LI GUOZHU v. NEW CENTURY IATRICAL INV. MANAGEMENT LTD AND OTHERS

HCMP 3353/2014

[2018] HKCFI 868

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 3353 OF 2014

____________

____________

____________

_________________

J U D G M E N T

_________________

I. Introduction

1.  This case concerns the disputes between the petitioner and the 2^nd to 4^th respondents, all Mainland residents, in relation to a Hong Kong company, namely, the 1^st respondent herein (“the Company”), which holds an interest as a joint venture partner in a hospital in Baoying County, Jiangsu Province.  References below collectively to the respondents refer to the 2^nd to 4^th respondents.

2.  By the petition, the petitioner claims that the respondents have conducted the affairs of the Company in a manner unfairly prejudicial to him as its member.  He seeks an order under ss 724-725 of the Companies Ordinance (Cap 622) that the respondents sell their shares in the Company to him at a price to be valued with reference to the provisions of the written agreement between them, as well as damages for loss resulting from certain alleged acts.

3.  By their counterclaim, the respondents seek a declaration of their true proportion of interest in the Company and an order for the alteration of the issued shareholding accordingly, as well as an order to reinstate them as directors and to expel a nominee of the petitioner from membership and directorship.

II.  Background

The beginnings

4.  In this section I set out the relevant factual background, including my findings where there is a dispute.  The more important issues of fact will be separately dealt with in later sections in the context of the allegations of unfairly prejudicial conduct.

5.  The petitioner was born and raised in Baoying. He was trained as a Chinese medical doctor and had a good relationship with the local government there.  There was a public hospital there called Baoying Chinese Medicine Hospital (“Hospital”), which, as at 2004, had been in operation for about 20 years.  In early 2004, certain government officials of Baoying approached the petitioner and raised the possibility of a private investment in the Hospital requiring the amount of RMB30 million to be paid in phases.

6.  The petitioner was interested and asked his friend, Mr Zhang Zheng (“Zhang”), to source potential co-investors. Zhang duly lined up himself and 10 others including the respondents as potential investors in the project, as set out in the table in §13 below.  I shall refer to the 12 of them (including the petitioner) as “Investors”.

7.  As to their relationships, the petitioner accepted that he did not know the 10 other Investors before they were introduced to him by Zhang.  The 2^nd respondent was a very close friend of Zhang’s.  The 2^nd respondent, Zhang, Zhou Lihui and Zou Xianzhuang all worked together at a shipyard called Zhonghua (中華船廠).  Li Anping was a contractor of that shipyard.  Zhao Xiying was Zhang’s wife’s sister.  Huang Shu was the wife of a friend of Zhang’s.  Miao Chenwei and Shang Jiong were the sons of two other friends of Zhang’s and took part as nominees of their fathers.  The 3^rd respondent was introduced to Zhang by a friend.  He was the managing director of his own company called Hongchi (弘馳公司) which was engaged in the business of ship making, docking and repairing.  The 4^th respondent was a close friend of the 3^rd respondent’s as well as assistant managing director in Hongchi. 

8.  From around March to May 2004, there were discussions among the Investors and visits to the Hospital to acquaint themselves with the project as well as meetings with county government officials.

Cooperation Agreement

9.  Eventually, on 27 May 2004, the 12 of them entered into a written agreement (“Cooperation Agreement”) in Shanghai. Together they agreed to invest RMB7 million in the venture in the proportions set out in §13 below.  In order to benefit from the incentives offered by Mainland authorities to Hong Kong investors, it was agreed that a company in Hong Kong would be used for the purpose of the project which would invest in turn in a joint venture with the relevant local authority of Baoying. There is a reference to a listing on the Hong Kong stock market.  Under the agreement, each Investor is a shareholder as well as a director.  There are provisions regulating the conduct of meetings including notice, quorum and the level of votes required for a resolution.  The agreement provides that if any Investor wishes to sell his shares to a third party, the other Investors have a right to purchase those shares first on the same terms.

10.  Pursuant to the Cooperation Agreement, the petitioner travelled to Hong Kong and Shenzhen and took steps to engage agents for setting up a company in Hong Kong and on 18 June 2004, the Company was incorporated.  Although the Company has its own memorandum and articles of association, it is provided in clause 41 of the Cooperation Agreement that:[1]

“In case the standard Articles of Association are required to be used by the local department for industry and commerce at the time of company registration, the standard Articles of Association are for registration purposes only and do not represent our real intentions in our cooperation. When legal disputes arise in our future cooperation, this Cooperation Agreement shall prevail. Legal exposition shall be done to the outside world in accordance with such these provisions.”

11.  Zhang became the chairman and the 3rd respondent the vice-chairman of the board of directors of the Company, and the petitioner the general manager.

The shareholdings

12.  Clause 9 of the Cooperation Agreement sets out the respective shares of investment of the 12 individuals and provides, in particular, that the petitioner and the respondents each has 100 out of 700 shares.

13.  From the outset, however, the number of shares shown in the Memorandum of Association and the documents filed in the Companies Registry did not accord with the proportion of investment set out in the Cooperation Agreement.  In the documents registered in Hong Kong, the total number of issued shares was stated to be 10,000 shares.  The initial amounts invested by the Investors, and their shareholdings as stated in the Cooperation Agreement on the one hand, and in the Memorandum of Association and registered in the Companies Registry on the other, are as follows:

	Investor	Funds invested (RMB)	Shareholding according to Cooperation Agreement	Shareholding as stated in Memorandum and documents filed in Companies Registry
1	Zhang	1,000,000	100	2,500
2	Petitioner	1,000,000	100	2,500
3	2nd Respondent	1,000,000	100	1,000
4	3rd Respondent	1,000,000	100	1,000
5	4th Respondent	1,000,000	100	1,000
6	Huang Shu	500,000	50	500
7	Zhou Lihui	500,000	50	500
8	Shang Jiong	300,000	30	300
9	Zhao Xiying	250,000	25	250
10	Miao Chenwei	200,000	20	200
11	Zou Xianzhuang	150,000	15	150
12	Li Anping	100,000	10	100
	Total	7,000,000	700	10,000

14.  There has been litigation in the Mainland between the parties on the true proportion of their shareholding.  The courts there have ruled that the respondents each holds a 1/7 interest in the Company corresponding to their initial capital contribution.  In these proceedings, it was accepted by Mr Samuel Chan, during his opening at trial for the petitioner, that the apportionment set out in clause 9 of the Cooperation Agreement is correct.  The respondents’ counterclaim for a declaration for that purpose was therefore effectively conceded.

15.  There remain disputes as to whether the respondents consented to the shareholding proportions set out in the memorandum of association and whether the signatures of the respondents on that document are actually their signatures, though, as I shall explain below, they have little bearing on the real issues.

Joint Venture Agreement

16.  Pursuant to the Cooperation Agreement, the Company negotiated on and eventually entered into a joint venture agreement dated 15 November 2004 (“the Joint Venture Agreement”) with the Department of Health of Baoying (“Department of Health”), relating to the operation of the Hospital for a term of 20 years.  The agreement envisaged a total investment of RMB30 million by the Company.  The Company has a 70% interest under the Joint Venture Agreement and the Department of Health 30%.  The Hospital was to be governed by a management board, consisting of a total of 5 members: 3 to be appointed by the Company and 2 by the Department of Health.

17.  On the same date, the board of directors of the Company resolved that the petitioner, the 3^rd respondent and Zhang would be nominated to the Hospital’s management board, with Zhang as the chairman, and that the petitioner would be nominated to be the General Administrator of the Hospital.  They were duly appointed as such.  As Chairman, Zhang also became the legal representative of the Hospital.  Since 2004 and up to 2009, the petitioner had been working as the General Administrator of the Hospital.

Events in 2005 to 2009

18.  On 10 June 2005, the petitioner, Zhang, and the 3^rd and 4^th respondents each agreed to invest a further RMB500,000 for the purposes of the Hospital.  This led the parties to think at one point that the shareholding base in the Company had become enlarged to RMB9 million but it is now accepted that it remained at RMB7 million.

19.  In March 2006, following certain investigation, the Bureau of Industrial and Commercial Administration of Yangzhou City, Jiangsu Province (“ICA Bureau”) issued an order, confiscating the profits of the Hospital for the year 2005 in the sum of RMB295,968.83 and imposing a fine of RMB50,000, and stating as follows:[2]

“Upon investigation, New Century Iatrical Investment Management Limited, for the sake of gaining profit from investment and without having first obtained documents of approval such as the Certificate of Approval for the Establishment of Enterprises with Foreign Investment as well as a business licence, on 15 November 2004 signed the [Joint Venture Agreement] with the Baoying Department of Health. Both parties will jointly run the Baoying Chinese Medicine Hospital, and set up its Board of Directors on which Zhang Zheng will become Chairman. Li Guozhu and Ma Hongqi of New Century Iatrical Investment Management Limited in Hong Kong as well as Zhang Wenshu and another person from the Baoying Department of Health will act as its directors. Li Guozhu was hired as head of the Baoying Chinese Medicine Hospital. The system of head of hospital accountability under the leadership of the Board of Directors shall be implemented. Baoying Chinese Medicine Hospital shall be operated independently, self-financed, and shall implement independent audit. As at the end of 2005, revenue from Baoying Chinese Medicine Hospital on account of medical service and medicine was RMB¥15,446,392.29. After deducting medical expenses, the balance was RMB¥295,968.83.

