TAM PO KEI v. ED FORCES TRADING CO LTD AND OTHERS

HCCW 379/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 379 OF 2007

____________

____________

And

HCMP 1590/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1590 OF 2006

____________

____________

BETWEEN

____________

(Heard together)

______________

J U D G M E N T

______________

INTRODUCTION

1.  The present dispute is between the children of the late Tam Lai Tung (who I shall refer to in this decision, as the parties have done through-out the case, as “Father”) concerning the way in which his eldest son, Tam Bo Kin, managed the affairs of the Company, which is the 6^th Respondent, between about 1972 and Father’s death on 24 August 1989.  The Petitioner, Bo Kei, is Father’s youngest child by his second wife, who although not a party to these proceedings, is a shareholder in the Company and supports his case.  Bo Kei believes that between 1972 and 1989 Bo Kin took advantage of his Father, who was 76 in 1972, and misappropriated money from the Company.  Bo Kin’s other siblings, who share the same mother, have sided with him and accept Bo Kin’s explanations, which I explain in detail later, for the way in which he managed the affairs of the Company.  They do so simply because they are prepared to believe what he says rather than because they have any independent knowledge of the relevant matters.  The dispute has all the hallmarks of long standing and deep rooted resentments, some probably of an emotional rather than a commercial nature, between step relations, which were suppressed whilst the family patriarch was alive, but quickly emerged following his death.  This animosity has resulted in 2 proceedings being issued.  The first, HCMP 1590 of 2006, is a petition presented on 7 August 2006 under section 168A of the Companies Ordinance, seeking various orders, principally, that Bo Kin account to the Company for monies that he has wrongly received from it and that either the Company or Bo Kin purchase Bo Kei’s shares.  The second proceedings, HCCW 379 of 2007, is a petition presented on 21 August 2007 under section 177(1)(a) by the Company for a winding-up order on the grounds that on 9 August 2006 the Company resolved by special resolution at an extraordinary general meeting that it should be wound up.

BACKGROUND

2.  The Company was incorporated in December 1964 and used by Father to invest in property in Hong Kong until his death on 24 August 1989.  The Company was not the sole means by which Father invested in property.  Although, the evidence before me on the subject was sketchy it appears that he also invested in his own name or with others in property in Hong Kong and overseas.  There is a dispute about why the Company was established.  Bo Kei argues that it was established to provide for Father’s children.  The 1^st to 5^th Respondents believe that it was established as a tax effective way for their Father to manage his affairs. Quite what the tax benefit was intended to be is unclear, but presumably if this was the intention it was driven at least in part by estate planning considerations.  On their case their Father treated the Company as his property to do with as he pleased.  He did not intend genuinely to divest himself of any property during his lifetime.  If this is the case it may have saved some tax, but at the significant price of contributing to a breakdown in the relationships between members of the Tam family and resulted in costly litigation.

3.  It is clear that at least during the 1960s Father had absolute control over the Company’s affairs.  This is reflected in the Articles of Association.  Article 9(1) provides that Father shall be the “Permanent Managing Director” of the Company the until he resigns or dies and that he shall have authority to exercise all the power and authority “vested in the Directors generally, and all the other Directors if any, for the time being of the Company, shall be under his control, and shall be bound to conform to his directions in regard to the Company’s business.”  Article 9(2) authorised Father to appoint other directors, determine their powers and duties and fix their remuneration.  Father provided all the capital for the establishment of the business and it is common ground that at least until 1971 he was in control of the affairs of the Company.  During this period he dealt with the assets of the Company as he saw fit and in a manner, which from a corporate government perspective was unsatisfactory.  For example, he appears to have caused the accounting records of the Company to have recorded withdrawals of money from the Company for his own use as payment of salaries and dividends to other directors.  No Party complains about this.  The 1^st to 5^th Respondents do, however, point to this as an example of the way in which their Father viewed the Company and also say it is consistent with their explanation of events which took place after 1971 and which form part of the complaints relied on by the Petitioner, Bo Kei.

4.  Father was borne on the Mainland in 1896.  He had little formal education and could not read or write English.  The 1^st to 5^th Respondents emphasised that he was a traditional Chinese patriarch and that his management of the Company reflected this.  Mr Alan Leong SC, who appeared with Mr King Wong for the 1^st to 5^th Respondents, described him thus in paragraph 1 of his Closing Submissions: “Tam Father…was a conventional Chinese man born in the Tsing Dynasty.  He was evidently the authority in the family, with whom no one dared to disagree.  Wealth of the Family was created by the Father.  Children held properties and monies at Father’s pleasure.  Father enjoyed an absolute discretion as to what assets he gave to whom”.  This was the tenor of the 1^st to 5^th Respondents’ evidence, which in general terms was not disputed by Bo Kei, although he painted a picture of a more approachable parent than his older siblings.

5.  The Company had from the date of its incorporation paid-up capital of HK$1,000,000 divided into 100 shares registered in the following names:

(1)   Father had 20 shares;

(2)   His 3 sons (Po Kei, Bo Kin and Po Yuen) also had 20 shares each; and

(3)   His 4 daughters (You Haup, Chung On, Lai Ching and Mee Ying) had 5 shares each.

6.  As I have explained above Father was appointed as Permanent Managing Director of the Company with the powers contained in article 9 of the Articles of Association.  Bo Kin, You Haup, Lai Ching and Po Kei were appointed as permanent directors who are entitled to hold office for life.  Po Yuen, Chung On and Mee Ying were also appointed directors and entitled to be re-elected as directors at general meetings.  All the parties agree that until 1972 when Bo Kin began to assist his Father in the running of the Company, Father was responsible for managing its business and that no regard was had to the rights and obligations of his children as directors and shareholders.  There is a dispute about the degree of control that Bo Kin had in the management of the affairs of the Company from 1972 to his Father’s death in 1989.  I address this matter in more detail later in this judgment.  It is agreed that until 1989 none of the other siblings had any involvement in the management of the Company.  In particular there is no dispute about the following background matters.  Bo Kei was only 4 when the Company was incorporated and he had no involvement in the management of the Company until December 1989 when he began to investigate its affairs.  Bo Kin had since about 1972, when he was 44, been involved in the day-to-day management of the Company and he accepts that he received payment for so doing.

7.  Po Yuen had since 1960, and possibly earlier, been suffering from schizophrenia.  From 1968 onwards, he was hospitalised for 2 to 3 weeks at a time at Government mental hospitals.  He committed suicide on 29 March 1996.  Po Yuen had no involvement in the management of Company, other than co-signing the audited financial statements of the Company for 1972 to 1974 at the request of his older Brother, Bo Kin.  With the exception of You Haup all Father’s daughters have since the incorporation of the Company lived in the USA and have not returned to Hong Kong on a regular basis.  Chung On and Mee Ying were not involved in the management of the Company until after the Father died when they began to participate at meetings of directors and shareholders indirectly by authorising Bo Kin to represent them.  You Haup and Lai Ching similarly began to participate in meetings after Father’s death. They have consistently sided with Bo Kin.  It does not seem to me to be in dispute that since Bo Kei began his investigations into the affairs of the Company in 1989, the shareholders have divided into 2 camps: Bo Kei and his mother and the 1^st and 5^th Respondents.  Their views are polarised and my impression during the trial was that there was considerable animosity between them.

8.  From 1965, the Company owned various properties, which were transferred from Father to the Company.  The properties were leased to tenants.  By 1989, the Company owned 9 residential and commercial properties.  The total annual rental generated by these properties was between $89,524 in 1965 and $5,241,966.42 in 1991.  Between 1992 and 1993 the Company sold all the properties.  According to its audited financial statements the Company made substantial profits.  In 1968 it made a profit after tax of $60,593.52.  By 1989 this had risen to $2,873,961.80 and the Company had retained profits of $13,614,256.  The Company was, however, run in a very unsophisticated way.  Father managed the affairs of the Company from his home at Man Wah Building.  A joint savings account number 011-2-009881 in the joint names of Father and Bo Kin was opened sometime in 1960s with HSBC.  The joint savings account was used by the Company from at least 1972 until it was closed by Bo Kin on 5 September 1989 at which time he transferred the remaining balance of $503,223.32 to another savings account number 011‑5-641501.  In February 1990, Bo Kin opened a savings and current account at HSBC in the name of the Company.

9.  Father died intestate on 24 August 1989.  Letters of administrations were granted on 4 April 1991 to Standard Chartered Bank Hong Kong Trustee Ltd (“Administrator”).  Following Father’s death differences between Bo Kei and his siblings quickly emerged.  It is Bo Kei’s case that difficulties began to arise following a board meeting that took place on 8 December 1989 to convene an annual general meeting and an extraordinary general meeting to approve the 1989 accounts and dispose of the Company’s properties. Bo Kei asked for copies of the Company’s audited accounts, which Bo Kin refused to give.  Bo Kei instructed Johnson Stokes & Master who made a formal request for inspection of the Company’s books and accounts.  Bo Kei and his Mother were not satisfied with the documents and information with which they were provided and this resulted in proceedings being commenced for the inspection of more documents.  At a hearing on 7 May 1991 undertakings were given by the Company to allow Mrs Tam to inspect documents for the period 1 January 1985 to 31 December 1989 relating to the joint savings account held in the name of the Father and Bo Kin, the Company’s bank accounts and all records submitted to the Company’s auditors.  Mr Alan Tang, then of KPMG, carried out the inspection and he produced a report dated May 1993.  As a result Bo Kei identified a number of matters, which he says constituted misfeasance by Bo Kin.  They are as follows:

(1)   A purported declaration of dividends for the years ending 31 December 1968 to 31 December 1989 in the aggregate sum of HK$12,040,000 of which $2,408,000 was payable but never paid.

(2)   Withdrawals from the joint savings accounts of $27,946,881 between 1 January 1985 and 31 December 1989.  These payments were to Bo Kin, his son, Tam Chung Hong, and other unidentified persons.

(3)   Loans to Bo Kin recorded in the 1983 Accounts to 1989 Accounts totalling $8,996,303.88 together with accrued interest of $12,040,282.  There was no evidence of these loans having been approved by the Company’s directors.

(4)   Payment of directors’ emoluments totalling $5,945,580 recorded in the 1968 Accounts to 2006 Accounts.  These payments had not been approved by the Company in general meeting as required by regulation 65 of the Articles of Association.

10.  There then followed a period of 13 years in which Bo Kei pressed his older brother to address these complaints, which he ignored.  Their relationship continued to deteriorate.  On 29 March 1996, Tam Po Yuen committed suicide.  At a Board meeting held towards 30 December 1989 Bo Kin produced an instrument of transfer purportedly executed by Po Yuen transferring 20 shares registered in his name to Bo Kin and requested the Board to approve the transfer, which they duly did.  This has given rise to an issue because Bo Kei argues that at the time the instrument was executed Po Yuen was a mental patient within the meaning of the Mental Patient Ordinance, Chapter 136, and consequently did not have the necessary capacity to execute the instrument of transfer and that accordingly under section 66 of the Companies Ordinance the registration of the transfer was unlawful.  This is relevant to another complaint concerning the 1^st to 5^th Respondent’s attempts to put the Company into liquidation.

