JC SUCCESS LTD v. CHEUNG THEOBALD AYLWIN AND OTHERS

HCMP 595/2022

[2025] HKCFI 3837

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 595 OF 2022

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J U D G M E N T

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1.  This is the trial of the Petition presented by the petitioner, JC Success Limited (富潤創富有限公司) (“Petitioner”), on 16 May 2022 for relief under s.724 of the Companies Ordinance (Cap. 622) (“CO”) on the ground that the affairs of the 5^th respondent, Lao Xue Yuan Holdings Limited (老雪園控股有限公司) (“Company”), have been conducted by the 1^st to 4^th respondents (collectively “Rs”) in an unfairly prejudicial manner.

A.  FACTUAL BACKGROUND

2.  The following facts are either not in dispute or are indisputable. 

A1.  Parties and relevant entities

3.  The main protagonists in these proceedings are:

(1)  Mr Chan Ho Chin (陳豪展) (“Mr Chan”) who together with his wife, Ms Lam Sai Mann Joyce (“Mrs Chan”), own and control the Petitioner.  The Petitioner holds 30% shareholding in the Company.

(2)  Mr Cheung Theobald Aylwin (張程華) (“Mr Cheung”), the 1^st respondent, through his family companies hold 30% shareholding in the Company.  The family companies are (a) the 3^rd respondent, Gastro Koncepts Limited[1] (“Gastro”) and (b) the 4^th respondent, Sky Prosper Limited (尚天有限公司)[2](“Sky Prosper”).  Gastro held 30% shareholding in the Company until 15 November 2019 when the same was transferred to Sky Prosper[3]. 

(3)  Mr Chiang Wai Yuen (蔣偉源) (“Mr Chiang”), the 2^nd respondent, holds 40% shareholding in the Company. 

4.  Amongst them:

(1)  Mr Chan is a seasoned businessman with over 20 years’ experience in food and beverage business.  He started his investment in a chain of Japanese restaurants called “Wako (和幸)”, followed by investments in several Sichuan cuisine restaurants.  He has invested in around 10 restaurants[4].   

(2)  Mr Cheung is an experienced businessman.  His family owns and operates restaurants but none of them provides Shanghai cuisine[5].  This included a Southeast Asian cuisine restaurant in Tin Hau called “Hungry Elephant” owned by Gastro[6].

(3)  Mr Chiang is a chef.  His father, Mr Chiang Biu (蔣標) (“Chiang Senior”), founded and operated a well-known Shanghai cuisine  restaurant called “雪園飯店” in North Point until 2009, followed by the opening of another Shanghai cuisine restaurant known as “小雪園” in Cheung Sha Wan (“Little SG”)[7].  There is no dispute that Chiang Senior established the brand name “雪園” and was recognised by the parties as its owner even though he has never registered the name “雪園” as a trademark.  Mr Chiang acquired his experience and skills in cooking and managing restaurant while working full time at Little SG from 2010 to 2016[8].

5.  The Company is a Hong Kong company incorporated on 16 December 2016.  It is the corporate vehicle used by Mr Chan, Mr Cheung and Mr Chiang to hold their investments in the following assets:

(1)  82% shareholding in Allied Success Group Holdings Limited (興匯集團控股有限公司) (“ASG”), a Hong Kong company incorporated on 18 November 2016 for the sole purpose of carrying on the business of a Shanghai cuisine restaurant called “老雪園”[9] (“Restaurant”) located at the basement of South Pacific Hotel (“Hotel”) at Morrison Hill Road, Wanchai (“Premises”); 

(2)  100% shareholding in Lao Xue Yuan Management Limited (“LXY”), a Hong Kong company incorporated on 7 April 2017 for the purpose of dealing with the administrative matters of the Restaurant including employment and payroll matters and another restaurant subsequently opened by them called “Wako”; and

(3)  The trademarks “小雪園” (TM No. 304057614), “老雪園” (TM No. 304057696) and “老雪園濃油赤醋” (TM No. 304311954).

6.  Mr Chan, Mr Cheung and Mr Chiang are (and have always been) the directors of the Company, ASG and LXY. 

7.  Apart from the Company, ASG has 18 individual shareholders and each of them holds 1% shareholding (collectively “Investors”):

(1)  The Investors are friends of Mr Chan, Mr Cheung or Mr Chiang, and were invited by either one of them to become shareholders of ASG. 

(2)  Amongst the Investors:

(a)  Ms Leung Ka Yin Agnes (梁家賢) (“Agnes”) became an Investor through the introduction of Mr Cheung, who is a friend of her husband, Mr Wong Sze Kin Nelson (黃詩鍵) (“Nelson”), for over 30 years. 

(b)  Mr Chiu Yat Ting Terence (“Terence”) became an investor through the introduction of Mr Chan, who has since 2013 been his business acquaintance.   

(c)  Ms Leung Ching Chee Alda (“Alda”) became an investor through the introduction of Mrs Chan, who has been her acquaintance since 2013. 

8.  The registered office of the Company is at Tung Hip Commercial Building, 244-248 Des Voeux Road Central (“Office”).  The Office is owned by Mr Cheung’s family and has been used as the registered office of all the companies owned by Mr Cheung’s family including Gastro, Sky Prosper and Terraform Management Limited (“Terraform”) and other companies to which secretarial services have been provided by Terraform. 

9.  Terraform is a service company owned and controlled by Mr Cheung’s family[10]. It handled all the financial and administrative affairs of the Company, ASG and LXY including book-keeping, accounting and company secretarial matters at a monthly fee of HK$28,000[11].

A2.  Inception of Company & relevant agreements

10.  Prior to their cooperation in 2016, Mr Cheung, Mrs Chan and Mr Chan had been friends for over 10 years[12], while Mr Chan became acquainted with Mr Chiang through business dealings for over 10 years[13].

11.  In 2016, Mr Chiang raised the idea of opening a Shanghai cuisine restaurant with Mr Chan.  For that purpose, Mr Chan introduced Mr Cheung as a potential investor to Mr Chiang[14].   

12.  After a series of discussions and negotiations, Mr Chan, Mr Cheung and Mr Chiang agreed to establish a joint venture business to run the Restaurant [15].  It was agreed that Mr Chan and Mr Cheung would each contribute HK$1,300,000 in return for 30% shareholding while Mr Chiang would contribute HK$400,000 for 40% shareholding, having regard to the fact that Mr Chiang was the only one who had knowledge and experience in operating a Shanghai cuisine restaurant[16], and would be the key person in (1) overseeing the day-to-day operation of the Restaurant; (2) bringing experienced staff to work for the Restaurant; and (3) securing the usage of “雪園” brand for the Restaurant[17].

13.  Mr Chan was responsible for negotiating and securing the terms of the tenancy in respect of the Premises[18]. 

14.  By Tenancy Agreement dated 16 January 2017 (“Tenancy Agreement”) entered into between South Pacific Hotel (Hong Kong) Limited (as landlord) (“Landlord”) and ASG[19] (as tenant), the Landlord agreed to let the Premises to ASG on the following terms:

(1)  ASG shall lease the Premises for a fixed term of 5 years from 15 February 2017 to 14 February 2022 (“Fixed Term”) (third schedule);

(2)  ASG may exercise an option to renew the tenancy for a further term of 3 years “as set out in Special Condition (10) of the Seventh Schedule” (“Option”) (third schedule);

(3)  The Premises can only be used as restaurant for Shanghai cuisine (fifth schedule);

(4)  ASG is entitled to 60 days’ rent-free period from 15 February to 15 April 2017 (sixth schedule);

(5)  To exercise the Option, ASG shall give notice in writing to the Landlord of its desire to renew the tenancy no later than 6 months before the expiration of the Fixed Term whereupon (a) the Landlord shall enter into a fresh tenancy agreement in respect of the Premises for a further term of 3 years at the market rent, to be determined in accordance with condition 10(b)-(f) but capped at 12% increase or decrease from the last monthly rent under the Tenancy Agreement (“Market Rent”), and (b) ASG shall furnish to the Landlord a deposit equivalent to 3 months’ Market Rent and management fees (if any), subject to the same terms and conditions as the Tenancy Agreement (condition 10(a) of seventh schedule) (“Condition”);

(6)  “品牌: 雪園是香港老牌上海菜餐飲企業, 據有自己客戶及良好口碑, 品牌由蔣先生父親創立及擁有。酒店同意租客以 ‘老雪園’ 為唯一經營品牌, 並於上址經營上海菜館。” (eighth schedule, §2); and

(7)  ASG shall invest HK$1.5 to 2 million in renovating the Premises (eighth schedule, §5). 

15.  By Shareholders’ Agreement dated 1 April 2017 (“SHA”) Gastro, the Petitioner and Mr Chiang agreed, inter alia, as follows:

(1)  “An 8-year lease agreement from 2017 to 2025 has been entered into between [ASG] and [the Landlord] for the rental of the [Premises]” (recital (C));

(2)  The Company has 3 initial shareholders viz., the Petitioner, Gastro and Mr Chiang.  The Company and “individual shareholders” shall enter into separate shareholder agreements in relation to ASG (clauses 2.3-2.4);

(3)  The primary object of the Company is to invest in the Restaurant’s business through ASG (clause 3.1);

(4)  “The business shall be conducted in the best interests of [the Company] in accordance with the Articles and the provisions of this [SHA] and the shareholder agreements between [the Company], individual shareholders and ASG” (clause 3.2);

(5)  The Board shall not carry out the specified action without the prior written consent of all the parties which include:

“(a) …

(b) make a loan or give credit in excess of [HK$20,000] to any individual, firm or company;

(c) sell, transfer, lease, assign or otherwise dispose of a material part of its undertaking, property or assets (or any interest in them), or contract to do so otherwise than in the ordinary and proper course of the business;

(d) enter into a contract, arrangement or commitment involving an expenditure exceeding [HK$20,000];

…

(i) wind up [the Company]” (clause 7.1)

(6)  The amount of capital investment shall be HK$3,000,100 divided into share capital of HK$100 and shareholders’ loan of HK$3,000,000, and the latter is to be contributed by the Petitioner and Gastro as to HK$1,300,000 each and Mr Chiang as to HK$400,000 (clause 9.1-9.3);

(7)  The Company shall use the money received from ASG to repay the shareholders’ loans according to their respective contribution within 30 days of receiving the same with compound interest at 10% per annum (clause 9.4);

(8)  Subject to the Board’s approval, the Company shall use the money it receives from ASG to repay the shareholders’ loans to the parties before distributing any dividends in accordance with clause 11 (clause 9.5);

(9)  Upon termination of the Tenancy Agreement or written consent of all parties to determine the Restaurant’s business, the Board shall cause the realization of all the assets of the Company at prices and on terms to be determined by the Board (clause 15.1);

(10)  On receipt of the proceeds of realization of all assets and discharge of all liabilities, the Board shall cause a final account to be prepared showing the total net profit or loss and upon such account being approved by the Board, each party shall under the direction of the Board receive from or pay to the Company its share of the net profit or loss in the “Agreed Proportion”[20] after taking into account any interim distribution of profit or cash surpluses (clause 15.2);

(11)  Mr Chiang “undertakes not to open, operate, work or manage other similar Shanghainese restaurant(s) in all of Hong Kong during his employment with the Restaurant” (clause 17.1); and

(12)  Mr Chiang “shall not engage in any competition with the business of the Restaurant within 24 months from selling his shares or termination of his employment with the Restaurant”.  He shall “pay a liquidated sum of HK$2.6M to [the Company] if he is in breach of these non-competition clauses”.  He  agrees that the restraints are considered by him to be reasonable for the protection of the business of [the Restaurant]” and the liquidated sum “is not extravagant, exorbitant or unconscionable” (clause 17.2-17.4).

16.  To secure further funding, Mr Chan, Mr Cheung and Mr Chiang invited their friends to invest in the Restaurant, and each of the Investors invested HK$80,000 in exchange for one non-voting share (1% shareholding) in ASG[21].