As such, the acts of the relevant parties above constituted acts of unlicensed business operation within the meaning of section 4(1)(i) of the Measures for Investigation, Disposal and Prohibition of Unlicensed Business Operations. By virtue of section 14(1) of the Measures for Investigation, Disposal and Prohibition of Unlicensed Business Operations, it was decided after deliberation that:

1. Rectification within a certain time period ordered;

2. Proceeds of RMB¥295,968.83 derived from illegal operations confiscated, and a fine of RMB¥50,000 imposed.”

20.  In April 2009, there was an allegation that the petitioner embezzled RMB1.5 million from the Hospital.  As a result, the petitioner was detained by the authorities in Baoying for 13 days and released on bail pending trial.  By 23 June, however, the county procuratorate had decided not to prosecute the petitioner.

21.  On 1 July 2009, Zhang and the respondents went to see the petitioner and proposed that he cease to be the General Administrator of the Hospital and hand over the Company’s chop.  The petitioner and the 2^nd respondent had a quarrel that ended up in a fight, which was reported to the public security bureau, though no one was charged or prosecuted as a result.  There were disputes about what precisely happened but it seems to me the incident should be viewed more as the result of other events rather than as an independent cause of the breakdown of relationship.  The fight itself was not relied upon as unfairly prejudicial conduct by either side.[3]

Transfers of shares

22.  By early July 2009, the respondents wanted to exit from the investment in the Hospital.  In fact, Zhang was also interested in leaving.  Through the introduction of Zhang, the 3 respondents came to have discussions with a third party named Jiang Wensong (“Jiang”) for the sale of their investment in the project. 

23.  The first meeting with Jiang took place on around 10 July 2009 in Shanghai, in Zhang’s presence.[4]  For some reason, Zhang did not wish to pursue a sale to Jiang and pulled out, but the discussions between the respondents and Jiang went on.  A few days later, they had a meeting in Yangzhou without Zhang.  The respondents agreed with Jiang to sell him their equity (RMB1 million each, plus the later contributions of the 3^rd and 4^th respondents of RMB500,000 each) at the price of RMB1.80 per RMB1.00 invested.[5] 

24.  On 25 July 2009, the respondents each signed an agreement with Jiang to that effect, containing a clause which required any party in breach to pay RMB2 million to the other party.  On the same date, for the purpose of complying with the pre-emption provisions in the Cooperation Agreement, the respondents issued a notice to the other Investors, including the petitioner, stating they intended to sell all their shares. However, the price was stated as RMB3.00 (rather than RMB1.80) for each RMB1.00 invested. 

25.  In around July 2009, having learnt that the respondents were selling their shares to Jiang, the petitioner also engaged in discussions with the other Investors to purchase their shares, pursuant to which they entered into 8 separate written agreements for the sale of their respective shares to the petitioner at the price of RMB1.70 for each RMB1.00 invested on 1 August 2009 (“Share Transfer Agreements”).  Bought and sold notes and instruments of transfer were signed and subsequently stamped.

26.  Following the Share Transfer Agreements, the petitioner convened a meeting of shareholders/directors of the Company held on 6 August 2009, the validity of which is in dispute.  The petitioner says he was authorised to and did attend on behalf of the 8 Investors who had sold their shares to him.  The respondents contend that no proper notice of meeting was given and the documents signed by the other Investors did not validly authorise the petitioner to attend and vote at the meeting.

27.  Meanwhile, upon learning from Zhang that the other Investors had agreed to sell their shares to the petitioner, in around early August 2009, the 3^rd respondent and Jiang agreed that the 3^rd respondent should try to acquire the shares of the other Investors as well, with money provided by Jiang.  The 3^rd respondent managed to persuade 4 Investors, namely, Shang Jiong, Miao Chenwei, Zou Xianzhuang and Li Anping, to terminate their Share Transfer Agreements with the petitioner and to sell their shares to the 3^rd respondent instead (which, as between the 3^rd respondent and Jiang, were for Jiang).  On 14 August, these 4 Investors sent a notice to the petitioner saying they would no longer be selling their shares to him.

28.  On 17 or 19 August (and possibly both), the respondents and Zhang met at the office of Mr Qiu Fei (“Lawyer Qiu”), who was Jiang’s lawyer but also apparently later acted for the respondents, to discuss the notices for the meetings planned for 25 and 26 August (which Lawyer Qiu prepared), and the signing of the share sale and purchase agreements with the 4 Investors.  At this meeting, Zhang signed a letter stating that for health reasons, he delegated the responsibilities of chairman of the board to the 3^rd respondent.

29.  On 20 August, the 3^rd respondent signed an undertaking to these 4 Investors promising to indemnify them against any liability to the petitioner for reneging on their agreements with him.  According to the 3^rd respondent, Jiang had in turn promised him a back-to-back indemnity.  On 19 or 20 August, the 3^rd respondent had entered into written agreements with these 4 Investors to acquire their shares at the price of RMB1.70 per RMB1.00 invested, although the agreements were dated 25 August 2009.  Whether the shares of these 4 Investors as well as Huang Shu are now held by the petitioner or the 3^rd respondent or anyone else is not an issue requiring determination in these proceedings.

30.  At some point in August 2009, the respondents also agreed with Jiang that their shares, albeit agreed to be sold to Jiang, would be transferred to the names of Jiang and 2 other individuals, namely, Xiao Jin (“Xiao”) and Mao Ruiqi (“Mao”) respectively.  On about 25 August 2009, the respondents each signed a share sale agreement with Xiao, Jiang and Mao respectively, which specified the price to be RMB3.00 for each RMB1.00 invested. 

Meetings on 25 and 26 August 2009

31.  The respondents convened a meeting of shareholders of the Company on 25 August 2009.  Notice was sent to the petitioner but it only came to his notice on the evening of 24 August. The meeting was attended by the respondents, Shang Jiong, Miao Chenwei, Zou Xianzhuang and Li Anping, but was not attended by the petitioner who disputes its validity.  Jiang was not present as such but was in a room nearby.  Zhang did not attend as he was hospitalised, and when the documents were brought to the hospital for his signature he signed to indicate his abstention on the following resolutions.  It was resolved, inter alia, that:

(1) The transfer of equity by the respondents to Jiang, Xiao and Mao be approved.

(2) The transfer of Huang Shu’s equity (RMB500,000) to the 3^rd respondent be approved.

(3) The Company would henceforth use a new company chop to be kept by the chairman of the board.

32.  On the next day, 26 August 2009, another meeting was held and attended by the 3^rd and 4^th respondents and Jiang, Xiao and Mao, and Cui Guoyu.  The petitioner did not attend it and disputes its validity.  The 2^nd respondent said he went up to the meeting at the beginning but left when told his presence was not required.  He signed the attendance sheet but was not recorded as having taken part in the meeting.  Those attending meeting passed, inter alia, these resolutions:

(1) The board of directors was replaced.  Jiang, Xiao, Mao, the 3^rd and 4^th respondents, Zhang and Cui were elected directors.  Jiang was elected chairman of the board.

(2) The Company’s previous nomination to the management board of the Hospital was revoked, and substituted by the nomination of Jiang, Xiao and Mao.  Jiang was nominated to become the General Administrator of the Hospital.

33.  Relying on the minutes of the meetings of 25 and 26 August 2009, Jiang caused the petitioner to be replaced by himself as General Administrator and took over the management of the Hospital from early September 2009.

34.  Subsequently, Jiang actually procured funds to be transferred to the respondents representing the price of RMB3.00, but part of the money made a round robin, so that the real price paid by Jiang to the respondents was RMB1.80 per RMB1.00 invested.

Filings in Hong Kong

35.  For his part, the petitioner said there was a general meeting of the Company on 24 September 2009 attended by himself alone at which a resolution was passed to appoint Pang as a director of the Company.  A Form D2A was lodged with the Companies Registry to that effect.

36.  On 16 December 2009, the petitioner lodged a Form D2A stating that the respondents had ceased to be directors of the Company on 15 December 2009.

Action in Hong Kong — HCA 2023/2009

37.  Meanwhile, in response to what had taken place that August, the petitioner commenced an action in Hong Kong (HCA 2023/2009) against, among others, the respondents herein and Jiang, Xiao and Mao and, on 29 September 2009, obtained an ex parte injunction to restrain the Company (whether by itself, directors, officers, agents or otherwise howsoever) from implementing the resolutions of 25 and 26 August 2009 including the nomination of Jiang for appointment as the new General Administrator of the Hospital.  On the return day of 9 October 2009, the injunction was continued, the defendants being absent.

38.  There is evidence that in light of the injunction, Jiang asked the Department of Health in November 2009 for his position as General Administrator to be suspended, but his request was turned down.

39.  Subsequently Jiang applied to set aside the injunction as applied against himself and filed, inter alia, an affirmation of the 3^rd respondent dated 15 January 2010 for this purpose.  Despite the injunction, it appears that Jiang continued to serve as the General Administrator of the Hospital pending his application to discharge it.  On 23 March 2010, the late Deputy Judge Carlson decided to discharge the injunction, and refused leave to appeal in September 2010.  In these proceedings the petitioner complains that the 3^rd respondent falsely claimed in his affirmation in HCA 2023/2009 that the respondents had sold their shares in the Company to Jiang, Xiao and Mao at RMB3.00 (instead of the true price of RMB1.80) for each RMB1.00 invested.

40.  As a result of the discharge of the injunction, Jiang continued to be the General Administrator of the Hospital until January 2012.