11.  On 18 April 2006, Bo Kin on behalf of the Board convened an extraordinary general meeting to be held on 17 May 2006 for the purpose of passing a resolution to wind up the Company.  This was objected to by the Administrator and Bo Kei.  Bo Kin then convened a Board meeting to be held for the purpose of convening an extraordinary general meeting so that a resolution could be passed to wind up the Company under section 177(1)(a) of the Companies Ordinance and to appoint the Company’s auditors as liquidators.  This was opposed by Bo Kei principally because he thought that it was inappropriate until Bo Kin had properly addressed his complaints about the way in which he had dealt with the Company’s money and secondly, because it was inconsistent with what he understood to be their Father’s intention when setting up the Company, namely, that it was to provide a forum for family members to meet and communicate, although by this time even it had been Father’s intention his children’s relationships had broken down to the point where it could not sensibly be achieved.  The 1^st to 5^th Respondents resolved at a board meeting on 5 June 2006 to convene an extraordinary general meeting on 3 July 2006 for the purpose of considering a resolution to wind up the Company under section 177(1)(a).  This prompted the Administrator to inform Bo Kei solicitors, Wilkinson & Grist, on 6 June 2006 that it had decided to distribute 17 shares in the Company to the beneficiaries in order to let them vote at the extraordinary general meeting.  Bo Kei’s mother was to receive 10 shares and Bo Kin 2; one in his capacity as executor of Po Yuen’s estate.  The remaining siblings were to receive 1 share each.  The transfer did not take place because the 1^st to 5^th Respondents declined Bo Kei’s request to postpone the extraordinary general meeting until after distribution of the shares and informed the Administrator that the Board would not approve the proposed transfer of 17 shares and that the July 2006 extraordinary general meeting would not be postponed.  The extraordinary general meeting was in fact postponed to 9 August 2006, which gave the Administrator the opportunity to lodge instruments of transfer.  However, the 1^st to 5^th Respondent’s refused to register them.  If the shares had been transferred it would not have been possible for the 1^st to 5^th Respondent’s to cause the necessary special resolution to be passed.  The transfer of Po Yuen’s shares to Bo Kei becomes material at this point because it increased Bo Kei votes.

12.  On 7 August 2006 Bo Kin presented the present petition.  Apart from the matters identified by KPMG in their report, he also complains about the manner in which the affairs of the Company have been conducted by Bo Kin with the agreement of the 2^nd to 5^th Respondents after the death of their Father.  The latter group of complaints include the following:

(1)   Approval of the 1989 accounts at the annual general meeting held on 30 December 1989 at which the 2^nd to 5^th Respondents allowed Bo Kin to withdraw a “Confirmation of loan to officers” form recording him as owing $8,996,303.88 to the Company.  This is part of the issue relating to Bo Kei’s claim that Bo Kin account for $8,996,303.88 taken by him from the joint savings account.

(2)   The transfer of 20 shares from Po Yuen to Bo Kin described earlier in this decision, which Bo Kei argues was done so as to enhance Bo Kin’s control over the Company and to extract a larger share of the dividends.

(3)   A denial of Bo Kei’s right to have access to books and records of the Company, which led to the commencement of proceedings to inspect them.  Despite the undertaking given to the court Bo Kei complains that only incomplete books and records were produced to KPMG.

(4)   The attempts to put the Company into liquidation and refusual to approve the proposed transfer of 17 shares by the Administrators in order to prevent a special resolution pursuant to section 177(1)(a) being defeated.

13.  On 21 August 2007 the Company issued a petition on 21 August 2007 seeking a winding up of the Company.

ISSUES

14.  The parties have agreed the following 10 issues.

(1)   Whether the purposes of establishing the Company were:

(a)   generate rental income for the benefit of the late Father’s descendants in the long term; and

(b)   to maintain the relationship between Family members by requiring the children to meet at least once a year at an annual general meeting,

such that it is not open to the 1^s to 5^th Respondents to put the Company into liquidation.

(2)   Whether the late Po Yuen was disqualified from acting as a director of the Company from 1968 onwards by reason of his mental incapacity.

(3)   Whether Father was in complete domination of the Company during his lifetime, such that:

(a)   he had complete control over the Company and made all important decisions for the Company; and

(b)   it was understood and accepted by all the directors and shareholders that he could withdraw money from the Company at any time, at his sole discretion, and for his own use.

(4)   In relation to the foregoing issue, whether Bo Kin was:

(a)   from 1964 until 1970, heavily relied on by Father in conducting the affairs of the Company; and

(b)   from 1972 until Father’s death in 1989, in complete control of the Company’s management and financial affairs due to Father’s loss of eyesight and poor health.

(5)   In relation to purported dividends stated in the Company’s audited financial statements,

(a)   whether such dividends were properly declared;

(b)   whether such dividends were paid and, if so, to whom; and

(c)   whether Bo Kin was liable to account to the Company for dividends wrongfully paid by reason of his (i) control over the Company’s financial affairs, (ii) act in allowing dividends to be improperly declared and paid and/or (iii) act in misappropriating the dividends purportedly declared and paid.

(6)   Whether Bo Kin, between 1 January 1985 and 31 December 1989, wrongfully caused the Company to make payments totalling $27,946,881 out of the joint savings account.

(7)   Whether Bo Kin (a) between 1 January 1983 and 31 December 1993, wrongfully caused the Company to make unauthorised loans to him and (b) on false premises, caused the annual general meeting to resolve that $8,996,303.88 of these loans had been a loan to the late Father rather than him.

(8)   Whether Bo Kin, from 1975 to 2006, wrongfully caused unauthorised directors’ emoluments totalling $5,945,580 to be paid to him.

(9)   Whether the purported transfer of 20 shares from the late Po Yuen to Bo Kin and the Board of Directors’ purported approval of such transfer were invalid and of no legal effect due to the late Po Yuen’s mental incapacity.

(10)   Whether Bo Kei has been denied access to the books and records of the Company and whether complete books and records of the Company pertaining to the period from 1 January 1985 to 5 September 1989 were made available to agents of Bo Kei (KPMG) for their inspection in June 1991.

(11)   Whether the 1^st to 5^th Respondents attempts to put the Company into liquidation was made in bad faith and/or for improper purposes.

(12)   In relation to HCCW 379 of 2007, whether, having regard to the matters complained of by Po Kei in HCMP 1590 of 2006, the 1^st to 5^th Respondents are entitled to cause resolutions to be passed for the purpose of putting the Company into liquidation.

15.  As is immediately apparent determining these issues involves a consideration of events, which took place many years ago. This inevitably creates problems particularly when dealing with the affairs of a company, which did not keep adequate records and which it is common ground was not managed by its directors with proper regard to their obligations under the Company’s Articles or the Companies Ordinance.  In broad terms the parties have approached the case in the following way.  The Petitioner alleges that Bo Kin was asked by their Father to manage the affairs of the Company because his health was deteriorating and, in particular, his eyesight was failing.  In 1970 he had a retina rupture as a result of hypertension.  He suffered from optical nerve degeneration and lost 80% of his sight.  Bo Kei alleges that Bo Kin took advantage of his Father during this period and misappropriated significant amounts of the Company’s money.  Bo Kei points to what he says is prima facie documentary evidence of misappropriation of the Company’s money by Bo Kin, which Bo Kin has failed to explain.  Bo Kin (supported by the 2^nd to 5^th Respondents) responds that Bo Kei exaggerates the state of their Father’s health and the problems with his eyesight.  Their Father was perfectly capable of understanding the affairs of the Company and reading documents when necessary and continued to direct the affairs of the Company albeit with Bo Kin’s assistance.  Everything he did was done at his Father’s direction and in much the same way as it had been done before 1972.  All the shareholders knew this and no one objected.  It is unfair and artificial only after Father’s death to undertake a detailed forensic analysis of the books and records of the Company and to hold Bo Kin accountable for appropriation of the Company’s money, which as a result of poor record keeping and the passing of time Bo Kin cannot explain except in very general terms.

16.  This is a messy dispute with limited evidence available to help me determine it.  In my view it has to be approached in a disciplined way if the court is to avoid being drawn into speculation about motives and actions.  I, therefore, start by considering relevant legal principles.

DIRECTOR’S DUTIES

17.  Ms Chan emphasises in her submissions that the 1^st to 5^th Respondents’ conduct has to be assessed by reference to the duties of a director.  Ms Chan argues that these cannot simply be ignored, because Father had little understanding or regard for them.  There was no material dispute between the parties as to what the relevant law is in this regard.  This being the case I take much of what follows from Ms Chan’s written closing submissions.

18.  It is well established that a director is under a duty to act in good faith.  This incorporates a duty to act in accordance with a company’s constitution.  As described in Ford’s Principles of Corporations Law at §8.160:

“An aspect of directors’ duties which is easily overlooked is the duty to act in accordance with the corporate constitution. This is analogous to the trustee’s duty to adhere to the terms of the trust instrument. It may be analysed as an aspect of the duty to act in good faith in the interests of the company, because the corporate constitution can…..define and set the limits of the company’s interests. The constitution may do so either by purporting to prohibit the company from undertaking certain activities, or by limiting the powers of the board (perhaps by requiring shareholder approval for certain matters).”

19.  The duty of a director to follow the procedures in the company’s constitution was described by Arden LJ in Clark v Cutland [2003] 2 BCLC 393 at paragraph 21:

“it is the duty of directors to follow the appropriate procedures in the company’s constitution as much as it is their duty to apply corporate property only for proper purpose. Failure to obtain appropriate approval and insufficient disclosure is a serious matter. Disclosure plays an important role in company law and the quality of disclosure is important. Disclosure is required for many purposes and it performs at least two valuable functions. It ensures that information is passed from the directors to the shareholders or from one director to another. It also acts as a deterrent against self-dealing. As Brandeis J (a justice of the United States Supreme Court) said extra-judicially, ‘sunlight can be the best of disinfectants’. Meaningless disclosure does not perform these functions and inadequate disclosure is often little better than no disclosure at all.”

20.  Where a director carries out a transaction without obtaining authorisation required by the articles of association, the consequence is that the transaction is without legal effect and not merely voidable.  This was explained by Arden LJ in Clark v Cutland ibid at §26-27:

“[26]…Under this article, directors were not entitled to any remuneration unless it was authorised by the company in general meeting. The judge held that there was no such authorisation in the present case. It follows that the payments of pension contributions to the pension fund trustees were without legal effect and not merely voidable….

[27]…However, where an agent carries out a transaction without authority, the consequence is (as I have stated) that the transaction is without legal effect.  This consequence is more serious in law than that which attaches to a transaction which is voidable since the right to rescind a voidable transaction can be lost.  Because the sanction attaching to an unauthorised transaction is more serious, it must supersede the sanction of voidability that would otherwise attach in the present case.”

21.  A director of course owes a duty to act bona fide in the interests of a company and this imposes a positive obligation on him.  It is no excuse that a director blindly followed the instructions of another director.  A company’s shareholders are entitled to have its officers independently consider and decide the company’s affairs.  I accept Ms Chan’s submission (which I understand not to be in dispute) that as a consequence a director has to justify the propriety of prima facie improper transactions, which he sanctioned even if he did not benefit from them.

22.  I would note in passing that that an unusual feature of the Company’s constitution is that article 9 of the Articles allowed Father “to exercise all the powers authorities and discretions by these presents to be vested in the Directors generally, and all the other Directors if any, for the time being of the Company, shall be under his control and shall be bound to conform to his directions in regard to the Company’s business”. Mr Leong seemed to suggest that this allowed Father to do much what he wanted.  However, Article 9 does not have the effect of empowering Father to exercise all the powers of the shareholders in their capacity as shareholders. Therefore, even if Father had, as Bo Kin alleges, authorised Bo Kin’s dealings with the Company’s money this would not validate transactions that were void for want of shareholder approval.

SECTION 168A

23.  The situations which can give rise to statutory relief under Section 168A are many.  They include misappropriation of company assets, failure to provide information, mismanagement of company’s internal affairs and payment of excessive directors’ remuneration: Victor Joffe, Minority Shareholders, 3^rd ed., paras. 5.140, 5.156-5.164.

EVIDENCE

24.  As I have already mentioned because of the way in which Father chose to arrange his affairs, the passing of time and the limited documentary evidence that is available the issues before the court are not easy to resolve.  Before turning to consider the value of evidence of the various witnesses it is appropriate to say something about the relevant evidential principals.

25.  The principles governing burden of proof in civil cases are described in Phipson on Evidence, 17^th ed., para 6-06, as follows:-

“So far as persuasive burden is concerned, the burden of proof lies upon the party who substantially asserts the affirmative of the issue. If, when all the evidence is adduced by all parties, the party who has this burden has not discharged it, the decision must be against him. It is an ancient rule founded on considerations of good sense and should not be departed from without strong reasons.”

