis for the bonus and stock option he announced in his e-mail sent at 1:12 pm on 18 February 2000 was that this was "in recognition of the individual performance of the senior management staff of the Company for the results they have achieved in 1999" and he ended by saying that "in future, the better results one contributes to the Company, the better his/her rewards will become by taking into consideration the total income received by him/her."

71. Kingson Lee responded to this by raising three points for consideration in his e-mail (this e-mail was sent at 12:17 pm on 18 February 2000 as John Lau's e-mail to Barry Ng on 17 February 2000 was sent by mistake to others at 10:25 am the following day before the details were finalised). He proposed that a qualification standard should be set for the bonus and stock option to be offered to senior management staff and queried how was performance and contribution to the Company measured to qualify for the scheme. He suggested that the price of the shares offered in the stock option should be equal to the net asset value of the Company at the time the option was offered and approved by the board of directors (according to Kingson Lee, the value of the shares on the basis of net asset value would be HK$1,000.00 per share; the shares in the stock option were initially offered at HK$40.00 per share and later increased to HK$50.00 per share). Lastly, Kingson Lee stated that the stock option should be offered to the nominated staff to recognise his/her contribution and if the staff did not exercise the option within the specified period, the offer should be withdrawn (according to the scheme announced, the stock option was granted to the 1st respondent and if any of the shareholders of the 1st respondent did not subscribe to the portion of the shares as allocated, this would be offered to the other shareholders of the 1st respondent).

72. John Lau responded to Kingson Lee's proposals by e-mail sent at 1:38 pm the same day in this manner:

" I must have the prerogative, as the majority shareholder of the Company as well as one who is still actively involved in the day-to-day operations of the Company, to compensate all my staff for what they have contributed to the success of the Company. The yardstick to measure all of your performance is very simple. Putting aside routine duties which all of you should deliver me 100% results in any case because you are paid a salary, I can weigh your contributions towards the extra good results of the Company in a very fair manner. For those whose departments are not profit-making, I shall also consider the improvements in workflow, savings of overheads, etc. Innovation, motivation of staff reporting to you and ability to adapt to changes and follow through on initiatives of mine are other factors for my consideration.

If all of you are objective and honest enough, you will find that the rewards I am dishing out to all of you reflect very well your contributions to the Company based on the factors of consideration which I listed above.

Would the good-performers continue with their hard work in 2000 and those under-performers brush up and do better this year to make them deserve the total take-home pay they are getting."

73. When Kingson Lee persisted in his reply e-mail at 2:45 pm that day to question what "formula" was used to fix the percentage of the bonuses distributed and why the stock option was granted only to the 1st respondent, John Lau sent the following reply by e-mail on 19 February 2000, emphasising that this would be "the last time" he was to elaborate on the award for performance schemes:

"1. I know very well the contribution from each of you towards the results and smooth-running of the Company. Please remember that this is different from the work you produce for the Company which is paid by means of monthly salaries. The monthly salaries we pay to senior management staff are not out of line with the market in any case.

2. I have the prerogative of deciding details of the schemes. In a delicate issue like award for performance, it does not make sense if I have to consult everyone concerned. That is why I only briefly stated at the meeting of the board of directors in early February that is what I am going to do and it was endorsed by the board. I did not say that I would consult all the directors regarding their details, neither was there any request on the spot.

3. Stock option prices are purely arbitrary. It can be totally free. Stock option is a form of award for performance and as such, it has no relationship with the NAV or any other figures of the Company.

4. I shall be stricter to everyone, especially the lesser shareholders of the Company, in the award for performance schemes from the results of this year. I tend to have awarded more or less the same percentages to the lesser shareholders this year, but this is a fore-warning that unless they produce the results, or contribute towards the smoother running of the Company, they should not expect to have the others bailing them out."

74. It is clear from the above that John Lau was not going to consult all the directors regarding the details of the bonuses and stock option that he was to announce, whether for that year or for the future. He was to be the sole arbiter in deciding what and how much any one should receive out of the profits.

75. The matter was dropped there as between John Lau and Kingson Lee, the other directors of the Company nominated to the board by the 1st respondent and the other shareholders of the 1st respondent did not raise any query or make any proposal as regards the e-mail exchanged between John Lau and Kingson Lee, which had been copied to them. The matter was brought up again when Will Toye apparently raised query regarding the bonuses announced and John Lau replied by e-mail. John Lau's e-mail did not appear to have been copied to the others, nor was it produced. Will Toye's response by e-mail dated 25 February 2000 was copied to others. He acknowledged the transfer to be made to the 2nd respondent of HK$133,980.00 as bonus, but he was unclear how the 2nd respondent's share of the bonus was worked out although he was pleased with it. He referred to the earlier board meeting in which John Lau advised that the special bonus to senior members or staff would be in the total sum of HK$1 million and asked John Lau to explain why the amount had been increased, who was receiving what amounts, and his thinking behind the awards. He stated he was all in favour of a profit sharing scheme based on targets or performance, "particularly when it is clear how it works". No reply of John Lau to this e-mail was disclosed.