41.  HCA 2023/2009 went dormant for a few years.  In October 2013, the respondents and Jiang, Xiao and Mao applied to have it struck out and to have the interim injunction discharged as against them.  Further affirmations were filed by the respondents.  In May 2014, by consent, the interim injunction was discharged as against them and the action was stayed.

Proceedings in the Mainland

42.  Arising from their disputes, the parties had also commenced proceedings in the Mainland which have generated many decisions at first instance and on appeals and reviews.  It is unnecessary to set out all the details but the following may be noted:

(1) In September 2010, the 3^rd respondent commenced proceedings in the Intermediate People’s Court of Yangzhou City, Jiangsu Province, against the petitioner for a declaration that the shareholders/directors meeting held on 6 August 2009 was invalid.  The action was dismissed by the Intermediate People’s Court.  The 3^rd respondent’s appeal to the Higher People’s Court of Jiangsu Province was dismissed on 4 June 2012.  The 3^rd respondent argues that the dismissal was based on procedural grounds only and that the substantive question is not res judicata.

(2) The petitioner commenced proceedings against Jiang and the respondents in the Intermediate People’s Court of Yangzhou City, Jiangsu Province, complaining that the 26 August 2009 meeting was invalid.  On 20 December 2013, that court handed down 3 decisions in which it found that the sale of shares by the respondents to Jiang was void. On 19 June 2014, the Higher People’s Court of Jiangsu Province dismissed Jiang’s appeals.

(3) In April 2013, the 3^rd respondent commenced a civil action in the Intermediate People’s Court of Nanchang, Jiangxi Province against the petitioner, Huang and the Company for an order to invalidate the transfer of shares in the Company between the petitioner and Huang.  The action was dismissed on 15 January 2015.

(4) In September 2013, the respondents brought another civil action in the People’s Court of Yangpu District of Shanghai against the petitioner and Zhang regarding the shareholding in the Company.  On 17 July 2014, the court determined that each of the 2^nd to 4^th respondents had a 1/7 interest in the equity of the Company regardless of what was stated in the Companies Registry in Hong Kong.  An appeal by the petitioner was dismissed by the Second Intermediate People’s Court of Shanghai on 22 July 2015.  On 13 November 2015, the Higher People’s Court of Shanghai rejected the petitioner’s and Zhang’s application for re-trial. In 2017, the petitioner’s application for a review was dismissed.

(5) There were also criminal proceedings brought by the authorities of Bao Ying County against the 3^rd respondent for creating false documents that alleged the 2^nd to 4^th respondents’ shares in the Company were sold to Jiang, Xiao and Mao at RMB3.00 for each RMB1.00 invested, and for forging the Company’s chop.  In December 2011, the 3^rd respondent was initially convicted for forging the Company’s chop but his appeal was ultimately successful.

Reinstatement of the petitioner as General Administrator

43.  In early September 2011, Jiang was removed from the management of the Hospital as the Baoying Department of Health stepped in and took over.  On 16 January 2012, following the findings of the Mainland courts referred to above, the Department of Health issued a notice revoking Jiang’s appointment.  The local government was in charge between September 2011 and January 2014.

44.  It was only in January 2014 that the petitioner was formally reinstated as the General Administrator of the Hospital.

45.  On 30 December 2014, the petitioner presented this petition.  The respondents sought a stay on the ground of forum non conveniens but the application was dismissed for reasons which I handed down on 13 November 2015.

III.  The parties’ respective cases

The petitioner’s claims

46.  The petitioner’s principal claims are as follows:

(1) The company was formed as a quasi-partnership with mutual rights of participation in the management and a mutual understanding that the petitioner would be the Hospital’s General Administrator.

(2) The respondents have conducted the affairs of the Company in a manner unfairly prejudicial to the petitioner:

(a) They conspired with Jiang to defeat the petitioner’s pre-emption rights.

(b) They procured 4 of the other Investors to breach their Share Transfer Agreements with the petitioner.

(c) They excluded the petitioner from the management of the Company and the Hospital.

(d) They adduced false evidence in HCA 2023/2009.

(e) Jiang mismanaged the Hospital while he was in charge.

(3) By way of relief, the respondents should be ordered to sell their shares in the Company to the petitioner, at a value based on Preamble 4 of the Cooperation Agreement.

(4) The petitioner also claims damages for (i) lost income during his exclusion from the management of the Hospital; (ii) legal costs incurred and paid to the respondents in HCA 2023/2009 caused by the respondents’ false evidence.

The respondents’ case on the petitioner’s claims

47.  The position adopted by the respondents in response to the petitioner’s claims may be broadly summarised as follows:

(1) They deny that there was a quasi-partnership and that in any event the relationship between the parties was governed by the Cooperation Agreement. 

(2) They contend that neither a breach of pre-emption rights nor the management of the Hospital was part of the affairs of the Company.

(3) They contend that the conduct the petitioner complains of was not unfairly prejudicial to the petitioner having regard to the petitioner’s own misconduct as alleged by the respondents in their counterclaim.

(4) They contend that not all respondents participated in all the conduct complained of by the petitioner.

(5) They contend that if a buy-out is ordered, it should be at a fair value, not based on Preamble 4 of the Cooperation Agreement.

The respondents’ claims

48.  The respondents counterclaim that the petitioner was himself guilty of misconduct and unfairly prejudicial conduct of the affairs of the Company.

(1) The petitioner embezzled RMB1.5 million from the Hospital.

(2) The petitioner failed to cause dividends to be distributed from the Hospital to the Company and from the Company to the shareholders.

(3) The petitioner deliberately misstated the shareholders’ shareholding in the Memorandum of Association and in the returns lodged with the Companies Registry.

(4) The petitioner breached the requirements of Hong Kong law for the holding of general meetings, the appointment of auditor, and the preparation of audited financial statements.

(5) The petitioner unlawfully caused Pang to be appointed as a director on 24 September 2009 and caused the respondents to be removed as directors of the Company on 15 December 2009.

49.  The respondents claim the following relief:

(1) A declaration that the respondents each is entitled to 1/7 of the shareholding of the Company, and an order that the authorised share capital of the Company be increased to HK$14,000 divided into 14,000 shares, and that 1,000 shares be issued to each of the respondents.

(2) An order that the transfer of 100 shares from the petitioner to Pang be set aside, and a declaration that Pang’s appointment as a director was invalid.

(3) An order reinstating the respondents as directors.

(4) An order directing the Company to appoint an auditor to compile audited reports for the Company from 2004 onwards.

The petitioner’s case on the respondents’ claims

50.  In brief, the petitioner’s position on the respondents’ allegations of misconduct is as follows:

(1) The petitioner denies he embezzled any money from the Hospital.

(2) The petitioner contends that there were directives in the Mainland preventing the Hospital from distributing its profits; hence the non-payment of dividends.

(3) The petitioner contends that all the Investors were aware of the registered shareholdings in Hong Kong, and that in any event, since on the respondents’ case they only became aware of this complaint after the summer of 2009, it was not a matter that caused the breakdown of relationship.

(4) In relation to the complaint of failure to comply with the requirements of Hong Kong law, the petitioner contends that the Investors did not attach any importance to such compliance and in any event it did not cause any breakdown of relationship.

(5) As for the appointment of Pang and removal of the respondents as directors, the petitioner contends that these are matters concerning the registered details of the Company in Hong Kong and not such as to affect his entitlement to relief.

IV.  Basis of cooperation

51.  The petitioner contends that the Company represents a quasi-partnership, while the respondents contend otherwise.  Since (as will be seen below) this is not an essential condition for my conclusions, I shall be relatively brief on this topic.  I accept that the 3^rd and 4^th respondents were very close between themselves, having worked together since about 1981, and that the 2^nd respondent was very close to Zhang.  The other Investors, apart from the respondents, were also close friends or relatives of Zhang.  While the petitioner was also a very good friend of Zhang’s, I do not think he had a close personal relationship with the respondents or the other Investors, at least at the beginning.  Nor did the respondents have a deep personal relationship with the other Investors apart from Zhang.  In short, there were personal ties but they revolved around Zhang as the hub.  There was little personal relationship to speak of between the petitioner and the respondents that formed the basis of their agreement.  Instead, the Cooperation Agreement appears to me an agreement among a loose collection of individuals united by the common aspiration to profit and based on commercial considerations.

52.  At a general level, of course, the other Investors, including the respondents, reposed trust in the petitioner: after all they agreed that he was to be nominated to be the General Administrator of the Hospital and thus a principal executive officer of the project in which they invested.  It is true also that the Cooperation Agreement spoke of a “cooperation team” (合作團隊) and stated the mission to be “unity, mutual cooperation and joint development” (團結互助、共同發展), and provided that all of the Investors would be directors of the Company thus collectively taking part in the management of the Company.  But these were in my view not sufficient to show that the Company was a quasi-partnership such that the exercise of the parties’ legal rights under their agreement or the Company’s articles should be subject to equitable constraints arising from personal relationships.  Instead, their cooperation seemed to me to be primarily a commercial one based on the express terms of their agreement which was drawn up in some detail in writing.

53.  Further, while there was of course agreement among the Investors that the petitioner would be the first General Administrator of the Hospital nominated by the Company under the joint venture with the Department of Health, I am unable to find any definite agreement or understanding that the petitioner would continue to be the General Administrator irrespective of developing circumstances.