26.  The application of the above principle is illustrated by Seldon v Davidson [1968] 1 WLR 1083.  The Court of Appeal affirmed the decision of the trial Judge that once the defendant admitted that he received payment of money (the subject matter of the plaintiff’s claim), prima facie that payment imported an obligation to repay in the absence of any circumstances tending to show anything in the nature of a presumption of advancement.  If the defendant sought to evade repayment of the money which had been paid to him, the onus was on the defendant to prove the facts which he alleged show that the money was not repayable (at 1088B-G, Willmer LJ): see also Ma Ka Hing v Pak Ming Chung CACV 215/2002 11 November 2003.

27.  If a defendant elects not to adduce evidence which is material to an issue, the court is entitled to draw from the facts which have been disclosed all reasonable inferences as to what are the facts in respect of which the defendant has chosen not to adduce evidence.  The principles were stated by Lord Diplock in British Railways Board v Herrington [1972] AC 877 at 930G-931B as follows:-

“The appellants, which are a public corporation, elected to call no witnesses, thus depriving the court of any positive evidence as to whether the condition of the fence and the adjacent terrain had been noticed by any particular servant of theirs or as to what he or any other of their servants either thought or did about it. This is a legitimate tactical move under our adversarial system of litigation. But a defendant who adopts it cannot complain if the court draws from the facts which have been disclosed all reasonable inferences as to what are the facts which the defendant has chosen to withhold.

A court may take judicial notice that railway lines are regularly patrolled by linesmen and gangers.  In the absence of evidence to the contrary, it is entitled to infer that one or more of them in the course of several weeks noticed what was plain for all to see.  Anyone of common sense would realise the danger that the state of the fence so close to the live rail created for little children coming to the meadow to play.  As the appellants elected to call none of the persons who patrolled the line there is nothing to rebut the inference that they did not lack the common sense to realise the danger.  A court is accordingly entitled to infer from the inaction of the appellants that one or more of their employees decided to allow the risk to continue of some child crossing the boundary and being injured or killed by the live rail rather than to incur the trivial trouble and expense of repairing the gap in fence.”

28.  The relevant principles for drawing adverse inferences in civil proceedings are conveniently summarised by DJ Lam (as he then was) in Ip Man Shan Henry v Ching Hing Construction Company Ltd, HCA 3675/1985, 15 January 2003, at §155:

“(a) if a prima facie case is made out, and if there are evidence available to the party against whom the case is established which could displace the prima facie case, and he omits to call such evidence, an inference could be drawn;

(b) however, the inference could be rebutted by a plausible explanation by the party who elected not to call the evidence;

(c) if an inference is to be drawn, it would be an inference that such available evidence, even if adduced, would not displace the prima facie case;

(d) it is also open to a tribunal of fact, upon the drawing of such an inference, to take it into account in respect of a matter with respect to which the person not called as a witness could have spoken,

i. in deciding whether to accept any particular evidence, which has in fact been given, either for or against that party;

ii. in deciding whether to draw inferences of fact, which are open to them upon evidence which has been given.”

29.  The relevance of these principles in the present case is, Ms Chan argues, that Bo Kin has failed to produce documentary evidence that it must reasonably be assumed has been available during the currency of this dispute.  The court, she argued, should draw from this the inference that such documents contained evidence unhelpful to Bo Kin’s case or putting positively helpful to Bo Kei’s case.

30.  Only Bo Kei gave factual evidence in support of his case.  Bo Kin, Yau Haup, Lai Ching, Tan Bo Cheong (a cousin of Bo Kei) and Yu Yu Kin (the Company’s auditor) gave factual evidence on behalf of the Respondents.  Yu Kai Yun (the Husband of Lai Ching) was not called upon as Bo Kei agreed to admit his affirmation as evidence subject to the point that Father only applied his name chop on the Chinese language receipt dated 2 June 1988 to which his evidence related.

31.  Both parties called an expert accounting witness.  Mr Alan Tang gave evidence on behalf of Bo Kei.  Mr Cheung Yuk Ming gave evidence on behalf of the 1^st to 5^th Respondents.

32.  Bo Kei was a careful witness and I found him to be honest.  There are, however, 2 difficulties with his evidence, which I bear in mind when considering it.  The first is that he had little firsthand knowledge of the material events prior to 1989 and, in particular, in relation to his Father’s accounting practices and the management of the Company’s properties.  Secondly, his attitude towards his siblings.  My impression from his evidence was that his older siblings had never taken much interest in him when young, and they did not give evidence to suggest otherwise.  He probably felt that they saw him and his Mother as interlopers.  He was suspicious of Bo Kei’s conduct of the Company’s affairs as his Father got older and his suspicions and distrust grew as he was rebuffed in his attempts to get information about the affairs of the Company after his Father died.  As a consequence he has become increasingly inclined to view their explanations and recollections sceptically rather than objectively.

33.  I did not find Bo Kin a helpful witness.  To some extent this was because given his age and the passing of time he recollection of events was understandably poor.  On other occasions I accept Ms Chan’s submission that he was evasive or untruthful.  She points to a number of examples in his evidence of unsatisfactory answers to important questions.  He failed to give a satisfactory explanation as to why the In-Out Books from 1972 to 1984 are missing from the disclosed documents.  The In-Out Books are relevant because they would help explain why money was taken out of the joint savings account during this period and possibly answer the complaints made by Bo Kei that Bo Kin had taken money out of the joint savings account for his own use.  Bo Kin accepted that since 1972 he had been responsible for making entries in the In-Out Books.  The In-Out Books are the only contemporaneous documents, which recorded the income, expenditures, directors’ emoluments and dividends paid by the Company.  They are important financial records of the Company, which one would expect to be kept in a safe place.  As Ms Chan pointed out their absence cannot be explained by pointing to a more general loss or disposal of documents.  Rental receipts were produced for all the properties purchased by Father in his and Po Yuen’s names dating back to the 1980s and Bo Kin was able to give detailed information to the 1^st to 5^th Respondents’ expert as to which entries in the joint savings account related to the rental generated by such properties.

34.  When pressed during cross-examination to explain what had happened to the missing In-Out Books he said that he had handed all the Company’s records to his solicitors for the purpose of the proceedings by Bo Kin for an order allowing him to inspect Company documents and he had no idea what had happened to those records thereafter.  These were the same solicitors who act for the Company in the winding-up proceedings.  The solicitors have not given evidence that they may have lost the documents.

35.  The next example given by Ms Chan is Bo Kei’s explanation of what happened to the balance of the joint savings account after it was closed on 5 September 1989.  During cross-examination Bo Kin initially said that there was only about $10,000 remaining in the account when it was closed.  However, after he was shown the relevant page of the passbook he accepted that there was about $503,223.32 and was unable to explain what had been done with what is a substantial sum.  During re-examination he said that the joint savings account was frozen immediately after Father’s death, and the closing balance was subsequently transferred to the Administrator.  This seems highly unlikely as that withdrawal slip shows a transfer to a savings account numbered 011‑5‑041501.  Presumably, if Bo Kin had first caused the money to be paid into his account and then subsequently transferred it to the Administrator he would be likely to remember this and documents could have been obtained from the Administrator to prove his recollection to be correct.

36.  Initially during cross examination, Bo Kin gave evidence consistent with the opening submissions made on behalf of the 1^st to 5^th Respondents, that all the properties purchased by Father, whether under his own name, in Po Yuen’s name or in the joint names of Bo Kin and Father, belonged to Father and that all the rental generated from these properties belonged to Father and could only be used by Father.  However, as the evidence developed he changed his story.  He said that he deposited the rental income from Father’s properties in the joint savings account and used it to finance his share of the construction costs of Wing On Building, a property registered in the names of Father and Bo Kin, which was re-developed in early 1980s.  This suggests that he felt free to use his Father’s money as he saw fit.

37.  Lai Ching’s evidence was of little value.  She has no firsthand knowledge of events prior to 1989.  She has been content to accept Bo Kin’s version of events.

38.  Her Sister, You Haup, was in the same position. Prior to Father’s death she had no involvement in the management of the Company’s affairs neither did she ever discuss the affairs of the Company with Father.  You Haup’s (who is a doctor) evidence is mainly relevant to Po Yuen’s mental capacity.

39.  Mr Yu Yu Kin’s evidence is of no value except in respect of one matter, which I describe in the next paragraph.  He supervised the work carried out by an audit clerk in the preparation of financial statements for the period from 1981 to 1993.  This involved him reviewing the financial statements prepared by the clerk before they were sent to the directors of the Company and signing the auditor’s reports after the directors had signed on the financial statements.  He could not remember having any discussions with Father concerning the Company and did not have any personal knowledge of what information was provided to the audit clerk.

40.  Ms Chan asked Mr Yu during cross-examination whether he was ever requested by the 1^st to 5^th Respondents or the Company to provide them with copies of the audit working papers.  He said that they had not been asked for and that they are no longer available.  Ms Chan argues that if this is the case it calls into question the 1^st to 5^th Respondents’ propriety in dealing with disclosure of documents.  The 1^st Respondent has produced “Confirmations of loans to officers” in support of his case.  If Mr Yu was being honest, and Ms Chan does not suggest otherwise, then it follows that the 1^st to 5^th Respondents have kept these documents.  It is likely says Ms Chan that these documents would have been part of a fuller set of accounting records.  If this is the case it suggests that the 1^st to 5^th Respondents disclosed the confirmations because they thought they were helpful to their case and suppressed the other records that they thought would prejudice their case.  I accept this.

41.  Tam Bo Chong’s evidence was of no value as he admitted in cross-examination that he had never discussed the Company’s affairs with Father.

EXPERT EVIDENCE

42.  Both parties called accountants to give evidence concerning the accounting records of the Company.  Mr Alan Chung Wah Tang, who is now at Grant Thornton, but was previously a partner at KPMG and responsible for a report prepared by that Firm in 1992 gave evidence on behalf of Bo Kei.  The 1^st to 5^th Respondent’s engaged Mr Chueng Yuk Ming. Neither report was satisfactory.  The problem with Mr Tang’s was relatively benign.  It was presented as a report of Grant Thornton.  It should have been a personal report of the witness.  The problem with the report of Mr Cheung was considerably greater.

43.  An expert witness is called to give evidence that assists the court.  The witness should be impartial and not stray into areas, which are the preserve of the court such as making determinations of fact.  The court has repeatedly made it clear that it is important that these criteria are met.  The authority most commonly cited to demonstrate these criteria is generally referred to as “The Ikarian Reefer” (No. 1) [1993] 2 Lloyd’s Rep. 68.  More recently the Rules of the High Court have added a requirement that an expert familiarises himself with a code of conduct contained in Appendix D to the Rules and makes a declaration to the court (Order 38, rule 37(c)) saying that he has read it and agrees to be bound by it.  Mr Chung’s report was prepared before Order 38 rules 37B and C came into force, but I would still have expected him to have been fully informed of his duties to the court and for his report to have been checked by the 1^st to 5^th Respondent’s legal team to ensure that it complied with those duties before it was served.  I told Mr Leong SC’s during the Opening that in my view the Report dated 21 December 2008 was unsatisfactory betraying partiality and containing conclusions in respect of factual questions, which it was for the court to decide.  I will quote one section of the Report, the conclusion in section 9, which illustrates this:

“(a) The dividends during the relevant years were properly declared and paid; Mr Tam Bo Kin has no obligation to explain or account for them;

(b) Mr Tam Bo Kin did not wrongfully cause by the Company totalling HK$27,946,881;

(c) The amount of HK$8,996,304 shown in the current account of a director with the Company as at 31 December 1988 was not an authorized loan wrongfully caused to be made to Mr Tam Bo Kin; and

(d) Mr Tam Bo Kin did not cause unauthorized director emolument totalling HK$5,945,580 to be paid to him”

44.  The report was amended to delete its most egregious defects.  When he came to give evidence he did so in an argumentative manner and in my view gave his evidence with a view to assisting his client rather than providing impartial assistance to the court.  In particular he gave evidence both at page 34 of in his revised Report and in his oral evidence that withdrawals from the joint saving account were not made by Bo Kin although it is apparent from the documents that all withdrawals were authorised by him and Mr Chung could not know how these withdrawals were used.  I found his evidence of little assistance when it related to matters of controversy as opposed to the agreement of figures.