76. The amount referred to in Will Toye's e-mail was rounded up to HK$134,000.00 and paid out to the 2nd respondent under bonus scheme 2 for the year ended 1999. This bonus scheme was distributed on account of the profit made arising out of the RMB exchange gains from airfreight operations and the profit was in the nature of a windfall, not due to the effort of any particular staff. This profit was made also in the next two or three years at the time when RMB was an unstable currency. The 2nd respondent was initially not awarded anything under bonus scheme 2, until Will Toye had raised query with John Lau as mentioned above. The bonus later awarded to the 2nd respondent was 8.7% of HK$1,540,000.00, the total amount distributed under bonus scheme 2. 8.7% was the percentage of the 2nd respondent's shareholding in the Company at the time. When Kingson Lee learned about the 2nd respondent's bonus, he e-mailed John Lau on 28 February 2000 stating that if bonus scheme 2 was to be distributed by reference to the percentage of the recipient's shareholding in the Company, the petitioner should receive HK$502,404.00 instead of merely HK$98,420.00. John Lau's reply to this on the following day was that bonuses were distributed "entirely at [his] discretion" and "not pro-rata to shareholding of the Company". If bonuses were indeed awarded only on account of "individual performance of the senior management staff", as John Lau had asserted in his previous e-mail, it is difficult to see why the 2nd respondent should be given a bonus and why the amount of its bonus should be fixed by reference to the 2nd respondent's shareholding when that was apparently not the criterion used for the other recipients. It is not in dispute that the 2nd respondent did not participate in the day-to-day management of the Company and that Allport held shares in the Company through the 2nd respondent as an investor.

77. The dividends, bonuses and stock option for the year ended 2000 were announced in a similar fashion. The details were not discussed in the board meeting held on 23 January 2001. In the official minutes, it was recorded that John Lau announced that a dividend would be distributed to the shareholders. He also outlined to the meeting his vision to "re-engineer a corporate culture of proactiveness among all its staff". In respect of the "staff stock option scheme", it was recorded that Will Toye expressed concern of the effect of the dilution of Allport's shareholding in the Company and John Lau "undertook to address this issue when stock options to senior management staff were awarded".

78. Three bonus schemes were announced by John Lau by e-mail dated 4 June 2001. Special bonus scheme 1 in the total amount of HK$1,192,000.00 was attributable to the profit made out of RMB exchange gains. The 2nd respondent got HK$103,700.00 under this scheme, which was again 8.7% of the total amount of bonus for this scheme. For special bonus scheme 2, which was in the total sum of HK$3 million and awarded only to the three shareholders in the Company, the 2nd respondent received HK$261,000.00, which was again 8.7% of the total amount. This would seem to contradict John Lau's earlier assertion that bonuses were "not pro-rata to shareholding of the Company". The petitioner, which held 32.6% of the shares in the Company before the dilution of shares, had only received HK$150,000.00 under this scheme, which was 5% of the total amount. It is difficult to reconcile the treatment of the 2nd respondent with that of the petitioner, even considering that the 2nd respondent's parent company Allport had brought in a lot of business to the Company according to John Lau's evidence, out of which transactions Allport had already made a profit.

79. As for the stock option scheme announced in the e-mail dated 4 June 2001, it would appear that John Lau had chosen to address the concern of Will Toye about the dilution of the 2nd respondent's shareholding by granting a stock option of 650 shares to the 2nd respondent, notwithstanding that it was the understanding of every one at the directors' meetings on 3 February 2000 and 23 January 2001, including Will Toye, that the stock option was to meant to be a reward for "senior management staff", so that "they would feel a greater affinity towards the Company". The petitioner was the only shareholder not granted a stock option for the second year running.

80. I should mention that there was produced the minutes of a board meeting held on 11 June 2001 attended only by John Lau and David Yeung. It was recorded that due notice of the meeting had been given to all directors and it resolved to offer a stock option to the 1st respondent of 7,680 shares and to the 2nd respondent of 650 shares, to be exercised on or before 30 June 2002 at HK$50.00 per share. As admitted by John Lau, this was just a paper meeting to ratify his announcement by e-mail on 4 June 2001. I reject his evidence that the minutes of this meeting had been circulated to Kingson Lee or the other directors at the time.

81. In respect of the distribution of profits for the year ended 2001, at the board meeting on 17 February 2002, John Lau announced that a dividend would be declared and distributed to the shareholders and a bonus and stock option scheme, similar to the ones of the past years, would be worked out for senior management staff with satisfactory performance and this was "endorsed" by the meeting. On 17 June 2002, the details were announced in John Lau's e-mail. There were three bonus schemes. This time, Kingson Lee did not even receive any bonus under the performance bonus (of the total sum of HK$4,530,000.00, and would appear to be awarded to individual senior management staff) or the special bonus scheme (of the total sum of HK$4 million, and would appear to be awarded only to the shareholders of the Company). Again, the stock option was given only to the 1st and 2nd respondents. So Kingson Lee had missed out substantially on bonus where performance was purportedly used as the yardstick and the petitioner had missed out on bonus and stock option in which shareholding was a criterion as only the shareholders were rewarded. The amount received by Kingson Lee as bonus for this year was a paltry sum of HK$13,715.00. It is small wonder that upon the receipt of John Lau's e-mail, Kingson Lee replied by e-mail on 18 June 2002 "to register [his] strong disagreement" to the schemes announced for the year ended 2001.

