WONG MAN YIN v. RICACORP PROPERTIES LTD AND OTHERS

FACV No. 14 of 2002

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 14 OF 2002 (CIVIL)

(ON APPEAL FROM CACV NO. 3884 OF 2001)

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J U D G M E N T

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Chief Justice Li :

1. I agree with the judgment of Mr Justice Clough NPJ.

Mr Justice Bokhary PJ :

2. I agree with the judgment of Mr Justice Clough NPJ.

Mr Justice Chan PJ :

3. I agree with the judgment of Mr Justice Clough NPJ.

Mr Justice Clough NPJ :

Introduction

4. On the 22 June 2001, at the conclusion of the hearing of the petition of the appellant Mr Wong Man Yin (the petitioner) under s.168A of the Companies Ordinance (Cap.32), Deputy High Court Judge Woolley, in the Court of First Instance, ordered the respondents Mr Law Lam Wai (Law) and Mr Tam Kwong Chuen (Tam) to purchase the petitioner's minority shareholding in Ricacorp Properties Limited (Ricacorp). The deputy judge made a second order on the 17 October 2001 giving directions for the valuation of the petitioner's shares required to be purchased by the respondents.

5. On the 16 July 2002 the Court of Appeal (Rogers VP, Le Pichon JA and Sakhrani J) allowed the respondents' appeal against part of the deputy judge's directions and varied his order in the manner indicated in paras.34 and 37 below. The petitioner now appeals as of right from the decision of the Court of Appeal.

6. The issues raised in the appeal concern the scope and application, to the facts of this case, of the discretion conferred on the court by s.168A(2)(c) of the Companies Ordinance to give directions regarding the basis (including assumptions) of the valuation to be made in the implementation of a judge's order made under that provision for the purchase of the shares of a member of a company.

Background

The shareholder's agreement

7. On the 15 July 1995 the respondents and the petitioner entered into a shareholders' agreement (the Agreement) which was intended to provide the basis for co-operation in the estate agency business between Ricacorp and Capital Property Consultants Ltd (Capital). Capital was the smaller organisation, having 7 branches whereas Ricacorp had 20.

8. At the time of the Agreement the authorised and issued capital of Ricacorp was 10 million one dollar shares of which 91 per cent were held by the respondents, the remaining 9 per cent of the shares being held by two minority shareholders. The issued capital of Capital was 4 million one dollar shares, of which the petitioner held 75 per cent. The parties to the Agreement contemplated an alliance (and according to the petitioner an eventual merger) between the two companies with a view to expanding their market share in the real estate business.

9. The Agreement recited the agreement of the parties to make appropriate transfers of shares in the respective companies which would result, in the case of Ricacorp, in the parties holding 91 per cent of the issued shares equally between them. In the case of Capital the result would be that 75 per cent of the issued capital would be held as to 31 per cent by the petitioner and 22 per cent by each of the respondents. Clause 1.1 of the Agreement provided that the price of the shares to be transferred should be based on the net asset worth of the companies as at the 31 May 1995, that there would be an audited balance sheet as at that date to account for the net asset worth of the companies and that the petitioner was to pay a premium of 30.33 per cent of HK$3 million to the respondents for his shares in Ricacorp. Under clause 1.2 the relevant shares were to be transferred and paid for within 14 days of the execution of the Agreement. Clause 1.3 provided inter alia that any allotment of shares of the companies pursuant to any increase of capital should only be made pro rata to the existing shareholding of the parties.

10. Clause 3 included the following provisions :

(i) The existing loans due from Ricacorp to the respondents were to be transferred to the petitioner according to the new shareholding ratio (clause 3.1).

(ii) Future working capital of the companies was to be met, upon the unanimous resolution of the respective Boards, by means of advances and credit from financial institutions or other third parties (clause 3.2).

(iii) Shareholders' loans were to be repaid prior to any distribution of profits (clause 3.3).

(iv) Shareholders' loans were to bear interest at the rate to be determined by the Boards (clause 3.4).

11. Clause 6 related to the duration and termination of the Agreement. The clause included a provision that any party could determine the Agreement by notice in writing to the others if inter alia any other party was in breach of his obligations under the Agreement and had failed to make good such breach within 30 days of receipt of written notice from the other parties requiring him to do so (clause 6.2.1).

12. Clause 7 related to mutual co-operation. The parties agreed that each of them would :

(i) use all reasonable endeavours to promote the business and profitability of the companies (clause 7.1);

(ii) procure the observance and performance of the Agreement by doing or procuring to be done all things in that behalf within his powers including the passing of resolutions whether by the Board or in general meeting of the companies (clause 7.2); and

(iii) perform the Agreement in the spirit of mutual co-operation, trust and confidence, and use all means reasonably available to him, including his voting power in relation to the companies, to give effect to the objectives of the Agreement and to ensure compliance by the companies with his obligations (clause 7.3).

An initialled addition to clause 7 expressed the further agreement of the parties to form a holding Group to be known as "RICACORP CAPITAL PROPERTIES GROUP" which would control 91 per cent of Ricacorp and 75 per cent of Capital.

13. Distribution of profits was governed by clause 8 which provided that :

(i) subject to clause 3, the retention of profits by way of reserve for future contingency and development and to the directors' determination as to the working capital requirements of the companies, the balance of profits was to be distributed by way of dividends (clause 8.1); and

(ii) all shareholders would be entitled to participate in the dividends declared by the companies according to their respective shareholdings (clause 8.2).

14. The parties agreed under clause 16 that in the event of conflict between the Articles of the companies and the provisions of the Agreement, the Agreement was to prevail and they would exercise their respective shareholders' voting rights and take all necessary or requisite further steps to ensure that the provisions of the Agreement prevailed.

The Meeting on the 2 September 1995

15. On the 2 September 1995 there was a meeting (the September meeting) of the parties to the Agreement. Minutes of the meeting were prepared and signed by the parties. The minutes were expressed to be the minutes of a meeting of the "BOARD OF DIRECTORS OF RICACORP CAPITAL PROPERTY GROUP LIMITED" (emphasis supplied) although no such corporate entity ever came into existence. The relevance of these minutes in this appeal is that they include the following resolution (the September resolution) of the parties regarding remuneration :

"3.	Remuneration of Three Directors
	a.	Salaries :
		It was resolved that the current salaries of HK$60,000.00 per month for Mr K.C. Tam and Mr Barry Law remain unchanged and that of Mr Denny Wong will be increased to HK$60,000.00 per month with effect on 1 September 1995.
	b.	Bonus :
		20% of the Group's net profit before dividend distribution will be equally shared by three Directors."

The falling out of the parties

16. The harmony between the parties was short lived. There were initial measures taken to implement the Agreement before the parties fell out. The transfer to the petitioner of shares in Ricacorp required by clause 1 of the Agreement was made and the shares were paid for, although the petitioner subsequently complained that the audited balance sheet stipulated in clause 1.1 was never prepared and that he had been required to pay an excessive price for his shares. The petitioner thus acquired a shareholding of 30.33 per cent (3,033,333 shares) in Ricacorp. Each of the respondents retained a similar holding in that company and received a transfer of a 22 per cent holding in Capital. The petitioner was appointed a director of Ricacorp on the 4 August 1995. Law was appointed a director of Capital.

17. To raise capital for expansion of Ricacorp's Business two EGMs (the 1st and 2nd EGMs) were convened on the 4 August and 8 November 1995 to increase the company's authorised share capital by a total of 10 million shares. The petitioner attended both meetings and voted in favour of the resolutions.

18. The respondents had made substantial loans to Ricacorp but no part of those loans was ever transferred to the petitioner under clause 3.1 of the Agreement. Moreover the parties each made a further loan of HK$1.5 million to Ricacorp soon after the date of the Agreement. The petitioner called in his loan in November 1995. On the 1 December 1995 he issued a writ against Ricacorp to recover his loan which the company repaid.

19. This Court was referred to passages of the petitioner's evidence at the hearing of his petition from which it is clear that he maintained that his stance was that he should not be required to inject capital into Ricacorp when the respondents were refusing to do likewise for Capital. The deputy judge referred to this matter in para.6 of his judgment at the end of the hearing of the petition on the 22 June 2001 but properly found it unnecessary to determine the actual cause of or to apportion blame for the breakdown of relations between the petitioner and the respondents.