V.  Petitioner’s allegations of unfairly prejudicial conduct

54.  In this section I deal with the petitioner’s allegations of unfairly prejudicial conduct.

A.  Conspiracy to defeat the petitioner’s pre-emption rights

55.  The primary events set out above are broadly not in dispute although there were minor discrepancies among the respondents’ evidence about the dates of meetings and steps.  In connection with the sale of shares from the respondents to Jiang, I find that:

(1) While the respondents and Jiang had agreed to the sale and purchase of the respondents’ stake in the Company at RMB1.80 for each RMB1.00, they agreed to take steps to create an impression to the outside world, including in particular the petitioner, that the respondents’ shares were proposed to be sold to Jiang at the rate of RMB3.00 for each RMB1.00 invested. 

(2) To this end they created the false sale and purchase agreements with the price of RMB3.00 for each RMB1.00 invested, issued a notice to the other Investors including the petitioner that referred to this false price, and a tortuous route was adopted for payment of the net price to the respondents.

(3) They never revealed the true price of RMB1.80 to the other shareholders (except perhaps Zhang).

(4) They did all this in order not to have to transfer their shares to the petitioner.  In fact, it is admitted in their defence that the notice to the other shareholders was issued “in a bid to avoid the chance of their capital contributions (investments) / shares in the Company from being purchased by the Petitioner”.[6]  As admitted by the respondents in their statements given to Mainland authorities, the purpose of issuing the false notice stating the price of RMB3.00 was to ensure it would not be attractive for the petitioner to exercise his pre-emption rights.

(5) They knew that the petitioner had pre-emption rights under the Cooperation Agreement, and considered that if they proposed to sell the shares at RMB1.80 for each RMB1.00 invested, the petitioner would exercise his pre-emption rights and purchase their shares, but that he would not do so if he was told the price was RMB3.00.

56.  In their evidence, the respondents, to varying degree, questioned the accuracy of the confession statements they made to Mainland officials regarding the conspiracy.  I am satisfied, however, that the statements, as admitted by the 3^rd respondent, were “basically true”.  The respondents have not been able to point to anything in those statements that is fundamentally false or inconsistent with their admitted positions in these proceedings.  In addition, this conspiracy was also found in the Mainland proceedings involving the petitioner and the respondents referred to in §42(2) above which may well rise to an issue estoppel.

57.  The 3^rd respondent explained that he agreed to Jiang’s suggestion of this false scheme because of the fear that he might otherwise be liable for the penalty under the agreement with Jiang.  This, even if true, does not exonerate him.  Whatever might have been the motive, he was clearly aware of the object and purpose of the steps taken.

58.  Mr Ng argued that infringement of pre-emption rights in relation to the sale of shares in a company is not conduct of the affairs of the company.  For his part, Mr Chan accepted that the mere sale by one shareholder of his shares to a third party in contravention of the pre-emption rights of other shareholders does not amount to the conduct of the affairs of the company, for ordinarily the affairs of the company do not encompass the dealings in its shares by the shareholders: see eg Re Coroin Ltd (No 2)[2013] 2 BCLC 583.  Relying on Graham v Every [2015] 1 BCLC 41, he submitted, however, the present case is not an ordinary case involving simply a sale and transfer of shares in breach of pre-emption rights.  The breach of pre-emption rights has to be seen in the wider context of the complaint of exclusion of the petitioner.

59.  I accept that Graham v Every illustrates the proper approach.  There the claimant alleged in his petition complaining of unfairly prejudicial conduct that the respondent had acquired shares from two other shareholders in the company who had, in breach of shareholders’ agreement, failed to offer the shares pro rata to the claimant.  The judge struck out the allegation on the ground that such a breach, if established, could not constitute unfair prejudice.  In the Court of Appeal, Arden LJ found that because the directors were not remunerated by salary but by way of dividend, the size of a director’s shareholding would dictate his reward for his work on the Company’s business.  By denying the claimant’s pre-emption right at a time when he was still a director, the respondent was arguably interfering with the way in which the parties had agreed that the company would remunerate its directors, which was a matter within the conduct of the company’s affairs (see §40).  At §70, McCombe LJ said:

“what is being alleged here is a systematic exclusion of Mr Graham from the management of this joint venture company. One of the elements of that alleged exclusion is said to have been the failure by three of the parties, and I include the first respondent in this, to adhere to the provisions of clause 5 of the Heads of Agreement. If that is correct, the failure to observe the requirements of that clause was an essential feature of the unfairly prejudicial conduct alleged in the petition overall. In my judgment it would be artificial to strike out this allegation on the basis that, looked at in isolation, it might not be an ‘act of the company’. It seems to me that fails to give due regard to the general words of section 994(1)(a) which speaks of the company’s affairs being ‘conducted in a manner that is unfairly prejudicial…etc.’.”

At §§80-83, Vos LJ came to the same conclusion, holding that diluting the shareholding of a member could amount to unfair prejudice to his interests, and that was the consequence of the alleged acts.  The allegation there was that the respondents denied the claimant the additional shares he ought to have had, and thereafter used their greater control of the company’s affairs to his disadvantage by, inter alia, excluding him from the management of the company and reducing the (greater) profit share he would otherwise have had. These allegations, if proved, could support the conclusion that the company’s affairs had been conducted in a manner unfairly prejudicial to the interests of the members generally or the claimant’s interests.

60.  In my view, Mr Chan’s submission is correct. The breach of the pre-emption agreement and the procurement of the 4 Investors to breach their agreement with the petitioner were not isolated acts.  All these steps were undertaken in the context of a contest for control of the Company.  They were followed closely by the 2 meetings on 25 and 26 August 2009, and facilitated the resolutions which led to the removal of the petitioner as a director of the Company and the General Administrator of the Hospital.  Such wresting of control and exclusion from management was in my view clearly a matter concerning the affairs of the Company.

B.  Procuring breach of share transfer agreements by other shareholders

61.  Again, the primary facts are not in dispute. There is no dispute that the petitioner had entered into valid and binding agreements with the 8 other shareholders to purchase their shares.  The 3^rd respondent, with knowledge of those agreements, and acting in concert with Jiang, procured 4 of those shareholders to sell their 75 shares to himself (which he was to pass on to Jiang).  The other 2 respondents were present at that meeting with Jiang.  Those 4 shareholders were paid with Jiang’s money. This was not only prima facie a procurement of breach of contract, but also a scheme that infringed the pre-emption provisions because it would result in Jiang, an outsider, obtaining the shares of the 4 shareholders.

62.  It is not in dispute that coupled with the shares acquired from the 3 respondents, the shares of these 4 shareholders would give Jiang a majority shareholding in the Company.  I find that the 3^rd respondent’s purpose, as admitted in his statement to Mainland officials, was to assist Jiang in becoming the majority shareholder of the Company and chairman of the board and acquiring control over the Company.

C.  Exclusion of petitioner from management of the Company and Hospital

63.  It is clear from the contents of the resolutions passed on 26 August 2009 that the 3^rd and 4^th respondents, acting together with the others present at that meeting, passed the resolutions in order to exclude the petitioner from, and to confer on Jiang and his nominees, management of the Company and the Hospital.

64.  Although the 2^nd respondent only signed the attendance sheet on 26 August and was not recorded as having voted, he was party to the previous preparatory meetings on 17 or 19 August 2009 at the office of Lawyer Qiu as well as the shareholders meeting on 25 August.  There was obviously a coordinated course of action planned with Jiang, who stayed in the room next to the meeting on 25 August.  The 2^nd respondent’s participation in the course of conduct was not reduced to any significant extent by his not taking part in the vote on 26 August.

65.  For the following reasons, the resolutions on 25 August 2009 were invalid:

(1) With Zhang being absent, the meeting was not attended by shareholders/directors having 2/3 of the voting rights, as required by clause 14(2)(2) of the Cooperation Agreement.

(2) With Zhang being absent (and signing subsequently to abstain), the resolutions were not passed with an over 2/3 majority on a headcount basis, as required by clause 16(2)(5) of the Cooperation Agreement.

(3) In any event, share sale and purchase agreements between the respondents and Jiang, Xiao and Mao have been held by Mainland courts to be void.  This is a finding that binds the respondents in these proceedings.  In fact, the respondents have not disputed that they remain shareholders of the Company.

66.  The resolutions on 26 August were also invalid as a consequence of the invalidity of the share transfers to Jiang, Xiao and Mao and the resolutions on 25 August.  These findings were also made in the Mainland proceedings between the petitioner and the respondents referred to in §42(2) above which gave rise to issue estoppel.

67.  Mr Ng argued that excluding the petitioner from the management of the Hospital (as opposed to the Company) was irrelevant because the affairs of the Hospital were not those of the Company.  I reject this submission.  It is unclear whether or not under Mainland law the Hospital has its own legal personality.  But even assuming the Hospital is a separate legal person, it does not follow that conduct of its affairs cannot amount to conduct of the affairs of the Company.  It is well established that the affairs of subsidiary companies can be regarded as the affairs of the holding company for the purposes of a petition for relief from unfairly prejudicial conduct: Rackind v Gross [2005] 1 WLR 3505; Re Step by Step Ltd (unrep, HCMP 838-840, 842-851 and 1208/2007 & HCA 2712/2006; 26 October 2007) at §47. 

68.  In contrast, Mr Ng relied on Re Leeds United Holding Plc [1996] 2 BCLC 545, which concerned the company that owned Leeds United Football Club.  There Rattee J stated (at p 558d-e) that complaints in relation to the buying of players and renegotiating the manager’s contract without consultation with the petitioner related to “acts carried out, not in the management of the company at all, but in relation to the management of the club”. 