82. The grievance felt by Kingson Lee was compounded by the fact that the subsidiaries that were under his management had made profits during the years ended 1999 to 2001. They were Cargo Services Airfreight Limited ("CSAL"), Independent Cargo Consolidators Limited ("ICC") and Wanfu Trucking Limited ("Wanfu"). The total net profits of these three subsidiaries for the relevant financial years were HK$4,404,209.00 for year ended 1999, HK$6,705,864.00 for year ended 2000 and HK$8,408,235.00 for year ended 2001. However, as Kingson Lee was not a shareholder of these subsidiaries, unlike some of the senior management staff such as Wong Yiu Wing and Tim Ngan, he was not entitled to any dividends distributed by the subsidiaries. The dividends declared and distributed by the subsidiaries to the Company merged into the profits made by the Company and were distributed pursuant to the schemes announced by John Lau. Wong Yiu Wing, who held 17.5% shares in Wanfu, received HK$350,000.00 as dividends for the year ended 2001. Tim Ngan, who held 21.3% shares in CSAL, received HK$341,920.00 as dividends for that year. The receipt of the two staff from dividends alone was more than the combined receipt of Kingson Lee from dividends distributed to the petitioner for that year (HK$268,000.00) and from bonus (HK$13,715.00).

83. I should mention that it is alleged by John Lau that Kingson Lee was just a "nominal head" of these subsidiaries; that Kingson Lee was given the job "to fill his time"; that two of the subsidiaries, ICC and Wanfu, are in-house operators requiring "almost no supervision from the senior management of the Company"; and that Kingson Lee's contribution towards the three subsidiaries was "minimal". These matters are denied by Kingson Lee. I am sceptical about John Lau's assertions. It does not seem to me that John Lau was the type of tolerant boss who would make some one unable to meet his standards the nominal head of a company or division.

84. Under separate performance bonus schemes operated by the subsidiaries, all general staff was given performance bonuses equivalent to an extra number of months of the salary. The figures for the year ended 2000 were not available but for the year ended 2001, staff in ICC received an additional three months' pay, for Wanfu it was 2.5 months and for CSAL it was 1.5 months. However, as the managing director of the subsidiaries, Kingson Lee was not entitled to any performance bonus awarded by the subsidiaries.

85. It is apparent from the way in which the profits were distributed for the three years ended 1999 to 2001 that at the level of board meetings, what was discussed and agreed was the policy of whether any distribution was to be made and the form in which the distribution was to be made. With the exception of the meeting held on 3 February 2000, there was no discussion of the total amount of the profits to be distributed, or the details of the amount to be distributed to each of the recipients, or how the profits were to be allocated between the different forms of distribution. In the only year in which the total amount of distribution was discussed, John Lau did not adhere to the total figure agreed to be distributed as bonus when he announced the bonus schemes on 18 February 2000. Indeed, in one of John Lau's e-mail, he had claimed it as his "prerogative" to decide on the details of the schemes.

86. On behalf of the 1st respondent, Mr Erik Shum submitted that the distribution of profits for the three years aforesaid was approved of by the board of directors. I think this is stretching a point too far, in view of what was discussed and agreed at the board meetings. What is more pertinent is Mr Shum's other submission that Kingson Lee must have acquiesced in the distributions made in that he had accepted in principle the policy of rewarding staff by performance bonus and stock option at the board meetings, that he had raised no objection to the schemes when the details were announced except for a brief e-mail on 18 June 2002 to register his "strong disagreement", and that he had received the distributions made to himself and the petitioner. Mr Shum cited Re Home Treat Ltd. [1991] BCLC 705 in which Harman J stated at 709f that "the consent of all members expressed together is as good as a special resolution. It is also clear that acquiescence by shareholders with knowledge of the matter is as good as actual consent."

87. It is a question of fact in each case if the conduct of the individual concerned is such that he had assented to or acquiesced in any particular matter. Kingson Lee had raised questions on the schemes when first announced by John Lau in the e-mail exchanges in February 2000. Even though the objections Kingson Lee raised at that time were mild, it would appear from the tone and contents of John Lau's response by e-mail in February 2000 that John Lau had already decided on the policy and details and was not at all receptive to differing views. Kingson Lee gave evidence that he had borne with the treatment meted out to the petitioner for three years reluctantly because he knew that if he had gone further in raising objections, there would be a direct confrontation and he would fall out with John Lau. As to why he had not made complaints to other directors at informal meetings or at board meetings, he said that he knew it would be futile as this would not have achieved anything. I agree with his assessment that the other directors would probably not have supported him. None of them had responded when Kingson Lee's e-mail exchanges with John Lau were copied to them in February 2000 and in June 2002. I accept his explanation for his conduct. I find that he did not assent to or acquiesce in the distribution of profits to the petitioner for the relevant financial years.