20. The deputy judge found (and it was common ground in this appeal) that by December 1995 the parties to the Agreement had fallen out and that thereafter the petitioner and the respondents concentrated on pursuing the interests of Capital and Ricacorp respectively. However, the Agreement was not determined by consent of the parties or under clause 6 of the Agreement nor was any attempt made to rescind it in reliance upon repudiation by any party.

The events subsequent to the falling out of the parties

21. On the 14 December 1995 the Board of Ricacorp allotted (the 1st allotment) 5 million of the new shares authorised by the 1st and 2nd EGMs to each of the respondents. Thereafter the authorised capital of Ricacorp was successively increased by 10 million shares on the 14 March 1996 (3rd EGM) 20 million shares on the 18 September 1996 (4th EGM) and 20 million shares on the 18 October 1996 (5th EGM). On the 30 April 1996 the respondents were each allotted (the 2nd allotment) 5 million of the 10 million shares authorised at the 3rd EGM and on the 4 October 1996 the respondents were each allotted (the 3rd allotment) 10 million of the 20 million shares authorised at the 4th EGM. The respondents paid for the 40 million shares allotted to them by way of cash injections of HK$44.48 million of which HK$1.48 million was premium. Before each allotment the petitioner was given the opportunity to take up the new shares in proportion to his shareholding but declined to do so, as did the other two minority shareholders.

22. The result of these increases in the authorised capital of Ricacorp and of the three allotments was that the authorised capital of the company was 70 million shares and the issued capital had increased to 50 million shares of which 40 million shares had been allotted equally between the respondents by the 1st, 2nd and 3rd allotments, thereby increasing Law's aggregate holding to 23,033,334 shares and Tam's to 23,033,333. The petitioner was left with his original 3,033,333 shares and the balance of 900,000 shares was held by the other two minority shareholders. Thus the respondents each held 46.07 per cent of the company's issued capital and the petitioner's holding was reduced to 6.07 per cent.

23. On the 19 December 1996 the petitioner was removed as a director of Ricacorp. He never received any director's emoluments from the company.

24. On the 12 June 1997 the petitioner began an action (the writ action) in the High Court (HCA 6260/1997) against the respondents and the company. The relief claimed included declarations that the relevant resolutions passed at the 3rd, 4th and 5th EGMs were null and void because the EGMs were called on less than the statutory minimum notice of 14 days and that the 1st, 2nd and 3rd allotments were null and void because the petitioner was not given notice of the relevant board meetings. The respondents amended their pleadings to admit the petitioner's allegation of short notice in respect of the EGMs, and lack of notice in respect of the board meetings. The outcome was that on the 12 January 2000 the petitioner obtained interlocutory judgment on admissions granting the petitioner the relief he sought and thereby nullifying the relevant resolutions passed at the 3rd, 4th and 5th EGMs to increase the authorised capital of Ricacorp. The judgment also nullified the 1st, 2nd and 3rd allotments. The result was to restore Ricacorp's authorised capital to 20 million shares and its issued capital to 10 million shares. The shareholdings of the respondents were thus restored to the same holdings as they held before the 1st allotment and the petitioner once again held a 30.33 per cent holding.

25. The effect of the judgment in the writ action nullifying the issue of 40 million shares to the respondents was to leave Ricacorp indebted to them in the aggregate sum of HK$44,480,000. Initially this amount was treated as a loan but the respondents were concerned about the commercial image of the company in such circumstances and sought to remedy the situation by increasing the capital of Ricacorp. To this end they convened an EGM (the 6th EGM) on the 9 March 2000 at which it was resolved to increase the authorised share capital of Ricacorp by 40 million shares to be offered as a rights issue of four shares for each held at a price based on the net asset value per share of the company.

26. The petitioner attended the meeting and voted against the resolution. He declined to take up his entitlement of the rights issue. At a board meeting of Ricacorp held on the 24 March 2000 each of the respondents was allotted (the 4th allotment) 20 million of the new shares. The issued share capital of the company and the shareholdings of the respondents were thus restored to what they purported to be before the judgment in the writ action.

27. The events mentioned in paras.25 and 26 were reflected in the audited annual accounts of Ricacorp for the year ending the 31 March 2000. Thus the Balance Sheet stated the share capital of the company to be 50 million shares as at the 31 March 2000 and 10 million in 1999. A note in the accounts explains that the sum of HK$44,480,000 previously recognised in the accounts as share capital and share premium was initially transferred to amounts due to directors with interest being charged at 12 per cent per annum from the relevant dates of the purported issuance of shares. Aggregate interest of HK$19,585,052 is stated to have been charged and recorded as prior year adjustment in the accounts, but the respondents had waived an aggregate amount of HK$10,456,631 of their interest entitlement. The note further explains that on the 9 and 24 March 2000 ordinary resolutions were passed for the increase in the authorised capital of the company from HK$20 million to HK$60 million and for the allotment of 40 million shares at a premium of approximately HK$0.1397 per share.

Proceedings in the Court of First Instance

28. On the 24 March 2000 (the same date as the 4th allotment) the petitioner filed his petition under s.168A of the Companies Ordinance naming Ricacorp and the respondents as the respondent parties and claiming that the affairs of the company had been conducted in a manner unfairly prejudicial to his interests by reason of the following matters :

(1) the dilution of the petitioner's shareholding in the company by the invalid 1st, 2nd and 3rd allotments in breach of clauses 1.3 and 3.2 of the Agreement;

(2) the 6th EGM prior to which the petitioner had, he claimed, been denied relevant financial information;

(3) excessive directors' remuneration together with a failure to declare any dividends;

(4) failure to observe company and statutory regulations; and

(5) overstatement of the net asset value of Ricacorp at the time the petitioner purchased his shares in 1995 under the Agreement.

29. Several forms of relief were claimed by the petitioner in his petition. For the purposes of this appeal the only relevant relief sought by him, apart from costs, was an order that the respondents be required to purchase his shares in Ricacorp.

30. On the 21 September 2000 Yeung J ordered that the outstanding issues in the petitioner's writ action be heard together with his petition. Both matters came before Deputy Judge Woolley on the 5 June 2001. In the event the only effective issue in the writ action was the respondents' counterclaim (dismissed by the deputy judge) which is not relevant to this appeal.

31. The deputy judge gave judgment (the first judgment) on the 22 June 2001 rejecting the petitioner's complaints under (1), (2) and (5) set out in para.28. He upheld the complaints under (3) and (4), concluding that both those matters amounted to conduct unfairly prejudicial to the interests of the petitioner. The deputy judge accordingly ordered the respondents to purchase the petitioner's holding of 3,033,333 shares in Ricacorp. He indicated in his judgment that he would hear counsel on any consequential matters including the basis and date of valuation of the shares to be purchased under his order.

32. After hearing counsel on the 5 October 2001, the deputy judge gave written reasons (the second judgment) on the 17 October 2001 for his order of that date containing inter alia directions concerning the valuation by a valuer of the petitioner's shares in Ricacorp. This appeal is only concerned with the following directions :

"2.	...
	(5)	for the purposes of the valuation of the shares, there shall be added back to the assets of the 1st Respondent [Ricacorp] the sum of HK$30,320,603, being the amount of the excessive directors' remuneration paid to the 2nd and 3rd Respondents [the respondents];
	(6)	for the purposes of the valuation of the shares, the allotment of 20,000,000 ordinary shares of HK$1.00 each in the capital of the 1st Respondent to each of the 2nd and 3rd Respondents [the respondents] on 24th March 2000 be disregarded, but the moneys previously put into the 1st Respondent [Ricacorp] by the 2nd and 3rd Respondents [the respondents] as capital pursuant to the invalid allotments on 14th December 1995, 30th April 1996 and 4th October 1996 respectively be treated as loans to the 1st Respondent [Ricacorp] and the Valuer shall take into account interest which ought to have been paid at a proper market rate on those 'loans';"

The appeal to the Court of Appeal

33. The respondents filed a notice of appeal on the 5 December 2001 appealing inter alia against the direction in para.2(6) of the deputy judge's order made on the 17 October 2001. They sought an order that for the purposes of the valuation of the petitioner's shares the aggregate moneys (HK$44,480,000) paid to Ricacorp by the respondents for the invalid 1st, 2nd and 3rd allotments should be taken into account as to HK$40 million as paid up capital and the balance of HK$4,480,000 as share premium of the company. A cross appeal by the petitioner claiming interest on the sum of HK$30,320,603 directed to be added back to Ricacorp's assets under the direction in para.2(5) was not opposed.

