KONHILL INTERNATIONAL LTD. v. DAI PAI DONG RETAIL SHOPS CO. LTD. AND OTHERS

HCCW 340, 345 & 346/2002 & HCA 1036/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 340 OF 2002

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(Heard Together)

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D E C I S I O N

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The applications

1. There are a total of four summonses before me. Three of them, issued on 16 May 2002, are for the appointment of provisional liquidators in HCCW Nos. 340, 345 and 346 of 2002, under section 193 of the Companies Ordinance, Cap. 32. The fourth summons, issued on 6 June 2002, is for a worldwide Mareva injunction against Mr Chan Shiu Chick ("CSC"), the 2nd defendant in HCA No. 1036 of 2002.

2. In HCCW No. 340 of 2002, the petition was presented on 2 April 2002 by a contributory and creditor, Junestar Investment Corporation ("Junestar"), to wind up Boldwin Construction Company Limited ("Boldwin") on just and equitable grounds. It is the petitioner's case in these proceedings that Madam Law Wai Duen Nina ("LWD") is the registered and beneficial owner of all the shares in Junestar. LWD was married to CSC in 1964. CSC has petitioned for divorce in May 2001 on the ground of LWD's desertion since 27 May 1999. At the time of the hearing of the present applications, it would appear that the marriage has not been dissolved. CSC has brought proceedings in HCA No. 2623 of 2001 against LWD in June 2001, seeking declarations that he is the beneficial owner of 1,199 shares in Boldwin through his ownership of the all the issued shares in Junestar. In the winding-up proceedings and in HCA No. 1036 of 2002, he has asserted that LWD held all of the shares in Junestar on trust for him, alternatively 50% of the shares in Junestar on trust for him. CSC claims that his beneficial ownership of 1,200 shares in Boldwin, alternatively 1,199 shares in Boldwin, gives him the locus standi to appear on the petition including the application for appointment of provisional liquidators. Notwithstanding the dispute as to the beneficial ownership of 1,200 shares in Boldwin, Junestar does not oppose the appearance of CSC on the ground that as all the complaints in the petition were directed against him, he is entitled to defend himself against the allegations.

3. Of the seven creditors who have given notice of intention to appear on the petition in HCCW No. 340 of 2002 and to oppose it, none of them has filed evidence to oppose the application for the appointment of provisional liquidators. Although an affirmation was filed on behalf of Boldwin on 8 July 2002 to oppose the petition and the application to appoint provisional liquidators, Boldwin did not appear at the present summons.

4. The petition in HCCW No. 345 of 2002 was presented on 2 April 2002 by LWD as a contributory and creditor to wind up Maintain Profits Limited ("Maintain Profits") on just and equitable grounds. On the same day, LWD presented a petition in HCCW No. 346 of 2002 as a contributory and creditor to wind up Myriad Gold Corporation ("Myriad Gold"), also on just and equitable grounds. LWD and CSC are the only shareholders of Maintain Profits and Myriad, each holding one of the two issued shares in each company. The sole asset of Maintain Profits consists of 600,000 shares out of 1 million fully paid shares in B.F. Construction Company Limited ("BF"). The remaining 400,000 shares in BF are held by Myriad Gold as its sole asset. CSC appears in these two petitions as the opposing contributory. No other party has given intention to appear in these two petitions. As in the case of Junestar, there is dispute as to the beneficial ownership of the shares in Maintain Profits and Myriad Gold. CSC has sought declarations in HCA No. 2623 of 2001 that LWD holds one of the two issued shares in each of these companies on trust for him and the dispute in that action has not been resolved.

5. HCA No. 1036 of 2002, in which the application for a Mareva injunction is made, is a derivative action brought by Junestar against Boldwin and CSC seeking damages for breach of fiduciary duty owed by CSC to Boldwin as a director, various declarations, injunctions and other reliefs arising out of alleged wrongful acts done by CSC to Boldwin.

The companies

6. Boldwin was incorporated on 17 August 1976 under Cap. 32 as a private company. It has been carrying on business as a building contractor. When it was incorporated, two subscriber shares of HK$100.00 each were issued to LWD and CSC. They were the only directors of the company. In February 1977, Boldwin acquired the status of a registered building contractor under the Buildings Ordinance, Cap. 123 and LWD was the only authorised signatory to sign statutory forms and other prescribed documents under the Ordinance between February 1977 and November 1999. In the early days of its operations, Boldwin had carried out a number of construction projects for the Great Eagle group of companies, as LWD's father is the founder of the Great Eagle Group. It is not in dispute that at all material times, CSC had the day-to-day management of Boldwin as its managing director.

7. In November 1977, one of LWD's sisters, Madam Lo Hung Suen, and her husband, Mr Chan Wai Lim, were appointed as additional directors of Boldwin. They held their appointment until they resigned on 22 March 2002. Chan Wai Lim had business contacts in the Cheung Kong group of companies and introduced construction work to Boldwin from the Cheung Kong Group. Since about 1978, with the exception of two projects, all the construction projects undertaken by Boldwin as the main contractor were of the Cheung Kong Group.

8. On 1 December 1978, a total of 1,998 shares of Boldwin were issued and allotted to CSC, Lo Hung Suen and Chan Wai Lim, as a result of which its shareholding structure was changed as follows:

9. Junestar was incorporated on 14 January 1983 under the laws of the Republic of Panama as a company of limited liability with an authorised capital of US$10,000.00 divided into 100 shares of US$100.00 each, of which two shares were issued to the two subscribers. On 27 May 1983, the 100 shares in Junestar were issued in the form of bearer shares and a general power of attorney was given by Junestar in favour of LWD, CSC and another sister of LWD to act as general attorneys of Junestar. On 30 May 1983, the two subscriber shares in Junestar were assigned and transferred to LWD. From 30 May 1983 to 17 March 1999, all the issued shares in Junestar in the form of bearer shares were kept by LWD. On 18 March 1999, the 100 bearer shares in Junestar were converted into registered shares and were registered in the name of LWD. As mentioned earlier, LWD claims that she was and is the sole legal and beneficial owner of all the issued shares in Junestar, whereas CSC claims that LWD held all of the shares in Junestar, alternatively half of the shares, on trust for him. On 19 March 1999, LWD, her daughters Chan Nga Wai Ann and Chan Nga Mei Amy, were appointed as directors of Junestar. On 23 July 1999, LWD, CSC and LWD's sister ceased to be general attorneys of Junestar when their powers of attorney were revoked pursuant to a resolution passed by the directors of Junestar.

10. On 11 February 1985, CSC and LWD, in consideration of payment by Junestar of HK$119,900.00 and HK$100.00 respectively, transferred all of their shareholdings in Boldwin to Junestar and Junestar has since remained the holder of such 1,200 shares of Boldwin. It is the case of LWD that she had provided all the funds for payment by Junestar for the above transfer of shares. This is disputed by CSC.

11. On 26 September 1985, Chan Wai Lim and Lo Hung Suen transferred all of their shares in Boldwin to Rocky Limited ("Rocky") and Rocky has since remained the registered shareholder of the remaining 800 shares in Boldwin.

12. On 24 September 1997, BF was incorporated under Cap. 32 as a private company. It is also in the business of a building contractor. As in the case of Boldwin, all the building projects undertaken by BF as the main contractor are of the Cheung Kong Group. LWD and CSC were appointed as the only directors of BF. CSC occupied the position of managing director and had the day-to-day management of its business. Initially, 10 shares out of 10,000 shares in BF were issued, six were held by Andreas Investment Corporation ("Andreas"; a company incorporated in Liberia and acquired by LWD and CSC in 1987, its shares were held by them in equal proportions, and of which LWD, CSC, their two daughters Ann Chan and Amy Chan, are the only directors) and four were held by Gainfort Holdings Limited ("Gainfort"; a company incorporated in Hong Kong in 1993 with two issued shares, one held by Junestar and the other by Andreas).

13. On 15 October 1997, Maintain Profits was incorporated in the British Virgin Islands with an authorised capital of US$50,000.00 divided into 50,000 shares of US$1.00 each, of which only two shares have been issued and are registered in the names of LWD and CSC as to one share each. Myriad Gold was incorporated in the British Virgin Islands on 1 December 1997 with an authorised capital of US$50,000.00 divided into 50,000 shares of US$1.00 each, of which two shares have been issued and are registered in the names of LWD and CSC as to one share each.

14. On 2 March 1998, Andreas and Gainfort transferred their entire shareholdings in BF to Maintain Profits and Myriad Gold. On 3 March 1999, the authorised share capital of BF was increased from HK$10,000.00 to HK$1 million and on the same day, all of the shares of HK$1.00 each were issued, 600,000 shares to Maintain Profits and 400,000 shares to Myriad Gold.

15. There is effective deadlock on the board of directors of Maintain Profits and Myriad Gold as LWD and CSC are the only directors of these two companies.

16. The present directors of Boldwin are CSC, LWD, Mr Tang Chun Sing (appointed on 1 April 1999) and Mr Yu Ho Yuen (appointed on 8 July 1999). Mr Tang and Mr Yu are employees of Boldwin. It is alleged by LWD that they are accustomed to act in accordance with the wishes of CSC.

17. The present directors of BF are CSC, LWD, Ann Chan (appointed on 16 February 1998) and Mr Yip Hing Wah Henry (appointed on 1 April 1999). Mr Yip is an employee of BF and it is alleged by LWD that he is accustomed to act according to the instructions of CSC. Ann Chan left the family home with LWD and has apparently taken the side of LWD in the legal proceedings involving LWD and CSC.

18. It is not in dispute that in early 2000 Boldwin had completed all contracted building works, save and except for remedial works within the defects liability period in respect of the projects undertaken. The last tender Boldwin submitted was in July 2000. It has not entered into any new construction contract.

19. As for BF, it was the main contractor for three projects which have been substantially completed: STTL 446 in Area 108 Ma On Shan, New Territories; 661 to 665 King's Road, North Point, Hong Kong; and KIL 11056 Phase 2 Hung Hom, Kowloon. In addition, it has taken up a project at KIL 11056 Phase 4 Hung Hom, Kowloon (Hok Un Phase IVA & IVB), which is in the final phase of construction. All these are construction projects of the Cheung Kong Group.

The preliminary application to strike out part of the evidence

20. I propose first to deal with a preliminary application made by Mr Poon, SC on behalf of Junestar and LWD that certain parts of the evidence adduced by CSC in these applications should be struck out as they are in contravention of r. 121 of the Matrimonial Causes Rules, Cap. 179A, which reads as follows:

"121. Inspection etc. of documents retained in court

(1) A party to any matrimonial proceedings or his solicitor or the Secretary for Justice may have a search made for, and may inspect and bespeak a copy of, any document filed or lodged in the registry in those proceedings.

(2) Except as provided by r. 47A(3) and 95(3) and paragraph (1) of this rule, no document filed or lodged in the registry, other than a decree or order made in open court, shall be open to inspection by any person without leave of the court, and no copy of any such document, or of an extract from any such document, shall be taken by, or issued to, any person without such leave."

The word "court" in r. 121(2) is defined in r. 2(2) to mean "the District Court".

21. The evidence sought to be struck out relates to the evidence adduced or documents filed in the matrimonial proceedings between CSC and LWD (FCMC No. 4917 of 2001) and other documents that came into being as a result of the matrimonial proceedings, such as correspondence between solicitors, skeleton submissions of counsel, transcript of a hearing in chambers and are as follows:

(1) the 1st affirmation of CSC in HCCW No. 340 of 2002 filed on 4 July 2002 - paragraphs 22 to 24, 42, 59, 60 and 62;

(2) the following exhibits to the aforesaid affirmation of CSC: exhibits 12, 21, 41 to 52.

22. Mr Poon accepts that certain parts of the evidence filed on behalf of Junestar in HCA No. 1036 of 2002 are likewise in contravention of r. 121(2), being the 1st affirmation of LWD filed on 7 June 2002, paragraphs 12, 13 and 15 and the exhibits referred to in those paragraphs. He is content to have these parts of the evidence struck out.