17.  Each of the Investors entered into an Investors Agreement with the Company (the terms of which are identical) (“Investors Agreement”) regarding the governance and operation of ASG[22].  The Investors Agreement provides, inter alia, as follows:

(1)  “An 8-year lease agreement from 2017 to 2025 has been entered into between [ASG] and [the Landlord] for the rental of the [Premises]” (recital (B));

(2)  “The primary object of ASG is to operate the Restaurant and other related business” (clause 3.1);

(3)  ASG shall have 3 directors to be appointed by the Company.  Investor has no right to appoint any director or to manage ASG or the Restaurant (clause 6.1-6.4);

(4)  The Board shall open a bank account in the name of ASG (“ASG Account”).  The parties’ financial contributions and all sums received in connection with the Restaurant’s business shall promptly be paid into ASG Account (clause 7.1-7.2);

(5)  No payments shall be made or monies withdrawn from ASG Account except as authorized by the Board for the purpose of the Restaurant’s business or to distribute profits.  ASG Account shall be operated in accordance with the mandate laid down by the Board, and all withdrawals shall be signed by 2 authorised signatories (clause 7.3-7.4);

(6)  As for capital investment, the Company shall contribute HK$3,000,000 while the Investor shall contribute HK$80,000 by 31 March 2018 (clause 8.1-8.2);

(7)  Upon termination of the Tenancy Agreement or the written consent of all parties to determine the Restaurant’s business, the Board shall cause the realization of all the assets of ASG on terms to be determined by the Board (clause 14.1); and

(8)  On receipt of the proceeds of realization of all assets and discharge of all liabilities, the Board shall cause a final account to be prepared, and upon approval by the Board, each party shall under the direction of the Board receive from ASG its share of the net profit in proportion to its shareholding,  taking into account any interim distribution of profit or cash surpluses, but the Investor shall not be required to pay any extra money to ASG even if the final account shows a net loss (clause 14.2-14.3).

A3.  Operation of Restaurant and ASG

18.  The capital investment contributed by the Company and the Investors was applied by ASG towards renovating the Premises and operating the Restaurant.  According to the audited financial statements of ASG for the year ended 31 December 2017 (“2017 AFS”), being the first financial year when it operated the Restaurant, a total amount of HK$3,499,093 was incurred of which HK$2,796,838 went to “leasehold improvements”[23]:

(1)  I note that in the 2017 AFS (and the subsequent AFS for 2018 and 2019), the capital investment contributed by the Company and the Investors was not recorded as capital.  Instead, only HK$100 was recorded as capital and the balance was treated as “amount due to holding company” and “amounts due to members”.

(2)  Despite the accounting treatment, it can be seen from clause 8.1-8.2 of the Investors Agreement and the other evidence that all shareholders of ASG regarded themselves as having made capital investment in ASG, and was entitled to receive distribution by way of “dividend”, rather than repayment of any loans advanced by them to ASG.  Similarly, Mr Chan at one stage also requested Mr Cheung to declare “dividend” out of the profits made by ASG (see §81(7) below).  Accordingly, the references to “dividend” in the latter parts of this Judgment are references to what the shareholders of ASG regarded as distribution of ASG’s net profits after discharging all its liabilities. 

19.  Mr Chiang invited many staff of Little SG, who were apprentices of Chiang Senior, to work for the Restaurant[24].

20.  The Restaurant began its operation in early 2017[25].  According to Mr Chiang and Mr Cheung, the Restaurant opened for business in mid-February 2017 while Mr Chan says that it opened for business in May 2017[26].

21.  Until the dispute between Mr Chan and Mr Chiang which arose in July 2019, the modus operandi of the Restaurant/ASG and the respective roles of Mr Chan, Mr Cheung and Mr Chiang were as follows:

(1)  The 3 of them would meet from time to time to discuss the matters concerning the Restaurant or ASG and decisions were made by 2 of them informally. No board meeting or shareholders meeting was ever convened or held.

(2)  Mr Chiang was the only director who attended to and managed the day-to-day operation of the Restaurant including the kitchen and the dining hall[27].

(3)  Mr Cheung regarded himself a passive investor and rarely took part in dealing with the affairs of the Restaurant. 

(4)  All the revenues generated and all the expenses incurred by the Restaurant were paid into and out of ASG Account.  These included those payments required to be made by LXY which would be met out of the funds in ASG Account and be recorded as liability owed by LXY to ASG. 

(5)  Mr Chan, Mr Cheung and Mr Chiang are the authorised signatories of ASG Account, and 2 of them may authorise any payment of HK$50,000 or less.  For payments of more than HK$50,000, all 3 of them have to sign[28].

(6)  All the cheques for payment of the Group’s expenses were prepared by Terraform and presented to Mr Chan for signing and Mr Chiang would co-sign the same. 

22.  As regards the financial and administrative affairs of ASG and the Restaurant:

(1)  The accounting and company secretarial matters have been handled by Terraform.  By an Operation Services Agreement dated 1 April 2019 made between ASG (as principal) and Terraform (as manager), Terraform agreed to manage such matters at a monthly fee of HK$5,000 and additional performance bonus if the monthly sales of ASG reaches HK$1,500,000.

(2)  The administrative and employment matters of ASG and the Restaurant have been dealt with by LXY, and a Management Services Agreement dated 1 July 2019 was entered into by ASG (as principal) and LXY (as manager) whereby ASG agreed to pay a monthly fee of HK$28,000 to LXY.

(3)  Despite the aforesaid service agreements, from 1 December 2020, it was decided that ASG would pay Terraform the monthly fee of HK$28,000 directly without the involvement of LXY[29].    

23.  The fact that Mr Chiang had more substantial involvement in and was pivotal to the operation of the Restaurant is reflected in his remuneration:

(1)  Mr Chiang was employed by ASG as manager and was paid (a) a monthly salary of HK$40,000; (b) HK$12,000 per month as “housing allowance” (“Housing Allowance”), although there is a dispute as to whether Mr Chiang was entitled to receive Housing Allowance during the entire period of employment (as Rs contend) or merely ad hoc reimbursement for hotel accommodation expense actually incurred by him for the first 3 months (as the Petitioner contends); and (c) the amount charged against all customers for pre-meal snack (泡菜金) (“Pickle Money”)[30]. There is a dispute as to whether the Pickle Money should be shared amongst the staff (as the Petitioner says) or be used by Mr Chiang at his discretion (as Rs say).

(2)  In addition, Mr Chiang would be paid director’s emolument at HK$10,000 per month if the turnover of the Restaurant exceeded HK$1,500,000, and HK$2,000 for every HK$100,000 turnover above HK$1,500,000[31]. 

(3)  By contrast, Mr Chan and Mr Cheung were entitled to receive director’s emolument at HK$5,000 per month which would be increased to HK$15,000 if the turnover of the Restaurant exceeded HK$1,500,000[32].

24.  In the first 3 years, the Restaurant continued to operate at a profit.  According to the 2017 AFS and ASG’s audited financial statements for the years ended 31 December 2018 (“2018 AFS”) and 31 December 2019 (“2019 AFS”)[33]:

(1)  In 2017, ASG’s turnover was HK$14,902,496 while its net profit[34] was HK$1,874,308.

(2)  In 2018, ASG’s turnover was HK$21,066,264 while its net profit was HK$1,312,318.

(3)  In 2019, ASG’s turnover was HK$19,102,542 while its net profit was HK$357,752.

25.  The Restaurant suffered a loss in 2020 but was able to return to profitable operation in 2021 despite the effect of the pandemic[35].  According to the unaudited financial statements of ASG (“Unaudited FS”), during the period from January 2020 to February 2022, the turnovers, net operating profits and net profits of ASG were as follows:

Period	Turnover (HK$)	Net operating profit[36] (HK$)	Net Profit[37] (HK$)
Jan-Dec 2020	10,795,103	441,803	(335,838)
Jan-Mar 2021	2,602,826	(19,757)	(215,667)
Apr-Jun 2021	5,875,932	1,537,217	1,340,557
Jul-Sep 2021	7,254,895	1,704,573	1,507,032
Oct-Dec 2021	8,438,598	2,290,685	2,010,645
Jan-Feb 2022	1,793,210	(549,401)	(681,095)

A4.  Dispute between Mr Chan and Mr Chiang/Mr Cheung

26.  In 2018, Mr Chan, Mr Cheung and Mr Chiang (together with other investors) decided to open a teppanyaki restaurant in the name of Wako at the 2^nd floor of the Hotel (“Wako”), to be managed by Mr Chiang and for which he would be paid HK$5,000 per month; and LXY would deal with the administrative matters and would pay its expenses when necessary[38]. 

27.  However, Mr Chiang’s involvement in Wako only lasted a few months during which it continued to suffer a loss.  Mr Chan considered that Mr Chiang did not know how to manage a Japanese cuisine restaurant and blamed him for the loss.  This caused the relationship between Mr Chan and Mr Chiang to become strained and the 2 of them began to have disagreements over the business of Wako and the Restaurant[39].

28.  Another source of disagreement came in 2019 when Mr Cheung asked Mr Chiang to assist in managing Hungry Elephant in return for HK$20,000 per month.  Mr Chan was aware of the arrangement and considered that it was inappropriate for Mr Chiang to work for Hungry Elephant as he was a full time employee of ASG but he did not raise any objection.  Instead, Mr Chan objected to ASG continuing to pay the Housing Allowance whereupon Mr Cheung caused Hungry Elephant to pay the same to Mr Chiang[40].

29.  In July 2019, the relationship between Mr Chan, Mr Cheung and Mr Chiang began to deteriorate[41]. The parties put forward different reasons for the change:

(1)  On the Petitioner’s case, Mr Chan was concerned about Mr Chiang’s frequent absence from the Restaurant, and the fact that Mr Cheung had been paying Mr Chiang to work for Hungry Elephant.[42]

(2)  On Rs’ case, Mr Chan allegedly started bullying and acting disrespectfully towards Mr Chiang and sought to oust Mr Chiang from the business.[43]  This is denied by Mr Chan.[44]

A5.  SG Group

30.  On 17 November 2021, a new company in the name of 雪園集團有限公司 (“SG Group”) was incorporated in Hong Kong[45] in that:

(1)  Its shareholders are Mr Cheung, Mr Chiang, Jackel and Agnes;

(2)  Its directors are Mr Cheung, Mr Chiang and Nelson;

(3)  Its registered office is the Office while its company secretary is Ms Li; and

(4)  It has not carried on any business and has no asset. 

A6.  Closure of Restaurant

31.  ASG did not exercise the Option whereupon the Tenancy Agreement came to an end on 14 February 2022 and the Restaurant was closed on the same day.  The parties put forward different reasons for the end of the tenancy and the closure:

(1)  Mr Chan says that he was under the impression that the tenancy was for a period of 8 years.  He was not aware that ASG had to exercise the Option before the expiry of the Fixed Term and consequently, he did not take any step to exercise the Option.  Had he been told by Mr Cheung or Mr Chiang about the need to exercise the Option, he would have insisted on ASG exercising the Option.

(2)  Mr Cheung was aware that it was necessary for ASG to exercise the Option before the expiry of the Fixed Term, but he considered that ASG should only exercise the Option if Mr Chiang would continue to work for the Restaurant given that in his view, the Restaurant would not be able to operate profitably without Mr Chiang. 

(3)  Mr Chiang was keen to end the joint venture with Mr Chan.  Upon being told  by Mr Cheung about the need to exercise the Option, he decided against it as he did not want to continue to work with Mr Chan. 

32.  After the closure of the Restaurant, all the employees of ASG, including Mr Chiang, were laid off and their employment terminated with effect from 14 February 2022[46]. The Premises was handed over to the Landlord.  No further expense was incurred by ASG.   

33.  On 15 April 2022, Ms Penny Ng (“Penny”) (on behalf of Mr Cheung and Mr Chiang) invited all shareholders to attend a meeting to discuss the affairs of ASG to be held on 22 or 23 April 2022.  Prior to the meeting, Mr Cheung caused the 2017-2019 AFS and the Unaudited FS to be sent to Mr Chan and the Investors[47].