34. The Court of Appeal allowed the respondents' appeal, set aside para.2(6) of the deputy judge's order and made an order substituting the following direction :

"3.	...
	(a)	For the purposes of the valuation of the Petitioner's shares to be purchased by the 2nd and 3rd Respondents [the respondents], the moneys previously put into the 1st Respondent [Ricacorp] by the 2nd and 3rd Respondents [the respondents] for the aforesaid invalid allotments on 14th December 1995 (HK$10,000,000), 30th April 1996 (HK$10,000,000) and 4th October 1996 (HK$24,480,000) in the total sum of HK$44,480,000 be treated as capital of the 1st Respondent [Ricacorp] and the Petitioner's shares be valued by reference to an issued capital consisting of 50,000,000 shares;"

35. The Court of Appeal did not leave the matter there. Although no issue was raised in the respondents' notice of appeal regarding the deputy judge's direction in para.2(5) of his order the Court of Appeal considered it to be erroneous for two reasons. First because the court did not accept that the sum of HK$30,320,603 directed to be added back to Ricacorp's assets as excessive directors' remuneration should be calculated on the basis that the respondents were each entitled to a one third share of the bonus of 20 per cent of the Group's net profit agreed by the parties in the September resolution. The court considered that the respondents should be collectively entitled to the whole of the bonus.

36. The second reason for the intervention of the Court of Appeal was that the court considered that the September resolution (and no doubt clause 8.1 of the Agreement) contemplated that the balance of the company's profits after providing for the directors' remuneration should be available for dividend distribution. The court therefore considered it would be more consonant with the parties' intention to direct that the balance in question should be treated, for purposes of valuation of the petitioner's shares, as distributed as dividends and not as an addition to the company's assets.

37. Accordingly the Court of Appeal set aside para.2(5) of the deputy judge's order and substituted the following directions :

"3.	...
	(b)	For the purposes of the valuation of the Petitioner's shares, there shall not be added back to the assets of the 1st Respondent [Ricacorp] the excessive directors' remuneration paid to the 2nd and 3rd Respondents [the respondents];
	(c)	In determining what constituted excessive directors' remuneration, each of the 2nd and 3rd Respondents [the respondents] shall be allowed a salary of HK$60,000 per month and 10% of the profit (if any) for the relevant period. The excess is to be distributed by way of dividends to the shareholders pro rata according to their respective shareholdings and, for that purpose, notwithstanding the aforesaid allotments on 14th December 1995, 30th April 1996 and 4th October 1996 being invalid, the 2nd and 3rd Respondents are to be deemed to have been allotted the new shares under such allotments upon the payment of the requisite subscription moneys;"

No issue is raised in this appeal in respect of the direction in para.3(b) of the Court of Appeal's order.

The Final Appeal

38. In his appeal to this Court the petitioner seeks to set aside :

(1) the directions contained in para.3(a) and that part of para.3(c) of the Court of Appeal's order which directs the valuer of the petitioner's shares to treat the moneys paid by the respondents for the 1st, 2nd and 3rd allotments as capital and to treat those allotments as valid for the purposes of their entitlement to notional dividend distribution to the shareholders of Ricacorp (the Share Capital Issue); and

(2) that part of the direction contained in para.3(c) of the order which directs that in determining the amount of the directors' excessive remuneration each of the respondents are to be allowed 10 per cent of the profit (if any) of the company (i.e. one half of the directors' bonus) for the relevant period (the Bonus Issue).

The relief sought by the petitioner is the restoration of the deputy judge's decision on both issues.

The relevant law

The court's discretion under s.168A

39. There was no issue between the parties as to the principles governing the discretion conferred on the court under s.168A of the Companies Ordinance to grant relief to a successful petitioner under that section. The relevant provisions of the section are :-

"168A	(1)	Any member of a company who complains that the affairs of the company are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of some part of the members (including himself) ... may make an application to the court by petition for an order under this section.
	(2)	If on any petition under this section the court is of opinion that the company's affairs are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of some part of the members, whether or not such conduct consists of an isolated act or a series of acts, the court may, with a view to bringing to an end the matters complained of -
		(a)	...
		(b)	...
		(c)	make such order as it thinks fit ... for the purchase of the shares of any members of the company by other members of the company ...." (emphasis supplied)

These provisions are not framed in precisely the same terms in all respects as the equivalent provisions in s.75(1), (3) and (4)(d) of the English Companies Act 1980 (from which s.168A was derived) or as the re-enactment of those provisions in sections 459 and 461(1) and (2)(d) of the Companies Act 1985, but the provisions in s.168A and the provisions in the 1980 and 1985 Acts are in pari materia.

40. It was common ground between senior counsel for the parties in this appeal that the discretion conferred on the court under s.168A to grant relief with a view to bringing to an end the matters complained of is a wide discretion (extending to the terms of the order for purchase) to achieve a just and equitable result, applying the principle of fairness, but doing so judicially and in accordance with rational principles.

41. The relevant principles were felicitously enunciated in the following dicta of Lord Hoffmann in O'Neill v. Phillips [1999] 1 WLR 1092 (HL) at p.1098D-E :

"In section 459 Parliament has chosen fairness as the criterion by which the court must decide whether it has jurisdiction to grant relief. It is clear from the legislative history (which I discussed in In re Saul D. Harrison & Sons Plc. [1995] 1 B.C.L.C. 14, 17-20) that it chose this concept to free the court from technical considerations of legal right and to confer a wide power to do what appeared just and equitable. But this does not mean that the court can do whatever the individual judge happens to think fair. The concept of fairness must be applied judicially and the content which it is given by the courts must be based upon rational principles. As Warner J said in In re J.E. Cade & Sons Ltd [1992] B.C.L.C. 213, 227 : 'The court ... has a very wide discretion, but it does not sit under a palm tree.' " (emphasis supplied)

42. Lord Hoffmann continued in the following passage (at pp.1098F - 1099B) to elaborate on some of the factors to be borne in mind in the exercise of the court's jurisdiction under s.459 :

" In the case of section 459, the background has the following two features. First, a company is an association of persons for an economic purpose, usually entered into with legal advice and some degree of formality. The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholders. Thus the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed. Secondly, company law has developed seamlessly from the law of partnership, which was treated by equity, like the Roman societas, as a contract of good faith. One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith. These principles have, with appropriate modification, been carried over into company law.

The first of these two features leads to the conclusion that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. But the second leads to the conclusion that there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers. Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith." (emphasis added)

43. At p.1099 B-H Lord Hoffmann drew the parallel between the notion of "just and equitable", as explained by Lord Wilberforce (as a ground for winding up) in In re Westbourne Galleries Ltd [1973] AC 360 (HL) at p.379, and the concept of unfairness in s.459. He concluded (at p.1099 F-G) that :

"... a balance has to be struck between the breadth of the discretion given to the court [under section 459] and the principle of legal certainty."

44. The reminder by Lord Hoffmann in O'Neill v. Phillips of the equitable principles governing the judicial exercise by a court of its discretion to do what is fair under s.459 of the Companies Act 1985 constitutes a salutary warning which I adopt in relation to s.168A of the Companies Ordinance. In the present case I would deprecate any cavalier approach to the legal right of the petitioner to proper notice of the relevant EGMs and board meetings. The statutory safeguards contained in s.114 of the Companies Ordinance, regarding the minimum length of notice required of company meetings, exist to protect the rights of members of the company. Likewise a director's right to be given notice of a board meeting in accordance with the company's articles (or fair and reasonable notice if no period of notice is prescribed in the articles) exists to protect his rights and to ensure the proper management of the company. Failure to serve due notice of a company or board meeting is not, in my judgment, to be lightly treated as a mere technicality. There must be circumstances justifying such a conclusion.

