DONALD QUINTIN CHEUNG AND OTHERS v.FESTER CORPORATION LIMITED AND OTHERS

1986 No. A5808

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

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JUDGMENT

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1. I have before me 3 motions. First in Companies Winding Up No. 234 of 1986, the second, third, fourth and fifth respondents ask that the petition be stayed until determination of Action No. A5808 of 1986. Second, the 3 petitioners by cross motion ask that the pleadings in action No. A5808 stand as pleadings in Companies Winding Up No. 234 on certain issues. The third motion, in action No. A5808, is by the petitioners, and they ask for an order that all proceedings in that Action be stayed until Companies Winding Up No. 234 is concluded.

2. The motions essentially present the same issue and hence all are dealt with together. The facts, so far as they need be set out, can be stated quite shortly. The fourth and fifth respondents, Mr. and Mrs. Wang, are very successful property developers. Starting out in a small way in 1960, they now control some 150 companies ("group companies"), including the first 3 respondents. Of course, their activities generated a great deal of legal work, particularly in the way cf conveyancing. Most of that work went to a firm of solicitors in which the first petitioner, Mr. Donald Cheung, was originally an assistant solicitor, later a partner and eventually the senior partner. The second petitioner Mrs. Cheung, is the wife of Mr. Donald Cheung. The third petitioner, Mr. Frank Cheung, not a relative of the first petitioner, is also a solicitor who, following in the first petitioner's footsteps, became an assistant then partner and finally senior partner in the same firm.

3. Mr. Donald Cheung attended to a considerable amount of the respondents' work between 1960 and 1982, and he and his wife became close friends of Mr. and Mrs. Wang. In 1970 Mr. Donald Cheung took up minor shareholdings in two group companies i.e. On Shiu and Beta. Upon whose initiative this was done is disputed. In 1975 On Shiu went into liquidation, and certain assets were distributed in kind to the shareholders. As a result Mr. Donald Cheung and the other shareholders found themselves in a partnership. Meanwhile in 1972 Mr. Donald Cheung and Mr. Frank Cheung became minor shareholders in another of the Wang's projects, as a result of which the petitioners became shareholders of the let respondent "Fester", another group company.

4. In 1983 Mr. and Mrs. Wang on the one side and the petitioners on the other, fell out. Mr. Cheung who felt that minority interests were being prejudiced and that he was not being given sufficient information, instituted a series of legal actions in November 1984. In one of these he claimed that the affairs of Beta were being conducted in a manner which was unfairly prejudicial to the interests of the minority and asked for the winding up of that company or alternatively a buying out order under section 168A of the Companies Ordinance. He complained that an excessive sales commission of 5 had been paid to a group company in which he had no share, that a loan from Fester had been allowed to carry interest at excessive rates which benefited Mr. and Mrs. Wang against the minority shareholders, that a massive rights issue for $300 million had been made thereby severely diluting the minority shareholding and finally that loans that did not carry interest had been repaid.

5. For their part Mr. and Mrs. Wang responded with an action claiming in substance that the first and third petitioners were in breach of their duties as solicitors to the respondents and that the petitioners were accordingly constructive trustees of their shares for the benefit of the respondents. They sought declarations to that effect and return of the shares.

6. In March 1985 the respondents applied to strike out the Beta petition or for a stay pending the determination of the actions filed by the petitioners. The application was heard on the 4th and 5th of July 1985 by Penlington J. who stayed the proceedings on the petition, apart from discovery.

7. Meanwhile the matter of constructive trusts, curiously, was not raised in the strikingly similar context of Fester, the affairs of and some dissension in which continued their course. But on 29th July 1986 the petitioners filed their petition in Companies Winding Up No. 234 for their minority shareholding in Fester to be purchased by the majority. On 14th October 1986 Mr. and Mrs. Wang filed their writ in Action No. 5808 of 1986, claiming declarations that the minority shares are held in trust for Mr. and Mrs. Wang.

8. Returning then to the motions before me, the issues are, should the petition be stayed till after adjudication of ownership of the minority shareholding, or should the issue of ownership of the minority shareholding be heard in the context of the petition, and the action be stayed until the petition is determined.