A7.  Investors’ Meeting

34.  At the meeting held on 22 April 2022 at the Office (“Investors’ Meeting”), which was attended by some of the Investors and Mr Chan was absent, Mr Cheung explained the followings:

(1)  The corporate structure of the Company, ASG and LXY, their shareholding and management structure;

(2)  The Unaudited FS for the period from January 2020 to February 2022 remained unaudited as Mr Chan had refused to sign the audited financial statements of ASG for the year ended 31 December 2020 (“2020 AFS”) until shortly before the meeting, and the auditors would not proceed with the audit of the 2021 accounts until after the 2020 AFS had been signed off;

(3)  The Unaudited FS showed that ASG had assets of over HK$4 million which comprised:

(a)  cash at bank;

(b)  account receivables including (i) the loans advanced  to Wako (through LXY) to support its business since 2020; (ii) the HK$1,800,000 and HK$1,150,000 advanced to Mr Cheung and Mr Chiang personally in the beginning of 2022 which carry interest;

(c)  the deposits paid to the Landlord (HK$450,000) and utilities companies (HK$100,000);

(d)  the HK$120,000 COVID-19 subsidy to be received from the Landlord; and

(e)    other inter-company balances with LXY;

(4)  Taking into account the remaining liabilities of ASG including the provision for tax, there should be around HK$4,000,000 available for distribution to the shareholders, and each Investor would receive around HK$45,000;

(5)  ASG did not exercise the Option and the Tenancy Agreement came to an end.  The Restaurant was closed on 14 February 2022 and all the employees were laid off and paid.  From then onwards, ASG did not have to pay salary to any employee including Mr Chiang and Penny;

(6)  The Unaudited FS showed that despite the pandemic, in 2020, ASG was able to breakeven while in 2021, it generated net profits of a few millions;

(7)  The profits made by ASG in the past had been distributed to the shareholders in the form of “bonus”, as acknowledged by one of the Investors;

(8)  ASG did not have any fixed asset of value given that (a) it had taken over the Premises from the Landlord with the kitchen and dining hall left behind by former tenant and it only carried out renovation, and (b) it surrendered the Premises to the Landlord without having to pay any penalty or reinstatement cost to the Landlord;

(9)  The figures shown in the Unaudited FS were subject to audit and the same were provided to the Investors as the “framework” to facilitate further discussion;

(10)  A cheque of HK$35,000 had already been prepared as payment to each Investor;

(11)  As regards the reason for not renewing the Tenancy Agreement, he had in the past 2 years been caught between Mr Chan and Mr Chiang and he had been trying hard to resolve the impasse but to no avail.  At one stage, Mr Chan wanted to kick out Mr Chiang, but Mr Cheung was concerned about the operation of the Restaurant which had been run by Mr Chiang, and he proposed to exit the joint venture by selling his shares to Mr Chan at cost, but Mr Chan did not agree.  Mr Cheung tried to maintain the normal operation of the Restaurant by ensuring that Mr Chiang would continue to manage the Restaurant.  None of the directors attempted to call or hold any directors or shareholders meeting to discuss any matter.  Although he could have informed the Investors about renewal of the tenancy earlier, in reality, no renewal could be undertaken as Mr Chiang had made clear that he would not want to continue to work with Mr Chan;

(12)  Mr Chan had not treated him, Mr Chiang and the staff with respect, and refused to co-sign any cheques requested by Penny for payment of expenses.  Nor did Mr Chan convene any directors’ meeting to discuss any matter.  Instead, he kept making complaints to Mr Cheung and expected Mr Cheung to deal with his complaints even though their position in ASG was equal;

(13)  The relationship with the Landlord was good and it was possible to renew the tenancy, but if it were renewed and the parties continue to have arguments, the HK$4 million funds could easily have been used up.  It was only if the dispute between Mr Chan and Mr Chiang could be resolved that the Restaurant could continue to operate but he was not able to resolve their dispute;

(14)  Mr Chiang and he did not make any decision on the renewal of the tenancy.  Rather, they decided not to take any action in respect of the matter as no consensus could be reached amongst the 3 directors.  He did not think that he has power to cause ASG to take on a substantial “engagement”, and the decision could only be made by all the directors.  He had not spoken to Mr Chan about the matter;

(15)  Mr Chiang and he had decided to distribute the remaining funds to the shareholders as they did not want to retain the funds, and cheques were prepared for that purpose.  Under ASG’s articles, 2 directors could make decision on any matters;

(16)  As to whether it was still possible to renew the tenancy, he understood that the Landlord had been operating as a pandemic hotel and might resume normal business soon.  Once the Landlord resumed business, there might be an opportunity to obtain a renewal of the tenancy or the opportunity might be gone.  In the meantime, ASG did not have any overhead expenses; and

(17)  The Company held the trademark of “老雪園”, which could only be used with the consensus of its 3 shareholders.

35.  At the Investors’ Meeting, Mr Chiang told the Investors the followings:

(1)  He did not want to continue the joint venture with Mr Chan as Mr Chan did not treat him or the staff with respect; he used foul language when speaking to them and refused to sign any cheques presented by the staff and even scolded them;

(2)  From day 1, the arrangement was that he had power to manage the Restaurant and if Mr Chan wanted to change the arrangement, he should convene shareholders meeting to discuss the same;

(3)  On 14 February 2022, he ceased working for ASG. He decided not to use the brand 老雪園from 15 February 2022 unless Mr Chan sold the brand to him or he sold it to Mr Chan.  He would not continue the joint venture with Mr Chan;

(4)  The reason why he quit was because he could not cooperate with Mr Chan.  Even if he promised the Investors to continue, he would be not as committed to the business as he had been; and

(5)  He had offered to sell the brand and his interest to Mr Chan but the offer was ignored by Mr Chan.

36.  After the Investors’ Meeting, 11 of the Investors (including Terence and Alda) received payment in the amount of HK$35,000 as “dividend” from ASG.   

A8.  SGSP & SG No. 1

37.  Meanwhile, on 3 December 2021, a new company in the name of Snow Garden (South Pacific) Limited (雪園(南洋店)有限公司) (“SGSP”) was incorporated in Hong Kong[48] in that:

(1)  Agnes was its sole shareholder until 31 May 2022 when she transferred 99% shareholding to Mr Lam Chi Kin Christopher (林資健) (“Christopher”) and the remaining 1% to Nelson;

(2)  Nelson was its sole director until 20 May 2022 when he was replaced by Christopher as its sole director; 

(3)  The registered office is the Office; and   

(4)  Until she resigned on 22 January 2022, the company secretary was Ms Li.

38.  On 15 February 2022, SGSP entered into a tenancy agreement with the Landlord in respect of the Premises for a term of 5 years (commencing on that date), with an option to renew for a further term of 3 years (“New Tenancy Agreement”)[49].

39.  According to the business registration records of SGSP, it commenced food and beverage management business under the name of “雪園飯店” at the Premises on 15 February 2022[50].

40.  In June 2022, a restaurant in the name of “雪園壹號” (“SG No. 1”) opened for business at the Premises[51].

41.  SG No. 1 operates in a very similar, if not identical, manner as the Restaurant in that:

(1)  It hired most of the former employees of the Restaurant[52];

(2)  Its interior design is almost identical to that of the Restaurant[53];

(3)  Its phone number is the same as the Restaurant[54];

(4)  Its menu is similar to that of the Restaurant[55];

(5)  Its promotional posters for mooncakes and Chinese puddings are similar to those of the Restaurant[56]; and

(6)  Some customers in their social media described SG No. 1 as “re-opening” of the Restaurant[57].

A9.  Great Wonderful & SG Club

42.  On 6 June 2022, Nelson acquired a shelf company[58] by the name of Great Wonderful Limited (“Great Wonderful”) and became its sole shareholder and director. Its registered office is the Office[59].   

43.  According to its business registration records, Great Wonderful commenced its food and beverage management business under the name of “雪園會館” at a shop at Wuhu Street, Hunghom (“SG Club”) on 1 July 2022.  In December 2022, SG Club opened for business[60].   

44.  Mr Chiang made various posts on social media regarding his involvement in SG No. 1 and SG Club.  He even changed his name on WeChat from “蔣偉源(老雪園)” to “蔣偉源(雪園壹號)”[61].

B.  PETITIONER’S COMPLAINTS

45.  Against the above background, the Petitioner presented the Petition and complains that by reason of the following matters, the affairs of the Company have been conducted by Rs in an unfairly prejudicial manner:

(1)  The Company was formed on the basis of the “Common Understanding” that (a) Mr Chan, Mr Cheung and Mr Chiang would be appointed as directors of the Company and ASG, they would be jointly responsible for management and operation of the Group[62] and would consult each other as regards decisions concerning the affairs and business of the Group; and (b) the affairs and business of the Group would be conducted in accordance with the SHA and the Investors Agreement.  The Group operated as a quasi partnership and on the basis of mutual trust and confidence between Mr Chan, Mr Cheung and Mr Chiang[63] (Quasi Partnership Issue);

(2)  In breach of the Common Understanding, since July 2019, Mr Chan has been excluded from participating in the management of the Group[64] (Exclusion Issue);

(3)  In deciding not to renew the Tenancy Agreement, Mr Cheung and Mr Chiang acted in breach of the parties’ expectation under the SHA and the Investors Agreement that the Restaurant would operate for not less than 8 years, and ASG had been deprived of the opportunity to earn substantial profits for a further term of 3 years[65] (Non-Renewal Issue);

(4)  In causing SG Group and/or SGSP and/or Great Wonderful to be incorporated or acquired with intention of setting up and operating SG No. 1 at the Premises and SG Club in Hung Hom, Mr Cheung and Mr Chiang acted in breach of (a) the Common Understanding, (b) the parties’ expectation that the tenancy would run for 8 years as reflected in the SHA and the Investors Agreement, and (c) their fiduciary duties owed to the Company and ASG[66] (Breach of Fiduciary Duties Issue);

(5)  By procuring the establishment of SG No. 1 and SG Club, Mr Chiang acted in breach of his non-competition obligations under cl.17.1-17.2 of the SHA and is liable to pay damages of HK$2.6 million to the Company[67] (Non-competition Issue);

(6)  Mr Chiang and Mr Cheung acted in breach of their fiduciary duties and without authorisation of ASG’s board by co-signing cheques for payments of (a) HK$2.8 million to be paid to themselves; (b) HK$3.12 million to be paid to Terraform and from ASG Account[68] (Misappropriation Issue); and

(7)  In causing Gastro to transfer its 30% shareholding to Sky Prosper on 15 November 2019, Gastro acted in breach of clause 12.3 of the SHA[69] (Share Transfer Issue).

46.  At the CMC on 14 June 2023, this Court directed a split trial with the question of valuation to be considered after determination on “liability”. 

47.  In his opening, Mr Justin Ho (appearing with Mr Eugene Kwan) confirms that the Petitioner no longer pursues (1) the contention regarding the existence of a quasi partnership[70] (i.e. Quasi-Partnership Issue); and (2) the complaint regarding the transfer of shares from Gastro to Sky Prosper (i.e. Share Transfer Issue)[71].

C.  APPLICABLE PRINCIPLES

48.  Section 724(1) of the CO provides that the court may exercise its power to grant relief under s.725(1)(a) and (2) if it considers that “the company’s affairs are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of one or more members”.

49.  The principles governing an “unfair prejudice” petition may be summarised as follows:

(1)  The “affairs of the company” is to be construed widely.  The court will not adopt a technical or legalistic approach but will look at business realities.  In the case of a holding company, its affairs include the affairs of the subsidiaries under its control (Leung Yuet Keung v Harbour Front Ltd [2020] HKCFI 1912 §§34-36, per DHCJ Jat SC). 

(2)  The petitioner bears the burden of establishing that the affairs of the company have been conducted in a manner which is unfair and prejudicial to the interests of the petitioner or the shareholders generally (Re Nobility School Ltd [2020] HKCFI 1503, §28, per Anthony Chan J).

(3)  In deciding whether the conduct complained of is unfair for the purpose of s.724, the starting point is to ask whether there is any breach of the company’s articles or the agreements between the shareholders.  The exercise of a shareholder’s legal right may be subject to equitable constraint if it is contrary to the understandings between the shareholders at the time they entered into the association or later promises which it would be unfair to allow a shareholder to ignore (Re Nobility School Ltd, §32; Re Jiang Yuan International Development Ltd [2018] HKCFI 1575 §§11-14, 20-22; O’Neill v Phillips [1999] 1 WLR 1092 at 1101D-1102B, per Lord Hoffmann).

(4)  The concept of fairness must be applied judicially and the content which it is to be given by the court must be based upon rational principles.  The context and background are very important (O’Neill v Phillips, 1098D-1099F; Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501, at §§43-45, per Ma CJ and Lord Millett NPJ).

(5)  The powers which the shareholders have entrusted to the board are fiduciary powers and must be exercised for the benefit of the company as a whole.  If the board acts for some ulterior purpose, they step outside the terms of the bargain between the shareholders and the company.  Misappropriation of the company’s assets, which amounts to a breach of director’s duties, constitutes unfairly prejudicial conduct (Re Jiang Yuan §§18-19).