23. Mr Poon has drawn my attention to the fact that in previous proceedings involving LWD and CSC (HCMP Nos. 702 and 703 of 2001, proceedings brought by LWD to seek access to the books and records of Boldwin and BF), he had raised a similar objection to the inclusion of documents filed in the matrimonial proceedings in the hearing bundle and it was directed by Cheung J (as he then was) that the documents in the matrimonial proceedings should be removed and the affidavit exhibiting such documents should be re-sworn.

24. It was pointed out by Mr Poon that in HCCW No. 340 of 2002, there are other parties who have given notice of intention to appear, such as the seven opposing creditors. The other contributory, Rocky, has indicated in a letter dated 11 July 2002 that it opposes the winding-up of Boldwin. There are other directors in Boldwin apart from LWD and CSC. Mr Poon submitted that as there are other parties involved or who may take part in the winding-up proceedings, it would not be appropriate for the documents or evidence in the matrimonial proceedings to be filed as evidence in these applications, and thereby open to inspection by other parties, particularly as this is in violation of r. 121(2) of the Matrimonial Causes Rules and no leave of the District Court has been sought.

25. Mr Chang, SC, who appeared for CSC, disputed that that was the effect of r. 121(2). He submitted that r. 121(2) relates only to the inspection of documents in matrimonial proceedings retained in the District Court and prohibits inspection by third parties without the leave of the District Court. This provision does not restrict the High Court in dealing with matters relevant to an application before it and that the High Court does have power to admit evidence which is relevant.

26. I do not agree with Mr Chang that r. 121(2) should be read or applied in such a restrictive manner. As there is provision prohibiting the inspection of documents in matrimonial proceedings by third parties without leave, I see no reason why the court should allow such documents to be exhibited in other proceedings where they would be available for inspection by other parties, unless the leave of the court seized with the matrimonial proceedings has been obtained.

27. On this basis, I would strike out those parts of the affidavit evidence in contravention of r. 121(2). I would also exercise my discretion to strike out certain parts of the evidence notwithstanding that they are not, strictly speaking, in violation of r. 121(2) as they are not documents filed or lodged in the registry in the matrimonial proceedings. Such parts of the evidence relate to the conduct of the matrimonial proceedings and are of peripheral relevance to the present applications. It is quite unnecessary for CSC to go to great lengths in what had happened in the matrimonial proceedings in order to make the point that the present applications were made by LWD for an ulterior purpose. What he has stated in paragraph 61 of his 1st affirmation in HCCW No. 340 of 2002 is quite sufficient for his purpose.

28. I order the following parts of the evidence to be struck out:

(1) the 1st affirmation of CSC in HCCW No. 340 of 2002 - paragraphs 22 to 24, 42, 59, 60 and 62;

(2) the following exhibits to the 1st affirmation of CSC in HCCW No. 340 of 2002 - exhibits 12, 21, 41 to 52; and

(3) the 1st affirmation of LWD in HCA No. 1036 of 2002 - the last sentence in paragraph 12, paragraphs 13 and 15.

The law on the appointment of provisional liquidator

29. I turn to the authorities relating to the principles upon which the court exercises its discretion to appoint a provisional liquidator. The relevant principles are not in dispute and may be stated as follows.

(1) The court has a wide and unfettered discretion under section 193 of Cap. 32 whether or not to appoint a provisional liquidator. It is not confined to the situations where there is jeopardy to the assets of the company or obvious insolvency or the company has admitted that there is no defence to the petition. How this general power is to be exercised would depend on the particular circumstances of each case (Re Union Accident Insurance Co. Ltd. [1972] 1 All E.R. 1105 at 1109e to h; Re Five Lakes Investment Co. Ltd. & Multiford Co. Ltd. [1985] HKLR 273 at 283F to I).

(2) As regards the exercise of this power, it would be relevant to consider two matters. The first is whether the petitioner has made out a good prima facie case for a winding-up order at the hearing of the petition. If so, the next matter that falls to be considered is whether it is right for a provisional liquidator to be appointed in all the circumstances (Re Union Accident Insurance, supra. at 1110a to c; Re Five Lakes Investment Co. Ltd., supra. at 283J to 284A).

(3) In order to establish a good prima facie case for a winding-up order, the petitioner must show, by believable evidence, facts which are not disproved at present stage and which, if eventually proved at the hearing of the petition, would entitle the petitioner to a winding-up order. To decide this question, the court looks at not merely the petitioner's evidence but also the evidence put in by those opposing the application. The court must then form a provisional view and decide, as the matter then stands, if there is a reasonable prospect that the petition might succeed. Unless the evidence put in by the opposing party is so "obviously cogent", any conflict of evidence should be left to be resolved at the hearing of the petition. Any views expressed by the court on the merits of the petition at this stage are provisional only, as the views are formed on the basis of affidavit evidence untested by cross-examination (Re Five Lakes Investment Co. Ltd., supra. at 284A, D to E; Re Yick Fung Estates Ltd. & Shui Hing Investment Co. Ltd. [1986] HKLR 240 at 252F to H).

(4) As to whether it is right for a provisional liquidator to be appointed in all the circumstances, this is to be decided on the basis of commercial realities, the degree of urgency and need established by the petitioner, and the balance of convenience according to the circumstances (Re Club Mediterranean Pty. Ltd. [1975] 11 SASR 481 at 484; Re Five Lakes Investment Co. Ltd., supra. at 284B).

30. It was contended by CSC that Junestar and LWD have not satisfied any of the two matters required to be considered. There is the absence of a good prima facie case that a winding-up order would be made on their petitions and it is not right for provisional liquidators to be appointed for any of the three companies.

The petitioner's case in each of the winding-up proceedings

31. It was submitted on behalf of CSC that the petitioner is confined to the heads of complaint set out in the petition and cannot rely on any new head not fairly covered by the petition (In re Fildes Bros. Ltd. [1970] 1 WLR 592 at 597G to 598D). The question therefore is whether on the pleaded case there is a good prima facie case for a winding-up order to be made for each of the companies on the just and equitable ground.

32. In respect of Boldwin and BF, it is alleged in the petitions that it was the basic understanding of both LWD and CSC, and certainly the expectation of LWD, that she would participate in the general management of these companies and be consulted on general policies and other major decisions, as Boldwin was formed as a result of her decision to establish a company to engage in the construction business to take advantage of her family background and business connections in real estate development, and BF was formed as a result of a decision made by her and CSC that a new company owned by them alone was to take over the business of Boldwin. In each of the petitions, it is alleged that CSC has acted in breach of his fiduciary duties as a director and the basic understanding and expectation of LWD and Junestar as aforesaid, causing LWD and Junestar to lose all trust and confidence in his probity, good faith and competence. It is further alleged that CSC has refused to allow LWD to take any effective part in the management of either Boldwin or BF, that the affairs of Boldwin and BF have been conducted and continue to be conducted by CSC in a manner oppressive and unfairly prejudicial to the interests of the petitioners, and that the mutual co-operation and participation which formed the underlying basis for the formation of all these companies have been replaced by suspicion and hostility. In the case of Maintain Profits and Myriad Gold, there is complete deadlock on the board of directors as LWD and CSC each holds one of the two shares in these companies and they are the only directors.

33. The contention was made on behalf of CSC that the petition to wind up Boldwin on just and equitable grounds (where no deadlock on the board of directors is alleged) is bound to fail and the argument is as follows:

(1) Junestar's complaints are in substance directed against CSC, who is only a director of Boldwin on Junestar's case as pleaded in the petition. On this pleaded case, since 1984, there was no longer any "quasi-partnership" between LWD and CSC after CSC had allegedly sold his entire shareholding in Boldwin to LWD by transferring his shares to an offshore corporate vehicle beneficially owned by LWD, namely Junestar.

(2) It has not been alleged in the petition that Boldwin is a "quasi-partnership" between Junestar and Rocky, the only shareholders of the company, or that there is any breakdown in mutual trust and confidence between Junestar and Rocky (or between their controlling shareholders), or that Rocky has excluded LWD and Junestar from participating in the management of Boldwin.

(3) In the absence of any plea of a partnership-type of relationship between the shareholders of Boldwin, upon which the company was formed, so as to give rise to mutual trust and confidence and equitable considerations, it was submitted that Junestar's petition to wind up Boldwin on the just and equitable ground is bound to fail.

34. I reject the above submission. The winding-up jurisdiction is not confined to such circumstances as have affected or would affect a person in his capacity as a shareholder (Ebrahimi v Westbourne Galleries [1973] AC 360 at 375A). As stated by Lord Wilberforce in that case, it would be impossible, and wholly undesirable, to define the circumstances in which equitable considerations of a personal character may arise between individuals, which may make it unjust or inequitable to insist on legal rights, or to exercise them in a particular way (at 379E). It is not necessary that the person against whom complaints are made as giving rise to a loss of confidence must be a shareholder. Nor is it necessary for there to be a partnership-like relationship between the shareholders to give rise to trust and confidence being reposed in the individual charged with the management of the company. I agree with Mr Poon that the three elements stated by Lord Wilberforce at 379F to G as giving rise to equitable considerations relate to just one type of company that has been conveniently labelled as "quasi-partnership". Lack of confidence in the conduct and management of a company's affairs as a ground for winding up is not confined to quasi-partnership. It may warrant a winding up in other cases if the lack of confidence is based upon sufficiently grave misconduct by those in control of the company and in particular if it foreshadows grave misconduct in the future (Re San Imperial Corporation Ltd. [1980] HKLR 649 at 653 to 654).

35. My attention was also drawn to the decision of Re Greater Beijing Region Expressways Ltd. (No.3) [2000] 3 HKC 608 at 621 to 623 in which Le Pichon J (as she then was) rejected a submission on an application to strike out a petition that there was no room for the operation of the equitable principles in Westbourne Galleries merely because independent third parties had become shareholders of the company. It was held that prima facie there is "no obvious legal impediment" to the equitable principles being applicable upon the admission of independent shareholders.

36. The petition to wind up Boldwin was put on two bases. Firstly, there is the allegation of loss of confidence in the conduct and management of the company's affairs due to grave misconduct of CSC. Secondly, there is the allegation of a partnership like relationship between LWD and CSC giving rise to mutual trust and confidence and expectation on the part of LWD to participate in the general management and be consulted on important matters, and that there was breakdown of trust and confidence and wrongful exclusion of LWD from any effective part in the management. On either basis, I am not satisfied that the petition to wind up Boldwin on just and equitable grounds is bound to fail.

The beneficial ownership of shares

37. As I have mentioned earlier, there is a dispute as to the beneficial ownership of the shares in Boldwin registered in the name of Junestar, and the one share in Maintain Profits and in Myriad Gold held by LWD, and this is the subject matter of HCA No. 2623 of 2001. It was submitted by Mr Poon that the dispute in the beneficial ownership of these shares is irrelevant to the applications for appointment of provisional liquidators. There is no dispute that all three petitions were presented in compliance with section 179(1) of Cap. 32 in that each petition was presented by a contributory and creditor.

38. CSC has filed evidence in these applications deposing to matters in support of his case that he is the beneficial owner of all or virtually all of Junestar's shares in Boldwin, alternatively 50% of these shares, and his contention that LWD holds one share each in Maintain Profits and Myriad Gold on his behalf. I do not propose to set out his evidence in this respect. On the documentary evidence, it is not in dispute that CSC's shares in Boldwin were sold to Junestar in February 1985 and that LWD is the registered shareholder of all the shares in Junestar. What CSC has alleged in his affirmations has yet to be tested in cross-examination. I am unable to accept at this stage that the evidence he has adduced is so "obviously cogent" as to render LWD's assertion that she is the beneficial owner of all the shares in dispute wholly unbelievable.