WHO HAS TO PROVE WHAT?

45.  Ms Chan submits that in the present case, in respect of Bo Kei’s complaints about misapplication of the Company’s assets, the burden is on Bo Kei to prove that:-

(1)   Bo Kin was the person entrusted with the day-to-day management of the financial affairs of the Company.

(2)   The Company’s money was, before it was misapplied, in the hands of Bo Kin or under his control.

(3)   There was misapplication of the Company’s money.

46.  If Bo Kei discharges the burden of proving the above 3 matters, prima facie, Bo Kin is liable to account for the misapplication of assets and to justify the propriety of the transactions.

47.  If Bo Kei proves that there was misapplication of the Company’s money, irrespective of whether or not it is also proved that the money was received by Bo Kin, Bo Kin has to justify the propriety of the transactions as, says Ms Chan, he was involved in giving away the money while it was kept in the joint savings account which was at all times under his control.

48.  In relation to the first matter, Ms Chan submits that it is indisputable that Bo Kei was the person entrusted by Father with the day-to-day management of the financial affairs of the Company.  This I do not understand to be in dispute.

49.  In relation to the second matter:

(1)   There is no dispute that all the Company’s money was deposited into the joint savings account of which Bo Kin was an authorised signatory.

(2)   According to Bo Kin’s own evidence, from 1972 onwards, he handled all the deposits into and withdrawals from the joint savings account.  The passbook of the joint savings account was at all times kept by Bo Kin.

(3)   Each and every one of the withdrawal slips for the 5 years from 1 January 1985 to 31 December 1989 were signed by Bo Kin.

50.  The third matter is more complicated and it concerns issues 5 to 8.

ISSUE 1: Whether the purposes of establishing the Company were (a) generate rental income for the benefit of the late Father’s descendants in the long term; and (b) to maintain the relationship between Family members by requiring the children to meet at least once a year at an annual general meeting, such that it is not open to the 1^s to 5^th Respondents to put the Company into liquidation.

51.  In paragraph 10 of the petition Bo Kei states why he says the Company was founded.  He says that it was for the purposes of generating rental income for his Father’s children and grandchildren in the long term and maintaining the relationship between family members by requiring the children to meet at least once a year at an annual general meeting.  Unsurprisingly, as he was only 4 when the Company was formed he is unable to give any evidence about statements his Father made at the time the Company was formed concerning his intentions.  It became apparent during cross-examination that he relies entirely (there being no relevant documents) on conversations he had when he was a boy and after his return from University in the States with his Father about the Company and how companies operated.  He says that his Father had on a few occasions told him that he deliberately named the Company “置業”, meaning “to buy”, because his intention was to keep acquiring properties in order to increase the assets of the Company.  He also told him that the main “principal” (the word used in his answer in cross-examination) in setting up the Company was to increase its assets and properties, share profits generated between his children and grandchildren and to require everybody to attend an annual general meeting.

52.  Even if this is what he was told it is not consistent with the way in which Father arranged or conducted the affairs of the Company.  The Articles do not require all members to attend annual general meetings and in any event during Father’s lifetime no such meetings took place, which would have been an obvious thing to do if he wanted to establish some sort of family tradition or habit of meeting once a year in connection with the Company’s affairs.  It is also unclear in what sense Father anticipated the Company was to benefit his children.  Bo Kei accepts that his Father took money out of the Company between 1965 and 1970, albeit this was recorded in his current account with the Company.  It also seems to me that there is no reason to think, which appears to be what Bo Kei suggests, that the Company was intended to continue to operate indefinitely after his Father’s death.  It would be consistent with what Bo Kei understood his Father to intend that after his death the properties were gradually disposed of and the proceeds distributed between his children in order to meet their needs.

53.  The 1^st to 5^th Respondent’s case is simple.  They do not know what was going through their Father’s mind when he established the Company.  All they know is what he did in practice, which they say was to treat it as his own business.  They assume that he established it for tax purposes.

54.  I do not think that on the basis of the evidence before me that the Petitioner has proved on the balance of probabilities that Father established the Company for the purposes he suggests rather than as a convenient and tax effective way of managing his property investments.  In so far as Bo Kei argues that what he suggests were his Father’s intentions behind setting up the Company is a ground for the court interfering in his siblings attempts to wind up the Company I disagree.

ISSUE 2: Was Po Yuen disqualified from acting as a director of the Company from 1968 by virtue of his mental incapacity.

55.  For reasons discussed in relation to issue 9 I find that Bo Kei has not established that Po Yuen was disqualified from acting as a director from 1968 onwards by reason of his mental capacity.

ISSUE 3: Whether Father was in complete domination of the Company during his lifetime, such that: (a) he had complete control over the Company and made all important decisions for the Company; and (b) it was understood and accepted by all the directors and shareholders that he could withdraw money from the Company at any time, at his sole discretion, and for his own use.

56.  This issue requires me to determine the following questions: Did Father have complete control over the Company and make all its decisions?  Was it understood by all the directors and shareholders that he could withdraw money from the Company at any time and for his own use?

57.  The 1^st to 5^th Respondents say “yes”.  The Petitioner says “no” and cites a number of examples to demonstrate that his Father did not exercise the degree of control over the Company that the 1^st to 5^th Respondents’ assert.  First, he says that sometime in the 1970s Bo Kin objected to his Father’s suggestion that properties on Wai Ching Street owned by the Company should be sold and refused to assist his Father.  I note, however, that Father proceeded to arrange for their sale anyway.  Secondly, Mee Ying and her husband, T C Chen, suggested to Father that he should invest in the US property market and he did so.  I do not see how this sheds much light on Father’s degree of control over the affairs of the Company.  Thirdly, Father consulted You Haup, who is a medical doctor, on what arrangements should be made for Po Yuen and followed her suggestions.  I fail to see how this sheds much light on Father’s degree of control over the Company.  Fourthly, both Bo Kei and Lai Ching gave similar evidence that their Father would consult Bo Kin on business and investment matters.  I do not see how the fact that Father consulted Bo Kin demonstrates that ultimately he could not dictate how the Company’s affairs and assets should be dealt with.  Lastly, Ms Chan pointed to the fact that it was Bo Kin’s evidence that his Father asked in 1963 for his agreement to his marriage to Bo Kei’s Mother and he said that he was not surprised that he did so and thought he should ask.  I accept that this shows a sensitivity on Father’s part to Bo Kin’s feelings about him remarrying and demonstrates a more considered and delicate approach to dealing with his children than the 1^st to 5^th Respondents evidence suggested he adopted, but I do not think that it goes very far in supporting the suggestion that Father did not, as the 1^st to 5^th Respondents contend, see the Company as his creature, with which he could do much as he pleased.

58.  It seems to me that as with a number of other issues, and I have in mind issues 1 and 9, there is an air of artificiality about the exercise, on which the court is being asked to embark in deciding it.  First, there is no evidence of any material disagreement between Father and his children over the affairs of the Company during his lifetime, which resulted in Father backing down from a proposed course of action.  Indeed Bo Kei accepts, and I quote from Ms Chan’s closing, that “father was in general the decision maker for all family matters”.  Secondly, I am asked to decide this question, which concerns matters that took place over 20 years ago on the basis largely of conflicting oral evidence most of which is impressionistic. For example, some of Bo Kei’s evidence entailed his recollection of discussions he heard his Father and Bo Kei having in the living room when he was a teenager working in his bedroom.  Doing the best that I can with the evidence before me I find that Father was able if he so wished to determine how the affairs of the Company were to be conducted and that none of the directors and shareholders would have objected if he told them that he intended to withdraw money from the Company for his own use.  I reach this conclusion, because it is accepted by all parties that Father in general made all decisions concerning the family and was treated with great respect by his children.  He established the Company with his own money and no other shareholder every injected capital into the Company.  His children were financially beholden to him and were unlikely to wish to upset him.  The books of the Company record him as having withdrawn money from the Company in the 1960s for what appears to be his own use.

59.  This issue is not of itself determinative of anything.  Its relevance is mainly creating the setting in which the next issue has to be considered.

ISSUE 4: In relation to the foregoing issue, whether Bo Kin was: (a) from 1964 until 1970, heavily relied on by Father in conducting the affairs of the Company; and (b) from 1972 until Father’s death in 1989, in complete control of the Company’s management and financial affairs due to Father’s loss of eyesight and poor health.

60.  This issue gives rise to the following questions.  From 1972 was Bo Kin relied on heavily by his Father in conducting the affairs of the Company?  From 1972 until his Father’s death in 1989 was Bo Kin in complete control of the Company’s management and financial affairs due to his Father’s loss of eyesight and poor health?

61.  It is not clear in what sense Bo Kei contends that Bo Kin was heavily relied on.  It is not in dispute that from 1972 he was relied on to manage the Company’s day to day affairs as Father’s health declined.  In that sense he was heavily relied on, but it does not seem to me that little turns on this.  What matters is whether or not Father ceased to direct the affairs of the Company or withdraw the Company’s money.  If this is the case it follows that withdrawals after 1972 were Bo Kin’s responsibility.

62.  It is not in dispute that from 1972 onwards Bo Kin collected rent, paid expenses and took over the book keeping of the Company. It is implicit in the Petitioner’s case that conversely Father did very little and in particular did not dictate how the Company’s money was to be dealt with. There is no evidence, however, that Father ceased to direct any of the Company’s affairs.  I have already made reference to Bo Kei giving evidence that he overheard his Father and older Brother discussing the Company.

63.  In respect of this part his case the Petitioner ends up arguing (see paragraph 134 of Ms Chan’s closing) that “as R1 was the only person who dealt with the financial affairs of the Company and had full knowledge of all such matters, it was incumbent upon him to account for the financial affairs of the Company in particular, his dealings with the assets, to the Company and shareholders”.  It seems to me that this is to elide a number of different points.  It does not follow that because Bo Kin made withdrawals from the joint savings account it was his, rather than his Father’s decision that the withdrawals be made.

64.  There is no direct evidence that Father was unaware of the withdrawals.  Ms Chan invites me to infer that this and further to infer that the withdrawals were made improperly.  I am being asked to draw these inferences from very limited primary evidence.

65.  Bo Kin took over the book keeping responsibilities of the Company as his Father’s eyesight deteriorated and was thus, so Bo Kei argues, unable to check the books.  The question of the extent of that deterioration was explored in evidence with Bo Kei saying it was serious and the 1^st to 5^th Respondents saying it was less so.  There is no independent evidence on this issue and no way of testing whose recollection is better.  I am not satisfied on the basis of the evidence before me that the Petitioner has established on the balance of probabilities that Father was incapable of checking documents if he so wished.

66.  Ms Chan argued that as Bo Kin was the only person who dealt with the financial affairs of the Company and had full knowledge of all such matters, it is incumbent upon him to account for the financial affairs of the Company to its shareholders.  This she submitted was an aspect of his fiduciary duty as the director charged with the responsibility of dealing with the financial affairs and assets of the Company.  Ms Chan cited 2 authorities in support of this proposition: Gore-Browne on Companies, paras. 15[5] and 16[1]-[2]; Regal (Hastings) Ltd v Gulliver [1967] 2 AC 134 at 137G-138G, 147A-F, 149A-150B).  As I understand this submission it takes the Petitioner’s case on this issue in a new direction.  Rather than suggest that as a matter of fact Bo Kin was responsible for decisions to withdraw money it involves the assertion that even if he was doing no more than implementing his Father’s instructions as the director responsible for financial matters it was his obligation to check that the instruction was a proper one and ensure that the resulting transfer was recorded properly.  If he did not do so and as a result cannot now explain a prima facie misappropriation than he has breached his fiduciary duty and is liable to account for the resulting loss.  I can see some force in this argument, if the factual position is as simple as Ms Chan’s submission assumes.  As will become apparent when I deal with later issues, which concern withdrawals of specific sums of money I do not that it is.