(6)  A breach of director’s duty may provide a basis for both an unfair prejudice petition and a derivative action.  To determine whether a complaint is one of misconduct or mismanagement, it is necessary to look at the nature of the complaint and the relief sought.  Where the relief sought is a buy-out, it is relevant to take into account the fact that buy-out is available only in an unfair prejudice petition (Re Prosperous Pacific Limited [2025] HKCFI 1583 §§85-91, per DHCJ Le Pichon).

(7)  The court takes a wide view of prejudice suffered by a shareholder, which is essentially a question of fact.  Prejudice does not have to be financial loss.  Where the petitioner cannot show that he is, from a practical point of view, substantially in a worse position as a result of the allegedly unfairly prejudicial conduct, the court will not grant any remedy (Re Nobility School Ltd, §33).

(8)  A buy-out order cannot be made unless the unfairly prejudicial conduct is proved.  It is not enough for a petitioner to show that the relationship between the parties has irretrievably broken down.  There is no right of unilateral withdrawal for a shareholder when trust and confidence between shareholders no longer exist (Re Nobility School Ltd, §34).

(9)  While the petitioner would not be barred from relief if he does not come to the court with “clean hands”, it is necessary to consider the petitioner’s conduct as his own actions may render the actions of the respondent not unfairly prejudicial.  It may also affect the relief to be granted.  Where there is some conduct on the part of the petitioner that is sufficiently serious, closely related or connected to the alleged unfair prejudice, the court may exercise its discretion to refuse a remedy it would otherwise grant (Vitaly Orlov v Magnus Leonard Roth[2019] HKCFI 2120, §§154-155).

50.  As regards director’s duties, the principles are well-established and have been summarised by DHCJ MK Liu in China Metal Recycling (Holdings) Ltd & Anor v Chun Chi Wai & Ors [2021] HKCFI 378, §§52-63:

(1)  A director owes fiduciary duty to exercise his power for the purposes for which they are conferred, and not to misapply or misappropriate the company’s assets.  Once a prima facie case of misappropriation or misapplication of the company’s assets is shown, the evidential burden shifts to the director to demonstrate the proprietary of the impugned transaction (§§52, 56-57).

(2)  A director is under a duty not to place his personal interest in conflict with the interests of the company.  The test for determining whether there has been a breach of the no conflict duty is an objective one (§§59, 61).

(3)  A director is also duty bound to consider whether it is in the best interests of the company to enter into the transaction.  Where it is clear that the act or omission under challenge resulted in substantial detriment to the company, the director would have a more difficult task in persuading the court that he honestly believed it to be in the company’s interest.  If however the director did not give actual consideration to the interests of the company, the court would ask whether an intelligent and honest man in the position of the director could, in the circumstances faced by him, have reasonably believed that the transaction was for the benefit of the company (§§62-63).

D.  ASSESSMENT OF WITNESSES

D1.  Mr Chan

51.  Mr Chris Wong, counsel for Rs, submits that when assessing the credibility of Mr Chan’s evidence, it is important to bear in mind that in some key aspects of the Petitioner’s complaints, Mr Chan has provided several inconsistent versions.  Mr Wong refers to 3 examples. 

52.  First, Mr Chan changes his evidence on whether Mr Chiang was entitled to receive any Pickle Money:

(1)  In the Petition[72], it is stated that Mr Chan has no knowledge of and did not consent to pay any Pickle Money to Mr Chiang as he was only entitled to receive his monthly director’s fee and salary as manager of the Restaurant.[73]

(2)  After having sight of Rs’ POD, in the POR[74], Mr Chan claimed that the Pickle Money was to be shared amongst all staff of the Restaurant but Mr Chiang had on various occasions “pocketed” the Pickle Money without sharing it with the staff.[75]

(3)  In his WS, Mr Chan said that 50% of the Pickle Money should be distributed to the staff “as a matter of industry practice.”[76] Under cross-examination, Mr Chan says that he does not know for sure how the Pickle Money is to be distributed, and there is no record in support of his assertion that there should be a “50-50 distribution” between Mr Chiang and the staff.   

(4)  It is the unchallenged evidence of Mr Chiang that the Pickle Money has always been paid to him; he has a discretion in deciding how to use it; and he has been using it for the purpose of benefitting the staff including buying meals and paying various miscellaneous expenses for the staff, which is vital to maintaining his leadership at the Restaurant.   

(5)  As it is Mr Chan’s own evidence that he was actively involved in monitoring the financial aspects of the Restaurant,[77] he must be aware of the fact that the Pickle Money has all along been paid to Mr Chiang, and his statements to the contrary cannot be truthful. 

53.  Second, on the issue whether the Group has ever made any loans to others:

(1)  In his WS, Mr Chan said that the Restaurant never lent any money to “Wako Teppanyaki” or “Wako Sake Bar”.[78] 

(2)  Under cross-examination, Mr Chan firmly denies any possibility that the Group would engage in money-lending[79] and, if there was any, he had no knowledge of it and would not agree with it.

(3)  It is only after it is shown to him that the balance sheet of ASG as of 30 April 2022 recorded a loan made by ASG to Gold Success Development Limited (“Gold Success”) that Mr Chan accepts ASG did advance loan to support Gold Success’ business; and he has always been the sole shareholder of Gold Success.   

(4)  It is the uncontradicted evidence of Terence that Mr Chan was responsible for running the business of Wako.  It follows that Mr Chan must knew that ASG had been advancing loans to support Wako’s business and operations, and his assertion that ASG had never advanced any loans to others cannot be true.   

(5)  There is WhatsApp message which shows that on 9 November 2021, Mr Chan referred to the loan borrowed by Mr Chiang and asked him to repay the same.[80] When asked by this Court about the message, Mr Chan says that the Group did on occasions lend HK$100,000 and HK$150,000 to Mr Chiang for his personal use. 

54.  Third, as regards the terms of the Tenancy Agreement:

(1)  In his WS, Mr Chan said that he “successfully negotiated and secured the lease for the Premises” [81]. The terms of the Tenancy Agreement “were highly favourable, offering an initial term of 5 years with the possibility of renewal for an additional term of 3 years, which was exceptionally long for a commercial lease”[82].

(2)  Under cross-examination, Mr Chan confirms that it was his understanding that the term of the lease is “5 plus 3 years”, with the additional 3 years being an option to renew, as stated in the Tenancy Agreement. 

(3)  However, when being questioned as to why he did not do anything to renew the lease, Mr Chan claims that he did not know about the Condition for exercising the Option, and was completely unaware of the need to give a 6-month’s notice (that is, by 14 August 2021) if ASG decided to exercise the Option and extend the lease for a further term of 3 years. 

(4)  Mr Chan is unable to put forward any explanation as to why he was unaware of the existence of the Condition when the Tenancy Agreement was “successfully negotiated and secured” by him and no one else.  Nor is he able to explain why, if he were of the view that it must be in the interests of ASG to renew the lease for a further term of 3 years, he did not take any step to discuss with the Landlord about the renewal of the lease before the expiry of the Fixed Term, bearing in mind that renewal was a matter which required the consent of all 3 directors as required by clause 7.1(d) of the SHA. 

(5)  Even if Mr Chan did not bother to re-read the terms of the Tenancy Agreement he negotiated, as a seasoned businessman with ample experience in investing in restaurants business, he would know that before a lease could be renewed for another term, it would be necessary for the parties to agree on the new rent for the new term. Mr Chan does not offer any explanation as to how the lease could be renewed when the new rent had never been discussed and agreed with the Landlord.

(6)  For reasons set out in sub-paragraphs (1) to (5) above, I am unable to accept Mr Chan’s evidence that he was not aware of the existence of the Option or that it was necessary for ASG to (at least) negotiate and agree with the Landlord on the new rent for the new term.   

(7)  As further discussed in Section E2 below, in my judgment, on Non-renewal Issue, the position of Mr Chan was no different from the position of Mr Cheung/Mr Chiang – for one reason or the other, none of them has made any decision or taken any step to renew the lease before the expiry of the Fixed Term.   

55.   While I accept that under cross-examination, Mr Chan is more candid and forthcoming in his evidence, the fact that he has in the Petition, the POR and his WS given untruthful or unreliable evidence on the above 3 aspects has affected the overall credibility of his evidence.   

D2.  Mr Cheung

56.  Throughout his cross-examination, Mr Cheung gives evidence in a very direct and candid manner.  He answers every question quickly without any hesitation or prevarication.  Despite being subject to extensive cross-examination, Mr Cheung’s evidence remains consistent and is largely consistent with contemporaneous documents as well as what he said at the Investors’ Meeting. 

57.  Even when it comes to the few matters put to him as incorrect or are not favourable to Rs’ case, Mr Cheung readily accepts that to be the case.  For example:

(1)  In §28 of his WS, Mr Cheung says that the Investors Agreement has no bearing on the Company’s matter nor would it affect the agreement between Mr Chan, Mr Chiang and him.  When it is put to him that there is a linkage between the SHA and the Investors Agreement concerning the parties’ bargain reached at the time of the incorporation of the Company, Mr Cheung readily accepts that to be the case. 

(2)  When it is put to him that his oral evidence that no actual “decision” was made by him in not exercising the Option is contrary to §83 of his WS where he said he and Mr Chiang “finally decided that the Tenancy Agreement should not be renewed”, Mr Cheung immediately accepts that his WS in that aspect is incorrect. 

(3)  Mr Cheung explains that the 2 considerations stated at §83(1)-(2) of his WS (i.e. Covid-19 and the breakdown in relationship) were the key factors which led to his view that there was no practical choice even if he would like to continue the operation of the Restaurant.  He clarifies in his oral evidence that he did not make a “decision” not to renew.  Rather, it was the circumstances the parties found themselves in which rendered the  possibility of reaching a consensus amongst the 3 of them impossible.  Although Mr Ho criticizes his oral evidence on this aspect as being untruthful, I do not think that the criticism is justified as all that Mr Cheung says is to clarify how he came to the view that the lease could not be reviewed.  Indeed, his evidence that no actual decision was made on renewal is exactly the same as what he told the Investors at the Investors’ Meeting.   

58.  I find that Mr Cheung is a truthful and reliable witness.  Where the evidence of Mr Cheung is inconsistent with that of Mr Chan, I prefer the evidence of Mr Cheung over that of Mr Chan. 

D3.  Mr Chiang

59.  Mr Ho points to the inconsistencies between the oral evidence of Mr Chiang and Mr Cheung over various matters and submits that the court should reject the evidence of Mr Cheung and Mr Chiang.  For example (1) whether SG Group was formed as a back-up plan and for the purpose of providing Mr Chiang with another source of income (Mr Cheung says yes and Mr Chiang disagrees); and (2) whether Mr Chiang had asked Chiang Senior for permission to use the name 雪園 as part of the name of SG Group (Mr Cheung says yes and Mr Chiang says he cannot recall).

60.  While I do not think that Mr Chiang is forthcoming in most of the answers he gives under cross-examination and he frequently says that he has no recollection of the matters asked of him, this does not mean that the court should reject the entirety of his evidence, still less the evidence of both Mr Cheung and Mr Chiang.  In my view, in assessing the credibility of Mr Chiang’s evidence, the court should take into account the following facts and matters:

(1)  his relatively limited education background and the fact that he is not as sophisticated as Mr Cheung and Mr Chan;

(2)  his work experience and training was as a chef and staff working under Chiang Senior at Little SG;

(3)  prior to the joint venture in the form of the Company, Mr Chiang had never been an owner or investor in any business or restaurant;

(4)  the fact that during the Fixed Term, he was responsible for looking after the operation of the Restaurant and nothing else; and

(5)  his unchallenged evidence that during the Fixed Term, he was not concerned with and did not ask any questions about any matters other than his role in dealing with the day-to-day operating matters of the Restaurant; and he just signed any cheques and documents prepared by the staff of Terraform and presented to him, if the same had already been signed by another director, be it Mr Chan or Mr Cheung. 

61.  Having regard to the above facts and matters, it is not surprising that Mr Chiang does not have a clear recollection of many matters asked of him during cross-examination.  I do not regard this as indicative of his lack of credibility.  At the same time, I would not place much weight on his evidence unless his evidence is not being challenged or is supported by contemporaneous documents or consistent with other objective evidence.   

62.  Mr Wong refers to the following matters which Mr Chiang is familiar with, and for which he gives substantive evidence during cross-examination. For the reasons stated below, I accept the evidence of Mr Chiang on these matters:

(1)  On the brand name “雪園”, he corrects Mr Cheung’s understanding and explains that the parties were only able to obtain Chiang Senior’s permission on using the name “老雪園” as it was different from his brand “雪園飯店”, even though both names used the words “雪園”.[83]  This was a matter between Mr Chiang and Chiang Senior.  Mr Chiang is in the best position to explain the matter.  The inconsistency between his evidence and that of Mr Cheung is immaterial. 