39. The dispute as to the beneficial ownership of the shares is to be resolved in HCA No. 2623 of 2001. For the purpose of the applications that I am concerned with, so long as I am not satisfied that the strength of LWD's allegation on beneficial ownership is weakened to such an extent that a prima facie case is not made out for a winding-up order, it would not be relevant here. Nor do I think it relevant in the present applications to have regard to the rule of practice that where there is a genuine dispute on the ownership of shares, that dispute should be resolved before the winding-up petition is heard although the court retains a discretion whether to allow that issue to be determined in the context of the petition.

Allegations of misconduct

40. I turn to the allegations of grave misconduct and misfeasance alleged against CSC. It is necessary to go into them in some detail as it is disputed by CSC that LWD has made out a good prima facie case for a winding-up order on the basis of these allegations. Also, the allegations of grave misconduct serve an additional purpose here in that LWD relies on them to justify the appointment of provisional liquidators and the granting of a Mareva injunction in that there is a need to displace CSC from his position of authority to deal with the assets of Boldwin and BF in view of his misfeasance and breaches of fiduciary duty to ensure that the status quo of the assets is preserved pending the resolution of the dispute.

41. It is the case of LWD that she was first alerted to CSC's misconduct in the management of Boldwin and BF in about late May 1999 when she learned through her daughter Ann that CSC had deposited into Boldwin's account a substantial number of banknotes totalling in excess of HK$35 million. This caused LWD to take steps to investigate the affairs of Boldwin and BF. Initially she wrote to CSC seeking information and explanation on various matters. Later, she instructed solicitors to write to CSC. When CSC replied by his solicitors refusing LWD's request to inspect the books and records, LWD brought proceedings against CSC in February 2001 in HCMP Nos. 702 and 703 of 2001 to assert her right to inspect the books and records as a director of Boldwin and BF. By the orders made by the Court of Appeal on 7 September 2001, LWD was allowed to inspect the books and records of both companies. The orders were amended on 17 September 2001 to enable the agents of LWD to take copies of the documents and accounts stored in computer disks. PricewaterhouseCoopers ("PwC") were engaged by LWD to assist her in reviewing the books and records of the companies and they set out their findings in a report dated 7 February 2002 ("the PwC report") and a supplemental report dated 4 March 2002 ("PwC's 1st supplemental report"). The writ in HCA No. 1036 of 2002 was issued on 15 March 2002 and the petitions for winding up were presented on 2 April 2002. The allegations of misconduct against CSC pleaded in the petitions and the Amended Statement of Claim in HCA No. 1036 of 2002 are based on the results of investigation in the reports of PwC.

42. I will deal with the allegations of misconduct against CSC in respect of Boldwin, followed by the allegations of misconduct concerning BF.

Allegations of misconduct as regards Boldwin

Alleged misappropriation of over HK$40 million

43. I will first set out the basic facts, which are not in dispute.

44. On 27 May 1999, CSC caused to be prepared and delivered to the Hang Seng Bank Limited ("Hang Seng") a document entitled "Extract from the minutes of the meeting of the Board of Directors of Boldwin Construction Co. Ltd.", which is to the effect that a meeting of the board of directors of Boldwin had been held on 27 May 1999 at its registered office and that it had been resolved by the directors that Hang Seng be requested to allow Boldwin to withdraw two fixed deposits in the respective sums of HK$20,015,342.47 and HK$20,075,890.90 before their dates of maturity and that CSC be authorised to sign the requests for the premature withdrawal and to accept the terms imposed by Hang Seng for such withdrawals. The extract from the minutes was signed by CSC purportedly as the chairman of the meeting and by Miss Choi Shun Lai Sally purportedly as the company secretary. No board meeting of Boldwin was held on 27 May 1999 and the company secretary of Boldwin at the time was G.E. Secretaries Limited, a subsidiary of Great Eagle Holdings Limited. Miss Choi was the financial controller of Boldwin.

45. On the same day, CSC also caused to be prepared and delivered to Hang Seng documents instructing Hang Seng to credit the proceeds of the two fixed deposits to the account of Andreas at Hang Seng.

46. In accordance with the above documents, Hang Seng terminated the two fixed deposits of Boldwin on 27 May 1999 before their dates of maturity and credited the aggregate sum of HK$40,091,233.37 to the bank account of Andreas.

47. Upon receipt of HK$40,091,233.37, Andreas on the same day by way of a cheque drawn on its account with Hang Seng and signed by CSC as its authorised signatory paid to Worldsec International Limited ("Worldsec"), a securities trading company at which CSC or companies controlled by CSC maintained securities trading accounts, the sum of HK$39,354,023.05, in settlement of sums owed to Worldsec by CSC or Silver Cumulus Holdings Limited ("Silver Cumulus"). Silver Cumulus is a shelf company incorporated in the British Virgin Islands; it was acquired by G.E. Secretaries Limited for CSC on 24 May 1999 and is solely controlled by him.

48. The sum of HK$40,091,233.37, which was paid to Andreas, was not recorded in the account of Andreas in the ledgers of Boldwin. Instead, this was entered and recorded in the books of account of Boldwin as payments made to Junestar in the form of debits to the account of Junestar with Boldwin.

49. It is alleged by LWD that at no time was CSC authorised by Boldwin or its board of directors to request the premature termination of the two fixed deposits or to give instructions to Hang Seng to transfer the proceeds to the account of Andreas. The premature termination of the fixed deposits and the diversion of the proceeds were made for an improper purpose, namely, to benefit CSC personally. It is further alleged that the debit entry in the current account of Junestar with Boldwin was in breach of CSC's duty as a director to keep proper books of account under section 121 of Cap. 32 and was done to conceal the misappropriation of funds. Mr Poon has submitted that this misappropriation of funds demonstrates the blatant disregard by CSC of the distinction between the assets of a company and those of his own, and this distinction, which is of supreme importance, must be 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 (Bank Voor Handel en Scheepvaart N.V. v Slatford [1953] 1 QB 248 at 269 to 271).

50. CSC's answer is that his handling of the financial affairs of Boldwin was in accordance with the long-standing practice accepted throughout the years by all concerned. In his Defence in HCA No. 1036 of 2002, he pleaded that LWD had by conduct assented to and authorised his practice to draw from Boldwin against the shareholder's account of Junestar for his personal use and investments. There was also an accepted practice, reached as a result of an "understanding" between CSC and Chan Wai Lim in about April 1994, that Junestar and Rocky would keep deposited in their respective accounts with Boldwin the very substantial amounts of dividends declared by Boldwin from 1994/95 onwards and the shareholders would be at liberty to draw on their respective accounts as long as they were in credit and provided that the drawings would not create any cash flow problem for Boldwin. LWD would appear not to have been involved in this "understanding" between CSC and Chan Wai Lim. Even if there were an "understanding" between CSC and Chan Wai Lim, it is not entirely clear on CSC's case as formulated how this could be regarded as constituting the consent of all the shareholders, namely, Junestar and Rocky, so as to invoke the principle in In re Duomatic Ltd. [1969] 2 Ch. 365 and the Australian decision of Swiss Screens (Australia) Pty. Ltd. v Burgess (1987) 11 ACLR 81 that the informal assent of all shareholders who have a right to attend and vote at a general meeting of the company would be as binding as a resolution in a general meeting. I should point out that it is LWD's case that the dividends declared were on lent to Boldwin by Junestar and Rocky as the shareholders were informed by CSC that Boldwin would need to borrow money from them as additional working capital and that the shareholder's loan from Junestar had been repaid to the extent of HK$30,004,983.95 in April 1998, leaving outstanding an amount of HK$80 million odd.

51. Particulars of LWD's knowledge of CSC's drawings and of Ann's knowledge as imputed to LWD (on the basis that she is the "confidante" of LWD) are pleaded in paragraphs 27 and 29 of the Defence. I do not propose to set out these particulars except to observe that the particulars of knowledge do not strike me as very cogent on the face of it, nor do they support an allegation that all previous drawings made by CSC from Boldwin against Junestar's account for his personal investments in securities as set out in Annexure 1 of the Defence were with LWD's knowledge and consent. I also note that the previous drawings made from Boldwin against Junestar's account as set out in Annexure 1, even if made with the knowledge and consent of LWD, were a long way from the magnitude of HK$40 million. Besides, even if LWD had consented to CSC withdrawing money from Boldwin for his personal investments, two of the directors cannot help themselves to the funds of the company in this manner, as this would be contrary to the principle that the assets of a company do not belong to its shareholders.

52. Further in answer to this, CSC has alleged that in the latter part of May 1999, he wanted to use Andreas to make a substantial purchase of shares as his personal investment in the value of HK$70 million to HK$100 million and that he had, on or about 24 May 1999, when the marital relationship was apparently falling apart, made known to LWD this proposed investment. As LWD stated she would prefer CSC to cause the investment to be carried out through a new foreign corporation and not Andreas, she instructed G.E. Secretaries Limited to acquire a company for CSC and this was Silver Cumulus. CSC then purchased HK$70 million worth of shares in the name of Silver Cumulus and HK$39,354,023.05 was required to settle the margin amount in the securities trading account of Silver Cumulus with Worldsec by 26 May 1999.

53. As a bank account could not be opened in the name of Silver Cumulus with the Kincheng Banking Corporation ("Kincheng") at the time, CSC deposited the money he had borrowed to settle in part the margin amount into the bank account of Boldwin with Kincheng. Banknotes of HK$6 million were thus deposited on 25 May 1999 and banknotes in two portions of HK$10 million and HK$9 million were deposited on 26 May 1999. As the borrowed funds were insufficient to settle the margin amount, in accordance with the "accepted practice", CSC instructed the staff of Boldwin to give instructions to Hang Seng to transfer to Andreas' account with Hang Seng the proceeds of two other fixed deposits held by Boldwin in the total sum of HK$40,099,311.87. Unknown to him, LWD had given instructions to Hang Seng on 26 May 2002, the day before she left the matrimonial home with Ann, to withdraw these two fixed deposits totalling HK$40,099,311.87 and to transfer the funds to Junestar's account with Hang Seng (it is LWD's case that this withdrawal was a further repayment by Boldwin of part of the outstanding sum in respect of the shareholder's loan from Junestar). When CSC discovered on 27 May 1999 the proceeds of the other two fixed deposits had been transferred to Junestar instead of Andreas, and that Hang Seng would decline to honour the cheque he drew on Andreas' account in the sum of HK$39,354,023.05 in favour of Worldsec if Andreas was not put in funds within a short time, CSC instructed the staff of Boldwin to uplift the two fixed deposits in question in the total sum of HK$40,091,233.37 by premature withdrawal and to transfer the proceeds to Andreas. Again, this was done in accordance with the "accepted practice". Further, CSC had on or about 17 June 1999 deposited into Boldwin for the credit of Junestar's account the sum of HK$28 million from the moneys he had borrowed to fund his investment in shares.

54. Whether CSC's case of an accepted practice is made out is a matter to be resolved at the trial. If his allegation were accepted that there was a settled and accepted course of conduct agreed between Junestar and Rocky for each shareholder to draw money from Boldwin freely against the dividends each has kept deposited in its respective accounts of Boldwin, and that there was also a settled and accepted practice between CSC and LWD for CSC to draw money from Boldwin freely under Junestar's account for his personal benefit, it may be that LWD and Junestar cannot rely on CSC's withdrawals as grounds for complaint (In re Fildes Bros. Ltd., supra. at 596H to 597D; Ho Tung v Man On Insurance Co. Ltd. [1902] AC 232 at 236). At this stage, I do not regard the evidence of the settled and accepted practice as sufficiently cogent. Mr Poon has drawn my attention to the discrepancies regarding the alleged accepted practice between Junestar and Rocky as presently formulated and what CSC has deposed to in paragraph 33 of his 1st affirmation filed in HCMP No. 703 of 2001. It is not apparent why two fixed deposits of about HK$20 million each had to be uplifted on 27 May 1999 when CSC had at his disposal HK$25 million in banknotes being borrowed funds by 26 May 1999 and the amount of margin payment required was only HK$39 million. I also note that of the HK$40 million odd withdrawn on CSC's instructions for his personal benefit, only HK$28 million was repaid to Boldwin. My provisional view is that a prima facie case of misappropriation of assets has been made out.