69.  Mr Ng also relied on Re Neath Rugby (No 2) [2009] 2 BCLC 427 where it was stated (at §50):

“The judge cited the observations of Powell J in Re Dernacourt Investments Pty Ltd (1990) 2 ACSR 553:

‘The words ‘affairs of a company’ are extremely wide and should be construed liberally: (a) in determining the ambit of the ‘affairs’ of a parent company for the purposes of s 320, the court looks at the business realities of a situation and does not confine them to a narrow legalistic view; (b) ‘affairs’ of a company encompass all matters which may come before its board for consideration; (c) conduct of the ‘affairs’ of a parent company includes refraining from procuring a subsidiary to do something or condoning by inaction an act of a subsidiary, particularly when the directors of the parent and the subsidiary are the same …’

I would accept these propositions, but with some qualification.  (b) may extend to matters which are capable of coming before the board for its consideration, and may not be limited to those that actually come before the board: I do not accept that matters that are not considered by the board are not capable of being part of its affairs. Nonetheless, like the judge, I am unable to see how it can be said that the affairs of Neath and of Osprey were so intermingled that all of the affairs of the latter were the affairs of the former. …”

70.  With respect, these authorities do not assist the respondents.  It should be noted that in the present case, the Hospital was the only business of the Company and the very reason why the Company was brought into existence.  The investment in the Hospital is also the Company’s only substantial asset.  The Company had little to conduct except matters relating to the Hospital. 

71.  It is unnecessary to go so far as to say that all the affairs of the Hospital constituted affairs of the Company.  The Company, however, had a contractual right (under clause 15 of the Joint Venture Agreement) to appoint 3 out of 5 persons to the Hospital’s management board.  The exercise of that right is plainly part of the affairs of the Company.  It is undeniable that the Company, and in turn its shareholders, had a very real and intimate interest in who should be nominated to the management board and to be the General Administrator of the Hospital (who had, in practice, always been nominated by the Company for formal appointment).

D.  Making false affirmations in HCA 2023/2009

72.  The 3^rd respondent made an affirmation in January 2010 in support of Jiang’s attempt to discharge the injunction granted in HCA 2023/2009 as against the Company.  At §15(2) of that affirmation, the 3^rd respondent stated:

“Around 20^th July 2009, the 10^th, 12^th and 13^th Defendants [ie Jiang, Mao and Xiao respectively] have offered to buy our shares at more than RMB1.80. I told the 10^th Defendant that my investment (my capital contributions and shares in the 11^th Defendant) could not be sold to him at RMB1.80 unit price since someone had offered to buy my investment at RMB2.50 unit price. After some negotiations, the 10^th Defendant increased his offer price to RMB3.00 per unit which I have accepted. At that time, I also persuaded the 2^nd and 3^rd Defendants to agree to sell their respective investments (their capital contributions and shares in the 11^th Defendant) at RMB3.00 per unit to the 12^th and 13^th Defendants. I take exception to paragraph 9 of the Plaintiff’s 2^nd affirmation filed herein which says that there was an agreement entered into between me and the 10^th Defendant on 20^th July 2009 whereby I agreed to transfer to the 10^th Defendant my investment at RMB1.80 per unit. I asked and was told by the 2^nd and 3^rd Defendants that they had not entered such an agreement with the 12^th and 13^th Defendants.”

73.  This statement was plainly false and misleading because the respondents had all agreed to sell their shares to Jiang at RMB1.80 per unit, not RMB3.00.  (The 2^nd and 4^th respondents filed affirmations much later, in November 2013, in the context of the applications for strike-out and dismissal.)

74.  The making of the 3^rd respondent’s affirmation in January 2010 was clearly done in order to assist Jiang in his application to discharge the injunction by misleading the court into believing that the respondents’ shares had been sold to Jiang without any breach of the petitioner’s pre-emption rights.  While making an affirmation in itself might not ordinarily be regarded as an act in the conduct of the affairs of a company, this affirmation was done as part of the exercise to prevent the petitioner from obtaining remedy to reverse the effect of the appointment of Jiang and the exclusion of the petitioner, and therefore as part of the course of unfairly prejudicial conduct.

E.  Jiang’s mismanagement of the Hospital

75.  The petitioner refers to the evidence that while Jiang was in charge of the Hospital, 54 medical doctors and staff members left its employment due to their dissatisfaction with Jiang’s management, and that the Hospital incurred a loss of RMB10.88 million between September 2009 and July 2011.  (The petitioner also referred to the fact that Jiang was prosecuted for misappropriating a sum of RMB130,100 from the Hospital, but he has since been acquitted.)

76.  I am, however, unable to accept the petitioner’s contention that the respondents should be fixed with responsibility for Jiang’s acts of mismanagement or misconduct.  The evidence shows that in some respects, the respondents were acting as Jiang’s agents, not the reverse.  They did not have control over Jiang, nor did they procure Jiang to act in the way he did whilst in management of the Hospital.  It is true that but for their assistance, Jiang would not have been able to become involved in the Hospital, but that is far from a sufficient basis to attach to them liability for the acts of Jiang.  In any event, there is no sufficient evidence that the allegations of “mismanagement” went beyond differences in management style and opinion to amount to unfairly prejudicial conduct.

VI.  Respondents’ allegations of unfairly prejudicial conduct

77.  In this section I deal with the respondents’ allegations of unfairly prejudicial conduct and other misconduct on the part of the petitioner.  Of these, on the respondents’ own case, only the alleged embezzlement of RMB1.5 million and the failure to pay dividends were causative of the breakdown of the relationship.  At least according to the 3^rd and 4^th respondents’ evidence, the failure to pay dividends was by far the major event.  I shall first deal with these 2 allegations.

A.  Whether the petitioner embezzle RMB1.5 million from the Hospital

78.  The respondents allege that the petitioner embezzled RMB1.5 million from the Hospital in around 2006, though there is no dispute that at the end the Hospital suffered no loss.  The petitioner adamantly denied there was any embezzlement.  The respondents did not adduce any primary evidence of the alleged misappropriation, and one is left to grapple with a collection of conflicting secondary evidence.

79.  Reference was made to a decision of the People’s Procuratorate of Baoying dated 23 June 2009 not to prosecute the petitioner, in which it was suggested that in January 2006 the petitioner without authorisation transferred RMB1.5 million from the Hospital to a company called Yangzhou Zhongyi, of which RMB1 million was remitted to an account with the Department of Health as injection of capital for the Hospital and RMB0.5 million was mixed with the other funds of Yangzhou Zhongyi and used by it.  The document is inadmissible as evidence of the truth of its content, being simply opinion formed by the investigation authority of a different jurisdiction: Hollington v Hewthorn [1943] 1 KB 587.  It should be noted that, even according to this document, RMB1 million was injected into the Hospital.

80.  Further, according to the judgment of the Higher People’s Court of Jiangsu Province dated 19 June 2014 (which Mr Ng relied on as showing that the petitioner admitted the truth of the Baoying Procuratorate’s decision), the petitioner, via Yangzhou Zhongyi, had returned the money already by January 2008.  The petitioner explained that he did not mean to admit any wrongful misappropriation, which he denied throughout.

81.  The petitioner vehemently denied that there was any embezzlement.  His explanation given in oral evidence was that since the Hospital’s bank accounts were frozen in 2005 and 2006 due to legal proceedings against the Hospital, he borrowed RMB1.5 million from a friend on behalf of the Hospital to pay staff salaries and emoluments.  Funds were later paid into an account of a company belonging to the petitioner, which led to misunderstanding and suspicion that resulted in his brief detention by the authorities.  If what is meant by him was that he had borrowed money for the Hospital and later on reimbursed himself, I would be sceptical because this explanation was never put forward in his previous affirmations.

82.  On 14 April 2009, the Hospital’s staff issued a joint letter to the local authorities including the Procuratorate, stating, inter alia:

“In the process of the development of the hospital, even though there might have been irregularity in Mr Li Guozhu’s deployment of funds, he was striving for better development of the hospital and this also represented an inadequacy in the management of the hospital in its developmental process”.[7]

They begged for the early release of the petitioner so that he could continue to manage the Hospital.  This letter was again not evidence of any underlying fact about the RMB1.5 million. 

83.  It appears that loans totalling RMB1,524,560 were raised from the staff (as to RMB720,000), Zhang (RMB404,560), and one Miao Fuzun (RMB400,000) to repay the money in order to secure the petitioner’s release.  The petitioner said he had repaid the staff the RMB720,000 lent by them.  At the shareholders meeting on 25 August 2009, however, the respondents agreed that a loan of RMB1,524,560 should be booked in the accounts of the Company as a loan from Zhenjiang Meihua.  The 2^nd respondent admitted that this loan was “related” to the RMB1.5 million allegedly misappropriated by the petitioner.  It is not clear, however, how Zhenjiang Meihua came into the picture, or why the respondents agreed that the loan should be recognised in the Company’s books if the sum was used to secure the release of the petitioner who, they allege, was held in custody for having misappropriated that amount of money in the first place.  There was nothing in the minutes about recovering that sum of money from the petitioner at all.

84.  A certificate was issued by the Hospital dated 12 April 2016 that it had not found any misappropriation of RMB1.5 million by the petitioner or any return of funds of RMB1.5 million.  It confirmed that the Hospital did not suffer any loss of RMB1.5 million.

85.  On the limited evidence available, the precise details of the incident cannot be determined.  It seems to me that the most that could safely be said is that in 2006, the petitioner probably did transfer the Hospital’s funds in an unorthodox way, which probably involved a breach of the Hospital’s accounting rules, but the money was returned and the Hospital suffered no loss.  While this incident might have caused some agitation to the respondents and might even have dented their confidence in the petitioner, I am unable to find on the evidence available that there was unfairly prejudicial conduct on the part of the petitioner causing a complete breakdown of trust and confidence between the parties.