(2)  As regards non-renewal of the lease, Mr Chiang says contrary to §§90-91 of his WS, in fact, he did not know the deadline of giving notice to renew nor did he fully understand the mechanism for renewal.  He only knew that the Tenancy Agreement was for the Fixed Term during which he repeatedly told Mr Cheung that he could no longer tolerate working with Mr Chan.  He continued with his role in operating the Restaurant until the end of the Fixed Term  because Mr Cheung told him that they would have to pay compensation to the Landlord if they did not complete the full 5-year term.  His evidence is corroborated by Mr Cheung’s evidence and is consistent with what he said at the Investors’ Meeting. 

(3)  Although he is one of the shareholders of SG Group, Mr Chiang is not clear about its details.  He only remembers having joined a joint venture which did not require him to invest money, and there were discussions on different business ideas (including food manufacturing), although none of them materialised.  His evidence is consistent with the objective evidence.   

(4)  Mr Chiang frankly admits that after closure of the Restaurant, he started working at SG No. 1 as general manager, and would sometime help out at SG Club in accordance with his boss’ (Nelson) instruction.  Mr Chiang says that Nelson asked about the possibility of hiring him before the date of the New Tenancy Agreement but at that time, he knew nothing about SG No. 1.  Owing to his bad experience in investing in the Restaurant and the fact that he has no money in investing in another investment, after the closure of the Restaurant, he only wanted to work as an employee.  Both reasons are consistent with the undisputed evidence and cannot be said to be incredulous.

(5)  In his Closing, Mr Ho argues that the evidence of Mr Chiang in this respect is incredible and asks the court to infer from the evidence of Mr Cheung and Mr Chiang that “Mr Chiang must be taking active steps to facilitate the creation of, and have an interest in, [SGSP] and SG No. 1”, relying on 4 main allegations none of which has been pleaded.  For the reasons explained in §§107-109 below, I reject the submissions of Mr Ho.    

(6)  As regards the arrangement for prepayment of dividends, all that he knew was it had been agreed amongst all parties at the outset that Mr Chiang could borrow money from the Company for his personal use.  He was not familiar with the repayment mechanism, which had always been handled by Mr Chan or Mr Cheung.  Back in 2017 to 2018 when his relationship with Mr Chan was cordial, Mr Chiang would ask Mr Chan whenever he needed to borrow money from the Company, and Mr Chan would ask Mr Chiang to sign some documents to confirm the loan.  He was not certain about the terms of the loan agreement signed by him. 

63.  As compared to Mr Chiang, Mr Cheung is a more reliable witness.  Accordingly, insofar as there is inconsistency in the evidence between Mr Chiang and that of Mr Cheung in respect of a matter which concerns both of them, I prefer the evidence of Mr Cheung over that of Mr Chiang.    

E.  ANALYSIS  

E1.  Exclusion Issue

64.  At trial, it is common ground that the SHA and the Investors Agreement formed the bases of the cooperation between the Petitioner and Rs:

(1)  In his Opening, Mr Ho confirms that the Petitioner no longer pursues its contention regarding the existence of a quasi partnership[84] or that the affairs of the Group have to be conducted on the basis of the Common Understanding[85].

(2)  In his Opening[86], Mr Wong accepts that as clause 3 of the SHA referred to the incorporation of the Company for the purpose of investing in the Restaurant through ASG, the business of the Group shall be conducted in accordance with the SHA and the Investors Agreement[87].

65.  In his Closing, Mr Ho submits that although the Petitioner “no longer pursues its contention on quasi-partnership (and hence exclusion is strictly speaking not a standalone ground for unfair prejudice), the fact of exclusion remains relevant as it sheds light on Rs’ motives for their subsequent conduct”[88].

66.  It is not open to the Petitioner to change its case in the way suggests by Mr Ho:

(1)  The Petitioner’s pleaded case on exclusion from management is based solely on a breach of the Common Understanding[89] (no other breach has been pleaded) which, in turn, is one of the 2 bases[90] for contending that the Company and the Group should operate as a quasi partnership. 

(2)  Having abandoned its case on quasi partnership, I am unable to see how the Petitioner can ask the court to find that “since around July 2019, Mr Cheung and Mr Chiang no longer treated Mr Chan as part of the Company and made all decisions on their own without informing or consulting him.  This forms part of the relevant background against which Mr Cheung’s and Mr Chiang’s subsequent conduct must be viewed”[91].

67.  In any event, there is no merit in the complaint that Mr Chan has since July 2019 been excluded from the management of the Group, still less that such exclusion is unfairly prejudicial to the Petitioner’s interests. 

68.  First, the Petitioner has not been able to identify any term, whether under the SHA, the Investors Agreement or the articles of association of the Company or ASG, which imposes an obligation on the part of Rs to inform or consult Mr Chan on all decisions concerning the Group.  The Petitioner cannot complain about Mr Cheung and Mr Chiang’s conduct which is not in breach of any obligation, whether legal or equitable. 

69.  Second, the so-called exclusion is inconsistent with the undisputed evidence on the modus operandi of the Restaurant and the respective roles of Mr Chan, Mr Cheung and Mr Chiang (see §21 above). 

(1)  It is the unchallenged evidence of Mr Cheung at trial that prior to July 2019, he rarely involved in the affairs of the Group and all the expenses were paid by cheques co-signed by Mr Chan and Mr Chiang. 

(2)  The Petitioner has not articulated any basis as to why Mr Chan was entitled to change the status quo in July 2019 and insisted on the right to be informed or consulted by Mr Cheung and Mr Chiang on all decisions concerning the Group. 

70.  As stated in §29 above, the parties put forward different reasons for the deterioration in the relationship between Mr Chan, Mr Cheung and Mr Chiang from July 2019. 

71.  Despite the different narratives used by the parties, it is clear from the oral evidence of Mr Chan, Mr Chiang and Mr Cheung, which is consistent with the objective evidence (as I so find), that:

(1)  Mr Chan considered that he had the right to be consulted on all matters concerning the operation and management of the Restaurant, and Mr Chiang was required to seek his consent before taking any action on any such matters.  All the decisions made by Mr Cheung and/or Mr Chiang in relation to the Restaurant, ASG and LXY after July 2019, were either “unfair” as Mr Chan had not been consulted, or invalid as they had not been considered or approved by the board of ASG or LXY. 

(2)  The only basis for contending that Mr Chan had the aforesaid “right” is that the Group was a quasi partnership and was formed on the basis of the Common Understanding, both of which have been abandoned by the Petitioner.  It follows that Mr Chan’s conduct in insisting on this “right” must be unfair, if not wrongful.

(3)  Mr Chiang was aggrieved by what he perceived to be a lack of respect on the part of Mr Chan when dealing with him.  Mr Chiang regarded his position to be equal to that of Mr Chan, and he did not need to seek the latter’s approval on matters relating to the day-to-day operation and management of the Restaurant.  For other matters, it would be sufficient if 2 directors agreed on them, which had been the practice in the past, and the other director did not have to be Mr Chan. 

(4)  It is indisputable that Mr Chiang’s position in the Group was at least equal to, if not more important than, that of Mr Chan given Mr Chiang’s shareholding in the Company and his role in operating the Restaurant.  Mr Chiang was entitled to follow the past practice by obtaining consent from another director on matters which required approval by the board, and that director did not have to be Mr Chan. 

(5)  Mr Cheung was caught between Mr Chan and Mr Chiang who did not see each other eye-to-eye and they were not on speaking term.  Mr Chiang repeatedly told Mr Cheung that he did not want to continue to work with Mr Chan and even informed the other directors that he would withdraw from the Group from end September 2019 together with his staff[92]. Mr Cheung persuaded Mr Chiang to continue until the end of the Fixed Term as the tenancy could not be terminated before that.  In the meantime, Mr Cheung acted as the conduit between Mr Chan and Mr Chiang and conveyed the requests and complaints made by one of them to the other.  As the requests and complaints became more frequent, Mr Cheung did not want to continue to be embroiled in their disagreements and told Mr Chan to speak to Mr Chiang directly on any complaints or requests. 

72.  Third, the matters which the Petitioner alleges constitute exclusion from management are wholly without merit:

(1)  Approval of Housing Allowance to Mr Chiang and misuse of LXY’s funds for such purpose in July 2019[93]: The evidence shows that far from having been excluded, Mr Chan was privy to the decision concerning Housing Allowance: (a) Mr Chan accepts under cross-examination that he did not object to paying Housing Allowance to Mr Chiang even though he considered that it should be limited to reimbursement of actual expenses for the first 3 months; and (b) in his message sent on 20 November 2020, Mr Chan requested Mr Cheung to “cut off the salaries and hotel fee” to Mr Chiang because Mr Chiang “still not back to work everyday since last year till now”, and Mr Chiang should not be allowed “to have other job while getting salary from LXY”.  In any event,  it is the unchallenged evidence of Mr Cheung that as soon as Mr Chan complained about the payment of Housing Allowance, Mr Cheung caused Hungry Elephant to pay the same to Mr Chiang (see §28 above). 

(2)  Mr Chiang worked for Hungry Elephant in return for remuneration[94]: It is the uncontradicted evidence of Mr Cheung and Mr Chiang that Mr Chan was aware of the arrangement and did not raise any objection until 20 November 2020  (see §28 above). 

(3)  Decision to re-open the Restaurant on 1 September 2020 made without Mr Chan’s knowledge or involvement[95]: The decision was made by Mr Chiang at the time when he was not on speaking term with Mr Chan.  As the person being entrusted with the responsibility of managing and operating the Restaurant, Mr Chiang was entitled to make the decision with the consent of Mr Cheung.    

(4)  Decisions on choice of suppliers for the Restaurant in late 2020[96]: The decisions were made by Mr Chiang at the time when he was not on speaking term with Mr Chan.  The choice of suppliers was a matter concerning the operation of the Restaurant, which Mr Chiang was entitled to decide with the consent of Mr Cheung. 

(5)  Decision in February 2021 to cause ASG to incur “substantial expenses to renovate the Premises”[97]: The so-called renovation was no more than Mr Chiang’s decision to re-instal the movable partitions in the Restaurant so that it could charge more for individual rooms and generate higher revenue[98]. It was a matter concerning the operation of the Restaurant which Mr Chiang was entitled to decide with the consent of Mr Cheung. 

(6)  Decision to pay HK$35,000 to each Investors in April 2022[99]: The decision was made after the relationship between Mr Chan and Mr Cheung and Mr Chiang had irretrievably broken down and the business of the Restaurant came to an end.  More importantly, the decision was not carried out until after the matter was discussed at the Investors’ Meeting at which  no objection was raised by any Investors.  Mr Chan could have attended the Investors’ Meeting, if he really wanted to be consulted on the matter but he chose not to do so. 

73.  In his Closing, Mr Ho submits that “most blatant”example of exclusion from management is Mr Cheung’s persistent refusal to provide the books and records of the Group to Mr Chan in that:

(1)  In the WhatsApp messages between November 2020 and July 2021, Mr Chan repeatedly asked Mr Cheung for the books and records of the Group.  All these requests were consistently ignored by Mr Cheung.

(2)  Under cross-examination, Mr Cheung claims that he instructed Terraform’s staff to provide the documents sought by Mr Chan upon his request.[100]  However, there is not a shred of evidence to support such a claim.  In his WhatsApp messages to Mr Chan, Mr Cheung never suggested that Mr Chan should approach Terraform’s staff to obtain the documents sought.  Instead, Mr Cheung simply brushed aside (“耍佢”) Mr Chan’s requests by saying “ok.  will arrange” and “sorry, will soon”.  These were plainly not genuine attempts to provide documents to Mr Chan.

(3)  To date, Mr Cheung still has not provided the books and records of the Group to Mr Chan, despite the fact that Mr Chan (a) was fully entitled to inspect such books and records as a director of the Company and ASG; and (b) has requested inspection of such documents by solicitors’ correspondence. 

(4)  Mr Chan therefore “remains completely in the dark” as to the true financial status of the Group even to this day.  As explained in the Petitioner’s oral Closing, this is one of the main reasons why the Petitioner has been, and remains, unable to conduct any meaningful settlement discussions with Rs.