67.  During Ms Chan’s opening I raised with her the following matter.  If as a matter of fact all the directors and shareholders accepted that Father could do what he liked with the Company how does this impact on the ambit of the another director’s fiduciary duties.  Ms Chan argued in her Closing that Bo Kin’s fiduciary duties remained unaffected even if this was the case and that it was not a justification for Bo Kin to assert that he simply followed what another director told him to do.  Ms Chan referred me to Bishopsgate Investment Management Ltd v Maxwell [193] BCC 120 as demonstrating this.  I do not accept that this is a correct analysis of the situation.  If as a matter of fact the directors and shareholders of a company accept that one director and shareholder can treat a solvent company as his creature and use its assets as his own it seems to me difficult to characterise what would in different circumstances be breach of duty as such for the reason that the parties have agreed expressly or, perhaps as in the present case, tacitly that the best interests of a company are what the dominant shareholder decides and therefore there has not been a failure to act in the best interests of the company or to neglect the company’s interests.  This can be analysed in terms of what represents the interests of a particular company, the act being ratifiable or in terms of estoppel depending on the precise facts.  This accords with common sense because it is both artificial and unfair to suggest that if directors and shareholders accepted, or would have if they had been asked at the time, that a particular act was unobjectionable years later a shareholder can come forward and argue that the act analysed conventionally is in breach of fiduciary duty.  An act that would have been authorised if directors and shareholders had been alive to the need for formal approval by the board or the company, but was not, can be treated as approved and therefore lawful by virtue of the Duomatic principle.  It was explained by Neuberger J (as he then was) in EIC Services Ltd v Phipps [2003] BCC 931 at paragraph 121 and 122 in the following way:

“121. This principle, on which the first and second defendants rely, is named after Re Duomatic Ltd [1969] 2 Ch 365, and it has been expressed in slightly different ways in different cases. In Duomatic itself, Buckley J said at p.373:

‘[W]here it can be shown that all shareholders who have a right to attend and vote at a general meeting of the company assent to some matter which a general meeting of the company could carry into effect, that assent is as binding as a resolution in general meeting would be.’

In Parker & Cooper Ltd v Reading [1926] Ch 975, the principle was expressed in these terms by Astbury J at p.984:

‘[W]here the transaction is intra vires and honest … it cannot be upset if the assent of all the corporators is given to it. I do not think it matters in the least whether that assent is given at different times or simultaneously.’

More recently Meagher JA in Herman v Simon (1990) 8 ACLC 1094 at p.1096 described the principle as:

‘a doctrine that formalities may be disregarded if they have been waived by all shareholders acting in concert who want the same substantial result.’

122. Although the principle has been characterised in somewhat different ways in different cases, I do not consider that that is because its nature or extent is in doubt or the subject of debate.  The difference in language is attributable of the fact that the principle will have been expressed by reference to the particular facts of the case.  The essence of the Duomatic principle, as I see it, is that, where the articles of a company require a course to be approved by a group of shareholders at a general meeting, that requirement can be avoided if all members of the group, being aware of the relevant facts, either give their approval to that course, or so conduct themselves as to make it inequitable for them to deny that they have given their approval.  Whether the approval is given in advance or after the event, whether it is characterised as agreement, ratification, waiver, or estoppel, and whether members of the group give their consent in different ways at different times, does not matter.”

68.  This takes us full circle and demonstrates that the live issue between the parties is whether or not Father did instruct particular payments.  The better argument is that if the books and records of the Company show prima facie misappropriation of money it is necessary for Bo Kin as the director responsible for financial matters to demonstrate that he withdrew money on his Father’s instruction and that if the other shareholders had been told about the withdrawal they would not have objected.

69.  I am not satisfied that Bo Kei has established that between 1964 and 1970 Father relied heavily on Bo Kei in conducting the affairs of the Company.  I accept that from 1972 onwards Father relied heavily on Bo Kei, but I am not satisfied that Bo Kei had, to quote the sub-issue formulated by the parties, “complete control of the Company’s management and financial affairs due to the late Tam Father’s loss of eyesight and poor health”.

ISSUE 5: In relation to purported dividends stated in the Company’s audited financial statements, (a) whether such dividends were properly declared; (b) whether such dividends were paid and, if so, to whom; and (c) whether Bo Kin was liable to account to the Company for dividends wrongfully paid by reason of his (i) control over the Company’s financial affairs, (ii) act in allowing dividends to be improperly declared and paid and/or (iii) act in misappropriating the dividends purportedly declared and paid.

70.  There is no dispute that according to the 1968 to 1987 Accounts, dividends in the aggregate sum of $12,000,000 were said to have been declared and paid and that none of the dividends recorded as attributable to Bo Kei’s shareholding of 20%, namely, $2,408,000, were paid to him.  There is also no dispute that:

(1)   The first annual general meeting of the Company was held on 30 December 1989.  Prior to that no shareholders’ meeting was ever held.

(2)   The first Board meeting was held on 8 December 1989 for the purpose of convening the first annual general meeting which was held on 30 December 1989.

(3)   The 1968 Accounts to 1987 Accounts were never considered or approved by the Board of Directors or the shareholders at any meetings.

(4)   The documents entitled “minutes” of Board meetings or “Directors reports” produced by the Respondents in these proceedings were created by the secretarial department of the auditors and given to Bo Kin, who then asked Father to sign them.

(5)   Bo Kin agreed in cross examination that the chops appearing on the “minutes” or “Directors reports” were applied by him after Father took the chops out from the safe.  Neither Father nor Bo Kin obtained the consent of the other shareholders before Bo Kin applied the chops on the “minutes” or “directors reports”.

71.  Ms Chan submitted that as the 1968 Accounts to 1987 Accounts were never approved by the shareholders at general meetings, the requirements of sections 111 and 122 of the Companies Ordinance and articles 39 and 44 of Table A were breached.

72.  Further, as the declaration of dividends were never considered or approved by the shareholders at general meetings, the requirement of article 89 of Table A, which provides that “The company in general meeting may declare dividends, but no dividend shall exceed the amount recommended by the directors”, was also breached.  It follows, so Ms Chan argues, that the purported declarations of dividends were made in breach of the constitution of the Company and are void and have no legal effect.  The payments made pursuant to such declarations of dividends amount to misapplication of the Company’s assets.  There is thus a prima facie case for Bo Kin to justify the propriety of the dividends wrongfully paid and Ms Chan argues that Bo Kin has failed to discharge that burden.

73.  Bo Kin’s answer to this complaint is that by virtue of article 9 of the Articles, Father had the power to approve, without the knowledge or consent of other shareholders or directors, the audited accounts and the declaration and payment of dividends and that further he had the supreme power to decide all the Company’s affairs without consultation with any of the children.  In my view it is clear on the face of article 9 that it does not go so far as to allow Father to ignore the statutory requirement for the approval of the shareholders in general meeting even if had he convened a general meeting the result would have been a formality.  It also seems to me that even accepting, as I do, that it is highly likely that the other shareholders would have acquiesced to his wishes had he asked them to approve the books of the Company recording dividends to them that they were not in fact to receive, this is not a complete answer to the complaint.  Dividends were not properly declared and were not paid.  The Company’s books incorrectly described certain withdrawals of the Company’s money as payments of dividends.  Prima facie, these withdrawals were improper.  It may be that if he did, as he says, simply comply with his Father’s directions then for the reasons that I have discussed previously he is not liable for what in other circumstances would be a breach of his fiduciary duties, but in my view as the director primarily dealing with the Company’s money and bookkeeping he must establish that he was acting on his Father’s instructions.  His own evidence in this regard is very simple.  He asserts that this is what he did.  His sisters are prepared to support his story, but they do so because they believe him rather than because they have any independent firsthand knowledge that corroborates what he had told them.  I have not been presented by Bo Kin with any evidence that independently corroborates his story.  His Counsel has not presented me with any forensic analysis of the records of the Company and Father’s dealings, which supports Bo Kin.  In determining whether or not he is to believed I have to consider the inherent likelihood of what he is saying being true, his general credibility as a witness and the forensic points made by Ms Chan arising from such financial and accounting information as is available and that concern both the payments of dividends and also the balance of the directors current account and the withdrawals from the joint savings account.  The latter 2 matters I deal with latter in this decision.  The conclusions that I have reached in respect of them are relevant to the present matter as they go to the reliability of Bo Kin’s explanations generally in respect of financial matters.

74.  I accept that it is possible that Father used the Company’s money as his own when it suited his needs and that the creation of fictitious dividends was an expedient created to regularise the Company’s accounting records.  I accept this possibility because the evidence does suggest that Father did not treat the creation of the Company as giving his children property during his life time, but as a convenient vehicle for arranging his affairs.  Balanced against this factor is my general reservation about the reliability of Bo Kin’s evidence.  Most importantly though is what can be gleaned from the financial records of the Company and the questions about the reliability of Bo Kin’s story arising from the way he has dealt with the production of documents and financial information.

75.  Ms Chan suggests that Bo Kin’s explanation is incomplete and full of inconsistencies.  Bo Kin says that all dividends were paid to his Father.  Except for the first dividend that was declared in the year ending 31 December 1968 all dividends were declared and paid at a time when Bo Kin was responsible for the day to day affairs of the Company including making entries in the In-Out Book.  All dividends were paid out of the joint savings account.  According to Bo Kin this included large sums of money.  When he was asked to by his Father to withdraw such sums he would transfer them to his Father’s bank account or draw a cashier’s order in his Father’s name.  He also said in cross-examination that he normally kept records of such withdrawals.  I agree with Ms Chan that if this is true it is reasonable to expect Bo Kin to have obtained and produced documents, which demonstrated that this is what took place, but he has produced none.  In particular he has failed to produce the In-Out Book for the period 1972 to 1989.

76.  It is Bo Kin’s case that his Father decided how much dividends should be declared.  He said that in deciding how much dividend should be declared and paid, Father did not need to refer to any records or consult him.  He said that Father could clearly remember how much money he had withdrawn from the joint savings account.  I find this inherently unlikely.  Bo Kin buttressed this argument by saying that Father’s knowledge of the declaration of dividends is demonstrated by the fact that whenever a dividend was declared by the Company, Bo Kin always made the entries (in Chinese) in the In-Out Book, which he then gave to Father to read.  After reviewing the entries, Father always applied the name chops of all the shareholders on the relevant entries in the In-Out Book, which signified his approval.  Bo Kin said during cross-examination that this practice never changed.  However, it appears from paragraph 9.3 of the KPMG Report that when Mr Alan Tang reviewed the In-Out Books he could find no chops stamped on the In-Out Books for the 5 years from 1985 to 1989.  In this respect I find that Bo Kin was making up evidence to support his case.

77.  The KPMG Report also records that between 1985 and 1989, only about $1,400,000 was recorded as having been transferred to Father, while a total of $4,850,000 was said to have been declared and paid.  When Bo Kin was cross-examined as to this inconsistency, he said that the joint savings account consisted not only of the Company’s money, but also personal funds of Father, Bo Kin and Tam Po Yuen. This is not an answer to the question.  It leaves open the possibility that some of the dividends were paid to Bo Kin.

78.  Ms Chan submitted that Bo Kin’s explanation for the reason Lai Ting required the dividends is implausible.  He said that the dividends were used to invest in US property.  Ms Chan identified a large number of transactions, which she argues demonstrate that Father had considerable assets and had no need to withdraw funds from the Company.

(1)   In 1960, Father purchased No. 121 Chuen Lung Street, Tsuen Wan, in the joint names of Bo Kin and Po Yuen, which were sold by Bo Kin in November 2004 for $33.3 million.

(2)   In 1960, Father purchased No. 123 Chuen Lung Street, Tsuen Wan, in the joint names of Bo Kin and Po Yuen, which were sold by Bo Kin in November 2004 for $33,300,000.

(3)   In 1963, Father purchased Flat 4, 2/F Shek Pik Resettlement in Po Yuen’s name, which was sold by Bo Kin in June 1994 for $5,000,000.