Grounds for appellate court's interference

45. The grounds upon which an appellate court may interfere with a discretionary decision of a judge are well settled and have frequently been enunciated in different contexts. In the present case it suffices to adopt the following dicta of Lord Brandon in The Abidin Daver [1984] AC 398 (HL) at p.420 A-C cited by Mr Poon, senior counsel for the respondents :

"... where the judge of first instance has exercised his discretion in one way or the other, the grounds on which an appellate court is entitled to interfere with the decision which he has made are of a limited character. It cannot interfere simply because its members consider that they would, if themselves sitting at first instance, have reached a different conclusion. It can only interfere in three cases : (1) where the judge has misdirected himself with regard to the principles in accordance with which his discretion had to be exercised; (2) where the judge, in exercising his discretion, has taken into account matters which he ought not to have done or failed to take into account matters which he ought to have done; or (3) where his decision is plainly wrong."

The Share Capital Issue

Preliminary

46. By his order (giving effect to his second judgment), governing the method of valuation of the petitioner's shares to be purchased by the respondents, the deputy judge directed that the shares should be valued without discount and that the price should be the fair market value determined by reference to the assets, profitability, future prospects and goodwill of Ricacorp as at the 24 March 2000 (the date of the petition). These directions have not been the subject of appeal.

47. The deputy judge's purchase order was founded upon two of the petitioner's complaints of unfair and prejudicial conduct mentioned in para.28 above. These were (1) excessive directors' remuneration and failure to pay dividends (para.28(3)) and (2) failure to observe company and statutory regulations (para.28(4)). However for the purposes of this appeal it is necessary to keep in mind the reasons given by the deputy judge for his decision (which have not been the subject of appeal) rejecting the petitioner's complaints of unfair and prejudicial conduct mentioned in para.28(1), namely the dilution of the petitioner's shareholding by the invalid 1st, 2nd and 3rd allotments.

48. In rejecting the petitioner's complaints in respect of the 1st, 2nd and 3rd allotments the deputy judge concluded that there had been no breach of the Agreement by the respondents as alleged by the petitioner. The petitioner had invoked clause 1.3, alleging that the number of shares offered to him from time to time had been less than his entitlement. The deputy judge rejected this allegation for reasons not relevant to this appeal.

49. The petitioner also relied on clause 3.2, alleging that the working capital requirements of Ricacorp should not have been met by share allotments but by loans from financial institutions or third parties as provided by clause 3.2 or from loans from shareholders as contemplated by clause 3.3 of the Agreement. In rejecting this claim the deputy judge, after observing in para.13 of his first judgment that (in the case before him) the difference sought to be drawn by the petitioner between share capital and working capital was illusory, said -

"It is clear from the evidence that the intention was to expand the operations of the company very quickly, which was in fact done, the number of branches increasing from 20 in 1995, to more than 70 in 1996 and to over 135 in 1997, and the turnover from $69 million in 1995 to about $625 million in 1998. In order to do so a large injection of funds was necessary, not just to cover current expenses for day to day operations, but for investment in fixed assets. Clearly the money intended to be raised by the allotments was for both, and the agreement envisaged increasing capital by the issue and allotment of new shares. Doing the best I can with a badly drafted agreement, I am of the view that this was an alternative to raising loans, and for the latter a unanimous resolution of the board was required, perhaps understandably as they would commit the company to liabilities to third parties. In any event, I accept the evidence of Mr Law that attempts had been made to find financial institutions willing to offer loans of the size required, but in a volatile field and without much in the way of fixed assets as security, none had been found. The alternative was either massive shareholders' loans or increasing the share capital. Mr Law and Mr Tam had already made large loans to the company, which, under the agreement should have been shared by Mr Wong. This did not happen, and the only loan to the company from Mr Wong, of $1,500,000.00 shortly after the agreement, he demanded to be repaid about three and a half months later."

50. The deputy judge went on to deal with the unfair and prejudicial conduct alleged by the petitioner in relation to the invalidity of the 3rd, 4th and 5th EGMs and the 1st, 2nd and 3rd allotments which were invalid for want of adequate notice and were the subject of the judgment on admissions in the writ action. After referring to the undisputed fact that the petitioner had agreed to the creation of the new shares authorised by the 1st and 2nd EGMs the deputy judge said in para.16 :

"16. While there were therefore irregularities in the later EGM's, in that a miscalculation by Mr Law or Mr Tam had meant short notice of a day or two being given, and a lack of notice of the board meetings at which the allotments were decided, and while these are clearly breaches of company and statutory regulations, I cannot agree that, in so far as the share allotments are concerned, any prejudice or unfairness resulted towards the petitioner, Mr Wong. He did not deny receiving notice of the 3rd EGM, which he did not attend, but he did attend the 4th and 5th EGM's and voted, and, although he did not attend the subsequent board meetings, possibly through lack of notice, he was made aware of the allotments by the letters inviting him to subscribe. There was no attempt here by the other shareholders to conceal what they were doing, and he had ample opportunity to subscribe for the shares, and thus retain his proportional holding, or to seek to have the decisions annulled, which did not happen until the High Court proceedings were commenced in 1997. Even then, no prejudice was alleged, only annulment of the allotments on the basis of lack of notice of the meetings and breach of clauses 1.3 and 3.2 of the agreement."

51. The deputy judge's conclusion on this matter was expressed in the following passage in his first judgment :

"19. To conclude this part, I am satisfied that Mr Wong was well aware of the intention to increase the capital by the issue and allotment of new shares, and had initially agreed to it. He was kept informed, although perhaps not as timeously as could have been done, but with no prejudice to him, and he decided that he was not going to subscribe to the new shares, in the certain knowledge that the effect would be to reduce his proportion of the total shares.

20. Was the conduct of the respondents unfairly prejudicial in the context of these allotments? It certainly caused prejudice in that the petitioner's proportional shareholding was reduced, but this was, as I have already found, from his own choice. Was it unfair? I am not satisfied that it was. Breach of their obligations under the company's articles, or under statute, may well be evidence of unfair dealing, but it is by no means conclusive. As Hoffmann LJ observed in Re Saul D Harrison & Sons plc [1995] 1 BCLC 14, conduct may be technically unlawful without being unfair, and vice versa. While the respondents did breach regulations, all they were doing was continuing on the path of expansion of the company which had been the original intention of all the parties, and with which the petitioner concurred. The fact that he later, either for personal reasons, or reasons connected with the interests of his own company, decided not to support that expansion financially, does not make the respondents' pursuing it, while offering him a share in it, unfair for the purposes of section 168A." (emphasis supplied)

The decision of the deputy judge

52. When dealing with the share capital issue in his second judgment the deputy judge accepted the petitioner's argument that his shares should be valued on the basis of his original shareholding of 30.33 per cent in Ricacorp. On this basis he considered that the valuer should treat "the money put in to the company" by the respondents before the 24 March 2000 as a loan bearing interest at a proper market rate rather than the actual rate charged by the respondents. The reasons for this decision, expressed in para.16 of his second judgment, were :

"16. I think the correct approach here is to look at the reality of the situation as at 24 March 2000. This was that about two thirds of the rights issue had been taken up by, and allotted to, Mr Law and Mr Tam, but only partly paid for. As to the balance of the shares allotted to them at the meeting that day, there is no evidence that those were paid for at all until later. I accordingly consider that it would be artificial to allow any of those shares to be taken into account, where they had been allotted but not fully paid for. Doing so would further prejudice the petitioner as the matters of which he complained, and which I found to have been justified complaints, occurred while he was still a 30% shareholder, and it seems less than just to now value his shares as some 6% of the whole." (emphasis supplied)

The decision of the Court of Appeal

53. The decision of the Court of Appeal on the share capital issue is contained in the judgment of Le Pichon JA with which Rogers VP and Sakhrani J concurred. After reviewing the deputy judge's reasons for rejecting the petitioner's contention that the 1st, 2nd and 3rd allotments did not constitute unfairly prejudicial conduct Le Pichon JA commented at para.14 of her judgment as follows :

"14. It could not have been clearer that the buyout order was not made as a result of the respondents' conduct with regard to the share allotments. The buyout order was made to address other grievances which the petitioner was able to establish, viz. excessive directors' remuneration coupled with a failure to declare dividends and the failure to observe company and statutory regulations. As regards the latter grievance, apart from the lack or any proper notice of EGMs and board meetings conceded by the respondents, it concerned the respondents' failure to prepare accounts or convene annual general meetings to consider the accounts as required by statutory and company regulations, to hold the AGM at all in 1998, and to send the 1998 accounts to the petitioner at all or in proper time rather than any alleged dilution of the petitioner's shareholding."