74.  I am unable to accept Mr Ho’s submissions:

(1)  The Petitioner’s pleaded case is that since February 2021, Mr Chan had made numerous enquiries about the affairs of the Group, and repeatedly requested Mr Cheung and/or Mr Chiang to reply to his enquiries but all the “legitimate and reasonable enquiries” pleaded were “rejected, denied or ignored by Mr Cheung and/or Mr Cheung”.[101]

(2)  Insofar as it is alleged that Mr Chan had made any enquiries or requests with Mr Chiang from February 2021, the same cannot be true as it is common ground that since their dispute in July 2019, Mr Chan and Mr Chiang were not on speaking term. 

(3)  The burden is on the Petitioner to plead and establish its case that Mr Cheung was under an obligation to answer any enquiries or requests made by Mr Chan in respect of the affairs of the Group.  None has been pleaded. 

(4)  When this Court asks Mr Ho on what basis the Petitioner contends that Mr Cheung was obliged to entertain the enquiries and requests made by Mr Chan given that their position was equal, Mr Ho submits that Terraform is Mr Cheung’s company and he treated Terraform’s staff as his staff.  I am unable to see why the fact that Terraform is Mr Cheung’s company would create an obligation on Mr Cheung to answer Mr Chan’s enquiries.  As Mr Cheung points out in his oral evidence, Terraform is a service provider to ASG/LXY, and all directors including Mr Chan were entitled to request Terraform to provide any documents and information they required.   

(5)  The mere fact that for a few months after July 2019, Mr Cheung attempted to deal with the requests made by Mr Chan does not support the Petitioner’s case on exclusion from management.  If anything, it only goes to show that Mr Cheung endeavoured to maintain a cordial relationship with Mr Chan. 

(6)  Indeed, it is difficult to see why Mr Chan had to request Mr Cheung to provide (a) all the accounting records and reports of the Group, (b) copies of all cheques issued; and (c) all payroll records[102] when he had approved the 2017 AFS and 2018 AFS and had co-signed all the cheques issued out of the ASG Account until he refused to sign any cheques after July 2019.

(7)  At trial, it is the unchallenged evidence of Mr Cheung that (a) all the accounting records had been prepared and kept by Terraform; (b) all the directors including Mr Chan could request Terraform to provide the same to them; and (c) Mr Cheung never instructed any staff to deny any request made by Mr Chan. 

(8)  The fact that Mr Chan has not been denied of any information and documents concerning the Group or been excluded from management can also be seen from the WhatsApp messages disclosed by the parties, which show that (a) Penny continued to provide updated sales report for July, August, September 2019 and Unaudited FS to all directors up to at least March 2020 in the “Directors Support” group chat; (b) updates about the affairs and operation of the Restaurant were provided to the directors through the same group chat; (c) although Mr Chan did not provide any comments on the affairs mentioned in the Group, Mrs Chan did from time to time provide her comments on the matters raised; (d) on 3 September 2020, Mr Chan forwarded the salary record of LXY to Mr Cheung and asked why his salary was missing.  This reinforces the fact that Mr Chan was able to obtain any records he wanted to see from Terraform.

(9)  Lastly, the suggestion that Mr Chan has been kept in the dark is also flatly contradicted by objective evidence that (a) Mr Chan was able to obtain the accounting records of ASG and  the bank statements of ASG Account, which he relied on in putting forward the Petitioner’s case on misappropriation of ASG’s funds; and (b) prior to the Investors’ Meeting, the 2017-2019 AFS and the Unaudited FS were sent to Mr Chan (see §33 above).  There is no suggestion that the 2017-2019 AFS and the Unaudited PLS are in any way incomplete or incorrect. 

E2.  Non-renewal Issue

75.  As stated in §45(3) above, the Petitioner’s pleaded case is that in deciding not to renew the Tenancy Agreement, Mr Cheung/Mr Chiang acted in breach of the parties’ expectation under the SHA and the Investors Agreement that the Restaurant would operate for not less than 8 years, and ASG had been deprived of the opportunity to earn substantial profits for a further term of 3 years[103].

76.  In my judgment, the Petitioner’s case on the Non-Renewal Issue is demurrable for the following reasons:

(1)  It is based solely on the existence of an “expectation” that the Restaurant would operate for not less than 8 years.  However, there is no plea as to how the alleged “expectation” could arise or exist when the Tenancy Agreement, the terms of which were negotiated and secured by Mr Chan, expressly provided that the lease was for the Fixed Term, and could only be extended by ASG exercising the Option. 

(2)  Even if the alleged “expectation” existed, it was only an expectation.  There is no plea as to how the alleged “expectation” could give rise to an obligation, whether legal or equitable, on the part of Rs to operate the Restaurant for not less than 8 years. 

(3)  Mr Chan himself did not do anything in relation to the renewal of the lease.  Although under cross-examination, Mr Chan asserts that he was not aware of the existence of the Option, I do not accept his assertion having regarding to the fact that (a) the Tenancy Agreement contains elaborate terms governing the exercise of the Option; (b) he was responsible for negotiating the terms of the Tenancy Agreement with the Landlord; and (c) he accepts under cross-examination that after signing the Tenancy Agreement and up to 2022, he continued to keep in touch with the Landlord.  Indeed, he was the one who dealt with the Landlord regarding the closure and termination of the lease in respect of Wako located at 2/F of the Hotel.

(4)  If Mr Cheung and Mr Chiang were in breach of the alleged “expectation”, so did Mr Chan.  The Petitioner cannot be heard to complain about the conduct of Rs when its representative was equally at fault.

77.  Not only has the Petitioner failed to discharge the burden of showing a prima facie case that Mr Cheung/Mr Chiang were under an obligation to exercise the Option and renew the lease, it adduces no  evidence to show that if the lease were extended, the Restaurant would continue to “earn substantial profits for a further term of 3 years”:

(1)  The Petitioner’s case on the Non-Renewal Issue is built on an assumption that if the Option were exercised and the lease renewed for a further term of 3 years, the Restaurant would continue to operate profitably as it did during the Fixed Term. 

(2)  No basis or evidence has been put forward by the Petitioner to make good the assumption.  Nor has the Petitioner attempted to demonstrate how the Restaurant could continue to operate profitably without the involvement Mr Chiang and his staff. 

78.  If, contrary to my view, the Petitioner has discharged the burden of showing a prima facie case of breach of any obligation such that Mr Cheung and Mr Chiang have the evidential burden of justifying their failure to cause ASG to exercise the Option and renew the lease, I consider that Mr Cheung and Mr Chiang have discharged such burden.

79.  Rs’ defence is that the decision not to exercise the Option and renew the Tenancy Agreement was made in the circumstances and taking into account the following 4 matters:

(1)  Mr Chan’s “unreasonable behaviour” which caused disruption to the operation of the Restaurant, the complete breakdown in the relationship between Mr Chan and Mr Chiang/Mr Cheung, and constituted breaches of fiduciary duties[104];

(2)  The operation of the Restaurant could not be continued given that Mr Chiang’s role in the Restaurant was indispensable but Mr Chan insisted on ousting Mr Chiang and, at the same time, refused to be bought out[105];

(3)  Mr Chiang and Mr Cheung were very pessimistic of maintaining a profitable business in view of Mr Chan’s “persistent unreasonable conducts and behaviour, his breaches of director’s duties and in light of the uncertainty in COVID-19 pandemic”[106]; and

(4)  ASG had 3 directors, and the tenancy could not have been renewed without the agreement of Mr Cheung or Mr Chiang[107]. 

80.  Each of the 4 matters relied on by Rs has been established.

81.  First, as regards the “unreasonable behaviour”  complained of by Rs, it consists of the following:

(1)  Since 2019, Mr Chan had growing discontents towards Mr Chiang and wanted to oust him from the business.  Mr Cheung disagreed as he considered that Mr Chiang was the only one who knew how to run a Shanghai cuisine restaurant and the staff were loyal to him[108]. 

(2)  Mr Chan started to bully and act disrespectfully towards Mr Chiang by telling others that Mr Chiang was merely an employee; requiring Mr Chiang to clock his working time; and unilaterally decided to reduce his salary from HK$40,000 to HK$10,000 in early 2020 so as to insult him. Mr Cheung had to step in by paying the difference out of his pocket and procuring LXY to resume paying the original level of salary to Mr Chiang[109]. 

(3)  Mr Chan became very rude to the staff of the Restaurant and Terraform and at times made abusive remarks[110].

(4)  Mr Cheung attempted to resolve the impasse by suggesting Mr Chan to sell his shares; offering to sell his shares in the Restaurant to Mr Chan for the same amount he invested; and meeting with Mr Chan and Mrs Chan to explain the reason for not agreeing to kick out Mr Chiang (with which Mrs Chan agreed, but not Mr Chan), but to no avail.  By June 2020, Mr Cheung and Mr Chan stopped communicating socially and only maintained limited communications on official matters relating to the Restaurant and the Company[111].

(5)  Since July 2020, Mr Chan had from time to time refused to co-sign cheques and documents concerning the operations of the Restaurant and the Company including those for payment of salaries to staff[112].

(6)  In July 2020[113], Mr Chan refused to sign the 2019 AFS prepared by the auditors (introduced by him to ASG) despite repeated requests which led to the resignation of the auditors.  Mr Chan only signed the 2019 AFS in January 2022[114].

(7)  In early 2022, Mr Chan asked for “dividend” to be paid out with ASG retaining HK$1,000,000 as operating funds.  Mr Cheung agreed subject to Mr Chan signing the relevant audited reports[115]. 

82.  The Petitioner’s pleaded case is that (1) Mr Chan never behaved unreasonably or caused any disruption to the operation of the Restaurant; (2) Mr Chan did not engage in any of the “unreasonable behaviour” summarised in the preceding paragraph nor did he ever suggest to oust Mr Chiang from the business; and (3) Mr Chan refused to sign the 2019 AFS until January 2022 because he had been excluded from the management of the Group since July 2019[116].

83.  At trial, the preponderance of the evidence is consistent with and supports Rs’ case that Mr Chan did engage in the “unreasonable conduct” complained of by Rs (as summarised in §81 above), which caused a complete breakdown in the relationship between the parties:

(1)  Under cross-examination, Mr Chan does not really dispute the fact that he did engage in the “unreasonable behaviour” complained of by Rs.  The consistent theme in Mr Chan’s evidence is that he does not consider that his behaviour was in any way unreasonable or that he acted in a disrespectful manner towards Mr Chiang.   

(2)  Mr Cheung’s evidence in relation to the “unreasonable behaviour” has not been challenged during cross-examination.  The focus of Mr Ho’s cross-examination is directed to challenging why Mr Cheung did not comply with the requests made by Mr Chan, and why he did not consult Mr Chan on the decisions which formed part of the Petitioner’s complaints under the Exclusion Issue.  For the reasons stated in Section E1 above, I do not consider the Petitioner’s complaints to have any merit. 

(3)  Similarly, Mr Chiang’s evidence in relation to the “unreasonable behaviour” has not been challenged during cross-examination.       

(4)  Even before the commencement of these proceedings, at the Investors’ Meeting, Mr Cheung and Mr Chiang already told the Investors that it was Mr Chan’s behaviour which caused a breakdown in the relationship and as a result, and Mr Chiang did not want to continue the joint venture with Mr Chan or continue to work for ASG and the Restaurant.  See §34(12) and §35(1)-(4) above.   

84.  Second, it is indisputable that in deciding not to exercise the Option and renew the lease, Mr Cheung took into account what he considered to be the indispensable role played by Mr Chiang in the Restaurant and his refusal to continue to work for ASG.  This was a commercial judgement which Mr Cheung was entitled to make.  Mr Cheung made known his view at the Investors’ Meeting (see §34(11) above).  Mr Cheung’s evidence that he took the view that the Restaurant could not continue to operate without Mr Chiang has not been challenged. 

85.  Third, there is no proper basis to doubt Mr Chiang/Mr Cheung’s pessimism in maintaining a profitable business in light of Mr Chan’s “unreasonable behaviour” and the uncertainty posed by COVID-19, having regard to the following facts and matters:

(1)  Mr Chiang had been the only director who managed the day-to-day operation and business of the Restaurant and all the staff worked under him;

(2)  Under the leadership of Mr Chiang, the Restaurant was able to operate profitably during the Fixed Term notwithstanding the challenge posed by COVID-19;

(3)  The turnovers of the Restaurant were not stable. There was a substantial decline in turnovers and net profits in 2020, the first year after the pandemic had broken out.  As Mr Cheung explains under cross-examination, although ASG achieved record high turnovers and profits in 2021, that was the result of a combination of (a) the restrictions on travel, (b) the Government’s subsidies and (c) the rental reduction granted by the Landlord, all of which were not recurring in nature.  There was no proper basis to impugn or doubt their pessimism about the prospects of the Restaurant, particularly when the directors had since July 2019 been embroiled in arguments which, in turn, caused disruption to the normal operation of the Restaurant including its ability to pay ordinary business expenses.