Alleged wrongful payment of bonus salary to CSC and interest to Rocky

55. The basic facts, which are not in dispute, may be set out as follows.

56. In a document purporting to be the minutes of a meeting of the board of directors of Boldwin held at its registered office on 30 July 1999 ("the 1st minutes"), it was stated that LWD was present at the meeting, that the board of directors had resolved a bonus salary was to be awarded to CSC as the managing director of Boldwin since its founding in 1977, and that such bonus was to be calculated at the rate of 12.5% of the accumulated net audited profit of Boldwin as from the first fiscal year of Boldwin. The 1st minutes were signed by CSC purportedly as chairman of the meeting and were shown to LWD by Chan Wai Lim. No such meeting was in fact held, nor was LWD present at any such meeting. LWD objected to the 1st minutes in her letter to Chan Wai Lim on 6 August 1999.

57. In another document purporting to be the minutes of a meeting of the board of directors of Boldwin held at its registered office on 14 August 1999 ("the 2nd minutes"), it was stated that CSC, LWD, Chan Wai Lim and Lo Hung Suen were present at the meeting with CSC elected as the chairman and that the board of directors had resolved (1) that a bonus salary of HK$23,503,273.30 was to be awarded to CSC for his service as the managing director since the founding of Boldwin up to 1998 calculated at the rate of 12.5% of the net annual audited profit of Boldwin; and (2) that as from 15 June 1999, interest would be paid to all directors' accounts and shareholders' accounts with Boldwin at the rate of 8% per annum on the credit balance of such accounts. The 2nd minutes were signed by CSC purportedly as the chairman of the meeting. No meeting was in fact held on 14 August 1999, nor was LWD present at any such meeting. LWD objected to the 2nd minutes by her letters to CSC and the board of directors of Boldwin dated 16 and 19 August 1999 respectively.

58. In a third document purporting to be the minutes of a meeting of the board of directors of Boldwin held at its registered office on 14 August 1999 ("the 3rd minutes"), it was stated that LWD, CSC and Chan Wai Lim were present at the meeting with CSC elected as the chairman and that the board had passed resolutions identical to those set out in the 2nd minutes. The 3rd minutes were signed by CSC purportedly as the chairman and by both CSC and Chan Wai Lim purportedly as attendants of the meeting. No such meeting was in fact held.

59. As at 15 June 1999, being the date referred to in the resolution set out in the 2nd and 3rd minutes as from which interest was payable on the credit balance of directors' and shareholders' accounts, Boldwin owed Rocky HK$78,056,082.88 as shareholder's loan. I should mention that on 14 June 1999, LWD had caused a fixed deposit of Boldwin of about HK$49 million to be uplifted and HK$40 million of the proceeds to be transferred to Junestar's Hang Seng bank account, in further repayment of the shareholder's loan from Junestar to Boldwin, thereby reducing the outstanding balance on the loan to HK$1,495,704.18. By her letter of 23 June 1999, LWD informed the other directors of Boldwin of the repayments of the shareholder's loan of Junestar in the total sum of HK$80,099,311.87 and, at the same time, urged the board to forthwith repay the shareholder's loan of Rocky out of Boldwin's surplus funds not immediately required for the company's business. Between 10 August 1999 and 5 September 2000, a total of HK$49 million was repaid by Boldwin to Rocky.

60. By a cheque dated 19 August 1999 drawn on the account of Boldwin in Kincheng and signed by CSC, Boldwin paid to CSC HK$23,503,273.30 as bonus salary for managing director from 1976 to April 1998. Interest on Boldwin's indebtedness to Rocky calculated at 8% per annum in the sum of HK$6,962,145.83 was credited to an interest payable account in the books and records of Boldwin from 15 June 1999 to 31 March 2001, although no actual payment has been made.

61. Quite apart from the fact that no such meetings of the directors were held as stated in the 1st, 2nd and 3rd minutes, it is LWD's case that the resolution purportedly passed to pay bonus salary to CSC was unlawful as it was in breach of Article 49 of the Articles of Association of Boldwin which prescribes that bonus must be paid out of net profits and there was no net profit available for this purpose when the resolution was purportedly passed. It is stated in the 1st report of PwC that Boldwin had suffered heavy losses from 1998 to 2000 resulting in a fundamental uncertainty to prepare its accounts on a going concern basis, as it had recorded net accumulated losses of approximately HK$270 million by the end of 31 March 2000. The resolution to award bonus salary was in breach of Article 49 in another respect, as this article requires the approval of Boldwin in general meeting for the payment of any bonus, and no such general meeting was held. Both the resolutions to pay bonus salary and interest on the credit balance of directors' and shareholders' accounts were in contravention of Article 43 and section 162(1) of Cap. 32 in that neither CSC nor Chan Wai Lim, who was interested in one or the other of the resolutions, had disclosed to the board their respective interests at or before the passing of such resolutions. Further, even if a meeting of the board of directors were held between CSC and Chan Wai Lim as stated in the 3rd minutes, such meeting was inquorate and in breach of Article 37 in that Article 43 declares that any director who is interested in any contract, arrangement or dealing shall not vote and shall not be counted as part of a quorum when any such contract, arrangement or dealing is under consideration.

62. It is alleged by CSC that the payment of HK$23.5 million as bonus salary to himself was discussed between CSC, LWD and Chan Wai Lim on no less than two occasions after LWD had left the matrimonial home when they still attended regular family gatherings at the residence of LWD's parents and that all three had agreed in principle for CSC to be paid HK$1 million a year for each of the 23 years when he served as managing director. The 1st minutes were prepared by Miss Choi on the instructions of CSC in accordance with this agreement in principle. Subsequent to the 1st minutes, Chan Wai Lim raised with CSC that interest should be credited to the dividends which Rocky had kept deposited in its account with Boldwin. CSC therefore instructed Miss Choi to prepare the 2nd minutes, which recited that CSC, LWD, Chan Wai Lim and Lo Hung Suen were present at the directors' meeting. The 2nd minutes were discussed and agreed to by CSC, LWD and Chan Wai Lim when they met at another family gathering. They also agreed to sign a revised version of the minutes which would recite that only CSC, LWD and Chan Wai Lim were present. Hence, the 3rd minutes were prepared by Miss Choi. However, LWD refused to sign the 3rd minutes in breach of her agreement to do so.

63. It was submitted by Mr Poon that the alleged agreement of LWD to award bonus salary to CSC is plainly inconsistent with contemporaneous documents, namely, the letters written by LWD to Chan Wai Lim and CSC objecting to the 1st and 2nd minutes and these letters were not refuted by CSC at the time. Further, it has not been denied that the resolutions purportedly passed were in breach of various provisions in the Articles of Association. I note also that the allegation that LWD had agreed various things with CSC and Chan Wai Lim on several occasions at the family gatherings is at odds with paragraphs 62 and 63 of the 1st affirmation of CSC in HCMP No. 703 of 2001 in which he stated there was a "communication blockade" and that he was unable to talk to LWD on any of these occasions due to the intervention of Ann Chan.

64. On this allegation, my provisional view is that a prima facie case of misappropriation of assets of Boldwin has been made out by LWD and Junestar.

Alleged unlawful payments to CSC's brothers, securities trading companies and for the purchase and maintenance of a horse

65. It is not in dispute that between 1 April 1996 and 16 August 1999, CSC had used the funds of Boldwin to make various payments for his personal purpose unrelated to the interest of Boldwin. The total amounts involved were HK$14,842,576.16 and the facts are as follows.

66. Between 1 April 1996 and 16 August 1999, CSC had caused to be withdrawn from Boldwin a total amount of HK$501,500.00 in cash, of which HK$241,500.00 were paid to his two brothers and the balance of HK$260,000.00 were withdrawn by him for unknown purpose.

67. Between 13 July 1996 and 16 April 1999, CSC had caused the funds of Boldwin in the aggregate amount of HK$13,681,578.07 to be paid to various securities trading companies in settlement of sums owed to them by CSC or by companies solely under his control for his personal investments in securities.

68. Between 11 December 1998 and 13 January 1999, CSC caused Boldwin to pay a total sum of HK$659,498.09 for his purchase of a horse and its maintenance.

69. All the above payments were entered and recorded in the books of account of Boldwin as payments made to Junestar in the form of debits to its current account with Boldwin.

70. LWD claims that she only became aware of these payments as a result of the PwC report, they were made without authority and CSC was simply treating the assets of Boldwin as his own.

71. CSC's answer is that there was an accepted and settled practice between Junestar and Rocky for Junestar to withdraw money from Boldwin against the shareholder's account of Junestar, that there was also an accepted and settled practice between CSC and LWD for CSC to draw against Junestar's account with Boldwin for his personal use, and that all the above drawings were made in accordance with accepted practice. CSC further stated that the drawings were subsequently set off by re-deposits made by him to Boldwin for the credit of Junestar's account, the particulars of which are set out in Annexure 2 to his Defence in HCA No. 1036 of 2002. According to Annexure 2, of the total amount he had withdrawn to pay for his investments in securities being HK$13,681,578.07, CSC had re-deposited a total of HK$10,263,989.99 to set off such drawings. It is alleged that some of the drawings were clearly known to LWD, "on the face of the books and records of Boldwin", and also because LWD claims to be the sole proprietor of Bold Win Securities Company, being one of the securities trading companies through which CSC carried out his investments in securities (it is CSC's case that Bold Win Securities Company was jointly owned by CSC and LWD beneficially). It is further alleged that LWD had assented to and authorised all the drawings (there were quite a number of them) in that a cheque dated 30 October 1997 drawn on Boldwin for HK$600,000.00 in favour of a securities trading company was signed by LWD jointly with CSC, that the vouchers of three other payments to securities trading companies were checked and approved by Ann Chan who was CSC's personal assistant in Boldwin at the time and she had signed a cheque for one of these transactions jointly with Miss Choi, and that the vouchers of the payments made for the purchase and maintenance of a horse were checked and approved by Ann Chan.

72. I have dealt with CSC's case on accepted practice in the earlier parts of this decision and his allegations of knowledge on the part of LWD and Ann's knowledge to be imputed to LWD. Suffice it to say at this stage I am of the provisional view that a prima facie case of misappropriation of Boldwin's assets by CSC has been made out.

Alleged unlawful payments in respect of a property

73. The basic facts relating to this complaint, which are not disputed, are as follows.

74 . Between 27 June 1998 and 10 September 1998, CSC caused Boldwin to pay a total sum of HK$309,623.16 to various suppliers and contractors in respect of renovation work carried out to a property in Hong Lok Yuen, Tai Po, New Territories, which was owned by Krupton Limited, and the shares of which are held by the senior project manager of Damen Limited and his wife. Damen Limited is a member of the Cheung Kong Group and was the employer of Boldwin in the construction project at Tin Shui Wai. A substantial part of the payments made was for building a tennis court in the property.

75. It is alleged by LWD that CSC made the payments for the above renovation work with a view to offering an advantage to the project manager as an inducement or reward for favouring or facilitating Boldwin in doing business with the Cheung Kong Group.

76. It is denied by CSC that the payments were made for the alleged improper purpose. He claims that the project manager had requested Boldwin to convert the yard in his property into a golf practice area and to carry out some renovation works inside the house. CSC delegated the job to an employee of Boldwin who mistakenly arranged for the yard to be converted into a tennis court instead of a golf practice area and the cost of the works had far exceeded the amount the customer had intended to spend. As a result, Boldwin did not seek payment from the project manager of any of the costs it had paid to its sub-contractors.

77. It is not alleged by CSC that the project manager had rejected the finished work, assuming that the work was done by mistake. On a provisional basis, I am not prepared to say that a prima facie case of misconduct on the part of CSC has not been made out.