88. I turn to consider the question if the distribution of profits to the petitioner over these years was unfair and discriminatory. That must be assessed by objective standards. Looking at the matter in the round, it seems to me the figures are sufficiently compelling and that they do support the petitioner's complaint, particularly when one looks at the trend over that period. The total amount received by the petitioner as dividends and bonus had fallen from HK$1,908,420.00 for the year ended 1999 (of which HK$1,630,000.00 was received as dividends) to HK$281,715.00 for the year ended 2001 (of which HK$268,000.00 was received as dividends). This was due to some extent to the sharp decrease in the portion of distributable profits allocated to dividends (from 59% to 10%) and the corresponding increase in the portion allocated to bonuses.

89. As to the alleged justification that Kingson Lee was paid a lot less than some of the other senior management staff because of his deteriorating performance and "laid back" attitude, it seems to me there may well be exaggeration in John Lau's evidence. Even accepting John Lau's evidence that Barry Ng was appointed as an additional deputy managing director in 1996 and had taken over some of Kingson Lee's portfolios because of the unsatisfactory performance of Kingson Lee (Will Toye gave supporting evidence in that he had spoken to John Lau in late 1995 about the request of Allport and its European associates that they preferred the European business be passed onto Barry Ng by Kingson Lee), that there were occasions as evidenced by various e-mails from John Lau in August 2000, September 2000, January 2002, May 2002 and June 2002 in which John Lau had complained of poor performance of Kingson Lee, and that Kingson Lee was asked in the board meeting on 17 February 2002 to "get his act together" to show some results in the market in the United States for 2002, I do not think the diminishing amount paid out to the petitioner as distributable profits during the relevant years can be wholly justified. It must not be overlooked that as a shareholder, the petitioner had invested in the capital of the Company and was entitled to share in the distributable profits. The reduction of the portion of distributable profits allocated towards dividends to just 10% is, on any objective view, simply disproportionate, even though John Lau might have a genuine desire to promote a "proactive" company culture with bonus and stock option schemes based on staff performance.

90. When the petitioner's complaint of unfair distribution of profits is considered in the context of its case that there was an initial agreement or understanding that Kingson Lee and John Lee were to share profits equally (which I have found to be established), the unfairness and discrimination suffered by the petitioner would be even greater. John Lau's bonus was more than three times what Kingson Lee received for the year ended 1999. Out of the total amount distributed as dividends and bonuses for the year ended 2000 in the sum of HK$9,767,000.00, John Lau's personal share was HK$4,333,920.00, whereas Kingson Lee only received HK$898,600.00. For the year ended 2001, of the total amount distributed in the sum of HK$9,804,303.00, John Lau's personal share was again in excess of HK$4 million and Kingson Lee received just HK$281,715.00.

91. The last issue to consider under this head is whether the dilution of the petitioner's shareholding would have any significant effect on the petitioner's interest in the Company so as to justify the relief of winding up. Mr Shum's argument here is that the dilution of shares could not be a valid ground of complaint because even though the petitioner's shareholding was diluted from 32.6% prior to the exercise of any stock option to 22.33% upon the exercise of the last stock option, the petitioner's shareholding has always been and will remain a minority shareholding, and it would never have attracted management control either in general meeting or at board level. Mr Shum cited the decision of the Court of Appeal in Ng Yat Chi v Max Share Ltd. & Anr. [2001] HKLRD 561. There the petitioner's shares were diluted from 49% to 1% when the petitioner failed to subscribe for shares in a rights issue to the existing shareholders. It was held on two grounds that the rights issue was neither prejudicial nor unfair to the petitioner. The first ground was that the circumstances of the company clearly required an increase in capital, as its continued existence was dependent upon further injection of funds to finance interest payments of its debts. The second ground, as stated at 577, was as follows:

"In the second place, the circumstances of the Company must be considered. Although the petitioner's shares represented 49%, in the circumstances of this Company, they represented, first of all, a minority shareholding which had at best only attracted a minority board representation. Importantly, they, in common with shares of other private companies, could not be transferred without the consent of the board. The petitioner's shares attracted no management control or control either in general meeting or at board level. In other circumstances, a 49% shareholding often does attract those benefits. The mere dilution of this 49% shareholding to something less than 1% could, in the present circumstances, only have affected the possibility that the [majority shareholder] could use its voting rights to secure approval of some scheme of arrangement. However, even in such hypothetical circumstances, the matter would be subject to the court's approval and the minority shareholder would be in a position to establish its rights if necessary. Hence, on the basis that the petition was to protect the value of the shares held on trust for [the beneficial owner], the rights issue was neither prejudicial nor was it unfair."

92. The above dicta must be understood with regard to the particular circumstances of the company under consideration. The company there had a gross deficiency in capital. The value of the shares was nil according to a valuation report. There had been no dividend payments because of sustained losses for a number of years and there was no prospect of dividends in future. As already mentioned, that company would not be able to survive without a capital injection. In those circumstances, the only practical effect the dilution of the petitioner's shares might have, as stated in the judgment, was to secure for the majority shareholder the statutory majority required for a scheme of arrangement.