(4)   In 1964, Father purchased G/F, 55 Texaco Road, Tsuen Wan in Bo Kin’s name, which was eventually sold by Bo Kin in April 2005 for $8,600,000.

(5)   In 1964, Father purchased 4/F, 55 Texaco Road, Tsuen Wan in Bo Kin’s name, which was eventually sold by Bo Kin in February 2006 for $9,600,000.

(6)   Between 1969 and 1981, Father remitted an aggregate sum of US$1,077,115 to the USA for investment in real estate.  During the same period, the dividends declared by the Company were only $3,490,000, which was less than half of the amount remitted to the USA.

(7)   By 1976, Father had such substantial financial resources that he could set aside a sum of US$600,000 and place it in a Canadian bank account and leave it as a time deposit for 12 years.

79.  Ms Chan also pointed to the fact that Bo Kin had confirmed during his evidence that his Father had other substantial properties at his disposal:

(1)   Prior to 1971, Father had already bought 4 floors at 268 Des Voeux Road West and, since then, has been receiving all the rental income generated by these properties.

(2)   Father received regular income of tens of thousand dollars from Tam’s Investment, which in turn owned a 6-storey building from which substantial rental was generated.

(3)   In around 1970, the Family together with the Company owned about 50-60 flats or units in Hong Kong, of which the Company owned about 30 units.

(4)   An average unit was worth about $20,000 - $30,000 and in total worth about $2,000,000 to 3,000,000.

(5)   The properties were all mortgage-free.

(6)   The family and the Company received rental totalling tens of thousand dollars each month.

(7)   Father had since the 1930s held 6 founder shares and 606 ordinary shares in Sunbeam, which is an extremely profitable company, which between 1989 and 2005 paid an average dividend of $2,000,000 per annum to Father’s estate.

80.  I accept that Father had considerable assets and that Bo Kin has not demonstrated that he needed to use the Company’s money to fund either his general expenditure or investments.

81.  Ms Chan also points to the fact that when confronted with the fact that no chops had been stamped in the In-Out Book inspected by KPMG, Bo Kin asserted for the first time that the auditors changed the practice of the Company and did not allow him to chop the In-Out Book but instead gave him forms for each shareholder to sign or apply their chops to acknowledging receipt of the dividends.  When this was put to Yu Yu Kin in cross-examination he did not accept that this had taken place although he qualified his answer and said that his audit clerk might have told Bo Kin to change the practice without him knowing.  No such documents have ever been produced.  In my view Bo Kin was not giving honest evidence in this regard.

82.  In respect of this issue I find as follows.  The dividends stated in the Company’s audited financial statements were not properly declared, but they were paid.  Bo Kei has not proved who actually received the dividends that were paid, however, from 1972 Bo Kin was in control of the Company’s financial affairs and is liable to account for the dividends that he wrongfully allowed to be distributed from 1 January 1972.

ISSUE 6: Whether Tam Bo Kin, between 1 January 1985 and 31 December 1989, wrongfully caused the Company to make payments totalling HK$27,946,881 out of the joint savings account.

83.  As I have already explained KPMG inspected the books and records of the Company in June 1991.  KPMG concluded that between 1 January 1985 and 31 December 1989, Bo Kin caused the Company to make payments out of the joint savings account to himself, his son (Tam Chung Hong) and another unknown person.  The withdrawals totalled $27,946,881.00.  Their investigations showed, and I quote from paragraph 3.3.5 of the Report “The sum was made up of the opening balance of some HK$499,000 at 1^st January, 1985 and deposits of some HK$28.9 million into the account during the same period.  Mr Tam Bo Kin had been identified as the recipient of at least HK$22,600,000 out of these withdrawals; the recipients of approximately HK$6 million of the remainder have not been identified”.  KPMG’s inspection of the In-Out Books for the same period showed gross receipts of the Company of $17,025,351.  Their inspection of the joint saving account statements shows total deposits for the same period of $28,965,014.  It follows that $11,939,663 was deposited into the joint savings account from a source other than rental income of the Company.

84.  Ms Chan points out correctly that according to the minutes of a meeting held on 9 March 1993 and attended by the Administrators, Bo Kin and the parties’ respective legal advisers, Bo Kin said that all the funds that passed through the joint savings account were those of the Company and there were no personal funds in it.  Ms Chan went on to submit that on this basis, any withdrawals made out of the joint savings account, which were unrelated to the Company’s business were prima facie a misapplication of the Company’s assets for which Bo Kin has to account.

85.  Bo Kin said at trial that what he stated was wrong and that apart from the Company’s rental income, he also deposited the rental income received from the personal properties owned by him Po Yuen. This, at least initially, would appear to be plausible as the deposits into the joint savings account were greater than the Company’s rental income.  The difference is $11,939,633.  However, as Mr Tang demonstrated during his evidence the matter is more complicated than might at first appear to be the case.  The total deposits of $28,965,014 include transfers from time deposits and other substantial deposits of $10,954,528.  The total withdrawals from the joint savings account for the period 1985 to 1989 included transfers to time deposits of $12,460,747.  Mr Tang could not tell from the transfer advice where the transfers went.  In paragraph 44 of his first affirmation dated 6 November 2006 Bo Kin states that withdrawals were made from the joint savings account and thereafter the principal and interest was deposited back into the joint account.  This is consistent with the withdrawals and deposits representing the circulation of money.  The gross receipts of the Company for the period 1985 to 1989 were $17,025,351.  The net deposits excluding the transfers from time deposits and other substantial deposits (which are unlikely to be rental receipts) is $18,010491.  The difference is $985,140.  The net withdrawals from the joint savings accounts were $17,003,739 (the difference between all withdrawals from the joint savings account, $29,464,486, and the transfers to deposits, $12,460,747).  The total payments recorded in the financial statements were $9,619,554.  The difference is $7,384,185.  As I have already explained the net receipts of the Company for the same period was $7,405,797.  This is extremely close to the difference between the payments recorded in the financial statements and the net withdrawals.

86.  This suggests that Bo Kin was correct when he stated apparently in March 1993 that all the money that went into the joint savings account was the Company’s money.  If this is correct the consequence is that he has to explain why there was only $550,223.33 in the joint savings account when the account was closed.

87.  Bo Kin first suggested that the joint savings account was used for depositing rental income and withdrawing expenses for properties owned by him and Po Yuen in paragraph 43 of his affirmation made on 6 November 2006.  I quote the whole paragraph: “The joint account was a personal bank account for my late father and me.  We used the account for depositing rental income and withdrawing expenses for properties owned by me and my brother Tam Po Yuen.  Since the Company seldom used its current account and was operated in a cash basis through a current account with my late father, all rental income of the Company was also deposited into this joint account. All payments of rather, property tax, maintenance, management fee etc relating to all properties, properties owned by me and my brother as well as those owned by the Company, were all drawn from this account.  From time to time, my late father would instruct me to draw certain monies from the joint account for a variety of other purposes.  I did so as instructed without any questions”. This paragraph is inaccurate.  We know for example that the Company did not have a bank account.  It also begs questions.  Why deposit rental income from Po Yuen’s properties into a joint savings account of Father and Bo Kin?  It also does not attempt to demonstrate that the statement made in February 1993 was wrong.  The reason may be that there is no reference in the petition or Bo Kei’s evidence at this early stage of the proceedings to the statement recorded in the minutes of meeting, which were not exhibited until Bo Kei’s 3^rd affirmation dated 6 August 2007.  The paragraph reads like an off the cuff answer to paragraphs 45 to 47 of the petition by a witness, who had forgotten what he had said 13 years earlier and was unaware of what an analysis of the Company’s financial statement and the joint savings account might reveal.

88.  In section 5 of his original report dated 23 December 2008 Mr Cheung explains, in extremely partisan terms, that Bo Kin’s original statement in 1993 cannot be correct because of the discrepancy between the Company’s rental income and the total amount of the deposits. Mr Cheung did not appear to be alive to the fact that money appeared to be circulating from the joint savings account into time deposits and back into the account.  Mr Cheung did not disagree, however, with Mr Tang’s analysis that was produced during Mr Tang’s evidence in chief.

89.  In his Opening Submissions Mr Leong submitted that Bo Kin could not be said to have misappropriated $27,946,881 of the Company’s money from the joint savings account because the money held in it was not the Company’s money.  I accept that the property in cash received from tenants passed to the owners of the joint savings account when it was deposited, but if the money was being held by them on behalf of the Company, as it clearly was in my view, it does not seem to me that the substance of the complaint is answered by a technical point about title and it is certainly no answer, as Mr Leong suggested in paragraph 54 of his Opening, to say that the joint savings account has no connection with the financial affairs of the Company.  It manifestly did.  In his closing submissions Mr Leong provided no answer to Mr Tang’s analysis of the flow of money into and out of the joint savings account and it is misleading to state, as he did in his written Closing, that Mr Tang confirmed that there were many payments into and out of the joints savings account that were clearly not the Company’s money.  It was accepted during the examination of the experts that the money in the joint savings account was not the Company’s money in a proprietary sense, but it consisted of money received from the Company because the Company did not have its own bank account.  It does not follow that because of the anomalous manner in which Father allowed the Company to be operated that it cannot be shown from an informed analysis of the financial statements and the joint savings account that it is probable that all the money that went into the joint savings account had its origin in deposits made from the Company’s rental income and that when the account was closed there was less in it then there should have been.

90.  In my view Bo Kin was correct in his original statement that the all money that went into the joint savings account came originally from the Company and that the reason why there is a difference between total deposits and the income of the Company is that the large majority of the money was transferred to time deposits and then re-deposited into the joint savings account when the time deposits matured.  The transfers to time deposits totalled $12,460,747 and transfers from time deposits and other substantial deposits totalled $10,954,523.  The difference is $1,506,224.

91.  The analysis carried out by Mr Tang and recorded in the KPMG report for the period 1985 to 1989 shows that $1,400,000 was transferred to Father out of the joint savings account.  Mr Tang confirmed in re-examination that this amount was included in the transfers to time deposits.

92.  This suggests that the difference between the total transfers to deposits and the re-deposits is accounted for largely by the transfer of $1,400,000 to Father.  Ms Chan submitted that it is open to the court in the absence of any explanation for the withdrawal by Bo Kin to infer that it was in reality a repayment by Bo Kin to his Father of income received from the rental of personal properties held in his name but financed by this Father.  I do not accept that primary facts have been proved that allow me to draw this inference.  What I do accept is that Bo Kin has failed to establish that withdrawals of money from the joint savings account that were not re-deposited were transfers to his Father at his Father’s direction.  Having failed to adequately explain the shortfall in the balance of the joint savings account of $550,223.33, when it was closed he is liable to account for it to the Company and I so find.

ISSUE 7 : Whether Tam Bo Kin (a) between 1 January 1983 and 31 December 1993, wrongfully caused the Company to make authorised loans to him and (b) on false premises, caused the AGM to resolve that HK$8,996,303.88 of this had been a loan to the late Tam Father rather than him.

93.  Although there are disputes about withdrawals of the Company’s money there appears to be no other material dispute about the way in which its financial affairs were managed.  The Company always operated its business on a cash basis and had no borrowing.  All the rental income and rental deposits were received in cash and the expenses were paid by cash.  The amounts received and paid were recorded in the In-Out Book which, in turn, was used by the auditors to prepare the financial statements of the Company.

94.  The Company’s surplus cash was, as a consequence of the Company having no bank account, described until 1974 as “Cash in hand” in its audited financial statements.  In the 1974 to 1989 financial statements the surplus cash held in the joint savings account was described as “Current Account with a Director”.  I do not understand there to be any dispute that the amount described in the financial statements for the years 1974 to 1989 as “Current Account with a Director” represented the Company’s money; money, which in a conventionally managed company would have appeared as cash at bank.  This was accepted by the Company’s auditor, Yu Yu Kin, in answer to questions by me.