54. Le Pichon JA rejected the petitioner's argument that the valuation of his shares should reflect the true legal position as to the relative shareholdings of the parties as at the 24 March 2000 in the light of the judgment in the writ action nullifying the 1st, 2nd and 3rd allotments. She referred to the passage in Lord Hoffmann's judgment in O'Neill v. Phillips cited at para.41 above and said at para.16 of her judgment.

"16. ... Given the fact that the judge found that the allotments were bona fide in the sense that they were necessary and in the interest of the company, they did not constitute unfairly prejudicial conduct. In respect of the allotments, there was therefore nothing to be put right by way of a buyout. That being so, there can be no intrinsic objection to treating the sums paid by the respondents for what they were in reality, i.e. as capital rather than as a loan. Were it otherwise, it would work a serious injustice to the respondents who have put up the working capital without which profits could not have been reaped. It has to be borne in mind that a capital injection is to be distinguished from a loan : the expectations are entirely different. In the former, the investor takes the risk of losing his investment in whole or in part but also stands to reap a substantial benefit should the investment prove profitable. In the latter, all the investor expects is a return in the form of interest payments on the amount advanced. To treat the subscription monies for the 1st, 2nd and 3rd allotments as a loan would effectively penalize the respondents for conduct which has been found not to be unfairly prejudicial. That cannot be right."

55. Le Pichon JA then adverted to the lack of proper notice of the board meetings at which the 1st, 2nd and 3rd allotments were made and concluded at para.17 as follows :

"17. Insofar as the buyout can be said to have been granted in respect of lack of any or proper notice of board meetings, it was plainly within the category of technical infringements referred to in Saul D. Harrison [[1995] 1 BCLC 14(CA) at pp.18g-19a]. This is because, as noted below, the shortness of the notices formed but an insignificant aspect of the respondents' failure to observe regulations. Having regard to these considerations, the judge's direction which has the effect of treating the petitioner as owning 30.33% of the issued shares was wrong in principle and cannot be justified. In my judgment, fairness would require in (sic) the petitioner's shareholding to be valued by reference to an issued capital consisting of 50 million shares."

The petitioner's argument

56. At the heart of the petitioner's argument in support of the deputy judge's decision on this issue was the proposition that as the judgment in the writ action nullifying the 1st, 2nd and 3rd allotments was a binding judgment, and made on deliberate and considered admissions, it was not unfair or unjust for the petitioner to rely on it. The deputy judge could not be faulted for giving effect to a binding judgment of the court by treating the relevant allotments as invalid in the exercise of his discretion after considering the arguments of the parties. The rest of the petitioner's argument was directed to contesting the decision of the Court of Appeal that it would be unfair to hold the respondents to the judgment in the writ action which was said to be consistent with clause 1.3 of the Agreement.

57. Mr Tong, for the petitioner, who did not appear at any stage below, sought to argue (albeit in his reply) that, notwithstanding what had been argued before the deputy judge and was manifestly understood by him to be the petitioner's case, the latter did not claim in his petition that the making of the invalid allotments amounted to unfairly prejudicial conduct of the affairs of Ricacorp. However the terms of the petition do not bear this out. The events relevant to all 6 EGMs and of the 1st, 2nd and 3rd allotments and of the judgment in the writ action are outlined in paras.25 to 46 of the petition under the rubric -

"Persistent Attempts to Dilute your Petitioner's Shareholding and Breaches of Clauses 1.3 and 3.2 and Implied Term of the Shareholders' Agreement"

and the second sentence in para.43 of the petition (which went on to set out the 7 grounds put forward by the petitioner's solicitors in their letter dated the 6 March 2000 to the respondents' solicitors for opposing the 6th EGM) was -

"Your Petitioner believes that the issue of the Rights Shares is a continuation of the 2nd and 3rd Respondents' acts to to oppress your Petitioner as a minority shareholder of the Company."

The respondents' argument

58. The respondents contended (as they had done successfully in the Court of Appeal) that having found that the three invalid allotments were made bona fide in the company's interests as its consequential expansion brought about the substantial increase in both turnover and profit (both of which have to be taken into account for the purpose of valuing the shares) and that the allotments were not unfair to the petitioner, the deputy judge was inconsistent and erred in directing the valuer to disregard the invalid allotments by treating the subscription moneys as loans to the company. It was emphasised that as a result of the capital injected by the respondents into the company by the three invalid allotment subscriptions the turnover of the company increased from HK$69.3 million in 1995 to HK$177.4 million in 1996 and HK$989.6 million in 1998. Whereas the company made a loss of HK$18.5 million in 1995 the result of the respondents' capital injection was a profit of HK$11.8 million in 1996 and HK$46.5 million in 1998.

59. Mr Poon, for the respondents, sought to illustrate the extent of the disparity between the consequences of a valuation of the petitioner's share in accordance with the deputy judge's direction compared with a valuation on the basis that the respondents' injection of capital in respect of the invalid allotments be treated as capital. For this purpose he made calculations of the net asset value of the company (because that value was a factor to be taken into account when applying the "earning basis" in the valuation) as at the 31 March 2000 based on the consolidated balance sheet as at the same date. After making appropriate adjustments he calculated that if the deputy judge's order stands the petitioner would be treated as entitled to a share of HK$14,089,823 of the company's net assets, whereas if the capital injection made in respect of the invalid allotments were to be treated as capital he would only be entitled to a share of HK$6,704,577 of those assets.

Decision

60. It seems to me, as it seemed to the Court of Appeal, that the deputy judge's decision on this issue is not sustainable because it is inconsistent with his earlier decision in his first judgment that the respondents' conduct in relation to the invalid allotments (which diluted the petitioner's shareholding) did not amount to unfairly prejudicial conduct. The earlier decision resulted in the petitioner being denied relief under s.168A in respect of that conduct, but the effect of the deputy judge's decision on this issue in his second judgment is to grant him relief in respect of it.

61. The underlying cause of this unsatisfactory result was the inconsistent decisions of the deputy judge in his first and second judgments respectively as to the effect to be given to the invalidity of the 1st, 2nd and 3rd allotments. Both decisions were made in exercise of the same discretion conferred on the court under s.168A(2) of the Companies Ordinance which Oliver LJ (as he then was) aptly described (in relation to s.75 of the Companies Act 1980) in In re Bird Precision Bellows Ltd [1986] Ch 658 at p.669D as a very wide discretion -

"... to do what is considered fair and equitable in all the circumstances of the case, in order to put right and cure for the future the unfair prejudice which the petitioner has suffered at the hands of the other shareholders of the company."

62. In his first judgment the deputy judge considered the five matters complained of by the petitioner in relation to the conduct of the affairs of Ricacorp. He held that two only of those matters amounted to unfairly prejudicial conduct of the petitioners, namely (1) the excessive directors' remuneration paid to the respondents coupled with failure to pay any dividends and (2) failure to observe company and statutory regulations.

63. One of the matters complained of by the petitioner which the deputy judge found not to constitute unfairly prejudicial conduct was the dilution of the petitioner's shareholding by the three invalid allotments which were nullified by the interlocutory judgment on admissions in the writ action. In support of this complaint the petitioner relied on alleged breaches of clauses 1.3, 3.2 and 3.3 of the Agreement and on the judgment in the writ action nullifying the relevant three allotments which had the effect of restoring the petitioner's shareholding to 30.33 per cent of the company's issue share capital. The judgment in the writ action was founded on the inadequate length of the statutory notice for the 3rd, 4th and 5th EGMs and the absence of notice of the relevant board meetings.