93. The circumstances of the Company in these proceedings are very different. The Company has made significant profits over the years and has been distributing profits to shareholders. The percentage of the shareholding would have a direct bearing on the amount of profits distributed to a shareholder by way of dividends, assuming that bonuses would be paid on a different criterion. The dilution of 10% in these circumstances is not insignificant. I reject the submission that the dilution of shares of the petitioner would not constitute a valid complaint.

Misuse of Company funds

94. I have in the earlier part of this judgment set out the specific allegations of misuse of Company funds by John Lau. I turn to consider each of them.

95. On the engagement of Llea to perform company secretarial services, the petitioner has produced a letter from John Lau on behalf of Llea dated 26 March 1998 addressed to four companies including CSFEL, giving information of the tariff for various company secretarial services undertaken by Llea. There must have been acceptance of the tariff when Llea was engaged to perform company secretarial work for the Company and other companies in the group.

96. For the payment of HK$30,000.00 by the Company to compensate John Lau for his loss during an office burglary, Kingson Lee had known about this as John Lau's e-mail dated 10 October 1998 to the financial controller, Laura Mak, was copied to him. In the e-mail, John Lau stated that due to a technicality, he was unable to seek compensation from insurance for his loss of HK$30,000.00 and had no alternative but to seek compensation from the Company.

97. For the payment of rental of the residential car-parking space of John Lau, there was a payment voucher dated 20 January 2000 which was approved by Kingson Lee.

98. The purchase of a company car for the use of John Lau could be seen in John Lau's e-mail to Kingson Lee and Barry Ng and copied to Laura Mak dated 23 February 2001 in which he stated that he had "decided" that a car of a particular model was to be purchased by the Company at about HK$980,000.00 for the use of the managing director and that the car was to be bought on a special instalment plan. The subsequent e-mail from him, in reply to Laura Mak's query about getting a cash discount on the purchase, was also copied to Kingson Lee.

99. The payment of entertaining expenses in the sum of HK$980,000.00 arose out of John Lau's e-mail to Laura Mak dated 16 March 2001 in which he stated that it was "common knowledge" that he had not been debiting his entertaining expenses on a regular basis to the Company since July 1997, although there was a provision of HK$20,000.00 per month in the accounts with an overall accrual of over HK$1.3 million as of the date of his e-mail. He further stated that he had "decided" the arrangement for his entertaining expenses should be a flat fee of HK$17,000.00 per month, free of any supporting receipts, including club subscriptions but excluding the expenses for Christmas presents to staff and business associates. To clear off the outstanding amount from July 1997 to February 2001, he sought reimbursement of HK$948,000.00, made up of monthly expenses of HK$17,000.00 per month for 44 months and Christmas presents of HK$50,000.00 per year for four years. This e-mail was copied to Kingson Lee and Barry Ng.

100. I do not find the complaints of misuse of Company funds made out by the petitioner. The purchase of the company car and the payment of entertaining expenses cannot be regarded as unusual or improper in the circumstances. There is no suggestion that the amount claimed for entertaining expenses was excessive or that entertaining expenses had not been incurred. I do not think it was improper for the Company to compensate John Lau for his loss of cash in the office burglary. The loss was reported to the police and he was not able to claim against insurance.

101. All of the expenses now alleged as misuse of Company funds were known to Kingson Lee and the time. In the case of the car-parking fees, he had even signed the voucher to approve payment. Unlike the complaint of unfair distribution of profits, Kingson Lee had not even made known any differing views or objections, however mild, he might have to any item of expenditure. I find that by his conduct he had acquiesced in the expenses and cannot complain about them now.

Exclusion from management

102. I have already found that Kingson Lee did not join the new business established in 1990 as a mere employee. I have also found that there was an understanding that through Kingson Lee the petitioner was to participate in the conduct of business of a succession of companies in which it was a "principal shareholder", in the words of John Lau in his letter to Allport dated 28 April 1990.

103. I turn to deal with the circumstances in which Kingson Lee was dismissed from his employment and his directorship was terminated.

104. It is common ground that not long after John Lau had announced the distribution of profits for the year ended 2001 in June 2002 and on or about 3 July 2002, John Lau informed Kingson Lee that the latter's salary would be reduced. I reject John Lau's evidence he had given forewarning to Kingson Lee in January 2001of this reduction if there was no improvement in performance. Again, this is a matter not mentioned in John Lau's affirmations and not even put to Kingson Lee in cross-examination. In response to the reduction of salary, Kingson Lee told John Lau that he would consider selling the shares of the petitioner in the Company to John Lau. Kingson Lee alleged that the reduction of his monthly salary, as stated by John Lau, was HK$50,000.00, whereas John Lau alleged that the reduction was HK$30,000.00. Whatever the figure, the reduction was not insubstantial and that appeared to be the last straw that made Kingson Lee want to leave the Company.

105. It is not in dispute that on or about 10 July 2002, Kingson Lee proposed to John Lau a price for the petitioner's shares based on 26.8% (the petitioner's shareholding after the exercise of the stock option by the 1st and 2nd respondents in respect of the year ended 2000) of the net asset value of the Company in the management account as at May 2002 at HK$110,185,138.00 (that was the net asset value stated in the balance sheet of the CSFEL group, not of the Company), less 20% as a discount. The offer price amounted to about HK$23 million odd. Kingson Lee also proposed to act as a consultant for the Company for two years after the sale of the petitioner's shares.