9. Mr. Oliver for the respondents submits that there are very substantial disputes on the facts and law, and that the disputes are not co-extensive in relation to the issues on beneficial ownership and section 168A relief. It would, he says, be most inconvenient to grant the petitioners' motion because the issue would be fought out to a judgment but no relief is claimed. He rightly points out that Mr. Thomas for the petitioners, in effect, asks for the action and petition to be heard together. If the 2 matters were heard together, he adds, and it was established that the respondents were the beneficial owners of the minority shares, then the very considerable time and effort spent in preparation and presentation of the case for section 168A relief would be wasted. On the other hand, the petitioners would not suffer prejudice by having the petition stayed as all they seek is the price of their shares, and any delay could be reflected by the Court in that price. Finally, he submits, that the authorities all support the practice that adjudication of substantial disputes as to a petitioner's status should precede that of the petition, even where it is a petition for section 168A relief, as in the present proceedings.

10. Mr. Thomas for the respondents in substance submits first that this buying out petition is on the authorities and in good sense, very different from a winding up petition, and should not be thwarted by the respondents' attempts to question the beneficial ownership of the petitioners' shareholding. And second, that the respondents are estopped from denying the petitioner's beneficial ownership.

11. It is convenient to begin first with the latter point of estoppel. The evidence overwhelmingly shows that long after the claim of constructive trusts and beneficial ownership was made in the context of Beta and On Shiu by the respondents, they were actively treating the petitioners as beneficial owners of their minority shareholding in Fester. Indeed the respondents demanded huge sums for payment of proportionate allocation of a massive new rights issue, and in respect of the complaints by the petitioners that that issue at par was not fair to the minority and diluted their shareholding, did not respond with any denial of their beneficial ownership. This, and other conduct it is not necessary to detail, is impossible to reconcile with any belief on the part of the respondents that they were the beneficial owners of the Fester shares held by the petitioners. On the other hand, notwithstanding the undoubted fact that Mr. and Mrs. Wang were astute and very successful property developers, it seems not so inconceivable to me as to dismiss that possibility out of hand, that they may have failed to appreciate the implications of constructive trusteeship as fully and in the same way as a lawyer would. Furthermore their solicitors were as late as the 12th of September 1985 seeking counsel's advice as to whether the petitioners held the shares in question on constructive trusts, and the conduct I referred to all occurred before that. Finally in this regard it was suggested on the petitioners' behalf that they filed their petition in all innocence, without expectation of the respondents claiming beneficial ownership of the minority shareholding. If practising solicitors could fail to make the constructive trusts transposition from Beta to Fester, it must be at least credible that the lay respondents likewise did so.

12. Mr. Oliver also submits that the breach by the 1st and 3rd petitioners of their duty as solicitors merely entitled the respondents to rescind the issue of shares to them and that until they did so, the respondents could not have been beneficial owners (O'Sullivan v. Management Agency Ltd. (1985) 1 QB 428 at 457). In that regard the first unequivocal assertion of beneficial ownership by the respondents was the issue of their writ in Action No. 5808 in October 1985.

13. Mr. Thomas in the context of detriment stresses and relies upon the basal purpose of the doctrine of estoppel as explained by Dixon J. in the following passage reproduced from page 111 of the 3rd Edition of Spencer Bower on Estoppel:

"...it is often said simply that the party asserting the estoppel must have been induced to act to his detriment. Although substantially such a statement is correct and leads to no misunderstanding, it does not bring out clearly the basal purpose of the doctrine. That purpose is to avoid or prevent a detriment to the party asserting the estoppel by compelling the opposite party to adhere to the assumption upon which the former acted or abstained from acting. This means that the real detriment or harm from which the law seeks to give protection is that which would flow from the change of position if the assumption were deserted that led to it. So long as the assumption is adhered to, the party who altered his situation upon the faith of it cannot complain. His complaint is that when afterwards the other party makes a different state of affairs the basis of an assertion of right against him then, if it is allowed, his own original change of position will operate as a detriment. His action or inaction must be such that, if the assumption upon which he proceeded were shown to be wrong, and an inconsistent state of affairs were accepted as the foundation of the rights and duties of himself and the opposite party, the consequence would be to make his original act or failure to act a source of prejudice."

14. I think it must be accepted on the evidence that the alleged change of position does act to the detriment of the petitioners. They now face additional delay in redeeming their investment (which will be somewhat exacerbated if their petition is stayed) and they also have now to reach back to 1972 and beyond in collating their evidence.