64. Ordinarily a petitioner under s.168A would be entitled to found a complaint of unfairly prejudicial conduct on breach of his contractual or statutory rights of the kind relied upon by the petitioner. However the deputy judge found that, for the reasons set out in paras.49 to 51 above, the petitioner's complaint was not established. The deputy judge's conclusion was that the respondents were not in breach of clauses 1.3, 3.2 or 3.3 of the Agreement and that the invalid allotments were genuinely intended to raise capital for the expansion of the company, that they were applied to achieve that purpose and that the petitioner had been given ample opportunity to subscribe for the shares but declined to do so for his own reasons.

65. As to the admitted breaches of statutory notice requirements for the relevant EGMs and the breach of the company's articles in respect of the relevant board meetings, the deputy judge did not accept that, in the light of the particular facts of the case, the breaches resulted in any prejudice or unfairness to the petitioner. He cited and relied on the dictum of Hoffmann LJ in Re Saul D. Harrison & Sons Plc [[1995] 1 BCLC 14 at 19a] that conduct may be technically unlawful without being unfair, and vice versa. The deputy judge did not use the expression "technical" but he clearly regarded the relevant breaches which invalidated the allotments as trivial or technical because he found that on the facts the petitioner was not in fact prejudiced by them.

66. Although his reasoning could perhaps have been better expressed, the deputy judge, in declining to treat the relevant breaches of the notice requirements as amounting to unfairly prejudicial conduct notwithstanding the fact that they rendered the relevant allotments invalid, is to be understood to be restraining the petitioner, who was invoking a jurisdiction based on fairness analogous to equity, from relying on his strict legal rights because to do so would be contrary to good faith. Under the circumstances, in taking this course, the deputy judge was, in my judgment, striking the right balance between the breadth of his discretion and legal certainty.

67. When the deputy judge came to consider the directions to be given regarding the basis of the valuation to be made by a valuer to determine the value of the petitioner's shares he was continuing the process of putting right and curing for the future the unfair prejudice which the petitioner had suffered or, more specifically, in terms of s.168A(2) "... bringing to an end the matters complained of ...". The relevant matters were the excessive directors' remuneration and non payment of dividend, and failure to observe company and statutory regulations.

68. In arriving at his decision that, for purposes of valuation, the invalid allotments should be disregarded and that the moneys (amounting to HK$44,480,000) subscribed in respect of the allotments should be treated as interest bearing loans, the deputy judge expressed himself in para.16 of his second judgment (set out at para.52 above) to be looking at the reality of the situation as at the 24 March 2000. He identified the reality on that date as being that the respondents had not yet paid the full amount of their subscription for the shares allotted to them by the 4th allotment. He considered it would therefore be artificial to allow any of the 4th allotment shares to be taken into account. He added that to do so would further prejudice the petitioner as the matters which he had found to be justified complaints occurred while he was still a 30 per cent shareholder and it seemed unjust to value his shares now as some 6 per cent of the whole.

69. In rejecting the respondents' contention that in the valuation process their subscription moneys for the invalid allotments should be treated as share capital, the deputy judge was here taking into account the invalidity of the three allotments which had purported to dilute the petitioner's shareholding until set aside with retroactive effect by the judgment in the writ action on the 12 January 2000. Put another way, he was impliedly permitting the petitioner to rely on the invalidity of the relevant allotments notwithstanding the fact that in his first judgment, delivered almost four months earlier, he had considered it would be unfair to do so and refused the petitioner relief under s.168A in respect of the respondents' conduct resulting in the dilution of his share capital.

70. The decision of the deputy judge in his second judgment resulted in an order which would have been appropriate if he had held in his first judgment that the petitioner was entitled to relief in respect of the dilution of his share capital resulting from the invalid allotments. As Le Pichon JA rightly observed below, the effect of the deputy judge's order amounted to penalising the respondents for conduct which the deputy judge had previously held not to be unfairly prejudicial.

71. Furthermore the matters complained of by the petitioner which were required to be brought to an end by the purchase order were the only two matters found by the deputy judge to be unfairly prejudicial conduct on the part of the respondents. As regards non compliance with company and statutory regulations the only non compliance relevant to this issue related to breaches of the relevant EGM and board meeting notice requirements. They had been dismissed by the deputy judge as being, in effect, merely technical. The material considerations for valuation purposes were the over payments to directors and failure to pay dividends. No relief was granted in respect of the dilution of the petitioner's shareholding by the invalid allotments. Accordingly for the reasons given by Le Pichon JA in para.16 of her judgment (set out at para.54 above) there can be no intrinsic objection to treating the moneys paid by the respondents as being in reality what they purported to be. By doing so the petitioner and the respondents would, for valuation purposes, be credited with entitlement to dividends on a commercially realistic basis by reference to the amount of capital they actually put into the company. As Mr Poon contended, the valuer would have to examine the accounts going back over the relevant years and see how they reflected the true commercial position in order to value the petitioner's shares.

72. If the valuation were to be carried out in accordance with the Court of Appeal's order the respondents would not, as Mr Tong contended, receive an undeserved windfall in respect of their share of directors' over payments. Their entitlement to dividend would relate to their share capital as members of the company (not as directors) and payable out of profits generated by the application of their share capital for the expansion of the company's business. On the other hand, if the valuation were to be carried out in accordance with the deputy judge's order, the petitioner, who had made no further contribution of capital after paying for his shares (and successfully sued the company in December 1995 to recover his only loan) would receive a windfall in the sense that he would be treated for valuation purposes as if the deputy judge had upheld his complaint that the dilution of his shares by the invalid allotments was the result of the respondents' unfairly prejudicial conduct. The significance of the petitioner's windfall (and the corresponding loss to the respondents) was demonstrated by Mr Poon's calculation referred to in para.59 above.

73. Mr Tong's contention that the respondents' intentions regarding the money they injected into the company changed after the judgment in the writ action on the 12 January 2000 because they deliberately elected to convert their former share capital into interest bearing loans (receiving substantial repayments and interest from the company) does not carry much weight because the relevant dividends can only be notionally calculated by reference to profit and the only profitable years were the accounting years from the year ending on the 31 August 1996 to the year ending on the 31 March 1999.

74. The petitioner's primary argument was that the deputy judge could not be faulted for giving effect to the binding judgment in the writ action nullifying the relevant allotments and that the fact that the invalid allotments did not by themselves cause unfair prejudice to the petitioner was not a reason for rendering them legal and valid contrary to that judgment. It seems to me that this argument (which was inherently an indirect appeal against the deputy judge's decision in the first judgment), although advanced by Mr Tong with his usual ability, ignores the underlying reason for the deputy judge's decision in the first judgment. As indicated in para.66 above, in his first judgment the deputy judge was not rendering the invalid allotments legal and valid but restraining the petitioner from relying on the breaches of the relevant notice requirements and on the consequential invalidity of the relevant allotments. This was in the context of the petitioner's application for relief under s.168A where the deputy judge was, on the facts before him, entitled to conclude that for the petitioner to rely on strict legal rights founded on a mere technicality would not be acting in good faith.

75. In my judgment, having restrained the petitioner from relying on the invalidity of the relevant allotments in advancing his complaint in respect of the conduct of the respondents regarding the invalid allotments, the deputy judge should have been consistent and adopted the same approach in his second judgment towards the subsequent reliance by the petitioner (in relation to the subsidiary valuation issues) on the judgment in the writ action which was founded on the invalidity of the relevant share allotments. He was plainly wrong not to do so.

76. Equally, as the Court of Appeal held, the deputy judge was plainly wrong in directing that, for the purposes of the valuation, the moneys subscribed by the respondents as share capital be treated as loans and not share capital. By so doing he was effectively granting the petitioner relief (on account of the conduct of the respondents in diluting the petitioner's shareholding by the invalid allotments) which he had refused to grant the petitioner in his first judgment.