106. On or about 24 July 2002, John Lau made a counter-offer to Kingson Lee to purchase the petitioner's shares at HK$8 million and the purchase price was to be paid by instalments. According to Kingson Lee, John Lau had offered to pay by two equal instalments; the first upon signing, and the last within 12 months. Kingson Lee was to be employed as a consultant at HK$30,000.00 per month for three years and there would be a non-competition clause for two years in the sale and purchase agreement to the effect that Kingson Lee was allowed to engage in the same industry as the Company but could not solicit business from the existing customers and could not solicit staff to join him during the two-year period. John Lau's version of his offer is that he had offered to pay the consideration of HK$8 million by three instalments.

107. Kingson Lee indicated to John Lau that he was interested to purchase the shares of CSAL, one of the subsidiaries of the Company, to continue his career in the business and requested John Lau to make an offer. On or about 25 July 2002, John Lau informed Kingson Lee that the price for 75.13% of the shares in CSAL was HK$12 million. This was not accepted by Kingson Lee. John Lau then requested Kingson Lee to vacate his office by 1 August 2002, whether or not they could reach a deal.

108. On 26 July 2002, Kingson Lee informed John Lau that the price of HK$8 million for the petitioner's shares would be acceptable and a draft sale and purchase agreement was later drawn up by the solicitors engaged by John Lau and sent to Kingson Lee for approval. In the end, the agreement was not signed. There is dispute between the parties if they had reached a binding agreement on 26 July 2002. On the petitioner's case, there was no binding agreement as Kingson Lee had informed John Lau that his acceptance of the consideration was subject to the signing of a formal agreement. On the part of John Lau, he alleged that there was clear and unconditional acceptance of his offer and that as a token of goodwill in view of Kingson Lee's amicable departure, he had even increased the consideration for the petitioner's shares to HK$8.5 million.

109. On 29 July 2002, before any draft sale and purchase agreement was sent to Kingson Lee, he received a draft announcement of his departure. He replied to John Lau by e-mail on the same day that he did not have anything to add to the draft announcement save in one respect which is immaterial for present purpose.

110. On 31 July 2002, Kingson Lee received a draft sale and purchase agreement in which the name of the purchaser was left blank and it was provided that the purchase price was payable in three instalments within two years, that Kingson Lee was to be employed by the Company as a consultant for two years at HK$30,000.00 per month, and that Kingson Lee and the petitioner were to provide an undertaking that for a two-year period they would not approach among others prospective customers of the Company and/or its subsidiaries for any business of the same nature. On receipt of this draft agreement, Kingson Lee sent a fax to Will Toye the same day but erroneously dated 30 July 2002 setting out the course of his negotiations with John Lau for the sale of the petitioner's shares and seeking Will Toye's assistance to act as mediator. Kingson Lee stated in his fax that he was advised by his solicitors not to sign the draft agreement as the terms were not fair to him.

111. On 3 August 2002, Kingson Lee requested John Lau to withhold the publication of his departure until they had completed the sale of the petitioner's shares. John Lau replied by e-mail on 5 August 2002 stating that the two issues (the sale of the petitioner's shares and Kingson Lee's departure) were "totally separate" and he saw no reason to change their plan to make the announcement of departure on 6 August 2002. Kingson Lee replied on the same day that he had not changed his intention to sell his shares "provided that the terms and conditions are mutually agreed by the seller and buyer". He further stated that he had expressed his disagreement to the terms of the draft agreement drawn up by John Lau's solicitors and that any announcement of his departure before the signing of the agreement would jeopardise the harmony of their discussion on the sale of his shares.

112. Also on 5 August 2002, a revised draft sale and purchase agreement was sent to Kingson Lee in which the purchaser was stated to be Modern Talent Limited, a company incorporated in the British Virgin Islands. Kingson Lee was unhappy about the identity of the purchaser, which was a shell company of John Lau. He sent another e-mail to John Lau on 5 August 2002 stating that no agreement had been reached although he "agreed" (I understand this to mean he was willing to do so, in the context of what he wrote) to sell his shares. He asked if John Lau would be willing to guarantee payment of the purchase price and if John Lau were prepared to do so, he would sign a non-competitive agreement for two years and had instructed his solicitors to prepare a contract for further negotiation with John Lau.

113. On 6 August 2002, John Lau e-mailed Kingson Lee stating that he would have no problem to enter into the agreement in his personal capacity to purchase the petitioner's shares. He stated that the announcement of Kingson Lee's departure would be made that day and Kingson Lee would cease to be employed by the Company in his present capacity as from 9 August 2002. He asked Kingson Lee to confirm if he would like to take on a job as consultant for the Company for two years as from 9 August 2002.