B.  Failure to pay dividends

86.  The respondents complain that the Hospital failed to pay dividends to the Company and the Company failed to pay dividends to the Investors.  It is not in dispute that as at 31 October 2007 and 2008, the Hospital appeared to have made accumulated profits of RMB7,008,124.08 and RMB8,370,368.67 respectively, but no dividend was distributed to the Company.  Consequently, the Company had no profits to distribute to its shareholders.

87.  Equally, it is not in dispute that, in an appropriate case, the failure to pay dividend can constitute conduct of the affairs of a company in a manner unfairly prejudicial to certain members, especially where those in control caused the company to pay themselves substantial emoluments in the meantime: see e.g. Wong Man Yin v Law Lam Wai (unrep, HCA 6260/1997 & HCMP 1571/2000, 22 June 2001), §§24-29; Re a company (No 00370 of 1987),ex parte Glossop [1988] BCLC 570, 576; Rahman v Malik [2008] 2 BCLC 403.  In order to see whether the respondents have made out their complaint of unfairly prejudicial conduct in this regard, it is necessary to examine the relevant facts more closely.

88.  It is reasonably clear that at the time of the initial investment, the Investors expected the project to be profitable, that the Hospital would distribute profits to the Company, and that they would receive dividends from the profits.  Thus Preamble 5 to the Cooperation Agreement estimated the return on investment to be 20%-30% from the second year onwards and possibly even higher in subsequent years.  Clause 11(3) provided that the Investors were entitled to dividends in proportion to their capital contributions.  Clause 23 provided that when distributing profits, the Company should retain 20% of the profits towards funds for the development and general welfare of the Company.

89.  It appears that this was also the understanding of the Department of Health.  Under the Joint Venture Agreement (which was drafted by the lawyers of the Department of Health), it was provided that apart from 20% which would be retained for development, the net profits of the Hospital would be distributed at the end of each year between the Company and the Department of Health in the proportion of 70% : 30%.  I accept the petitioner’s evidence that he did not know there would be any hurdle in this regard in 2004. 

90.  The first inkling of a problem came in 2006.  As mentioned in §19 above, on 28 March 2006, following investigation, the Company was fined RMB50,000 by the ICA Bureau of Yangzhou City, and the Hospital’s net profit of RMB295,968.83 for 2005 was confiscated, apparently for carrying on business as an enterprise with foreign investment without the necessary licence.

91.  Furthermore, on 31 March 2006, the ICA Bureau issued a direction to the Department of Health stating that in entering into the Joint Venture Agreement and jointly operating the Hospital, the Department had acted in contravention of regulations and operated a sino-foreign enterprise without approval.  The ICA Bureau directed the Department of Health to assist the Company to rectify the contravention within 2 months.[8]

92.  I accept the petitioner’s evidence that in the wake of this event, there was a great deal of discussion both within the management board of the Hospital and with the government authorities; it would be surprising if there were not.  From these communications he learnt that there was a problem arising from governmental regulations concerning the status of the Hospital.  The precise steps and approval required to rectify the situation are not entirely clear from the evidence, but I accept that the problem was not entirely resolved within 2 months as demanded by the ICA Bureau. 

93.  Mr Ng for the respondents said that there was a lack of documentary evidence in support of the petitioner’s evidence.  I agree that documentary support is sparse, but that does not necessarily give rise to an inference of falsity.  During the trial the petitioner did try to put in further documents in this regard but they were rejected principally on the ground of lateness.  Lack of documents could be a result of inadequate preparation for the trial or other causes.

94.  Mr Ng submitted that the petitioner’s case was incredible because the illegality could not have escaped the attention of the lawyers of the Department of Health.  As a matter of fact, however, despite the Joint Venture Agreement was the work of the Department’s lawyers, the Hospital was fined and its profits confiscated, and the Department was reprimanded by the ICA Bureau in 2006.  I do not think that the fact a county government department and its lawyers were involved means that the joint venture would face no impediment whatsoever arising from national, provincial or municipal laws, regulations or policies.

95.  Mr Ng sought to refute the petitioner’s account on the ground that the Hospital’s accounts stated a “distributable” balance. In my view that word in the accounts could not bear the weight that Mr Ng sought to put on it.  One can also ask, if the profits were easily distributable, why did the Department of Health not ask for a distribution (since it would get 30%), and why did Jiang not distribute the profits after he had taken office in September 2009?  Further, Mr Ng queried why the petitioner agreed to purchase the other Investors’ shares in August 2009 if no profits could be obtained?  I do not think this shows the petitioner’s account to be incredible.  Different Investors might take different views about the prospects of the venture; they might have different investment time frames and different appetites for risks.  Even the petitioner does not say that it will be impossible for the Hospital to distribute dividends in future.

96.  I accept the petitioner’s evidence that discussions with the Department of Health continued in the few years following March 2006 as to how to rectify the situation, without success, and that these efforts came to a stop when dispute broke out between the petitioner and the respondents in the summer of 2009.  The latest business licence of the Hospital issued on 21 September 2015 still specified that it was a non-governmental non-profit-making medical institution.

97.  The respondents denied knowledge of these matters but it seems to me that they could not have been entirely ignorant of the position.  Prior to the summer of 2009, there were annual Investors’ meetings held in Shanghai, at which the petitioner as General Administrator of the Hospital would give a report.  The 2^nd respondent, who was very close to Zhang, said that Zhang would keep him informed of major events concerning the Hospital from time to time.  He accepted that the Investors were told about the fine and confiscation of profits, which was only to be expected.  It is to be expected that the Investors raised questions about the financial situation, since they each invested a substantial amount with a view to profit.  It is difficult to believe that the 3rd respondent, as a member of the Hospital’s management board, heard nothing about the fine and confiscation of profit in 2006 as he claimed. 

98.  I also accept the petitioner’s evidence that in 2007 and 2008 the respondents did attend (together with the petitioner and Zhang) meetings in Shanghai with officials of the Department of Health.  I do not accept the meetings were purely for entertainment.  More likely than not the problem about the Hospital’s status was mentioned, at least in general terms.

99.  More specifically, the petitioner said that in the discussions following the fine in March 2006, he was told about a Directive issued by the (national) Department of Health of the Mainland, the National Chinese Medicine Management Authority, the Ministry of Finance and the National Audit Commission dated 18 July 2000 on the management of medical institutions at the county level (“2000 Directive”), which provided:[9]

“I. Definitions of non-profit medical institutions and for-profit medical institutions. Non-profit medical institutions and for-profit medical institutions are differentiated taking the institutions as a whole. The demarcation line is drawn having regard to the purpose of operation, mission of service as well as the implementation of different financial, taxation, pricing policy and accounting schemes.

(1) A non-profit medical institution means that it is set up and run in the interests of the public, and not for profit.  Its revenue is utilised to cover the costs incurred in providing medical service.  The balance of income and expenditure in its actual operation can only be utilised in its self-development, such as the improvement on medical conditions, the introduction of new technology or the provision of new medical service programmes etc.  A for-profit medical institution means that the revenue derived from its provision of medical service may be utilised as financial returns for investors.  The government does not run any for-profit medical institution.”

100.  The petitioner’s pleaded case is that the Hospital was and is classified as a non-profit-making medical institution. Clause 21 of the Joint Venture Agreement specified: “Operated as a joint venture, the nature of the Hospital will remain unchanged as a public non-profit medical institution for community benefit”[10]. As such, the 2000 Directive applied and still applies to the Hospital.  The Directive required that all surplus of a non-profit-making hospital be used on the improvement of the hospital itself.  Accordingly, the management board of the Hospital had been re-investing the surplus into the development of the Hospital over the years, and had decided that it was not yet in a position to apply to the authorities for permission to change the Hospital’s status to a profit-making one or to distribute profits to the Investors.

101.  In addition, the petitioner alleged that the State Council issued a Directive (“2010 SC Directive”) (關於進一步鼓勵和引導社會資本舉辦醫療機構意見的通知) on 26 November 2010, which stated (in §19):[11]

“To promote lawful operations by non-governmental medical institutions. Non-governmental medical institutions must strictly adhere to the nature of business registered, use receipts and bills manufactured under the supervision of tax bureaux and in compliance with the characteristics of the medical and health industries, implement the financial and accounting system stipulated by the country, carry out audit of accounts and finance management according to law, and accept the supervision and inspection by relevant authorities. Revenue received by non-profit medical institutions can only be utilised towards the sustained development of the medical institution. In respect of those institutions that are operating in contravention of their business purposes, distributing dividend or a different form of it out of its balance of their income and expenditure accounts, health departments should order it to make rectification within specified periods. For cases involving greater culpability, the institutions shall be closed down according to regulations and their legal liabilities pursued in accordance with the law. Revenues and profits received by for-profit medical institutions may be utilised as financial returns for investors.”

102.  The 2010 SC Directive also stated at §16:[12]

“In principle, a non-profit medical institution operated by social capital shall not be transformed into a for-profit medical institution. As to those institutions that definitely need to undergo such a transformation, they must have the permission of the original approval bureau to do so and must go through the relevant formalities in accordance with law.”

103.  The petitioner pleaded that the Department of Health did try to commence an application to convert the Hospital into a profit-making one but this ground to a halt because of the shareholders’ dispute within the Company. 