77. I would uphold the decision of the Court of Appeal on this issue.

The Bonus Issue

Preliminary

78. In his first judgment the deputy judge held that during the relevant period the respondents, as directors of Ricacorp, had been guilty of unfairly prejudicial conduct by enriching themselves from the profits of the company and paying no dividends to the company's shareholders. He calculated that between the years ending the 31 August 1995 and the 31 March 2000 the aggregate net profit (after setting off substantial losses in two of those five years) of the company was HK$29,662,582 whereas the respondents had received directors' emoluments amounting in aggregate to HK$53,921,299. The Bonus issue arises in respect of the deputy judge's determination, in his second judgment, of the proper bonus entitlement of the respondents to be taken into account when calculating the amount of the adjustment to be made by the valuer in the company's accounts in respect of the excessive directors' remuneration. No question arises in respect of the entitlement of each of the respondents to a salary of HK$60,000 per month during the relevant period.

The decision of the deputy judge

79. In his second judgment the deputy judge held that, for the purposes of the valuation of the petitioner's shares, the directors' excessive remuneration was to be taken to be the sum of HK$30,320,603. In arriving at this figure he accepted the calculations relied upon by the petitioner's counsel which took into account the bonus entitlement of the respondents collectively as being two thirds of 20 per cent of the company's profits.

80. On this issue the deputy judge had been addressed by both counsel in support of their respective calculations on the basis that the parties were agreed, by reference to the September resolution, that 20 per cent was the appropriate percentage of the net profits of Ricacorp to start with when determining the directors' bonus entitlement. That was the extent of the consensus. The petitioner contended that the respondents' bonus entitlement was only two thirds of 20 per cent of Ricacorp's net profits. The respondents argued that they should be treated as entitled to the whole 20 per cent between them.

81. The petitioner's argument in support of his calculations emphasised that the reference to 20 per cent in the September resolution was in respect "of the Group's net profit" and not specifically to the net profit of Ricacorp. The Group was meant to be Ricacorp and Capital but such a group was never established. It was contended that, in the light of the fact that Ricacorp made profits and Capital made losses, the spirit if not the letter of the September resolution required that the remuneration of the respondents should be reduced because Capital's losses should be set off against Ricacorp's profits. The spirit of the resolution required that the 20 per cent should be shared equally by the directors. The petitioner had tried to follow the spirit of the resolution in his counsel's calculations but had refrained from claiming any salary or one third of the 20 per cent bonus and had made no discount in respect of Capital's losses. On this basis allowing the respondents' two thirds of the bonus payable out of Ricacorp's profits would be reasonable. The court was reminded that its function was to assess what was fair and reasonable remuneration for the respondents.

82. The respondents' argument in support of their counsel's calculation was that the intention of the parties to the September resolution was that the 20 per cent bonus should be payable to participating directors. On this basis, if one of the three participating directors dropped out the remaining two should share the bonus because they would be doing the work formerly done by three directors. The petitioner had ceased to be a director on the 19 December 1996 and had by then ceased to participate or take any interest in the affairs of Ricacorp. Thereafter he had concentrated on the affairs of Capital. Reliance was also placed upon the fact that the petitioner was not himself claiming entitlement to salary or a one third share of the bonus.

83. The deputy judge expressed his reasons for his decision to accept the calculations of counsel for the petitioner in the following passage of his second judgment :

"13. The starting point must be the agreement between the parties as to what was to be the remuneration of the directors. This agreement was reached on 2 September 1995 at a meeting of the three, Mr Wong, Mr Law and Mr Tam. There it was decided that the salaries of all three would be $60,000.00 a month and a bonus of 20% of the (intended) Group's net profit before dividend distribution which was to be shared equally between the three directors. It is apparent from this that each director was entitled, in addition to the $60,000.00 a month, to a third share of the 20% of the net profits. Of the calculations produced for this hearing by counsel, I accordingly accept that of Mr Chow for the petitioner as being correct, in that it identifies the proper remuneration to have been paid to Mr Law and Mr Tam as two thirds of the 20% of the profits. ... I therefore find that the sum to be added back for the excess payments to be as Mr Chow calculates, namely $30,320,603.00." (emphasis supplied)

The decision of the Court of Appeal

84. This issue was not raised in the respondents' notice of appeal or the petitioner's respondent's notice. It was one of the matters raised by the Court of Appeal of its own motion. Le Pichon JA gave the following reasons for reversing the deputy judge's decision :

"19. ... the judge proceeded on the basis that the appropriate allowance for bonus for each of the respondents was one-third of 20% of the profit before dividend distribution. It is tolerably clear from the board minutes that the parties considered and agreed that 20% of the group's net profit before dividend distribution was the appropriate bonus. Whilst at the date of the September agreement there were three working directors, so the 20% fell to be shared between them, the amount set aside for bonus was not dependant (sic) on the number of working directors. Rather, the bonus should go to those collectively responsible for generating the profits of the company. In other words, the same percentage should be maintained as bonus irrespective of the number of working directors."

The petitioner's argument

85. The petitioner's argument on this issue followed much the same lines as the argument advanced on his behalf before the deputy judge. It was contended that the September resolution (which the courts below adopted as their starting point) afforded no basis for paying 20 per cent of Ricacorp's net profits to the respondents. In its context the words "the Group's net profit" was clearly meant to be a reference to both Ricacorp and Capital and to manifest the intention of the parties that 20 per cent of the net profit of both companies was to be shared equally between them. This was the corollary of the proposed merging of operations and sharing of expenses. The words "three directors" in the resolution were therefore descriptive of the three parties and not intended to refer to the directors of a particular company. Moreover, in the event, Capital sustained continuous and substantial losses during the relevant period. By the 31 March 2000 the accumulated losses amounted to HK$67.5 million. These loans were effectively funded solely by the petitioner's loans to Capital.

86. Reliance was also sought to be placed on the proposition that, although the actual merger of operations did not in fact take place, the merger at board level did take place. I mention in passing that, although the parties resolved at the September meeting that there should be a merger at board level, there does not seem to have been a complete merger in fact. At the end of para.2 of his first judgment the deputy judge stated (as indicated at the end of para.16 above) that Law (and not Tam) became a director Capital. In this connection the report of Capital's directors for the year ending the 31 March 2000 (which was the only relevant material before this Court) names Law as one of the directors not Tam.

87. It was argued that, as it was clearly not envisaged that the petitioner would be removed as a director, the September resolution could hardly be treated as a shareholders' agreement that the respondents should be paid substantial sums before distribution of profit. Finally it was contended to be fundamental to basic notions of justice and fairness that the respondents, who had been guilty of unfairly prejudicial conduct by drawing excessive remuneration, should be allowed to retain a substantial part of such payments as remuneration (or dividend).

The respondents' argument

88. The respondents' argument sought to sustain the decision of the Court of Appeal on this issue in reliance on the following propositions. Notwithstanding that the September agreement related to a company which was never formed, it was common ground between the parties that the reference to "Group's", in the September resolution was a reference to the two companies, namely Ricacorp and Capital. The intention of the parties to the resolution was that bonus would only be derived from "net profit" and would only be payable if there were such profit. Accordingly the bonus referred to in the resolution under the heading "Remuneration of Three Directors" was intended to be an incentive and, as the Court of Appeal held, "... should go to those collectively responsible for generating the profits of the company" namely the respondents in the case of Ricacorp.

89. Mr Poon for the respondents contested Mr Tong's argument (seeking to rely on Capital's losses as a material factor) based on the fact that the intention manifested by the September resolution was that 20 per cent of the net profits of both Ricacorp and Capital were to be shared equally by the three parties to the agreement. Such an argument, Mr Poon contended, failed to have regard to the often cited reminder by Lord Russell of Killowen in E.B.M. Co Ltd v. Dominion Bank [1937] 3 All ER 555 at p.564 that it was -

"... of supreme importance that the distinction should be clearly marked, observed and maintained between an incorporated company's legal entity and its actions, assets, rights, and liabilities on the one hand, and the individual shareholders and their actions, assets, rights and liabilities on the other hand."