95.  As at 31 December 1988, the amount recorded under the “Current Account with a Director” was $8,996,303.88.  By 31 December 1989 the amount had increased to $12,040,282.08.  This amount should have been in the joint savings account and available to the Company when the Company opened an account in its own name on 12 February 1990.  Sometime in early 1990 Bo Kin paid $3,043,978.20 into this bank account.  This left $8,996,303.88, which at the time Bo Kin argued was not payable for the following reasons:

(1)   This represented money withdrawn at Father’s direction for his own use as evidenced by the Confirmations that Father signed for the year ended 31 December 1987 recording that he owed the Company $6,313,104.38.

(2)   Father had “used quite a lot of money that he withdrew from the Company” to purchase properties for the family members both in Hong Kong and in the United States.

(3)   Although Bo Kin had signed the Confirmation for the year ended 31 December 1988, thereby acknowledging the fact that he owed $8,996,303.88 to the Company.  The Confirmation was signed by him “on behalf of” Father in October 1988 in order to finalise the audited accounts for 1988.

(4)   A resolution was passed at the annual general meeting of the Company held on 29 January 1991, against the objection of Bo Kei’s objection, resolving that the $8,996,303.88 was a loan to Father.

96.  Bo Kei’s explanation that he signed the confirmation as an accounting expedient rather than as an acceptance that he owed the Company $8,996,303.88, is borne out by the fact that it is common ground that this sum includes $6,313,104.38 in respect of which in earlier years Father had signed confirmations.  As I understood her argument Ms Chan says that this is to miss the point.  The amount recorded as a loan to a director was never anything other than a record of the amount of the Company’s money, which should have been in the joint savings account.  The fact that Father had signed Confirmations in earlier years in respect of such sums cannot be taken as an indication that he was acknowledging that he had borrowed money from the Company. The material question is why should the holders of the joint savings account not account to the Company, for the amount of the Company’s money that should have been in that account and available for transfer to the Company’s account when it was established in February 2010?  In other words the question is whether Bo Kin has established that the Company’s money that he caused to be withdrawn from the joint savings account was withdrawn at his Father’s direction and for his Father’s use?

97.  I can understand why Bo Kei has questioned whether or not $6,313,014.38 should be treated as a sum owed by his Father’s estate.  However, in this case Bo Kin is able to point to a record, the confirmation, as showing his Father as acknowledging that he owed this sum to the Company. Ms Chan suggested that Bo Kin’s explanation of how his Father used this money, to purchase properties for Family members, is unsatisfactorily vague and improbable because of his other resources; a matter I have considered earlier. She also points to the fact that Bo Kin has accepted that he was the person making the withdrawals.  In my view as there is a confirmation signed by Father it is for Bo Kei to prove that the $6,313,014 was used by Bo Kin rather than his Father.  There is no direct evidence of this and I do not think that Bo Kei has proved primary facts from which I could properly draw the inference that Bo Kin used the money himself.  I do, however, accept that the resolution passed at the annual general meeting held on 29 January 1991 is invalid as appropriation of a company’s money to directors themselves is not a matter which can be ratified by the shareholders: see Burland v Earle [1902] AC 83 at 93-94; Cook v Deeks [1916] AC 554 at 564). In conclusion I find that Bo Kei is liable to account for $2,683,199.50 being the difference between $8,996,303.88 and $6,313,104.38 as he has failed to establish that this sum was paid to his Father. 

ISSUE 8 : Whether Tam Bo Kin, from 1975 to 2006, wrongfully caused unauthorised directors’ emoluments totalling HK$5,945,580 to be paid to him.

98.  The accounts of the Company for 1975 to 2006 record $5,945,580 was purportedly paid as “directors’ emoluments”.  There is no dispute about this.  It is Bo Kei’s case that these payments are void and Bo Kin is liable to make restitution of this sum to the Company.  The reasons, which I take from Ms Chan’s closing submissions are as follows:

(1)   They were made in breach of reg. 65 of Table A, which requires approval of the Company in general meeting and no such general meeting has ever been held.

(2)   There was no consent, formal or informal, of all shareholders in respect of such payments.

(3)   They were made by Bo Kin for the purpose of benefitting himself.

99.  Ms Chan submitted that the propriety of what had taken place had to be assessed, and in this respect she must be correct, by reference to the well established principles, which govern the propriety of payments to officers of a company who unless they enter into a service agreement are not employees and are not entitled to be paid for the services they provide as office holder.  A director is an officer of the company and, in the absence of a service contract, is not regarded as an employee of company. A director is not entitled as of right to payment for the work he undertakes as an office holder: Gore-Browne on Companies, para 13[5].  Bowen LJ explained the principle thus in Hutton v West Cork Railway (1883) 23 ChD 654 at 671-673:

“But what is the remuneration of directors? I think it is pretty clear that, like the compensation for loss of the services of the managing director, it is a gratuity. A director is not a servant. He is a person who is doing business for the company, but not upon ordinary terms. It is not implied from the mere fact that he is a director, that he is to have a right to be paid for it……but in some companies, there is a special provision for the way in which the directors should be paid; in others there is not. If there is a special provision for the way in which they are to be paid, you must look to the special provision to see how to deal with it. But if there is no special provision their payment is in the nature of gratuity … Directors, under those circumstances, often do get money. But whenever they get it it is in the nature of a gratuity voted. That does not get rid of the difficulty, because one must still ask oneself what is the general law about gratuitous payments which are made by the directors or by a company so as to bind dissentients….The test there again is not whether it is bona fide, but whether, as well as being done bona fide, it is done within the ordinary scope of the company’s business, and whether it is reasonably incidental to the carrying on of the company’s business for the company’s benefit….The law does not say that there are to be no cakes and ale, but there are to be no cakes and ale except such as are required for the benefit of the company.”

100.  A director is a fiduciary and is under a duty not to make a profit out of his trust or place himself in a position where there is a conflict between his personal interests and his duty as a fiduciary.  However, as noted in Hutton, supra, and in Guinness Plc v Saunders [1990] 2 AC 663 at 692C-E, the strict rules of equity may be relaxed by the articles of association of the company and a director may be entitled to receive remuneration in accordance with the express provisions of the articles of association.  The principle is explained in Palmer’s Company Law, Vol 2, para 8.907 as follows:-

“If, on the other hand, the articles provide that the remuneration of the directors is to be determined by the company in general meeting (as was common early in the 20th century), then the board has no power to act. The directors are entitled only to whatever remuneration is agreed by resolution duly passed at a general meeting, or, alternatively, approved unanimously by all the shareholders entitled to attend and vote at a general meeting. It is not normally sufficient to show the figure taken by directors in the accounts, and the acceptance by the company of the accounts will not in itself authorise remuneration which has not otherwise been authorised. Exceptionally, however, a resolution of the members approving the accounts may be a sufficient authorisation, if all the members are aware that, by being asked to approve the accounts, they are being asked also to approve the remuneration.”

101.  Ms Chan submitted that it follows that where remuneration is paid to a director in breach of the articles of association of a company, the company is entitled to recover the sum paid as an unauthorised payment.  This is so notwithstanding the fact that the payment was approved by the Board of Directors: Kerr v Marine Products Ltd (1928) TLR 292, 293‑294, per Finlay J).  This proposition was not disputed by Mr Leong SC.

102.  Bo Kin’s response to this complaint is that Father made all the entries in the In-Out Book recording the payment of salaries as he saw fit.  Nobody at that time would have questioned what he did and that if the issue had arisen during his Father’s life time all his children, including Bo Kei, would have agreed to ratify his decisions.  He also says that in fact he did not receive director’s fees during his Father’s life time.  He only started to do so after his Father’s death and this was ratified by the Board.

103.  Ms Chan argued that it was not correct that Bo Kin did not receive director’s emoluments.  She points to section 7.20 of Mr Cheung’s Report, which records Bo Kin as having confirmed in an interview with Mr Cheung that he did receive directors emoluments that were recorded in the In-Out Books in his name during the period from 1972 to 1989.  However, in re-examination he sought to qualify this statement.  He said that the interview was conducted in Chinese and Bo Kin might have meant “salary”.  This is speculation.  I accept Ms Chan submission that given the fact that the allegation to which section 7.20 of Mr Cheung’s report was directed was quite clearly dealing with directors emoluments and that Mr Cheung is an experienced certified public accountant he would have made it clear what he asked Bo Kin and would have been careful in recording his answer.  Indeed during his cross-examination he confirmed that what he had recorded in section 7.20 was factually accurate.

104.  Bo Kin attempted to exculpate himself with various explanations of what had taken place.  He suggested that directors’ emoluments were in fact staff salaries, but somehow the auditors labelled them as “directors’ emoluments” in the audited accounts.  He was not able to explain why they would have done so or why this error, if it was one, went uncorrected for years.  It is also inconsistent with the fact that he accepts that he initiated an increase in his directors’ emoluments to $20,000 per month in 1989 and that he continued to receive this until 1992.  He also suggested that he only received a small amount from the Company and the other withdrawals described as directors emoluments were taken by his Father.  There is no evidence of this.

105.  In my view it is likely that what Mr Cheung says Bo Kin told him is correct, namely, that between 1975 and 2006 he received payments of $5,945,580 and I so find.  It seems to be perfectly likely that he did receive the amount recorded in the In-Out Books for the period 1972 to 1989 when he was working full time for the Company.

106.  The minutes of annual general meeting for the financial years ending 31 December 1991 to 31 December 2004 make express reference (except for the years 1996, 1997 and 1999) to a resolution that an emolument of $20,000 per month be paid to Bo Kin for the following year.  This is preceded by a resolution that no director’s fee shall be paid.  I have not been addressed on what is the effect of this resolution and rather oddly in his Opening Submissions Mr Leong seems to refer to these, wrongly, as director’s resolutions to pay a director’s fee.  It may be that he had confused them with the board resolutions included in the financial statements approving them. Be that as it may it seems to me that on a fair reading of what appears in the minute what must have been intended by the drafter is that the emolument represented a payment in the form of a salary for services provided rather than a director’s fee.  In my view these sums ($240,000 multiplied by 11 years, $2,640,000) should be excluded from the calculation of what director’s emoluments were paid to Bo Kin.  It follows that he received director’s emoluments of $3,305,580 between the years 1975 and 1991.

107.  This brings me to Mr Leong’s submission that the payment of such director’s fees as Bo Kin received cannot now be challenged for lack of shareholder approval as all decisions were made by Father and none of the other shareholders would have objected to what he wished to do.  It seems to me that if this factual assertion is probably correct that by virtue of the Duomatic principle, which I have considered earlier, the payments cannot now be challenged on the grounds of lack of shareholder approval.

108.  It seems to me that if Father approved the payments of the director’s emoluments to Bo Kin no shareholder would have objected.  It is quite clear that they were all, including Bo Kei, content to leave matters in their Father’s hands and acquiesce to his wishes.  It would be inequitable for them to now challenge the payments.  The question becomes: did Father approve the payments to Bo Kin? Answering this question is complicated by the fact that Bo Kin in his oral evidence denies receiving them.  However, having found that his initial statements to Mr Cheung were correct and that Bo Kin did receive directors emoluments it seems to me that it is probable that his Father did know that he was receiving such payments and certainly had no reason to object as during the material period Bo Kin worked for the Company.  I also find that if shareholders had been asked during Father’s life time they would have approved them and after his death a majority would have approved them.  I, therefore, conclude that such director’s emoluments as Bo Kin did receive are not recoverable from him.

Issue 9: Whether the purported transfer of 20 shares from the late Po Yuen to Bo Kin and the Board of Director’s purported approval were invalid and of no legal effect due to the late Po Yuen’s mental incapacity.

109.  At a board meeting held immediately after the 1989 annual general meeting, which was attended by Bo Kei and the 1^st to 5^th Respondents, Bo Kin produced an instrument of transfer apparently executed by Po Yuen transferring his 20 shares in the Company to Bo Kin.  The instrument of transfer has not been produced and it is unclear precisely when it was executed, although apparently it was about the time that Po Yuen made his will dated 17 November 1989.