104.  These assertions are challenged by the respondents.  The debate was conducted on a highly unsatisfactory basis because there was no expert evidence adduced on Mainland law with regard to the effect of the 2000 Directive and the 2010 SC Directive.  These Directives and in particular their effect on the Hospital are matters of Mainland law and fall to be proved as a fact by a qualified witness: Phipson on Evidence (19^th ed), §33-76.  I am unable to accept the petitioner’s evidence that these were applicable laws copies of which he obtained for the purposes of these proceedings.  Nor is it open to me to read the Directives on my own and make findings on that basis of what the relevant Mainland law was and is.  Accordingly, I am bound to conclude that the petitioner has failed to prove as a fact that these two Directives constituted Mainland law that prohibited and still prohibits the Hospital from distributing any profits to the Company.

105.  In my view, however, this does not affect the evidence referred to in §§90-98 above on which I have made the findings already set out. 

106.  In the light of these facts and taking into account the management set-up of the Hospital, I find that while the respondents (and, for that matter, possibly the other Investors) might have been disappointed or even frustrated by the absence of return by way of dividends by mid 2009, the respondents have failed to establish unfairly prejudicial conduct on the part of the petitioner in this context.

(1) Under the Joint Venture Agreement, the General Administrator was responsible for the day-to-day operation of the Hospital; financial matters were overseen by the Financial Controller of the Hospital. Decisions on budgeting and planning were to be made by the management board. The management board was chaired by Zhang. 

(2) The respondents have failed to show that the petitioner as General Administrator was in control of or otherwise responsible for the decision whether or not the Hospital should distribute dividends to the Company and the Department of Health.  In the absence of specific provisions in the Joint Venture Agreement or other evidence, one would think that this would be a matter for the management board and for discussion between the Company and the Department of Health as joint venture partners.  The petitioner was but one of the members of the management board.  The 3^rd respondent was at the material times also a member, and Zhang, who was as close as a brother to the 2^nd respondent, was the legal representative of the Hospital.

(3) Furthermore, there were problems with the status of the Hospital as shown by the 2006 penalty and confiscation of profits.  That problem, whatever it was, had not been resolved.  While I am unable to conclude that the Hospital was prevented by the 2000 Directive and 2010 SC Directive from distributing dividends, given the penalty and confiscation one cannot infer that the failure to pay dividends was intentionally caused by the petitioner.

(4) It was telling that even during the period when Jiang was General Administrator of the Hospital (ie September 2009 to September 2011), no profit was distributed by the Hospital to the Company.  Likewise, between September 2011 and January 2014, before the formal reinstatement of the petitioner as General Administrator, nothing was distributed.

(5) It is not in dispute that the petitioner did receive a salary of RMB20,000 per month but in the absence of relevant evidence I am not prepared to hold that this was an unreasonable sum which the petitioner did not in fact earn and deserve by his work as General Administrator.  This has not been shown to be a case of one shareholder receiving extravagant emoluments while blocking the distribution of profits to other shareholders by way of dividends.

(6) It follows that the failure of the Hospital to pay dividends to the Company and the Department of Health has not been shown to be unfairly prejudicial conduct on the part of the petitioner.

(7) In the absence of any dividends received from the Hospital, it is common ground that the Company had no profits from which to distribute dividends to its own shareholders.

C.  Misstating shareholdings in the Memorandum of Association and in annual returns

107.  It is common ground that:

(1) The petitioner (on his case, together with Zhang) caused the shareholding to be entered into the Memorandum of Association and the returns filed with the Companies Registry in the proportions described in the fifth column in the table in §13 above, which did not accord with the proportions set forth in the Cooperation Agreement and the proportions of the actual investment of funds.

(2) The respondents’ true proportion of shareholding in the Company is now beyond question, having been decided by the relevant Mainland court.  Each of the respondents holds a one-seventh interest in the equity of the Company.

108.  The petitioner explained in oral evidence that he and Zhang were stated in the Memorandum of Association as the holder of 2,500 shares each because they were the founding members and because the proportions (with a denominator 10,000 instead of 700) would be easier to calculate.  He said it was done in preparation for listing the Company in Hong Kong in future.  He also said the respondents did each sign on the Memorandum of Association against his name.

109.  I am not persuaded by the petitioner’s explanation.  It seems to me unlikely that the respondents knew that they were allotted 1,000 shares each (10%) and the petitioner 2,500 shares (25%).  There was nothing in the Cooperation Agreement to suggest that the petitioner and Zhang were founding members with a greater entitlement beyond the proportions of their capital contribution.  If there was to be such special treatment, which was plainly a departure from the contributions and shareholdings set out in clause 9 of the Cooperation Agreement, one would expect it to have been specifically provided for in the agreement.  The petitioner’s explanation that the allocation was a contingent one for future listing purposes was inconsistent with the position he had taken earlier in Mainland proceedings and in these proceedings that the true proportion of the shareholding was as stated in the Memorandum of Association.

110.  On the other hand, it is unnecessary to find whether the respondents’ signatures were forged.  Certainly there was no pleaded allegation that the petitioner forged them, nor was that put to the petitioner in cross-examination.

111.  The dispute about the precise shareholding proportions has been fully and finally dealt with between the petitioner and the respondents in the Mainland courts.  This has led to Mr Chan’s concession on behalf of the petitioner at the outset that each of the respondents was entitled to 1/7 of the shareholding in the Company.  Beyond this, however, the allegation of misstatement of shareholding seems to me to have little significance, because it only came to the respondents’ knowledge after the breakdown in relationship and after the respondents committed the acts which formed the principal complaint of the petitioner, and as such had little bearing on the matters on which the petitioner’s entitlement to relief depended: Richardson v Blackmore [2006] BCC 276.

D.  Breach of requirements of Companies Ordinance

112.  The respondents complained that the petitioner and the Company failed to comply with the statutory requirements under the Companies Ordinance in that no general meeting had been held, no auditor had been appointed, and no auditor’s report or annual financial statements have been prepared. 

113.  This complaint has, in my view, little merit in the scheme of things.  The respondents’ own view at the material times, and probably the attitude of other Investors as well, was that the parties’ cooperation would be based on Mainland law.  No one thought much about fulfilling the requirements under Hong Kong law.  The Cooperation Agreement was replete with references to the Company Law of the People’s Republic of China, and none to the Companies Ordinance.  Indeed, clause 41 (quoted in §10 above) states that the articles of the Company were used for incorporation only and did not represent the real intentions of the parties.  The 3^rd and 4^th respondents both accepted that the Investors were “lukewarm” about complying with the requirements of Hong Kong company law.  Accordingly, I do not think the failure gave rise to any unfair prejudice.  Further, there were in fact Investors’ meetings held in the Mainland between 2004 and 2008, and the respondents have not shown that such non-compliance caused them any material prejudice.  In any event, since it was accepted by the respondents that this matter did not cause them to lose trust in the petitioner, it was in my view not a complaint that, if established, would have disentitled the petitioner to relief.

E.  Appointment of Pang and removal of respondents as directors

114.  The respondents complained that the petitioner unlawfully caused Pang to be appointed as a director on 24 September 2009 and caused the respondents to be removed as directors of the Company on 15 December 2009.

115.  In my view, even if there was a shareholders meeting on 24 September 2009, it was not validly held since, as the petitioner admitted, he was the only one who attended.  No notice was given to the respondents.  Likewise, any meeting on 15 December 2009 would be invalid as no notice was given to the respondents and there was insufficient quorum.  These acts seem to be counter-attacks made by the petitioner against the respondents, but without proper legal basis.  However, since the 2^nd respondent did not consider himself to be a shareholder after 25 August 2009, his removal in December 2009 did not cause serious prejudice.  Further and in any event, Pang’s appointment and the respondents’ removal took place as a matter of registration in Hong Kong and had little real practical effect in the context of what has happened given the parties’ approach towards the application of Hong Kong company law.

116.  As to the transfer of 100 shares to Pang, the petitioner’s case is that Pang was a nominee holding the shares which beneficially belonged to the petitioner.  This does not mean that the pre-emption rights were not activated.  The transfer therefore infringed the Cooperation Agreement and should for that reason be set aside.  Although Pang has not been joined as a party, he has made an affirmation previously and there is no dispute he is a mere nominee.  No real prejudice, however, has been occasioned to the respondents.  It is not a matter that prevents relief being given to the petitioner in respect of his complaints.

VII.  Relief

A.  Order for purchase of shares

117.  On the basis of the above findings, the petitioner’s allegations of unfair prejudice have in my view been made out.  He was excluded from the management of the Company and the Hospital by means which was not only an infringement of his pre-emption rights but also involved deceptive practice and a conspiracy.  The respondents’ acts were both grossly unfair and seriously prejudicial.

118.  The parties can obviously no longer work together, which the 3^rd respondent admitted in terms.  The petitioner was more closely involved with the founding of the Company and the operation of the Hospital; the project was, in a sense, his “brainchild”.  He is a native of Baoying, a medical doctor and well connected with the officials in the Department of Health in Baoying.  The respondents hold 3/7 of the shareholding, which they were quite willing to dispose of in 2009.  Whilst they resist the petition, they have not sought an order to buy out the petitioner.  Although the petitioner appears to have the greater shareholding, the respondents account for a higher head-count which has significance for voting purposes under the Cooperation Agreement.  For the parties thus to remain co-shareholders in the Company will be of benefit to no one.  There is no peace-keeping machinery that will enable the Company and Hospital to function effectively which this court can impose without completely re-writing the terms of their cooperation.  This is a case calling for a “clean break”.  In all the circumstances the appropriate relief is, in my view, an order that the respondents sell their shares to the petitioner, on terms that I discuss below.