Interest-free loans to a sub-contractor

78. It is not in dispute that between 8 December 1993 and 6 July 2000, CSC caused Boldwin to lend to Chan Chi Kuen, a sub-contractor of Boldwin, interest-free loans without any security or agreed terms of repayment. Only one repayment of HK$212,800.00 was made during 1993/94. The balance outstanding from April 1997 to July 2000 was HK$797,000.00. The entire outstanding sum was repaid on 6 July 2000.

79. It is alleged by LWD that the loans were made without the knowledge or consent of the board of directors and that CSC had failed to act bona fide in the interest of Boldwin in granting the interest-free loans to this sub-contractor.

80. CSC claims that this sub-contractor was extremely valuable to Boldwin and they had a very successful business relationship since 1979. The loans were made to ease "minor cash flow problems" of the sub-contractor from time to time and they were made in the best interest of Boldwin in view of its business relationship with the sub-contractor.

81. This seems to me to be a relatively minor complaint, if established. I do not propose to take this into account for the purpose of the present applications.

Alleged misuse of Boldwin's bank account

82. It is not in dispute that over a period of eleven days between 25 May 1999 and 4 June 1999, CSC caused to be deposited into Boldwin's account at Kincheng a substantial number of banknotes not belonging to Boldwin in the total sum of HK$35,800,000.00. Each of the cash deposits was recorded in the books of account of Boldwin as a credit entry in the current account of CSC as a director. On 2 June and 14 June 1999, two cheques signed by CSC were drawn on Boldwin's account made payable to CSC, in the respective sums of HK$7,800,000.00 and HK$28 million, causing the entire amount deposited to be withdrawn. On 17 June 1999, CSC drew a cheque on his personal account at Kincheng in favour of Boldwin in the amount of HK$28 million. This was recorded in the books of account of Boldwin as a credit entry in the current account of Junestar.

83. On 8 June 1999, LWD issued a notice convening a meeting of the board of directors on 22 June 1999 for the purpose of considering CSC's use of Boldwin's bank account in the manner aforesaid. The meeting was aborted, as all the other directors did not attend. LWD also sought an explanation of the above transactions from CSC in her letters dated 23 June 1999, 5 July 1999 and 5 August 1999. No explanation was given by CSC.

84. CSC stated that the amount of HK$35,800,000.00 in banknotes were borrowed by him to make a substantial purchase of shares as his personal investment in late May 1999 in the value of HK$70 million to HK$100 million as mentioned earlier. The funds were deposited into Boldwin's bank account because a bank account could not be opened for Silver Cumulus. Further, as Silver Cumulus did not have an account in the ledgers of Boldwin, the amount deposited was credited to the director's account of CSC with Boldwin. It would appear that he first provided an explanation that the aforesaid deposits and withdrawals were for his investments in stocks only in paragraph 31 of his 1st affirmation in HCMP No. 703 of 2001 filed on 22 February 2001, in which he also alleged that LWD had been fully informed by him of the use of Boldwin's bank account in that manner.

85. It is highly unusual for such a large amount of money to be deposited in banknotes within such a short period of time. So far, CSC has made no mention of the ultimate source of these funds. It is not apparent why, instead of his personal bank account, Boldwin's bank account was used for the alleged purpose. He gave no explanation at the time despite LWD's repeated requests. His allegation that LWD was fully informed of his use of Boldwin's bank account does not tally with contemporaneous documents being the notice to convene a directors' meeting and the letters of LWD. I am inclined to think that a prima facie case of misconduct has been made out for this complaint.

Other misfeasant acts as alleged

86. These other misfeasant acts as alleged relate to CSC's management of the construction projects of Boldwin. In summary, it is alleged that in breach of his fiduciary duty, CSC had caused Boldwin to give substantial discounts to the employers in the net tender sum of the projects; that Boldwin was subject to substantial claims by the employers of liquidated and ascertained damages ("LADs"), substantial variations claims have remained uncertified, and final accounts in respect of projects have not been settled due to the mismanagement of the projects.

87. Regarding the giving of substantial discounts, it is accepted by Mr Poon that there is an error in paragraph 61 of the petition and in paragraph 40 of the Amended Statement of Claim in HCA No. 1036 of 2002 in that it is alleged that Boldwin gave to the employers substantial discounts to "the net contract sum". This should have been "the net tender sum", being the gross tender sum less the provisional sums for the works undertaken by the subcontractors and suppliers of Boldwin. Further, the total amount of discounts given for eight projects, in the sum of approximately HK$136,150,000.00, would have been equivalent to an effective percentage of 4.72% of the original tender sums, not 6.29% as pleaded.

88. It is not in dispute that CSC was the only person in Boldwin to deal with all commercial negotiations on financial matters throughout the tender stage, construction stage, and up to the final account stage, with both the employers and sub-contractors. Discounts were offered either at the time when a tender was submitted or after tender negotiations with the employers. It is recognised in the PwC report that due to the highly competitive nature of the construction industry, the giving of discounts to procure construction projects is "not unusual". What gave rise to concern, according to the PwC report, is the magnitude of the discounts offered, considering that the profit margins for main contractors are typically low.

89. CSC engaged his own experts in the construction industry to give a report dated 4 July 2002 ("the Molloy report") providing their comments to the relevant sections in the PwC report. PwC made a second supplemental report dated 15 July 2002 in response to such comments ("PwC's 2nd supplemental report"). The findings in the Molloy report as to the total amount of discounts offered by Boldwin are in line with those stated in the PwC report. I should also point out that in PwC's 2nd supplemental report, it is accepted that the giving of discounts by Boldwin does not "necessarily" reduce the profit margin of Boldwin as it had obtained cheap prices from its domestic sub-contractors to help it to procure the projects.

90. Has a prima facie case been made out that CSC was in breach of fiduciary duty in offering discounts in the total sum of about HK$136 million? There is insufficient evidence at this stage to support CSC's contention that without such substantial discounts, members of the Cheung Kong Group would not have awarded the contracts to Boldwin. On the basis of the magnitude of the discounts given, I am persuaded that a prima facie case has been made out for this complaint.

91. I turn to the substantial claims for LADs by the employers. This would need to be considered in conjunction with Boldwin's claims for extension of time ("EOT"). The case as pleaded in the petition and the Amended Statement of Claim is based on the findings in the PwC report. This report was prepared on the basis of the documents inspected by PwC between 13 and 25 September 2001. After September 2001, there had been EOT approvals and additional payment certifications, causing the potential liability of Boldwin to the employers for LADs to be reduced by some HK$277 million to about HK$169 million.

92. I will take the figures from the Molloy report as this was prepared with the benefit of subsequent information.

93. It is alleged by LWD and Junestar that the substantial potential liability of Boldwin to the employers for LADs was due to mismanagement of the projects in several respects being the failure to deliver most of the construction projects on time and by the date for practical completion, the failure to comply with time bar provisions in the main contract agreements in submitting claims for EOT, the failure to submit proper claims for EOT in that the claims submitted do not address the issues of entitlement and programme criticality adequately, the failure to identify causes of delay to allow LADs to be passed through to domestic or nominated sub-contractors. Further, it is alleged that Boldwin had failed to monitor properly the quality of the works of the sub-contractors in various projects in that a total sum of about HK$52,448,000.00 had been deducted by the employers, and that Boldwin had failed to finalise the accounts for a number of projects which have long been completed with the result that substantial payments for the works done remain outstanding. One of the criticisms in the PwC report is that basic project control tools in the form of computer software have not been used to update and monitor construction programmes in view of the size and complexity of the projects.

94. The author of the Molloy report has reached a different conclusion in that he does not consider that the procedures adopted by Boldwin had resulted in significant financial risk to its financial position. According to his findings, in order to maintain good business relationship with the Cheung Kong Group, CSC and his staff have not adopted a "claim conscious and contentious approach" in running the projects with the employers. That is why only a small team of quantity surveyors were employed in dealing with contractual and EOT matters. In some instances, EOT claims were submitted only after the employer's representative had confirmed the date of practical completion (not forthwith upon it becoming reasonably apparent that the progress of the works is delayed, as provided in some of the contracts) for two reasons. Firstly, CSC and the Cheung Kong had been adopting a "partnering approach" in carrying out the projects, so the employers had seldom imposed LADs against Boldwin notwithstanding there was delay, and the EOT claims submitted were not used to assert the contractual rights and entitlement of Boldwin but merely as a tool for commercial negotiation in reaching a fair settlement of the final accounts with the employers. Secondly, it is claimed that as EOT claims were used as a tool for negotiation, it was difficult to know how much EOT Boldwin would need to apply for until the employer's representative had confirmed the date of practical completion. The author of the Molloy report claims that this is the "normal approach" adopted by most developers and contractors in Hong Kong as major developers dislike claim conscious contractors. Further, events subsequent to the inspection of documents by PwC have shown that the employers have approved claims for EOT for most of the projects, notwithstanding they were not submitted within the contractual time limit.

95. As for the amount deducted by the employers for defective work of the sub-contractors in the sum of HK$52 million odd, this represented only 2% of the combined value of the projects involved. The author of the Molloy report does not consider the percentage deducted to be excessive or unusual. Besides, corresponding amounts have been withheld by Boldwin from payments due to the sub-contractors, so the effect on Boldwin's financial position would be minimal.

96. Regarding the delay in finalising accounts, the author of the Molloy report is of the view that there is very little the main contractor can do as it is for the employer's quantity surveyors to deal with variation valuations and to finalise accounts. Further, it is common for final accounts to remain outstanding two or three years after completion of the work.

97. I note that according to the Molloy report, since the commencement of the present proceedings, the attitude of the representatives of the Cheung Kong Group has become "more contractual" in that the claims for EOT have been scrutinised and some of the claims have been rejected. The author of the report recognises there is a need for "detailed and substantiated claims" to be produced if Boldwin's claims are to be preserved and for that reason, he recommends that key staff, including CSC, should be retained.

98. There is no dispute that the projects have not been administered by Boldwin strictly in accordance with the contractual provisions, as it is the gravamen of the Molloy report that things were done in an "informal and non-contractual manner" and it was sought to justify the "non-adversarial attitudes" adopted.

99. It seems to me that the practice of Boldwin to submit claims for EOT well after the contractual time bar and after the dates for practical completion is a risky practice. Further, the claims submitted do not appear to have contained adequate particulars, as recognised in the Molloy report. The claims for EOT have not been settled as yet. It is not known how the employers would resolve this, now that they appear to have become "more contractual". I am not expressing any views on the merits of the employers' claims against Boldwin for LADs. I am of the provisional view that there is a prima facie case CSC was in breach of his fiduciary duties in that the construction projects had not been administered in accordance with the contractual provisions.

The audited accounts

100. The complaint is that as the director responsible for the day-to-day affairs of Boldwin, CSC was in breach of sections 122(1), (1A) and (2) of Cap. 32 in that none of the audited financial statements of Boldwin comprising both profit and loss accounts and the balance sheets for the years ended 31 March 1997, 1998, 1999 and 2000 were laid at its annual general meetings during the statutory period as none of such annual general meetings were ever convened. The last annual general meeting of Boldwin was held on 30 December 1996.

101. After LWD was alerted to CSC's mismanagement of Boldwin in late May 1999 as alleged, she had requested for information on the audited accounts on several occasions when she was provided with the audited financial statements for the years ended 31 March 1999 and 2000. In the auditors' report to the annual accounts for these financial years, the auditors made a disclaimer of opinion as to whether the financial statements gave a true and fair view of the company's affairs due to the limited evidence made available to them concerning in particular the validity and correctness of the amount of LADs payable to the employers for the delay in completion of the construction projects undertaken. LWD requested for information and explanation in view of the auditors' qualifications. CSC did not answer or did not answer adequately the queries she raised on the audited accounts. Her attempts to seek such information at meetings of the board of directors were likewise unsuccessful, as the meetings were either aborted or adjourned by CSC.