Decision

90. The September resolution related to the holding company which the parties attending the September meeting contemplated incorporating soon afterwards to hold their shares in Ricacorp and Capital. In the event, although the Agreement was never rescinded by any of the parties, no holding company was ever incorporated and Ricacorp and Capital continued their independent existence. It follows that the September resolution did not govern the amount (if any) of the directors' bonus properly payable to the respondents out of the profits of Ricacorp.

91. There never was any agreement between the parties on this issue before or after the petitioner's removal as a director of Ricacorp on the 19 December 1996. In the absence of any such agreement it fell to the deputy judge to determine what in all the circumstances would be the proper amount to allow in the valuation of the petitioner's shares in respect of the directors' bonus payable out of Ricacorp's profits earned during the relevant period.

92. No evidence of comparables or expert evidence was adduced to resolve this issue but the parties elected to have the issue decided by the deputy judge with reference initially to the terms of the September resolution. The arguments proceeded before the deputy judge on the basis that, although the issue was not governed by the September resolution, the parties agreed that the amount of the directors' bonus should be taken to be 20 per cent of the net proceeds of Ricacorp, this being the percentage bonus the parties had agreed by the September resolution in respect of "the Group's net profit". The parties however differed on the question how the 20 per cent bonus was to be apportioned. The petitioner (who made no claim to be treated in the valuation as entitled to a share of the bonus) contended that the respondents should only be regarded as entitled to two thirds of the bonus. The respondents argued that, as the participating directors, they should be treated as entitled to share the bonus between them.

93. The September resolution (previously set out in para.15 above) was as follows :

"3.	Remuneration of Three Directors
a.	Salaries :
	It was resolved that the current salaries of HK$60,000 per month for Mr K.C. Tam and Mr Barry Law remain unchanged and that of Mr Denny Wong will be increased to HK$60,000 per month with effect on 1 September 1995.
b.	Bonus :
	20% of the Group's net profit before dividend distribution will be equally shared by three Directors." (emphasis supplied)

94. Assuming, but not at this stage deciding, that it was justifiable for the deputy judge when considering this issue to have regard to the terms and effect of the September resolution it seems to me that it provides no support for the petitioner's argument that the words "three Directors" were intended to be descriptive of the three parties and not to be descriptive of the directors of a particular company. The parties purported to pass the resolution as directors of the contemplated holding company and the resolution was expressed to relate to the remuneration of "Three Directors". That expression must have contemplated the three parties as actively participating directors of the holding company because earlier in the minutes of the September meeting the decision of the parties was recorded (in para.iii under the heading "Supporting and Back-up") to announce the appointment "of three Directors to the Board of the Group after setting up the Group Company". The parties were then respectively named as Chairman (Law) and Managing Directors (Tam and the petitioner). The parties were identified by name in the first para.(a) of the resolution relating to salaries but the bonus approved in the second para.(b) was expressed to be equally shared "by three Directors". I am left in no doubt that the parties were identified in their capacity as participating directors of the contemplated holding company and as entitled in that capacity to share the directors' bonus.

95. The petitioner's argument is not advanced by the fact that the bonus was to be 20 per cent of the Group's net profit before dividend. The consolidated accounts of the Group would, as an accounting exercise, have identified the Group's net profits or losses by reference to the relevant accounts of Ricacorp and Capital. The bonus payable to the three directors would be 20 per cent of those profits (if any). They would receive their share of the bonus as directors of the holding company and not in their capacity as directors of Ricacorp or Capital.

96. It was not envisaged that the petitioner (or either of the respondents) would be removed as a director. On the hypothesis that the holding company was in fact formed and thereafter the petitioner was removed as a director he would cease to be entitled to be paid because he had ceased to be a director and to provide productive services to the company which resulted in net profits. He would therefore not be entitled to receive his share of the 20 per cent bonus.

97. The September resolution identified 20 per cent of the Group's net profit for division in equal shares between the three directors. The corollary was that, subject to retention of profits as reserves or for any other appropriate purpose, 80 per cent of the net profits were to be available for distribution as dividend. The resolution was not expressed to entitle each of three directors to a separate bonus of 6 2/3 per cent of net profits but was a collective bonus to be shared equally by the three members of the board. Having regard to both the letter and the spirit of the resolution the proposition that if the petitioner ceased to be a director the respondents, as the continuing directors, would be entitled to only two thirds of the bonus because the resolution provided for it to be equally shared between three directors seems to me to be manifestly unsustainable. It implies that the amount of the bonus was intended to be controlled by the number of directors and ignores the fact that the bonus must have been intended as an incentive to those collectively responsible for generating the company's profit and to be payable only if the company did make a profit. The Court of Appeal was clearly right in holding that the bonus should go to those collectively responsible for generating the profits of the company.

98. I emphasise that the deputy judge was, at this stage of the proceedings, determining what in all the circumstances would be the proper amount of bonus to allow the respondents as directors of Ricacorp during the relevant period for the purposes of the valuation of the petitioner's shares in that company. The scheme involving the co-operation between Ricacorp and Capital and the formation of a holding company of those two companies had never effectively been put into operation. During the relevant period the affairs of Ricacorp were conducted by the respondents independently of those of Capital whose affairs were effectively conducted by the petitioner. The spectral affairs of a holding company which never came into existence were not a material factor in relation to the issue before the deputy judge save only that, in seeking to do what was just and equitable in all the circumstances, a relevant factor was that the petitioner and the respondents had by the September resolution (as properly understood) agreed that a directors' bonus of 20 per cent of net Group profits was appropriate for the holding company they intended to form for Ricacorp and Capital, both companies being involved in estate agency business.

99. The contemporaneous losses sustained by Capital could not be a relevant consideration in assessing the proper directors' bonus payable from the net profits of Ricacorp. The distinct legal entity of the two companies precluded any such consideration. Furthermore under the circumstances there could be no objective unfairness in the respondents relying on this fundamental distinction in the light of the limited extent of the unfairly prejudicial conduct established against them.

100. Accordingly the only factor available to the deputy judge in determining the bonus properly allowable in the valuation of the petitioner's shares in respect of Ricacorp's directors during the relevant period was the 20 per cent bonus agreed by the parties in the September resolution which has the meaning and effect indicated in paras. 94 to 97 above. The parties elected to treat that bonus as applicable mutatis mutandis to the net profits and directors of Ricacorp.

101. The petitioner, who was never a participating director at any material time and ceased to be a director on the 19 December 1996 understandably did not claim to be treated in the valuation as being entitled to any director's bonus during the relevant period. He had, in effect, dropped out by December 1995. It follows that the respondents as the two continuing directors were to be treated as entitled to share a bonus of 20 per cent of the net profits of Ricacorp.

102. In my judgment the deputy judge misdirected himself in relation to crucial matters in exercising his discretion on this issue by (1) accepting the calculations of counsel for the petitioner based on an erroneous understanding of the effect of the September resolution and (2) impliedly accepting the erroneous proposition that in seeking to do what was just and equitable the court should take into account the fact that Capital made losses during the relevant period.

103. The Court of Appeal raised this issue of its own motion. The task of this Court has not been made easier by the absence from the record of counsel's submissions in the Court of Appeal whose judgment on the issue is open to criticism as being briefly dismissive when overruling the exercise of the deputy judge's discretion. The Court of Appeal was not entitled to interfere with the decision of the deputy judge made in the exercise of his discretion simply because its members considered that, if sitting in the Court of First Instance, they would have reached a different conclusion. However, on consideration of the arguments advanced before the deputy judge and before this Court I conclude, for the reasons given in para.102 above, that the deputy judge misdirected himself in relation to crucial matters when exercising his discretion and thereby arrived at a decision on this issue which was plainly wrong. The Court of Appeal was therefore justified in interfering with his decision.

104. I would uphold the decision of the Court of Appeal on this issue.

105. Accordingly I would dismiss the petitioner's appeal and make an order nisi (to become absolute unless a written application giving reasons for any other order is made within 14 days) awarding the costs of the appeal to the respondents.

Sir Anthony Mason NPJ :

106. I agree with the judgment of Mr Justice Clough NPJ.

Chief Justice Li :

107. The Court unanimously dismisses the petitioner's appeal and makes the order nisi as to costs referred to in the last paragraph of the judgment of Mr Justice Clough NPJ.