110.  Po Yuen was diagnosed as having schizophrenia in 1960.  Prior to his death on 29 March 1996 he stayed in hospital for somewhere between 15 and 20 days each month.  The remainder of the month he lived with his Father, Madam Tam and for periods with Bo Kei and You Haup.

111.  Bo Kei argues that by virtue of his schizophrenia and his residing in a hospital Po Yuen was a “patient” within the meaning of section 2 of the Mental Health Ordinance, Cap 136, and did not have the capacity to execute an instrument of transfer and accordingly the purported transfer of shares was in contravention of section 66 of the Companies Ordinance and void.

112.  “Patient” in the Mental Health Ordinance “means a person suffering or appearing to suffer from mental disorder”.  “Mental disorder” means “mental illness” a “psychopathic disorder” or “any other disorder or disability of mind which does not amount to mental handicap”.  In her submissions Ms Chan submitted that Po Yuen was a “mentally incapacitated person” which means (see section 2) “a person who is incapable, by reason of mental incapacity, of managing and administering his property and affairs”.  Ms Chan’s argument as formulated in her submissions, as opposed to the way the matter is put in the petition, is that by reason of mental incapacity Po Yuen did not have the capacity to execute the instrument of transfer.  It was not argued that by virtue of the provisions of the Mental Health Ordinance if I was satisfied that Po Yuen satisfied the definitions of patient or mentally incapacitated person it followed that he was deemed not to have the necessary capacity to transfer his property.  I have not had cited to me any law that suggests that simply because a person suffers from a mental illness he is treated as not having the mental capacity to transfer his property.  It would seem to me that whether or not this is the consequence of a mental illness will depend on its severity and whether its symptoms are intermittent or not.

113.  In the present case I have no independent medical evidence concerning Po Yuen’s illness.  All I have is the conflicting evidence of Bo Kei, Bo Kin and You Haup about the severity of the illness.  The latter giving evidence that Po Yuen had lucid periods and was quite capable of making decisions about matters such as how he wished his property to be dealt with during these periods.  Conversely Bo Kei suggests that Po Yuen was constantly seriously affected by this illness.

114.  I have no direct evidence about Po Yuen’s state at the time the instrument of transfer was executed and I do not have any assistance from a psychiatrist in understanding the likely impact of schizophrenia on Po Yuen’s ability to make decisions.  I am not satisfied that I can from the limited evidence before me draw the inference that he lacked the necessary mental capacity to execute the instrument of transfer.  I, therefore, find that the transfer was effective.

ISSUE 10 : Whether Po Kei has been denied access to the books and records of the Company and whether complete books and records of the Company pertaining to the period from 1 January 1985 to 5 September 1989 were made available to agents of Po Kei for their inspection in June 1991

115.  This particular issue is framed as an independent complaint, but its significance is its connection with the complaints about the way in which Bo Kin dealt with the financial affairs of the Company.  Bo Kei suggests that documents were withheld for as long as possible and in some cases he suggests suppressed in order to prevent him investigating how his elder brother had dealt with the Company’s money.  It seems to me clear that the 1^st to 5^th Respondents delayed and avoided providing the documents that Bo Kin requested as long as possible and forced Bo Kin to commence the inspection proceedings to obtain them.  A flavour of the 1^st to 5^th Respondents attitude to Bo Kin’s attempts to obtain inspection of documents is to be found in KPMG’s minutes of a meeting of 21 May 1990 the accuracy of which has not been disputed.  Bo Kin was a director of the Company and in my view he was entitled to inspect the records that he sought.  The 1^st to 5^th Respondents’ obstruction of him doing so was not legitimate.  I am also not satisfied that they made a proper attempt to ensure that all documents were produced.

116.  As a result of the Inspection Proceedings the Company gave undertakings to produce the books and records of the Company for 5 years from 1985 to 1989.  However, only the following records were produced to KPMG:

(1)   Copies of extracts of “Rent Receipt Stubs” from 1985 to 1989.

(2)   Copies of the In-Out Books from 1985 to 1989.

(3)   Copies of passbooks of the joint savings account for the period from 27 December 1984 to 5 September 1989.

(4)   A copy of the HSBC savings passbook in the name of the Company (no. 011-0-041928) for the period from 12 February 1990 to 1 July 1991.

(5)   A copy of HSBC bank statement of the Company (no. 011‑083805-001) for the period from 28 February 1990 to 24 December 1990.

(6)   Copies of the Company’s 1985 to 1989 Audited Accounts.

117.  However, in the Inspection Proceedings Yu Yu Kin made an affirmation stating that the Company had provided the auditors with the following books for the years 1985 to 1989:

(1)   In-Out Book for the relevant year.

(2)   Rental receipt stubs for the relevant year.

(3)   Receipted demand notes for rates for the relevant year.

(4)   Bundle of miscellaneous payment vouchers for the relevant year.

118.  There has been no satisfactory explanation for the absence of documents, which should have been provided.  The 1^st to 5^th Respondents simply say that they cannot find anything other than the documents that they have disclosed.  Neither has there been a satisfactory explanation for the fact that the 1^st to 5^th Respondents have only produced the In-Out Books for 1965, 1970, 1971, 1989 and 1990 to 2005.  During his cross-examination Bo Kin confirmed that he made the entries in the In-Out Books.  He accepted that they were important documents.  He confirmed that they were bound by studs and contained records for 6 to 7 years.  He said that he provided the In-Out Books to his solicitors after proceedings commenced.  He could not explain why some pages were missing.  Ms Chan fairly points out that it is suspicious that substantial parts of the records are missing as one would have expected them to be bound together.  She also fairly points out that there has been no evidence filed to suggest that Bo Kin’s solicitors lost some of the In-Out Books.  In my view these facts allow me to infer that Bo Kin removed pages that he did not wish Bo Kei to see and it is to be presumed that this was unhelpful to his case.

119.  I, therefore, find that Bo Kei had been denied access to the books and records of the Company and that a complete set of the records that were probably available for the period 1 January 1985 to 5 September 1989 were not provided to KPMG.

Issue 11: Whether the 1st to 5th Respondents attempts to put the Company into liquidation was made in bad faith and/or for improper purposes.

ISSUE 12: In relation to HCCW 379 of 2007, whether, having regard to the matters complained of by Po Kei in HCMP 1590 of 2006, the 1^st to 5^th Respondents are entitled to cause resolutions to be passed for the purpose of putting the Company into liquidation.

120.  Bo Kei’s petition was presented on 7 August 2006.  On 5 June 2006 the Company convened an extraordinary general meeting to consider a special resolution for the winding up of the Company under section 177(1)(a) of the Companies Ordinance.  The meeting was postponed until 9 August 2010 at which time the resolution was passed resulting in a petition being presented on 21 August 2007.

121.  The parties, including the Company, accept that the outcome of Bo Kei’s petition determines how I should deal with the Company’s petition.  As I have decided to grant Bo Kei the relief explained in the next section of this decision it follows that I will dismiss the winding-up petition.  It is not necessary for me to say more about issues 11 and 12.

122.  I think that it is, however, desirable to say something about the winding-up petition.  It is well established, and generally well known to lawyers who practice Company Law, that where a dispute arises between shareholders a company should not take an active part in the proceedings.  It is also an abuse of power and a misfeasance for the directors to cause a company to spend money financing a personal dispute between the shareholders: Re a Company No. 004502 of 1998, ex parte Johnson [1991] BCC 234 at 236D-H and 238D-E, per Harman J; Re CG &L Investment Ltd v Wyatt Estates Ltd [1992] 1 HKC 78 (CA) at 82E-83C per Penlington JA.

123.  In their evidence justifying the winding-up petition the 1^st to 5^th Respondents say that they instigated the winding-up because they were tired of what they describe as a litigation nightmare and that it would be the most appropriate way to end this emotional family dispute.  In cross‑examination Bo Kin accepted that he and his siblings had agreed to wind up the Company because they did not want Bo Kin to continue with his investigation. He also accepted in answer to my questioning that the 1^st to 5^th Respondents refused to approve the transfer of 17 shares from the Administrator because they were concerned that after the transfer, Madam Tam and Bo Kin would be able to block any resolution to wind up the Company. Quite clearly in taking steps to put the Company into liquidation the 1^st to 5^th Respondents were attempting to dispose of the shareholders dispute between themselves and Bo Kei and his Mother.  This was to draw the Company into the dispute and was not legitimate.

124.  At the first hearing of the unfair prejudice petition on 6 June 2006 Kwan J (as she then was) made it clear that the Company should not take any step or assume any role in the dispute between the shareholders other than for giving discovery.  Despite this at the pre-trial review it became clear that the Company had ignored these comments and despite having had the relevant authorities drawn to its attention by Ms Chan in her skeleton for the hearing intended to attend the whole trial through counsel.  I explained clearly that this was unnecessary and inappropriate.  Notwithstanding this Mr Maurice Chan appeared on behalf of the Company on the first day of the trial and informed me that he had been instructed to attend the whole trial despite not intending to cross-examine any of the witnesses.  In my view this was quite unnecessary.  It was only necessary for there to be formal attendance by the Company for the purposes of its petition.  Mr Chan told me that the 1^st to 5^th Respondents have paid the Company’s legal costs themselves.  This in my view is appropriate.  They should not be reimbursed out of the Company’s assets and to the extent that the Company does owe its lawyers any legal fees these should be paid by the 1^st to 5^th Respondents.  I would note that if the Company’s solicitors know that some of their fees and disbursements have in fact been paid by the Company they should write to the court forthwith and inform me.

CONCLUSION AND REMEDIES

125.  I am satisfied that the affairs of the Company have been conducted in a manner unfairly prejudicial to the Petitioner, Tam Bo Kei.  There has been a failure to address his legitimate concerns about the way in which his elder Brother managed the financial affairs of the Company and how the Company’s money had been dealt with.  The failure of his siblings to address properly and fairly these concerns has caused a complete breakdown of whatever trust might have at one time existed between them.

126.  In my view it is appropriate that the 1^st to 5^th Respondents buy Bo Kei shares in the Company and I so order.  It is necessary for me to specify the date at which the shares are to be valued.  Generally the court orders that the date of valuation is the date of the order itself, but another date may be ordered if fairness requires it: Profinance Trust SA v Gladstone [2002] 1 BCLC 141 §§60-61 per Walker LJ.  Ms Chan submitted that the precise date chosen makes little difference what is important is the order that I make to remedy the complaints that I have found proved, which will have a consequential effect on the value of the shares.  I have found that:

(1)   In relation to issue 5 Bo Kin is liable to account for dividends declared and distributed after 1 January 1972.

(2)   In relation to issue 6 that Bo Kin is liable to account for the balance in the joint savings account when it was closed of $505,223. 33.

(3)   In relation to issue 7 that Bo Kin is liable to account for the difference between $8,996,303.88 and $6,313,104.38, namely, $2,683,199.50.

127.  In my view there is little point to be served by ordering that Bo Kin makes restitution of the money for which he is liable to account.  The better course is to order that the shares are bought by Bo Kin and valued on the basis that the above sums have been reimbursed to the Company with interest.  I would like the parties to address me on the precise form of words and in particular on how interest should be dealt with as to which I have not had any submissions.  In addition there is the question of costs.  It seems to me that costs should follow the event, but in the case of the winding-up petition there is the additional question of who should bear the costs.  Mr Chan accepted in his Closing Submissions that if the winding-up petition is dismissed the 1^st to 5^th Respondents should bear the costs.  I have doubts as to whether or not this is correct as the evidence adduced before me calls into question whether or not the Company’s legal advisers had properly explained to the 1^st to 5^th Respondents that it was unnecessary to have legal representation throughout the trial.  I make the following directions:

(1)   The Petitioner file and serve within 7 days of the handing down of this decision its proposed form of judgment in both proceedings with such explanatory written submissions as it considers necessary;

(2)   The Respondents file and serve within 7 days thereafter there proposed amendments if any to the proposed form of judgment with explanatory written submissions as they consider necessary;

(3)   The matter is relisted for a 30 minute hearing in the week commencing?