15. However if any representation flowed from the respondents' conduct, or any assumption was made by the petitioners upon that conduct in the ordinary way, it was that the respondents did not deny the petitioners' beneficial ownership of the minority shareholding at that time, not that the respondents were not in a position to rescind the allocation of the shares, or would not do so. If the 1st and 3rd petitioners were in breach of their duty as solicitors to the respondents, that would entitle the respondents to rescind the agreement by which the allotment was made, and upon rescission there would have arisen the constructive trusts upon which the petitoners would hold the shares. (Alati v. Kruger (1955) 94 CLR 216, 223 cited in O'Sullivan v. Management Agency Ltd. (CA) (1985) 1 QB 429, 457). On the facts rescission would have taken place on the commencement by the respondents of Action No. A5808 on 14th October 1985. The conduct relied upon by the petitioners as constituting the respresentation giving rise to the estoppel, as I have already said, all occurred prior to that date. Upon this basis, if no other, I think the plea of estoppel fails.

16. I turn then to the matter of whether the Action should be stayed. It is not disputed that there is no legal bar to the issue of beneficial ownership being determined in the context of a petition for section 168A relief. What is questioned is whether that is what should be permitted in these proceedings. In his 1985 judgment, Penlington J, upon an issue and considerations not dissimilar, held upon the authorities cited to him, some of which have been relied upon before me, that:

".... the general rule of practice is that if there is a genuine dispute as to the ownership of shares that dispute should be settled before a petition for winding up is considered unless it can be shown that harm will be done to a minority shareholder because in the interim period the majority shareholders are able to take steps which will reduce the value of his shareholding."

17. It was not sought to question that statement of the law which I accept and propose to adopt without re-examining the authorities there considered. However Mr. Thomas for the petitioners seeks to distinguish the present proceedings from the Beta motion before Penlington J. in 3 respects on the facts. First in Beta the petition was for winding up or a buying out order under section 168A. Here it is only for a buying out order. Second that Penlington J. was considerably influenced by the fact that the actions before him had been commenced by the petitioner, whereas in the present proceedings, it is clearly the respondents who have raised the issue of beneficial ownership. I will merely say that how far Penlington J. was so influenced is debatable. Third that there was no estoppel point in the Beta motion before Penlington J. I must say on this third point that if anything, the plea of estoppel favours prior determination of the beneficial ownership issue, since if successful, the plea itself might well produce a simple and expeditious answer.

18. Mr. Thomas relies principally upon re Garage Door Associates Ltd. (1984) 1 WLR 35, which was also the authority mainly relied upon by the first petitioner before Penlington J. Both parties petitioned in that case, each raising the ownership of shares. Mervyn Davies J. declined to strike out that part of one petition seeking winding up not only on the ground that the petitioner had the necessary status quo, being a registered shareholder, but because the issue of the entire disputed shareholding was raised by the petitions. He saw no occasion for saying that the hearing of those petitions was an improper forum for any. debate about the true ownership of the shareholding, and observed that in that way the issue as to share ownership would be settled, and afterwards, if appropriate, the winding up application could be prosecuted.

19. I do not find in that judgment, which turned upon its own exceptional facts, anything that displaces the rule of practice in relation to a petition for a buying out order as opposed to winding up. In refusing to strike out the petition for winding up, Mervyn Davies J. was not providing for the issues of ownership and of winding up to be heard together but for the later to follow the former in the same proceedings. Furthermore the petitions before him in the particular circumstances of that case, were concerned with the very issue of ownership of the shareholding of the company. Nothing he said derogates from the necessity to consider the particular circumstances of each case, and in the present proceedings the circumstances are very different from those in re Garage Door.

20. Before I come to the actual consideration of those circumstances, there are two matters that need to be mentioned. First Mr. Oliver sought to reinforce the legal rule of practice in question by referring to the following 3 decisions, which he submitted, demonstrated that where the petitioner lacked capacity or his capacity was challenged, that issue should be determined separately (Richmond v. Branson and Son (1914) 1 Ch. 986; Russian Commercial & Industrial Bank v. Comptoir D'Escompte DeMulhouse and others (1925) AC 112; Banco de Bilbao v. Sancha (1938) 2 KB 176). I find little assistance in these cases for they are concerned respectively with whether the plaintiff's solicitor, the plaintiff bank's manager and the board of a bank really represented the named plaintiff. In the present proceedings no such issue arises.