102. In the draft audited accounts dated 5 March 2002 for the financial year ended March 2001, the auditors stated that they were unable to obtain information and explanation from the directors as to how they have satisfied themselves that Boldwin will be able to meet in full its financial obligations as they fall due in the foreseeable future and how they have satisfied themselves that it is appropriate to prepare the financial statements on a going concern basis. The auditors made a disclaimer of opinion as they had done for the previous years.

103. The above matters would appear not to have been disputed by CSC.

Denial of access to documents

104. This relates to the attempts of LWD to inspect the books and accounts of Boldwin and BF in 2000 and 2001, which were blocked by CSC and which led to the proceedings brought by LWD in HCMP No. 702 and 703 of 2001 February 2001. Eventually, it was ordered by the Court of Appeal on 7 September 2001 that CSC should forthwith provide to LWD and her agents all books and accounts of Boldwin and BF for inspection and for copies to be taken.

No annual general meetings or properly constituted board of directors

105. By section 111 of Cap. 32 and Article 22 of the Articles of Association of Boldwin, a general meeting is required to be held once every year as its annual general meeting and not than 15 months shall elapse after the holding of the last annual general meeting. As mentioned earlier, no annual general meeting of Boldwin has been held since 30 December 1996.

106. It is provided in Article 38 of the Articles of Association that the directors shall hold office for a term of one year and shall retire at the expiration of their terms of office. It is alleged in the petition that as no annual general meeting of Boldwin has been held since 30 December 1996, there is no properly constituted or elected board of directors of Boldwin since 31 December 1997, being the last day on which the 1997 annual general meeting should have been held. I was referred by Mr Poon to In re The Bodega Co. Ltd. [1904] 1 Ch. 276 and In re Consolidated Nickel Mines Ltd. [1914] 1 Ch. 883. It is further alleged that the appointments of Tang Chun Sing and Yu Ho Yuen as additional directors are unlawful and invalid in that they were allegedly appointed at two meetings of the board of directors purportedly held on 26 March 1999 and 7 July 1999 as set out in two minutes signed by CSC as the chairman of the meetings when no such meetings were held. Further, it was stated in the minutes that Tang and Yu were elected by the "subscribers" of Boldwin. By 1999, the subscribers of Boldwin, being LWD and CSC, had long ceased to hold any subscriber share or to be the registered holder of any share in Boldwin.

107. The complaint here is that there is no properly constituted board of directors for Boldwin, although there are de facto directors who have been discharging the functions of directors. The petitioner's position is that it would not be right to allow the de facto directors to continue, in view of conflicting decisions on the effect of an irregularity upon acts affecting shareholders, such as allotting shares, making valid calls, forfeiting shares or appointing directors (see Gore-Browne on Companies, 44th ed., Vol. 2, paragraph 26.5).

108. On behalf of CSC, Mr Chang submitted that the contention that there has been no properly constituted board is misconceived on a number of grounds.

109. Firstly, it was submitted that the provisions relating to rotation of directors, being regulations 73 to 76 of Table A in the First Schedule of Cap. 32, 1975 edition, were incorporated in the Articles of Association. Regulation 76 provides that,

"the company at the general meeting at which a director retires in manner aforesaid may fill up the vacated office by electing a person thereto and in default the retiring director shall be deemed to have been re-elected unless at such meeting it is resolved not to fill up such vacated office."

It was submitted that even if some of the directors of Boldwin should retire by 31 December 1997, the retiring directors were deemed to have been re-elected pursuant to regulation 76.

110. I have reservations if the provisions on rotation of directors, including regulation 76, were adopted in the Articles of Association of Boldwin, in view of Article 38. Even if regulation 76 had been incorporated in the Articles, this provision would not apply if no general meeting of the company were held at all, in breach of Article 22 and section 111 of Cap. 32 (see Buckley on the Companies Acts, 11th ed., p. 745).

111. Secondly, it was submitted that Article 38 would not apply to CSC as he is the managing director. Regulation 68 in Table A provides inter alia that,

"the directors may from time to time appoint one or more of their body to the office of managing director or manager for such term and at such remuneration ... as they may think fit, and a director so appointed shall not, while holding that office, be subject to retirement by rotation, or taken into account in determining the rotation of retirement of directors ...."

Assuming that regulation 68 was incorporated in the Articles, the difficulty here is that there is no evidence of CSC having been appointed as the managing director of Boldwin. The available evidence merely showed that he was the de facto managing director.

112. Thirdly, as regards the alleged irregularity in the appointment of Tang and Yu as additional directors or the irregularity in not holding annual general meetings, reliance was sought to be placed on regulation 88 in Table A which provides that,

"all acts done by any meeting of the directors or of a committee of directors, or by any person acting as a director, shall, notwithstanding that it be afterwards discovered that there was some defect in the appointment of any such director or person acting as aforesaid, or that they or any of them were disqualified, be as valid as if every such person had been duly appointed and was qualified to be a director."

Further, Mr Chang submitted that the Duomaticprinciple referred to earlier (i.e. the informal consent of all the shareholders) could also be invoked.

113. In answer to this, Mr Poon referred to the decision of Morris v Kanssen [1946] AC 459 which held that the provisions equivalent to regulation 88 and section 157 of Cap. 32 were only designed to deal with the situation where there were slips or irregularities in appointment, not with a case with a total absence of appointment, as in the present case. In the latter situation, there was not a defect in the appointment, there was no act at all.

114. It may be that some of the acts done by the de facto directors would be regarded as valid if the Duomatic principle could be invoked. It is not necessary to decide this for present purpose. The point here is whether on the face of it, there is no properly constituted board of directors for Boldwin. I am satisfied that a prima facie case has been made out in this respect.

Allegations of misconduct as regards BF

Exclusion from management of BF and secret bank accounts

115. All the bank accounts in Boldwin and BF used to be operated by CSC and LWD signing singly. After the incidents in May 1999, and in August 1999, LWD requested CSC to convene meetings of the board of directors of Boldwin and BF to change the bank mandates to joint signatories. A meeting of the board of directors of BF was held on 2 September 1999 attended by LWD, CSC and Ann Chan in which it was resolved that all accounts of BF with the Hongkong & Shanghai Banking Corporation ("HSBC") and Hang Seng be operated with LWD and CSC signing jointly in addition to the company chop of BF.

116. Between October 2000 and February 2001, LWD was pressed by the employees of BF acting on CSC's instructions to co-sign a great number of cheques in excess of HK$80 million. LWD did so with reluctance as she regarded the documents or particulars provided to her in support of the payments were inadequate. She was however given to understand that the bank accounts of BF operated by her and CSC jointly were the only sources for BF to discharge its daily expenses and the amounts due to its sub-contractors. In November 2000, CSC refused to supply the monthly bank statements of BF to LWD.

117. A meeting of the directors of BF was purportedly held on 27 November 2000 and attended by CSC and Henry Yip. LWD has challenged the validity of the resolutions passed at this meeting on the ground that LWD and Ann Chan had objected to the short notice of the meeting. According to the minutes of this meeting, it was resolved by CSC and Yip that with effect from 29 November 2000, the mandates for the operation of the accounts of BF with HSBC and Hang Seng be changed to CSC and Yip as joint signatories in addition to the company chop of BF and a new account was to opened with these joint signatories. LWD and Ann Chan received a copy of the minutes on 30 November 2000.

118. Attempts at resolving the dispute on the aforesaid amendment of the mandates were not successful, as a meeting of the board of directors could not be held due to the deadlock among LWD, Ann Chan, CSC and Yip on the election of the chairman of the meeting. Thus, the meetings on 30 November 2000, 4 December 2000, 29 January 2001 and 7 February 2001 were all aborted.

119. It was only after the Court of Appeal had granted the orders for LWD and Ann Chan to inspect the documents of BF and when PwC carried out an inspection as their agent in September 2001 that it was discovered that according to the minutes of a meeting of the board of directors of BF purportedly held at its registered office on 1 September 1999, CSC and Yip had resolved that two bank accounts in the name of BF be opened with Kincheng, Shamshuipo sub-branch and that such accounts be operated by CSC solely with the company chop of BF ("the Kincheng accounts"). It was in the course of inspection of documents by PwC that CSC produced to them three documents addressed to LWD, Ann Chan and himself purporting to be notices dated 17 August 1999 issued by him for convening the meeting of directors allegedly held on 1 September 1999.

120. From 1 September 1999 to July 2001, CSC had, caused a total of HK$1,126,559,000.00 received by BF from the employers as interim progress payments to be paid into the Kincheng accounts operated solely by him, instead of paying the amounts into the accounts of BF at HSBC or Hang Seng which were operated with joint signatures. Substantial amounts have been withdrawn from the Kincheng accounts as in the account ledger of BF for January 2002, it was recorded that the monies standing to the credit of the Kincheng accounts stood at HK$156,183,740.00, a mere 13.86% of the total amounts deposited.

121. It is alleged by LWD that the opening and operation of the Kincheng accounts by CSC were acts done without the authority of the board of directors of BF, as neither LWD nor Ann Chan had received the notices for the meeting of 1 September 1999, nor were they aware of the resolutions purportedly passed at that meeting. It is further alleged that CSC is liable to account to BF for all sums deposited into and withdrawn from the Kincheng accounts of over HK$1 billion. LWD's solicitors had written to the Bank of China (Hong Kong) Limited ("BOC") as the successor in title of Kincheng on 20 December 2001 requesting BOC to refrain from acting in any way to facilitate CSC in operating the Kincheng accounts. The request was turned down by BOC on 28 December 2001 on the ground that the Kincheng accounts had been operating for some time and the bank had no notice of any illegality or irregularity concerning the opening or operating of the accounts until receipt of the letter of LWD's solicitors. BOC requested BF to give them proper authority or instruction or the necessary court order if LWD should require them not to act on the mandate that was given.

122. A meeting of directors convened by LWD on 4 January 2002 for this purpose was aborted because the four directors could not agree on the chairman for the meeting. CSC has continued to operate the Kincheng accounts.

123. CSC's answer to the above allegations is that he had given proper notice of the meeting on 1 September 1999 by faxing the notices dated 17 August 1999 to LWD and Ann Chan and that all the withdrawals from the Kincheng accounts had been recorded and documented.

124. On a provisional basis, I do not think CSC has adduced cogent evidence in answer to LWD's allegations here. I take into account the conduct of LWD from August 1999 when she repeatedly sought information on the financial affairs of Boldwin and BF. It does not seem likely she or Ann Chan would not attend the meeting of directors on 1 September 1999 if they had indeed received notice of the meeting by fax. Further, prior to September 2001, CSC had made no mention of the Kincheng accounts in any of the letters of his solicitors or in his affirmations filed in court. In paragraph 30 of his 1st affirmation filed in HCMP No. 703 of 2002, he complained of LWD's delay in co-signing cheques for BF and alleged that the company was in "great jeopardy" and the consequence of not making punctual payments to its sub-contractors because of LWD's delay would be "very disastrous". I am satisfied a prima facie case of misconduct of CSC has been made out.

Deadlock at board meetings

125. As mentioned above, between 30 November 2000 and 4 January 2002, five meetings of the directors were aborted because the four directors could not agree on the chairman of these meetings. The powers of management of BF cannot be vested in its shareholders exercisable in general meetings as Maintain Profits and Myriad Gold are owned and controlled equally by LWD and CSC.

126. CSC's answer to the deadlock is that this has not affected the ability of BF to deal effectively with its business operations as since the incorporation of BF, he has been vested with full power to manage the business of BF as its managing director "without reference to its Board of Directors, whether in form or in substance". Hence, until his position has been altered by a valid and effective resolution of the board of directors or of the shareholders in general meeting, he is entitled to continue to manage BF as its managing director.

127. I am of the provisional view that if there is complete deadlock and mutual trust and confidence is gone, a good prima facie case to wind up Maintain Profits and Myriad Gold on just and equitable grounds is made out.