86.  Fourth, the last matter ought not to be controversial:

(1)  It is common ground that the decision whether to exercise the Option was something which could only be carried out by the board with the consent of all parties to the SHA, namely, the Petitioner and Rs (clause 7.1(d) of SHA). 

(2)  No board meeting has ever been convened or held to discuss whether to exercise the Option.

(3)  Mr Chan himself did not do anything in relation to the Option or the renewal of the lease. 

(4)  As for Mr Cheung/Mr Chiang, they decided not to exercise the Option and renew the lease, taking into account the 4 matters pleaded in their POD. 

87.  In his Closing[117], Mr Ho criticises the evidence of Mr Cheung and Mr Chiang as “a moving feast and is wholly incredible” on the bases that (1) in Mr Cheung/Mr Chiang’s WS, they say that they had discussed the matter and decided not to renew the lease; (2) however, under cross-examination, they disown their WS and say that they did not make any decision not to exercise the Option; (3) in particular, Mr Chiang’s oral evidence is that he never discussed the issue of renewal of the lease with Mr Cheung (as he was not aware of the need to exercise the Option) is inconsistent with Mr Cheung’s evidence that the 2 of them did discuss the matter. 

88.  I do not find the criticisms to be well-founded:

(1)  It is clear from the POD, the WS of Mr Cheung/Mr Chiang and the explanations given by them at the Investors’ Meeting that it has been the consistent stance of Rs that (a) Mr Chiang had decided not to work for ASG after the expiry of the Fixed Term, and his decision was clearly communicated to Mr Cheung and Mr Chan[118]; and (b) Mr Cheung considered that the operation of the Restaurant could not continue without the involvement of Mr Chiang.

(2)  Mr Chiang was entitled to decide whether he wanted to continue to work for ASG.  Indeed, the Petitioner has not articulated any reason as to why Mr Chiang was not entitled to make such decision.   

(3)  Similarly, Mr Cheung was entitled to form a view and decided that the Restaurant could not continue to operate without the involvement of Mr Chiang, such that there was no alternative but not to renew the lease.

(4)  Neither of them has said, whether at the Investors’ Meeting, their WS or the POD, that they made a decision on behalf of ASG not to exercise the Option or renew the lease. 

E3.  Breach of Fiduciary Duties Issue

89.  The Petitioner’s case, as pleaded in the Petition, is that in causing SG Group and/or SGSP and/or Great Wonderful to be incorporated or acquired with intention of setting up and operating SG No. 1 at the Premises and SG Club in Hung Hom, Mr Cheung and Mr Chiang acted in breach of (1) the Common Understanding, (2) the parties’ expectation that the tenancy would run for 8 years as reflected in the SHA and the Investors Agreement, and (3) their fiduciary duties owed to the Company and ASG.[119]

90.  As the Common Understanding has been abandoned while the alleged “expectation” is dealt with in Section E2 above, the only remaining issue is whether Mr Cheung and Mr Chiang acted in breach of their fiduciary duties owed to the Company and ASG.

91.  The matters pleaded in support of the Petitioner’s case on breach of fiduciary duties and the defence raised by Rs may be summarised as follows:

(1)  Mr Cheung and Mr Chiang had all along been planning to use “new corporate vehicle(s) (i) to take over the lease of the Premises and (ii) to run a new Shanghainese restaurant by the name of ‘雪園’, which is scheduled to open in or around May 2022”[120].

(2)  On 17 November 2021, SG Group was incorporated with Mr Cheung, Mr Chiang, Jackel and Agnes as shareholders, and Mr Cheung, Mr Chiang and Nelson as directors[121].

(3)  On 3 December 2021, SGSP was incorporated with shareholders and directors as described in §37 above.  Amongst them, Nelson is Mr Cheung’s friend for 30 years.  Agnes (Nelson’s wife) and Christopher are 2 of the Investors[122];

(4)  On 15 February 2022, SGSP entered into the New Tenancy Agreement in respect of the Premises[123] (see §38 above);   

(5)  The third schedule to the New Tenancy Agreement acknowledged that “品牌: 「雪園」是香港老牌上海菜餐飲企業, 擁有自己客戶及良好口碑, 品牌由蔣偉源父親創立和擁有。租方使用「雪園」, 於上址經營上海菜(淮陽菜) 。”[124];

(6)  At around the same time, Mr Cheung and Mr Chiang re-hired most of the former employees of the Restaurant to work for the new restaurant including the 24 employees listed[125];

(7)  On 1 June 2022, SG No. 1 opened for business at the Premises.  The interior design of SG No. 1 has been kept almost identical to that of the Restaurant, and the phone number, menu and promotion materials are either identical or high similar to those of the Restaurant[126] (see §41 above);

(8)  On 6 June 2022, Great Wonderful was incorporated with Nelson as its sole shareholder and director, and in December 2022, SG Club was opened for business[127] (see §§42-43 above); and

(9)  According to an article published by Esquire HK, Chiang Senior was involved in setting up SG No. 1 and SG Club[128].

92.  In reliance on the above matters, the Petitioner asks the court to infer that Mr Cheung/Mr Chiang (acting in concert with Nelson, Agnes and Chiang Senior) had caused SG Group and/or SGSP and/or Great Wonderful to be incorporated or acquired, “with the intention of setting up and operating a new Shanghainese restaurant at the Premises and/or other related establishments at other locations”[129]. Such intention is evidenced by inter alia the following matters:

(1)  Mr Cheung[130] and Mr Chiang had deliberately caused ASG not to renew the lease with the Landlord “for the ulterior purpose of allowing [SGSP] to take over the lease of the Premises in February 2022”[131]. 

(2)  The registered Chinese names of SG Group and SGSP both contain the words “雪園”, and the new restaurant at the Premises was named “雪園壹號” (i.e. SG No. 1).  The name “雪園” was adopted so that SG No. 1 could “take advantage of the goodwill, reputation and customer base of the Restaurant”.  The same applies to SG Club set up by Great Wonderful[132]; and

(3)  In March 2022, Mr Cheung and Mr Chiang (by themselves or their agent) had approached some of the Investors, claiming that they managed to obtain a new lease at the Premises and asked if any of them would be interested to invest[133].

93.  On the basis of the above pleas, the Petitioner contends that Mr Cheung/Mr Chiang acted in breach of their fiduciary duties by[134]:

(1)  failing to act bona fide in the best interests of the Company;

(2)  causing ASG not to exercise the Option with the ulterior purpose of benefitting SGSP;

(3)  acting for his or their own interest, or that of SG Group and/or SGSP and/or Great Wonderful, to the detriment of the Company; and

(4)  placing his or their own interest in conflict with those of the Company.

94.  Rs deny all the allegations except the identity of the shareholders and directors of SG Group and SGSP.  They put forward the following defence to the alleged breach of fiduciary duties:

(1)  SG Group is a proposed joint venture between Mr Cheung, Jackel, Mr Chiang and Agnes, but it has not commenced any business[135].

(2)  Rs do not own, and have no relationship with, SGSP[136].

(3)  Rs are not parties to the New Tenancy Agreement, and they had no knowledge of its terms and contents[137].

(4)  Mr Cheung/Mr Chiang did not re-hire any of the former employees of the Restaurant[138].

(5)  Mr Cheung/Mr Chiang are not owners of, and have no relationship with, Great Wonderful[139].

(6)  Rs did not publish, or contact or make arrangement with Esquire HK or its reporters to publish the article.  Nor did they approve its contents.  Chiang Senior did not have any involvement in SG No. 1 or SG Club save that he consented to the operators to use 雪園 as part of their brand[140].

(7)  Mr Cheung/Mr Chiang had not set up, or procured the establishment of, or sought to set up, SG No. 1 at the Premises or SG Club[141].

95.  The burden is on the Petitioner to prove the primary facts pleaded in support of its case on breach of fiduciary duties (summarised in §91 above).  If the Petitioner fails to prove the such facts, there is no factual basis for the Petitioner to ask the court to draw the inferences pleaded in §37 of the Petition (summarised in §92 above).

96.  For the reasons set out in §§97-104 below, I do not think that the Petitioner has discharged the burden of proving the primary facts pleaded in support of its case on breach of fiduciary duties against Mr Cheung/Mr Chiang.    

97.  First, as regards the allegation that Mr Cheung/Mr Chiang had all along been planning to use “new corporate vehicle(s)” (i) to take over the lease of the Premises and (ii) to run a new Shanghai cuisine restaurant by the name of “雪園” scheduled to open in May 2022, and the incorporation of SG Group in November 2021 for such purpose (see §91(1)-(2) above):

(1)  There is simply no evidence in support of the allegation.  The mere fact that in November 2021, SG Group was incorporated with Mr Cheung/Mr Chiang as shareholders and directors or that its registered office and company secretary is the same as the Company is neither here nor there. 

(2)  In his WS[142], Mr Cheung explains that SG Group was in fact a proposed joint venture between Jackel, Mr Chiang, Agnes and him for other business, which has no relevance to the business of the Restaurant.  They managed to obtain the approval of Chiang Senior to use a name closely related to “雪園”. 

(3)  Under cross-examination, Mr Cheung’s evidence remains unshaken.  He explains that before SG Group was set up, the parties continued to be embroiled in arguments, and he wanted to have a back-up plan so that if Rs could not continue the joint venture, they would be able to pursue other business including restaurant business.  The 4 shareholders had decided to cooperate before November 2021 when SG Group was set up.  However, after looking around, they were not able to find any business worth pursuing and SG Group did not do anything in the end.  There is nothing to contradict Mr Cheung’s evidence in this respect.

(4)  When it is put to Mr Cheung that the reason why Mr Chiang had to ask Chiang Senior for permission to use the name “雪園” was because they intended to open a new restaurant using that name at the Premises, Mr Cheung refutes the suggestion and explains that the other business they intended to pursue was not confined to new restaurant and included manufacturing of food products for sale, similar to Nelson’s food supply business.  Moreover, at that stage, the Tenancy Agreement still had 6 months to run, and the same might continue as he was still trying to salvage the relationship between the parties and persuade Mr Chiang to change his mind.  The Landlord might let the Restaurant to continue to operate at the Premises even though the Option had not been exercised. Mr Cheung’s evidence is consistent with the objective evidence and makes commercial sense.  I accept his evidence. 

(5)  It is Mr Cheung’s unchallenged evidence under cross-examination that (a) he did not discuss with the Landlord about any new lease during the period from August 2021 to February 2022 as Mr Chiang did not want to continue with the joint venture; and (b) he had no involvement in negotiations of the New Tenancy Agreement.    

98.  Second, in relation to the incorporation of SGSP in December 2021 with Nelson, Agnes and Christopher as shareholders or directors (§91(3) above):

(1)  Under cross-examination, Mr Cheung explains that it was a company formed by Nelson and he was not aware of its existence until Nelson told him about it after the New Tenancy Agreement had been signed with the Landlord. 

(2)  It is put to Mr Cheung that he must have knowledge of and involvement in SGSP before the New Tenancy Agreement was signed because (a) Nelson had been his friend for 30 years; (b) SGSP’s registered office is the Office owned by his family; and (c) the company secretary of SGSP, Ms Li, is his staff. 

(3)  Mr Cheung’s evidence is that (a) Terraform operated at the Office and it provided company secretarial services to many companies and all of them used the Office as their registered office; (b) many of his friends, including Mr Chan and Nelson, used Terraform to provide company secretarial services and used the Office as their companies’ registered office; (c) his friends knew the staff well and they approached the staff directly when they required provision of company secretarial services and did not have to go through him.  The evidence is consistent with the manner in which Terraform provided services to the Company, ASG and LXY.  Mr Ho is not able to identify any fact or matter to contradict Mr Cheung’s evidence. 

99.  Third, in relation to the New Tenancy Agreement entered into between SGSP and the Landlord on 15 February 2022 (§91(4) above):

(1)  It is put to Mr Cheung that he must have been involved in negotiating the New Tenancy Agreement on the basis that Nelson had no means to know that (a) the Tenancy Agreement would come to an end; (b) the parties had been in arguments and Mr Chiang had expressed his unwillingness to continue; and (c) the business condition of the Restaurant. 