114. John Lau went ahead with announcing Kingson Lee's departure on 6 August 2002, stating that the latter would be leaving the Company as deputy managing director, that his shares would be sold back to the Company, that he had agreed to stay on as consultant, and that the re-organisation of the management was to take effect from 9 August 2002. This prompted a response by e-mail on 7 August 2002 from Kingson Lee to all the recipients of John Lau's announcement stating that the announcement was made without any prior discussion or resolution of the board of directors, that he had not tendered his resignation, and that no agreement had been reached on the sale of his shares although negotiation was going on. It is unnecessary to dwell on the accusation and counter-accusation arising out of the announcement.

115. On 8 August 2002, Kingson Lee discovered that his personal e-mail account at the office of the Company was disconnected. He later discovered that various notices by e-mail were sent on 7 August 2002 (which he did not receive) to the board of directors of the Company and of CSFEL for meetings to be held to terminate his directorship of these companies. On 8 August 2002, John Lau terminated Kingson Lee's employment with immediate effect and informed the latter he had no further interest to purchase the petitioner's shares.

116. Two letters were sent by the petitioner's solicitors to the Company dated 8 August 2002, one was marked "without prejudice subject to contract", for which privilege from production was waived. In the open letter, it was stated that the petitioner's offer to sell its shares should be based on the net asset value of HK$110 million odd. In the without prejudice letter, an offer was made to sell the shares at HK$7.5 million on condition that there would be no restrictive covenant or non-competition clause save for an undertaking not to solicit business from the two major customers of the Company, namely, Allport and Woolworths Limited, for two years. It was stated in both letters that the offers would be open for three days, failing which the petitioner would seek appropriate reliefs including winding up of the Company. On 9 August 2002, the petitioner's solicitors wrote to the Company again inviting the latter to make an "open and reasonable offer" to purchase its shares. There was no reply in writing to any of these letters.

117. On 10 August 2002, a board resolution of the Company was passed to terminate the directorship of Kingson Lee in the Company and all subsidiaries and associated companies. A similar resolution was passed by the members of CSFEL on 14 August 2002 to remove Kingson Lee as director with immediate effect.

118. It is contended by John Lau that Kingson Lee's departure was due to his own resignation and that his directorship of the Company and of CSFEL was terminated with cause. Mr Shum submitted that once Kingson Lee had evinced an intention to resign from the Company, it could not be said that he had been excluded from the Company. He prayed in aid the decision at first instance of Ng Yat Chi v Max Share Ltd. & Anr. [2000] 357 HKCU 1. What was held in that case was that the court found on the evidence the petitioner had accepted that he would not participate in the management of the company by reason of his personal financial circumstances and possibly his ill health and that he was not excluded from the management against his will. I do not think this is support for the submission of Mr Shum.

119. It is a dispute on the facts if Kingson Lee had left voluntarily or if he had been forced out against his will. I find it is the latter. I reject John Lau's evidence in these matters insofar as his evidence differs from that of Kingson Lee. I reject the allegation that Kingson Lee had sought to change the term of instalment payment from three instalments within two years to two instalments within a year. The fax sent by Kingson Lee to Will Toye on 31 July 2002, being a contemporaneous document, is cogent support for Kingson Lee's case that the parties had agreed on two instalments payable within a year and that it was John Lau who sought to change it to three instalments in the draft agreement drawn up by his solicitors. I find that the additional and material terms introduced into the draft agreement (in particular the undertakings for non-competition) constituted a new offer and that the new offer had not been accepted by Kingson Lee. John Lau was being disingenuous when he stated in his e-mail dated 5 August 2002 that the departure of Kingson Lee and the sale of the petitioner's shares were totally separate issues. Kingson Lee's e-mail on 29 July 2002 that he had nothing to add to the draft announcement of his departure could not be read as acceptance of his departure, as that was dependent on the sale of the petitioner's shares. John Lau was acting precipitately when he announced Kingson Lee's departure on 6 August 2002. In so doing, he simply foisted a fait accompli on Kingson Lee. It was hardly a voluntary acceptance of Kingson Lee to leave the Company.

120. Mr Shum made much of the fact that in the letters written by the petitioner's solicitors dated 8 and 9 August 2002, the petitioner had sought to revert to the net asset value of HK$110 million odd as the basis for the price of its shares, which had been rejected by John Lau from the start. Alternatively, the petitioner sought the lower price of HK$7.5 million for its shares but without the restrictive covenants. It was submitted that these letters demonstrated that it was the petitioner that had reneged on the agreement. I decline to draw any such inference. The negotiation tactics adopted by the petitioner on the advice of its solicitors to salvage the position came after the parties had fallen out and Kingson Lee's employment had been terminated. I do not think they were necessarily indicative of Kingson Lee's thinking when he was still in active negotiation with John Lau.

121. I find the allegation of wrongful exclusion from management established.

Is there a case for winding up

122. To recapitulate, I have found these allegations established: unfair distribution of profits for the years ended 1999 to 2001, unjust dilution of the petitioner's shareholding, and wrongful exclusion from management.