No annual general meetings or properly constituted board of directors

128. Since its incorporation, no annual general meeting of BF has been held, in breach of section 111 of Cap. 32 and Article 23 of the Articles of Association. Further, it is alleged by LWD that in view of Article 8 there is no properly constituted board of directors of BF since 23 March 1999, being the last day on which the first ordinary or annual general meeting of BF should have been held.

129. The validity of the appointment of Yip on 1 April 1999 as an additional director is challenged by LWD on grounds similar to those advanced to attack the appointment of Tang and Yu as additional directors of Boldwin.

130. For the reasons I have given in the earlier parts of this decision, I am of the provisional view that LWD has made out a prima facie case that BF does not have a properly constituted board of directors.

Payment of legal fees unrelated to BF

131. Between 16 February 2001 and 31 January 2002, CSC caused to be withdrawn from the Kincheng accounts a total of HK$7,152,811.00 to pay for legal fees incurred on his behalf or on behalf of Yip in legal proceedings to which CSC or Yip or both were parties, including HCMP Nos. 702 and 703 of 2001 and the appellate proceedings, HCA No. 2623 of 2001, and the matrimonial proceedings against LWD being FCMC No. 4917 of 2001. In respect of the legal fees incurred for FCMC No. 4717 of 2001 in the sum of HK$862,866.00, CSC has repaid this amount to BF by a cheque dated 2 February 2002 drawn on his personal account.

132. It is the case of LWD that the payments of such legal fees with the funds of BF were improper as BF has not been a party to any of these proceedings, with the exception of HCMP No. 703 of 2001. As for HCMP No. 703 of 2001, BF was merely named as a nominal defendant; those proceedings were brought by LWD and Ann Chan against CSC and Henry Yip to compel them to permit inspection of the books and accounts of BF. BF was not represented in the proceedings.

133. CSC's answer is that as he and Yip were sued in HCMP No. 703 of 2001 as directors of BF, it is arguable that payment of their legal fees in the proceedings and the related appeal out of the funds of BF at about HK$6.1 million was justified.

134. My provisional view is that there is a prima facie case of misappropriation of assets in this respect.

The Dongguan property

135. According to the minutes of a meeting of directors allegedly held at the registered office of BF on 24 July 2000 and attended by CSC and Yip, it was resolved that BF was to purchase a property at Laguna Verona, Hwang Gang Lake, Dongguan, China ("the Dongguan property") at HK$926,800.00. The Dongguan property is a golf resort bungalow. The provisional agreement for sale and purchase was signed on 27 July 2000. Payment of the purchase price was made from the Kincheng accounts.

136. It is alleged by LWD that the resolution to purchase the Dongguan property was invalid, as neither she nor Ann Chan had received notice of the meeting of directors. Further, the Dongguan property was purchased for an improper purpose in that it was to benefit CSC personally.

137. I am of the provisional view that there is a prima facie case of misappropriation of assets on the part of CSC.

Other misfeasant acts as alleged

138. As in the case of Boldwin, it is alleged these other misfeasant acts as alleged relate to CSC's management of the construction projects undertaken by BF. The complaints are similar. It is alleged that CSC had given substantial discounts to the net tender sum of four projects in the total sum of HK$133,836,000.00. Further, BF is subject to substantial claims of LADs by the employers. The figure as pleaded in the petition is HK$420,398,000.00. The potential liability would appear to have been reduced to HK$317,060,731.00 as a result of EOT claims granted and additional certifications for variations made after September 2001. The relevant figures, taken from the Molloy report, are as follows:

139. For the reasons similar to those given in the earlier parts of this decision, I have reached the provisional view there is a prima facie case of breach of fiduciary duties on the part of CSC in the manner the construction projects of BF were administered.

The audited accounts

140. None of the audited financial statements of BF comprising both profit and loss accounts and balance sheets for the period between its date of incorporation and 31 March 2000 was laid at its annual general meetings during the statutory period required under sections 122(1), (1A) and (2) of Cap. 32 as no annual general meeting was convened since incorporation. Neither the audited accounts for the period ended 31 March 1999 nor those for the following financial year have been approved by the board of directors due to the deadlock. The draft audited accounts for the financial year ended 31 March 2001 have not yet been supplied to LWD. LWD's many attempts to seek explanation and information from CSC on the financial statements were not successful.

Denial of access to documents

141. CSC refused to allow LWD and Ann Chan to inspect the books and accounts of BF and this has led to HCMP No. 703 of 2001, which I have dealt with.

Balancing competing interests - Boldwin

142. I turn to consider if it would be appropriate in all the circumstances to appoint provisional liquidators for Boldwin. This involves balancing competing interests, as the appointment of provisional liquidators is a serious intrusion on the company and should not be taken lightly without adequate reasons.

143. The case for the appointment of provisional liquidators for Boldwin has been put as follows. Firstly, reliance was placed on the serious misconduct, lack of probity and lack of competence of CSC as alleged. It was submitted that he should be removed from his control of Boldwin to prevent further abuses of power. Secondly, there would appear to be deep mistrust between LWD and those in control of Boldwin. The company has apparently been functioning without a properly constituted board of directors for some time, although there are de facto directors. The audited accounts of the company have been heavily qualified by the auditors for several years. It is doubtful if the company has been managed in a proper manner. In these circumstances, it would be desirable for a third party independent from the controversy of the parties to take charge of the company to keep a fair balance between them pending the resolution of the dispute. Thirdly, it was submitted that in view of the foregoing matters, it is necessary to appoint provisional liquidators to preserve the status quo so as to ensure that the assets of the company should remain undiluted, undiverted and properly administered pending the determination of the petition, which is envisaged would take some time to be resolved, in view of the voluminous evidence filed to date and the acrimonious dispute between LWD and CSC in these proceedings and a number of other proceedings. Reliance is placed on the dicta of Harman J in Re a Company (No. 00596 of 1986) [1987] BCLC 133, which was concerned with the appointment of a receiver for the purpose of preserving the company's assets pending the hearing of a petition to wind up on the just and equitable ground or for the purchase of shares, and in which the judge approached the matter in the same manner as in a partnership dispute. The relevant dicta at 135g to 136i read as follows:

"In a partnership dispute, it is almost as of course for the court, where the partners have fallen out and there has to be a dissolution, to order the appointment of a receiver, on motion, at an early stage of the partnership action. That is done to hold the ring, to ensure that the partner or partners who happen to be in possession of the partnership trading assets do not obtain advantage, nor damage the partnership assets to the harm of the dissenting partner, nor siphon them away or otherwise maltreat the partnership affairs. It is done without any judgment of the rights or wrongs in the partnership action or any attempt to take a view as to why the partnership has broken up. It is simply designed to hold the ring and ensure that the status quo of the assets is preserved, that the value of the business is there, so that the whole thing may best be realised for the advantage of all partners in due course. That is particularly the case where there is a business with a going concern and a good-will."

144. The above submissions made on behalf of the petitioner would, on the face of it, appear to justify the appointment of provisional liquidators for Boldwin. I turn to consider whether there are any factors which would militate against this course.

145. Firstly, it was submitted on behalf of CSC that it would be in the interest of Boldwin that the existing directors, in particular CSC, should retain day-to-day management of Boldwin to handle the claims for LADs vis-à-vis the employers and the claims of the sub-contractors. I do not regard this as a matter of weight. Although the appointment of a provisional liquidator operates to transfer to him the powers of the directors who thereby cease to be the company's authorised agents, it does not mean that a provisional liquidator may not retain the services of any director or key staff to carry on the business of the company insofar as that may be necessary for the beneficial winding up of the company.

146. Secondly, it was contended that the assets of Boldwin are not in jeopardy and sufficient interim measures have been implemented to preserve the assets. As at 25 June 2002, Boldwin had a total bank balance of about HK$7 million and since 3 April 2002, the mandates of its accounts have required the joint signatures of CSC and LWD or the joint signatures of one from group A (i.e. CSC, LWD) and one from group B (i.e. Tang, Yu). The petitioner also has the protection of section 182 of Cap. 32 in that any dispositions since the commencement of the winding up would require a validation order. Given the amount of cash balance in the accounts of Boldwin, that Boldwin is not actively trading and the only outstanding matters are the ongoing disputes with the employers and the sub-contractors, it was submitted that to appoint provisional liquidators would be a disproportionate remedy in view of the expenses involved.

147. I agree with Mr Poon here that one should not only be looking at the bank balances in considering the assets to preserve and whether the appointment of provisional liquidators would be a disproportionate remedy. According to the latest available financial statements of Boldwin, which are the draft audited accounts for the year ended March 2001, the current assets stood at HK$133 million, made up of bank balances and cash of HK$11.6 million, properties for sale of HK$1.6 million, trade debtors of HK$12.1 million, retention receivables of HK$78.9 million, other debtors of HK$2.6 million, temporary payments of HK$24.2 million and tax prepaid of HK$2.3 million. There were current liabilities to be discharged in the sum of HK$354.7 million. There would appear to be cash flow problems. The provisional liquidators would need to take possession of not just the bank balances but of other assets and to discharge such liabilities in the ordinary course of business of the company. I accept the petitioner's submission that there are doubts if the company has been managed in a proper manner in the interest of all concerned.

148. Thirdly, it was submitted that there has been undue and substantial delay of the petitioner in seeking the relief and that LWD has an ulterior purpose in bringing the petition. The claims relating to misappropriation of assets, wrongful payment of bonus salary, and misuse of Boldwin's bank account were known to LWD from May to August 1999. It was pointed out that an order for disclosure was made against LWD in the matrimonial proceedings on 25 March 2002 and the three winding-up petitions were presented on 2 April 2002. Further, CSC obtained a Mareva injunction against LWD on 15 May 2002 restraining her from disposing of assets to the extent of HK$110 million. The applications to appoint provisional liquidators were issued on 16 May 2002. It was alleged that the present applications were made to deflect CSC's pursuit of discovery in the matrimonial proceedings and to bring pressure on him so as to achieve a more favourable resolution of the dispute concerning ancillary relief in the matrimonial proceedings.

149. It is true that LWD was alerted to some of the misconduct complained of in the petition in 1999. However, one cannot ignore the attempts she made by herself and through her solicitors in obtaining information and explanation from CSC in 1999 to early 2001, which were largely unsuccessful. She then brought proceedings in HCMP Nos. 702 and 703 of 2001 in February 2001 to assert her right of access to the books and records. The petition for divorce was only filed by CSC in May 2001. The orders for inspection were made by the Court of Appeal in September 2001 and PwC inspected and reviewed the documents and reported their findings to LWD in their report in February 2002. The derivative action was brought by Junestar on 15 March 2002 and the three winding-up petitions were filed on 2 April 2002 with the summonses for the appointment of provisional liquidators issued on 16 May 2002. I do not think there was undue delay on the part of the petitioner. I decline to attach significance to the close sequence of the steps taken in the matrimonial proceedings and in the winding-up proceedings. The important thing to consider is not so much whether LWD has any ulterior motive in present the winding-up petitions but whether she has good prima facie grounds in doing so.

150. For the above reasons, I have come to the view that it would be appropriate in all the circumstances to appoint provisional liquidators for Boldwin.

Balancing competing interests - Maintain Profits and Myriad Gold

151. I turn to consider the position of these companies and BF. Similar submissions were made to justify the appointment of provisional liquidators for Maintain Profits and Myriad Gold. In addition, it was submitted that there is a complete deadlock at the meetings of the board of directors with the result that no business can be transacted at any board meetings. This is clearly an undesirable state of affairs. Unlike Boldwin, BF still remains active in the tender market and is seeking new construction projects, according to the PwC report.