B.  Damages

119.  Upon the discharge of the injunction in HCA 2023/2009, the petitioner was ordered to pay Jiang’s costs, which he paid in the sum of HK$400,000.  I note, however, that in his decision to discharge the injunction on 23 March 2010, Deputy Judge Carlson said that

“the Plaintiff should not be allowed to punch from a distance by obtaining an injunction in Hong Kong against the Hong Kong Defendant and seeking to bind all the other overseas defendants and yet not serving them with the writ”,

that he was prepared to discharge the injunction against Jiang “for this reason alone”, and that he also discharged in the injunction for the additional reason that the proper place to litigate the dispute was before the appropriate court at Baoying.

120.  In these circumstances I consider that the petitioner has failed to prove that the costs he had to pay were caused by the false affirmation of the 3^rd respondent.  Further, this is not an action to set aside the costs order for fraud and to recover those costs on a restitutionary basis. 

121.  As to the petitioner’s lost income, the remuneration was for the General Administrator of the Hospital, not as a member of the Company.  Anyhow, any such loss was caused not so much by the respondents as by Jiang’s own plan of assuming the position in the petitioner’s place.  Further, even when Jiang offered for his position to be suspended in November 2009, and even after Jiang was removed in September 2011, the petitioner was not reinstated by the Hospital or the Department of Health until January 2014.  In all the circumstances, I do not consider the petitioner has demonstrated that an order for damages ought to be made.

VIII.  Basis of valuation

122.  As to the terms of the order for the buy-out of the respondents, the principal issue is whether the valuation should follow paragraph 4 of the Preamble to the Cooperation Agreement (“Preamble 4”).

123.  Preamble 4 provides as follows:[13]

“In principle, during the cooperation period, partners are not allowed to withdraw. However, if owing to personal reasons, the development of the joint venture company is hindered, or the interests of the company are hampered, then the Chairman of the Board and the General Manager are entitled to put the matter forward for discussion in the Board of Directors. The Board will decide on the manner of disposal or order his/her withdrawal from the cooperation team. At the time of the withdrawal, a fixed return of 6% per annum will be paid on the actual amount of his/her investment fund at the material time together with the fund as settlement. No extra subsidy and any further demands will be entertained. Withdrawal is not allowed when the joint venture company is operating at a loss.”

124.  Mr Chan submitted on behalf of the petitioner that the price applicable under Preamble 4 of the Cooperation Agreement should be adopted.  In support of that contention, he relied on 2 cases: Re a company (No 04377 of 1986) [1987] BCLC 94 and Moxon v Litchfield [2013] EWHC 3957 (Ch).

125.  In Re a company (No 04377 of 1986), the articles provided that a member of the company who was but ceased to be a director of the company was bound to give a transfer notice that constituted the company his agent for the sale of his shares to other members at a price to be agreed or to be certified by the auditor of the company as “the fair value .. as between a willing seller and a willing buyer.”  The petitioner in that case was terminated as a director and the other members offered to purchase his shares at £900 per share which he rejected.  The auditor then valued the shares at £800 each.  The petitioner commenced proceedings alleging unfair prejudice.  The court struck out the petition on the basis that the articles provided for what was to happen upon a breakdown of relations and the petitioner had no legitimate expectation that the articles would not be relied upon by the majority shareholder.  At p 102a, Hoffmann J said:

“In these circumstances it seems to me that if the articles provide a method for determining the fair value of a party’s shares, a member seeking to sell his shares on a breakdown of relations with other shareholders should not ordinarily be entitled to complain of unfair conduct if he has made no attempt to use the machinery provided by the articles. I say nothing about cases in which there has been bad faith or plain impropriety in the conduct of the respondents or about cases in which the articles provide for some arbitrary or artificial method of valuation. But a provision that the auditors (or some other independent person) shall fix a ‘fair value’ for the shares gives the auditors precisely the function which a court would have to perform under s 459.”

126.  It will be noted that the emphasis was on fair value and that the decision was expressly not about agreed provisions for “some arbitrary or artificial method of valuation”.

127.  In Moxon v Litchfield, the shareholders’ agreement contained provisions which required any outgoing shareholder who fell within the definition of a “Bad Leaver” to transfer to others his shares at par value (£1 each).  The other shareholders regarded the petitioner as a “Bad Leaver” and required him to part with his shares at par.  The petitioner, arguing that it amounted to expropriation of his shares, sought relief from the alleged unfairly prejudicial conduct.  Hildyard J dismissed the petition on the ground that the petitioner was properly characterised as a “Bad Leaver” and there was no reason not to give effect to the contractual arrangements between the parties, including those for dismissal of a director and the sale of his shares.  This was therefore a case where a contractual compulsory transfer of shares at par value was held not to be unfairly prejudicial conduct.  It is not authority that in ordering a buy-out based on a finding of unfairly prejudicial conduct, the court should necessarily adopt the valuation enshrined in the contractual expulsion mechanism.

128.  In my judgment, Preamble 4 should not be adopted in the valuation of the shares because the machinery of Preamble 4 has not been invoked.  The buy-out is ordered by decree of the court, not a sale by operation of Preamble 4.  Further, Preamble 4 was acceded to in the context of an agreement that envisaged dividends would be paid to the shareholders every year, with an expected annual return of 20%-30% or more from the second year onwards.  It is expressly not operable when the Company was making a loss.  In fact, the Company has never declared a dividend.  The Hospital appears to have been accumulating its profits, so that the Company itself has been recording a loss.

129.  As an alternative, Mr Chan submitted that the respondents’ shares should be valued at RMB1.80 per unit.  In my view, while this was the price at which the respondents were willing to sell their shares to Jiang in July 2009, there is no basis to say that this represents the fair value of their shares to be bought out by the petitioner now pursuant to this court’s order.  The respondents’ capital has been locked in and still forms part of the capital of the Company, and thus the Hospital, on which its operations have been financed.

130.  As for the date of valuation, the overriding principle is that it should yield a fair value.  To this end it is generally desirable that the shares to be sold should be valued as nearly as possible to the actual date of sale.  Thus a useful starting point is the date of the buy-out order or the date of the valuation, although fairness sometimes requires an earlier date to be adopted.  See: Re Hong Kong Agricultural Special Zone Limited (unrep, HCMP 729/2012, HCA 1741/2012, HCA 126 & 2147/2013, 28 April 2017) at §§300-303; Tam Po Kei v Tam Bo Kin (No 1) [2011] 1 HKLRD 537, §126; Profinance Trust SA v Gladstone [2002] 1 BCLC 141, §§60-61.

131.  Mr Chan submitted that the date of 26 August 2009, being the date of exclusion of the petitioner, should be adopted.  I am unable to accept this submission.  This is not a case where the respondents wronged the Company by, for example, misappropriating its funds or diverting its business opportunities so that an earlier date might be appropriate in order to exclude the effect of the wrongful acts.  The Respondents have remained shareholders in the Company and I do not see any sufficient basis for saying that they should be excluded as outsiders from August 2009 onwards.

132.  In all the circumstances I consider the fair valuation date to be the date of this judgment.

133.  There should be no discount on account of the respondents’ shares being a minority stake.  Mr Chan further argued that there should either be a discount or a specific direction to the valuer to exclude from account the convertibility of the Hospital to a non-public profit-making hospital because previous steps to convert the Hospital had been sabotaged by the respondents.  I reject this submission.  In my view this was not fairly raised on the pleading as a complaint of unfairly prejudicial conduct on the part of the respondents.  The evidence of what precisely was done was scant and not foreshadowed by the petitioner’s affirmations.  There is no valid basis for excluding the respondents from the full prospects of the joint venture as a going concern.

IX.  Conclusion and orders

134.  For the above reasons, on the petition, there will be an order that:

(1) The 2^nd, 3^rd and 4^th respondents do sell to the petitioner and the petitioner do purchase from them all of their shares in Company (after the allotments referred to below) at a price to be determined by a valuer or joint valuers.

(2) The parties do confer for the purposes of the appointment of a valuer or joint valuers.  In the absence of agreement, the parties may nominate their respective candidates and seek directions from this court for the appointment of a valuer or joint valuers.

(3) The date of valuation shall be the date of this judgment.

(4) There shall be no discount for minority interest.

(5) The petitioner shall cause the respondents’ loans to the Company to be repaid in full at the time when their shares are purchased by the petitioner.

(6) The petitioner shall pay the respondents interest on the price of the shares from the date hereof until the determination of the price at the rate of 1% above prime per annum, and thereafter at judgment rate until payment.

135.  On the respondents’ counterclaim, there will be:

(1) A declaration that the 2^nd, 3^rd and 4^th respondents are each entitled to a one-seventh interest in the shareholding of the Company.

(2) An order that the Company do issue and allot 1,000 shares ranking pari passu with the existing shares to each of the 2^nd, 3^rd and 4^th respondents.

(3) An order that the transfer of 100 shares of the Company from the petitioner to Pang be set aside and a declaration that the appointment of Pang as a director of the Company was invalid.

136.  I decline to make an order for the reinstatement of the respondents as directors since this would be inconsistent with the whole point of the buy-out order even though the transfer of shares and their valuation will take time.

137.  The parties have liberty to apply for orders and directions on ancillary matters.

138.  There will be an order nisi that the petitioner do have the costs of his petition and the respondents do have the costs of their counterclaim.