21. Second, for his part, Mr. Thomas seeks to pray in aid in re Connolly Brothers Ltd. (1911) 1 Ch. 731. That case did not concern a winding up petition but rather competing appointments of 2 receivers. Nonetheless an analogy of a sort may be discerned. The High Court stayed the second action on the ground that it would not work out all that was required, which the former would. But unlike the ownership issue in the present proceedings, it was not concerned with the status of either party, nor could it have provided an answer to the 2 actions. The High Court also held the latter action vexatious and unreasonable. In that regard, Mr. Thomas submitted upon the facts in these proceedings that the respondent's Action was a " spoiling action", got up without any real substance to provide a point of argument to stave off the petition.

22. As I have already indicated, I am not persuaded that the respondents actually appreciated the effect of constructive trusts in the context of Fester. In that context final legal advice came at a very late stage. Nor am I persuaded that their claim is not bona fide. From the evidence it is clear that the respondents did not require the petitioners' investment, and I have no doubt that the minority shares were made available as some sort of favour. Although the shares had to be paid for, their allotment must be regarded as being in the nature of a gift. Whether the solicitor and client relationship between the first and third petitioners on the one hand and the respondents on the other extended to the issue of shares in Fester is disputed. But I think there must be a good arguable case that it did, having regard to the prolonged and extended relationship, particularly between Mr. Donald Cheung and Mr. and Mrs. Wang, and that that a gift by a client to his solicitor raises the presemption that it was unduly influenced by the fiduciary relationship subsisting between (see p. 543, 25th Editionn Snell's Principles of Equity) Further more in a transaction of the present sort in the particular circumstances, I think it must be at least arguable that it is incumbent upon the solicitor to prove that he advised his client as diligently as he should have, had the transaction being one between his client and a stranger, and that the transaction was as advantageous to the client as it would have been if he had been endeavouring to allot the shares to a stranger. (Demerara Bauxite Company v. Louisa Hubbard and ors. (1923) AC 673 at 682; see also Cordery on Solicitors, 7th Edition at pages 7-10). I do not accept therefore that the Action is simply a spoiling action. On the contrary I should record that in my view the respondents have a good arguable case, moreover a case that has not been shown not to be bona fide. In resisting the petition, the respondents must be entitled to adopt such defences as are open to them.

23. I proceed then to the question of whether the petition should be stayed, or, to use the words of Murvyn Davies J., the hearing of the petition would provide an appropriate forum for debate on the ownership issue. The petition is concerned with the issue of whether the affairs of Fester have been conducted in a manner unfairly prejudicial to the interest of the minority. That of itself will not raise the issue of ownership of the minority shares. The latter issue will in any event involve different evidence, that moreover will have to go back to 1972 when the minority shares were issued, whereas the allegations of prejudicial conduct relate to a very much later period commencing in 1983. If the respondents succeed in establishing their claim to beneficial ownership, the petition will fall away and considerable costs and effort will be saved. On the other hand if they fail, it is true that there will be no final result and the petition will then have to be determined, but that will have to be done in any case.

24. Against that the petitioners will be prejudiced to some extent if the respondents fail to establish the constructive trusts pursuant to which they claim beneficial ownership. The petitioners will then suffer a further extension, possibly very substantial, of the delay in being able to redeem their investments made in 1972. However it should be borne in mind that they only sought to redeem those investments in 1983 following the breakdown in relations with the respondents. In addition the delay could be substantially reduced if the preparation of evidence as opposed to the hearing were not stayed, although that may result in expenditure that will be wasted if the Action succeds. On behalf of the petitioners it is also urged that the value of their shares in Fester might be undermined, particularly in the very considerable period they may have to wait for their remedy. However I think that could be met or very considerably mitigated by the Court in determining the price at which these shares should be bought out. It is also claimed, that the issue of beneficial ownership may occupy very much more time than that of conduct prejudicial to the minority. Whether that will be so I cannot say. But clearly, like the latter issue it will involve a lengthy hearing, much preparation and substantial resources and costs. Furthermore the disputes in the two matters are not co-extensive.

25. Having regard to all the circumstances and the foregoing considerations I am not persuaded that the issue of beneficial ownership should be determined in the context of the petition. On the contrary I think that the advantage lies in the Action being tried first. I am not satisfied that the petitioners have shown good reason why the general rule of practice should not be observed in these proceedings. And even if that rule of practice does not apply to a petition for section 168A relief (which I think it does), in my view the foregoing circumstances and considerations clearly require the petition to be stayed pending determination of the locus standi of the petitioners. So that the motion for stay of the Petition succeeds while that for stay of the Action fails. I will now hear counsel as to the precise terms of the order I should make, it having been indicated to me that that a stay should not extend to the preparation of evidence. I will also hear counsel on costs.