152. The latest audited accounts of BF were for the year ended 31 March 2000. The draft audited accounts for the year ended 2001 are not available. In addition, CSC has produced the management account of BF being the balance sheet as at 31 July 2002 and the cash flow forecast from August 2002 to March 2003. According to the last audited accounts for 2000, current assets were HK$532 million and current liabilities were HK$534 million. According to the management account as at July 2002, current assets were HK$351 million including cash and bank balances of HK$188 million and current liabilities were HK$452 million. The net current liabilities were HK$101 million. Of the bank balances, as at 14 June 2002 HK$106 million were in the Kincheng accounts operated solely by CSC.

153. Mr Chang raised similar objections to the appointment of provisional liquidators for Maintain Profits and Myriad Gold as in the case of Boldwin. In addition, he submitted that it would not be right to appoint provisional liquidators for these companies as there is a real risk that such an appointment would trigger off a takeover of BF by the Cheung Kong Group under an Option Agreement and a Loan Agreement both dated 3 March 1999.

154. The Loan Agreement was made between Presidential Profits Limited ("President Profits", a company incorporated in the British Virgin Islands, the sole shareholder of which is Purple Heart Enterprises Limited ("Purple Heart"); LWD and CSC each held one of the two issued shares in Purple Heart) and Bomina Limited ("Bomina", a member of the Cheung Kong Group) as the lenders and BF as the borrower. By that agreement, the lenders agreed to grant to BF a revolving loan facility of up to HK$350 million. The facility to be granted by the lenders was at the percentage of 70% from Presidential Profits and 30% from Bomina. Under clause 5.05, a profit sharing arrangement is provided in that BF is required to deliver to the lenders its audited financial statements of each year and pay a premium to the lenders calculated with reference to its retained profits (70% of which would go to Presidential Profits and 30% to Bomina). By clause 12.03, any of the lenders may at any time after the happening of an event of default declare the loan and interest and other sums payable under the Loan Agreement have become immediately due and payable. The events of default include the presentation of a petition to wind up BF, Maintain Profits or Myriad Gold or the appointment of a liquidator, receiver or similar officer (clause 12.01(g)) and when CSC ceases to own directly or indirectly the entire issued share capital of Maintain Profits and Myriad Gold (clause 12.01(m)).

155. Mr Chang submitted that an event of default has clearly arisen under the Loan Agreement since 2 April 2002 when the petitions to wind up Maintain Profits and Myriad Gold were presented.

156. The Option Agreement was made between Maintain Profits, Myriad Gold, BF and Bomina and reference was made to the Loan Agreement. By clause 2 of that agreement, Maintain Profits and Myriad Gold granted to Bomina a call option entitling the latter to call upon and require Maintain Profits and Myriad Gold to sell the Option Shares, being the shares of BF representing 30% and under the circumstances specified in clause 5.3(a) thereof, 51% or such higher percentage of the issued share capital of BF as Bomina may elect. Where the call option is exercised in respect of 30% of the issued share capital of BF, the consideration shall be an amount equivalent to the par value of the shares; where the call option is exercised in the circumstances specified in clause 5.3(a), the consideration shall be calculated by a formula with reference to the net worth of BF (clause 4). The call option may be exercised at any time as long as the facility under the Loan Agreement is owing by BF (clauses 1 and 5.1). The event referred to in clause 5.3(a) giving Bomina the right to elect for a higher percentage of shares to acquire is where CSC, for any reason, shall be unable to act as or otherwise cease to be a director of BF or is otherwise disqualified to act as a director of BF.

157. It was submitted by Mr Chang that in the event provisional liquidators are appointed, clause 5.3(a) could be invoked by Bomina to purchase all the shares in BF. This is a risk I should take into account as one of the competing balancing factors. The risk would need to be assessed.

158. As regards the risk of Bomina enforcing the Loan Agreement because an event of default has risen, I ask what would be the damaging effect on BF. Bomina has not taken any action against BF for four months since the petitions to wind up Maintain Profits and Myriad Gold were presented in April 2002. The event of default has occurred, regardless of whether provisional liquidators are to be appointed. The loan payable under the facility granted, as appeared from the management account as at July 2002, is only HK$100,000.00. As for the premium payable to Bomina (being 30% of the retained profits), the figure is not given in the management account. I note from the audited accounts for the year ended March 2000 that the premium payable for the financial years ended 1999 and 2000 was in the aggregate sum of HK$14,189,919.00, of which 30% would be payable to Bomina. Even if Bomina should decide to demand immediate payment of 30% of the loan and the premium, I do not think this would have a serious damaging effect on BF.

159. What of the risk of Bomina exercising its right under the Option Agreement to acquire all the shares of BF? For one thing, the appointment of provisional liquidators for Maintain Profits and Myriad Gold does not necessarily give rise to the event provided for in clause 5.3(a). The directors of Maintain Profits and Myriad Gold will cease to act as such with the appointment of provisional liquidators, not so with the directors of BF, although LWD has sought in the draft order that the provisional liquidators should be given the power to appoint or remove directors of BF as may be necessary to obtain control or management of it for the protection of the interests of Maintain Profits and Myriad Gold in BF. That would be a matter to be considered by the provisional liquidators, if appointed, and no doubt the provisional liquidators would take the risk of acquisition by Bomina into account.

160. In all the circumstances, I am not persuaded that the risks of enforcement of the Loan Agreement and the Option Agreement should tip the balance. I am of the view that it would be appropriate in all the circumstances to appoint provisional liquidators for Maintain Profits and Myriad Gold.

If a Mareva injunction should be granted

161. Much of what I have said above would apply to the consideration of whether it is appropriate to grant a Mareva injunction in having regard to a good arguable case, the risk of dissipation of assets, the balance of convenience, and whether there is undue delay for the application. I am of the view that a Mareva injunction should be granted.

162. I need to consider the limit of the assets that CSC should be restrained from disposing of. Mr Poon has submitted a figure of HK$232,965,676.00 and this is made up as follows:

(1) Proprietary claims

The total amount as pleaded in the Amended Statement of Claim for the proprietary claims is HK$78,746,705.00, being paragraphs 14, 27, 29(1) to (3), and 36. LWD is prepared to give credit for the repayments by CSC and the re-deposits made to Boldwin to set off the drawings against the account of Junestar with Boldwin, with the exception of one re-deposit of HK$5 million on 30 March 1998, which is disputed, as there is evidence in the PwC report that subsequent to the re-deposit of HK$5,806,534.48 on 30 March 1998, HK$5,245,728.82 was drawn on Boldwin's account by a cheque signed by CSC payable to Andreas. The total sum for which credit is given is HK$33,263,989.00 and the net figure thus arrived at is HK$45,482,716.00.

(2) Special damages on other misfeasant acts

These relate to the substantial discounts to the net tender sum given by Boldwin to the employers in the total amount of HK$136,150,000.00 and the deductions made by the employers for the defective work of sub-contractors in the amount of HK$52,448,000.00, being paragraphs 41 and 50 respectively of the Amended Statement of Claim. The total amount under these heads of claim is HK$187,482,960.00.

163. I have no difficulty with imposing a limit of disposal of assets as per the amount of the net claim of the proprietary claims. However, I have difficulty at this stage as to the amount that Junestar would probably be entitled to recover from CSC as special damages on other misfeasant acts. As I have mentioned earlier, it is recognised in PwC's 2nd supplemental report that it is "not unusual" for discounts to be given in order to procure contracts from the employers, what gave rise to concern here is the substantial amount of discounts given, considering the typically low margin of profits for main contractors. Assuming that Junestar should succeed in its allegation that the discounts given are improper and in breach of CSC's fiduciary duty to Boldwin, it does not seem to me that the entire amount of discounts given should be awarded to Boldwin as damages, as allowance should be given to what may have been a proper level of discounts that could legitimately be given. There is no evidence on this at this stage. I do not think it right for an arbitrary figure or percentage to be taken in the absence of evidence.

164. As for the claim for defective work, I also have difficulty as to the amount that Junestar would probably be entitled to recover from Boldwin. At the moment, negotiations are ongoing between Boldwin, the employers and the sub-contractors. Assuming that Junestar should succeed in its allegation that CSC was in breach of fiduciary duty in failing to cause Boldwin to monitor properly the quality of the works of the sub-contractors, it is far from clear at this stage what would be the amount of deduction that Boldwin would need to bear eventually so that it should look to CSC for damages to cover its loss.

165. For the above reasons, I do not propose to take into account the claims for special damages on other misfeasant acts in fixing a limit of the assets that CSC should be restrained from disposing of pending the determination of the derivative action. Accordingly, the limit I would impose for this purpose is HK$45,482,716.00.

166. The other matter I need to consider is the question of an undertaking in damages to be given for the injunction to be granted. What is offered in the draft order is that this undertaking is to be given by Junestar. In her 2nd affirmation filed in HCA No. 1036 of 2002 on 15 July 2002, LWD has deposed that if required by the court, she is prepared to offer a personal undertaking in damages and she has also given an estimate of her personal assets on the basis of her equity interest in a number of companies and her interest as one of the joint tenants of the former matrimonial home. I think it would be appropriate in this instance to require a personal undertaking in damages from LWD as I have been given to understand that the amounts withdrawn from Boldwin in the total sum of about HK$110 million being dividends payable to Junestar have been transferred out from Junestar and this was why a Mareva injunction was made against LWD in the matrimonial proceedings. I am also satisfied that LWD's personal assets should be sufficient to cover reasonable damages she would have to pay in the event that the injunction to restrain disposition of assets of the limit of HK$45 million odd were wrongly made. I do not think it necessary to require LWD to fortify her undertaking in damages.

Orders

167. On the application to appoint provisional liquidators for Boldwin, I make an order that Mr Charles Chan Wai Dune and Mr James Wardell, both of CCIF Corporate Advisory Services Limited, certified public accountants, be appointed joint and several provisional liquidators of Boldwin until the hearing of the petition in HCCW No. 340 of 2002 or further order with their powers limited and restricted as provided in paragraph 2 of the summons with the deletion of sub-paragraph (8), which relates to the sale of assets. The power of the provisional liquidators may be extended to realise assets, if necessary. I decline to provide for this power in the first instance. I make an order in terms of paragraphs 3 and 4 of the summons.

168. On the application to appoint provisional liquidators for Maintain Profits and Myriad Gold, I make an order that the above named individuals be appointed joint and several provisional liquidators of these companies until the hearing of the petition in HCCW No. 345 and 346 of 2002 respectively or further order with their powers limited and restricted as provided in paragraph 2 of each of the summonses with the following amendments:

(1) Paragraph 2(4) is to read "To bring or defend any action or other proceedings in the name and on behalf of the Company or B.F. Construction Company Limited ("BF") as may be considered by the Provisional Liquidators to be necessary for the protection of the Assets". The reference to the presentation of a petition for the winding up of BF is to be deleted.

(2) Paragraph 2(8), which relates to the sale of assets, is to be deleted.

169. I also make an order in terms of paragraphs 3 and 4 of each of the summonses in HCCW No. 345 and 346 of 2002.

170. On the application for a Mareva injunction in HCA No. 1036 of 2002, I make an order in terms of the draft submitted with the following amendments:

(1) The limit of the assets up to which CSC is restrained from disposing of is altered to HK$45,482,716.00. All the references to the previous monetary limit are to be amended accordingly.

(2) Paragraph 1(2)(iv)(a) of the draft order should read "B.F. Construction Company Limited".

(3) Paragraph (2) under "Exceptions to this Order" is to read, "This Order does not prohibit the 2nd Defendant from dealing with or disposing of any of his assets in the ordinary and proper course of any business in which he has an interest".

(4) The undertaking in damages in paragraph (1) of Schedule 2 is to be given by Law Wai Duen, Nina instead of Junestar Investment Corporation.

171. As for the costs of the applications for the appointment of provisional liquidators, I make an order nisi as per each of the summonses that the costs of each application be in the cause of the respective petition with a certificate for two counsel. Regarding the costs of the application for a Mareva injunction, I also make an order nisi that the costs of the application be in the cause of the action in HCA No. 1036 of 2002 with a certificate for two counsel.