123. Mr Shum submitted that I should heed the principle enunciated by Lord Shaw in Loch v John Blackwood Ltd. [1924] AC 783 at 788 on the foundation of an application to wind up on the just and equitable ground, namely, that there must be a "justifiable lack of confidence in the conduct and management of the company's affairs". Lord Shaw further stated as follows:

"Furthermore the lack of confidence must spring not from dissatisfaction at being outvoted on the business affairs or on what is called the domestic policy of the company. On the other hand, wherever the lack of confidence is rested on a lack of probity in the conduct of the company's affairs, then the former is justified by the latter, and it is under the statute just and equitable that the company be wound up."

124. Mr Shum also drew my attention to the following extract from McPherson's Law of Company Liquidation by Andrew R Keay, 1st ed., at paragraph 4.41, in which the above dicta of Lord Shaw were cited in support of the proposition that to succeed on a petition, the petitioner's complaint must amount to something more than dissatisfaction at being outvoted on the domestic policy of the company. The relevant extract continued as follows:

"There can, however, be little doubt that, in relation to matters on which the directors have been vested with an absolute discretion, such as the retention of profits, the declaration of dividends or registration of share transfers, their decisions cannot be made the subject of a winding-up petition unless it is positively established that their discretion was exercised in an improper manner. Furthermore, where the question is one which the general meeting is entitled to decide, such as whether a director should be removed from office, or whether the company should continue to do business, it seems settled that the minority shareholders can never complain of being outvoted by a majority which has acted honestly and in accordance with the law. No doubt the position is different where there has been a breach of the legally recognised rights of the company or of individual shareholders, but in the absence of misconduct of this kind, a shareholder who becomes a member of a company in which it was contemplated that the majority rule should prevail has no right to insist on winding up simply because that vote has been exercised in a manner which is detrimental to his or her own interests. ... In general, and absent misconduct or oppression, courts will not wind up companies merely because a contributory is unhappy with the way in which the company is being managed or a section of the shareholders benefit where adhering to their rights."

125. Mr Chan for the petitioner did not dispute the above propositions of law but submitted that on the complaints of the petitioner, there was justifiable lack of confidence in the conduct and management of the company's affairs. I agree. I have found that there were rights or expectations on the part of the petitioner in a relationship involving mutual trust and confidence with the majority shareholder. This is not a case in which there are merely "differences of opinion" as to how profits should be distributed, or how the affairs of a company should be conducted, so that the majority of the shareholders and not the court must decide (Re James Lumbers Co. Ltd. [1926] 1 DLR 173 at 189). Those of the petitioner's complaints, which I find to be established, cannot be justified on the basis of a properly exercised commercial judgment. I find that there was lack of probity on the part of John Lau in the distribution of profits and granting of stock option and in engineering the exclusion of Kingson Lee from the management.

126. An order for winding up is not lightly to be made, particularly in a case like this where the Company is prosperous and trading successfully. It requires a strong case to be made out by the petitioner (Cumberland Holdings Ltd. v Washington H Soul Pattison & Co. Ltd. 13 ALR 561). I am satisfied in this instance that a convincing case of unfair and unjust conduct has been made out. Here, no agreement can be reached between the parties for the sale of the petitioner's shares. There is no statutory remedy by which the petitioner can be paid a proper price for its shares. The only alternative remedy suggested by Mr Shum is to call board meetings or general meetings for the petitioner to air its grievance and changes could be made if the complaints are justified. This can hardly be an effective remedy to the petitioner as John Lau has control over the board of directors of the Company and the 1st respondent. Counsel for the 2nd respondent accepted that there is no available alternative remedy to winding up. I am mindful of the fact that there is an innocent shareholder being the 2nd respondent holding 8.22% of the shares, nonetheless I find that justice and equity to all concerned do require the winding up of the Company in these circumstances.

If the petitioner has come with clean hands

127. I turn to consider the last broad issue.

128. On the findings I have made regarding the breakdown of the negotiation to sell the petitioner's shares, I reject the 1st respondent's allegation that the petition was not presented with the genuine objective of obtaining a winding-up order but with the ulterior motive of exerting pressure on John Lau to buy out the petitioner at a higher price or on better terms.

129. As for the other allegation that Kingson Lee had misappropriated HK$300,000.00 from the Company in February 2000, I reject John Lau's evidence that the loan of this amount to Kingson Lee was unauthorized. On his admission that he had learned from Laura Mak on 26 July 2002 the loan was unauthorized, I find it incredible that he nevertheless decided on the same day to raise his offer to purchase the petitioner's shares by HK$500,000.00 out of his own generosity.

130. The allegations that the petition was presented for a collateral purpose and that the petitioner has not come to court with clean hands are not established.

Conclusion and orders

131. For the above reasons, I make a winding-up order against the Company.

132. I make an order nisi that the petitioner's costs in these proceedings and any costs incurred by the Company in its limited participation in these proceedings are to be borne by the 1st respondent. As between the petitioner and the 2nd respondent, notwithstanding the latter's unsuccessful opposition to the petition, I make an order nisi there be no order as to costs. I do so for the reasons that the 2nd respondent is an innocent shareholder caught up in the dispute between the petitioner and the 1st respondent, that it has to take a stance it perceived to be in its best interest, and that it has taken a subsidiary role in opposing the petition.