(2)  Mr Cheung’s evidence remains clear and consistent throughout - Nelson (through Agnes) was one of the Investors.  Like any Investors, Nelson was entitled to know about the affairs of ASG and the Restaurant.  As a matter of fact, Nelson knew about (a) the financial results of the Restaurant; (b) the arguments between Mr Chan and Mr Chiang; and (c) Mr Chiang’s unwillingness to continue to cooperate with Mr Chan.  There is nothing to contradict Mr Cheung’s evidence in this regard. 

(3)  It is put to Mr Cheung that he must be surprised and upset when he learnt that Nelson had procured SGSP to sign the New Tenancy Agreement.  Mr Cheung’s evidence is that he was not upset about it; Nelson did ask if he wanted to become one of the investors, but he did not want to be involved in the new restaurant given that (a) the Restaurant’s business had not come to an end; and (b) there were too many Investors in the Restaurant and there might be question of conflict of interest.  His evidence is consistent with the circumstances faced by him and is credible.

100.  Fourth, the fact that the New Tenancy Agreement contains reference to the fact that the brand “雪園” had been established and owned by Chiang Senior and the new restaurant also used that name (§91(5) above) does not advance the Petitioner’s case:

(1)  The wordings of the third schedule to the New Tenancy Agreement are almost identical to those under the Eighth schedule to the Tenancy Agreement.  It merely set out the (undisputed) fact that the brand “雪園” had been established and owned by Chiang Senior, and would be used by SGSP to operate a Shanghai cuisine restaurant. 

(2)  In his Closing[143], Mr Ho contends that Chiang Senior “would only have agreed to grant permission for [SG No. 1] to use the 雪園 brand name, if Mr Chiang was involved in and had an interest in [SG No. 1]”. The contention only falls to be rejected as there is no averment in the Petition in respect of either allegation.  Nor is there any evidence in support of the allegation.

(3)  It is the consistent evidence of Mr Chiang that he was informed by Chiang Senior that he had given consent to the operators of SG No. 1 and SG Club to open restaurants under the 雪園 brand name, though he was initially not very receptive to the idea and it took some persuasion before he granted permission to the operators given his “unfavourable experience” with the 雪園 in Causeway Bay[144].  Other than the conjectures that the brand 雪園 “was something which [Chiang Senior] held near and dear to his heart” and Chiang Senior would not allow Nelson/Agnes who had no apparent experience in running a Shanghai cuisine restaurant[145], neither of which is supported by any evidence, Mr Ho is not able to identify any fact to contradict Mr Chiang’s evidence in this regard. 

(4)  As regards Mr Cheung, there is simply no evidence to show that he had any involvement in relation to the New Tenancy Agreement at all. 

101.  Fifth, the allegation that Mr Cheung/Mr Chiang re-hired most of the former employees of the Restaurant (§91(6) above) must be rejected.  Not only is it not supported by any evidence, it is contradictory to the Petitioner’s case that the former employees were hired by SGSP. 

102.  Sixth, the opening of SG No. 1 at the Premises on 1 June 2022 with the same or very similar design, phone number, menu and promotion materials (§91(7) above) does not advance the Petitioner’s case:

(1)  The Petitioner has not articulated any basis as to why these matters would give rise to a breach of fiduciary duties on the part of Mr Cheung/Mr Chiang.  This is particularly so when by the time SG No. 1 opened, the business of the Restaurant had already come to an end. 

(2)  In any event, there is no evidence to suggest that Mr Cheung/Mr Chiang were involved in dealing with these matters. 

(3)  Mr Chiang’s evidence is that he was employed as the general manager of SGSP.  There is nothing wrong for Mr Chiang to deploy his knowledge and experience in managing SG No. 1.

(4)  The Petitioner calls 2 investigators to give evidence on their visits to SG No. 1.  Their evidence is that during one of their visits, a receptionist, Ms Hung Wai Mei (洪惠美) (“Hung”), told them that the “bosses” of SG No. 1 were the same as those of the Restaurant.  However, as Hung explains in her WS and under cross-examination, as a receptionist working for the Restaurant and subsequently SG No. 1, she had no knowledge about why the Restaurant became SG No. 1 or who owned them.  She was keen to get the potential order from the investigators and causally said that the bosses were the same and Chiang Senior was their consultant even though she did not have any personal knowledge of either matter.  Hung’s evidence is not really challenged during cross-examination and I accept her evidence.   

103.  Seventh, the incorporation of Great Wonderful and the establishment of SG Club (§91(8) above) cannot give rise to any breach of fiduciary duties on the part of Mr Cheung or Mr Chiang:

(1)  During his Opening, this Court asks Mr Ho on what basis can the Petitioner complain about Great Wonderful and SG Club when (a) they are admittedly owned by Nelson and (b) SG Club operates at a different location.  None has been identified. 

(2)  The plea is demurrable.  There is nothing in the SHA, the Investors Agreement or any of the duties pleaded in the Petition which has the effect of imposing any obligation on Mr Cheung or Mr Chiang not to open a Shanghai cuisine restaurant at a different location (after the cessation of Mr Chiang’s employment) as the same cannot be in competition with the Restaurant. 

(3)  In any event, not a shred of evidence has been adduced by the Petitioner to show that Mr Cheung or Mr Chiang owns or has interests in Great Wonderful or SG Club.

104.  Eighth, the article published by Esquire HK (§91(9) above) only falls to be rejected:

(1)  It is impossible to see why the involvement of Chiang Senior in setting up SG No. 1 or SG Club, even if established, would give rise to any breach of fiduciary duties on the part of Mr Cheung or Mr Chiang. 

(2)  In any event, Rs’ case that Mr Cheung/Mr Chiang had no involvement in the publication of the article has not been challenged.   

105.  None of the primary facts pleaded in support of the Petitioner’s case on breach of fiduciary duties is established.  It follows that there is no factual basis for the court to draw any of the inferences pleaded in the Petition (see §92 above) or to find that Mr Cheung/Mr Chiang acted in breach of their fiduciary duties (see §93 above).

106.  In any event, in view of the finding that Mr Cheung/Mr Chiang were entitled to form their commercial judgement not to exercise the Option and renew the lease (see Section E2 above), there is no basis for the Petitioner to contend that they acted in breach of their fiduciary duties owed to the Company and ASG.

107.  In his Closing[146], Mr Ho argues that it can “readily be inferred from the evidence that both Mr Cheung and Mr Chiang must have taken active steps to facilitate the creation of, and have an interest in, [SGSP] and [SG No. 1]”.  Once it is accepted that Mr Cheung/Mr Chiang “had an interest in and facilitated the establishment of [SGSP] and [SG No. 1], it becomes obvious that they could only have had one purpose in not renewing the [Tenancy Agreement]”, and the “true reason for Mr Cheung’s and Mr Chiang’s decision not to renew the [Tenancy Agreement] was to cut Mr Chan out and to establish a new ‘雪園’ restaurant without him”.  Reliance is placed on the following 4 allegations (and the arguments advanced in respect of each allegation):

(1)  The “seamless fashion in which [SGSP] took up a new lease of the Premises could only have been possible with the facilitation of Mr Cheung and Mr Chiang”[147];

(2)  Chiang Senior “would only have agreed to grant permission for [SG No.1] to use the 雪園 brand name, if Mr Chiang was involved in and had an interest in [SG No. 1]”.  The consequence is that Mr Chiang “must have been involved in assisting Nelson/Agnes with obtaining [Chiang Senior’s] permission to use the ‘雪園’ brand name to open a new ‘雪園’ restaurant owned by [SGSP]”, which must have taken place prior to incorporation of [SGSP] [148];

(3)  Mr Chiang tried to conceal his involvement and relations with SGSP and SG No. 1 from the court, and it is “now evident that he had been involved in [SG No. 1] from the very start”[149]; and

(4)  It cannot be a mere coincidence that SGSP shared the same Office and company secretary as Sky Prosper, Terraform and SG Group[150].

108.  Nowhere in the Petition have the above allegations been pleaded.  It is not properly open to the Petitioner to run an unpleaded case against Mr Cheung and Mr Chiang for breach of fiduciary duties in the manner contended by Mr Ho.

109.  In his Closing[151], Mr Ho goes further and submits that the establishment of SG Club “is a further piece of evidence which shows that Mr Cheung and Mr Chiang acted in concert with [Agnes] and [Nelson] in operating the new 雪園 restaurants”, relying on 3 matters.  This is a blatant attempt to run an unpleaded case of conspiracy and breach of fiduciary duties against Mr Cheung/Mr Chiang, Agnes and Nelson and must be rejected.   

110.  For all the above reasons, the Petitioner fails on the Breach of Fiduciary Duties Issue. 

E4.  Non-competition Issue

111.  The Petitioner’s case is that by procuring the establishment of SG No. 1 and SG Club, Mr Chiang acted in breach of his non-competition obligations under cl.17.1-17.2 of the SHA and is liable to pay damages of HK$2.6 million to the Company[152]. Rs deny the allegation[153].

112.  Mr Ho submits that:

(1)  Once the court finds that Mr Chiang was involved in or facilitated the establishment of SG No. 1 before the Restaurant’s closure, it necessarily follows that he had breached clauses 17.1 of the SHA, which provides that “Mr Chiang undertakes not to open, operate, work or manage other similar Shanghainese restaurant(s) in all of Hong Kong during his employment with the Restaurant”. 

(2)  Pursuant to clause 17.3 of the SHA, Mr Chiang is liable to pay the Company liquidated damages in the sum of HK$2.6 million.  The Petitioner asks this to be factored into account in the valuation of the buy-out price for the Petitioner’s shares in the Company. 

(3)  In Rs’ Opening §88, they argue that clause 17.3 of the SHA is a penalty clause.  However, it is well-established that, if a party intends to argue that a clause is unenforceable, such allegation must be specifically pleaded.  Whether a clause is a penalty or not depends on its commercial justifications and is evidence-sensitive.  Rs should not be allowed to raise this point only in their Opening, when no evidence has been adduced on the matter and no opportunity has been provided to explore the same with the witnesses (On Sky Enterprise (HK) Ltd v Lanco International Holdings Ltd[2017] 1 HKLRD 941 §§94-97).  

113.  The Petitioner’s complaint must fail:

(1)  The obligation under clause 17.1 is expressly stated to be limited to the period during Mr Chiang’s employment with the Restaurant. 

(2)  It is common ground that Mr Chiang’s employment with ASG and his role at the Restaurant came to an end when the Restaurant closed on 14 February 2022.

(3)  There is no evidence to show that Mr Chiang has opened, operated, worked or managed any “other similar Shanghainese restaurant(s) in all of Hong Kong”, as I so find (see §§96-109 above). 

(4)  As Mr Chiang did not act in breach of clause 17.1 of the SHA, he is not liable to pay the liquidated damage to the Company.

114.  For completeness, in his Closing, Mr Ho (rightly) does not rely on clause 17.2 of the SHA:

(1)  Under clause 17.2, Mr Chiang “shall not engage in any competition with the business of the Restaurant within 24 months from selling his shares or termination of his employment with the Restaurant”.

(2)  As the Restaurant ceased to carry on business on 14 February 2022, Mr Chiang’s employment with SGSP could not be in competition with the Restaurant’s business. 

E5.  Misappropriation Issue

115.  In the Petition, the Petitioner complains that the following transfers, withdrawals and payments were made by Mr Cheung/Mr Chiang in breach of their fiduciary duties in that they were made for purposes unrelated to the Restaurant’s business and without ASG’s board authorisation[154]:

(1)  All the transfers and withdrawals from ASG Account during the period from 30 January 2021 to 31 March 2022 which reduced the balance in ASG Account from HK$6 million in end 2021 to HK$1.4 million[155];

(2)  Numerous payments totalling HK$2,821,590 was paid to Mr Chiang during the period from 2 November 2020 to 17 January 2022;[156] and

(3)  Numerous payments totalling HK$3,117,400 was paid to Terraform during the period from 17 December 2020 to 10 February 2022[157].

116.  Rs’ defence may be summarised as follows[158]:

(1)  They admit the transfers and withdrawals but deny that they were unauthorised or not for the business or operation of ASG or the Restaurant;

(2)  The payments to Mr Cheung/Mr Chiang were valid as they were made pursuant to either (a) the “agreed arrangement” between Mr Chan, Mr Cheung and Mr Chiang from the very beginning; or (b) the majority decision of ASG’s board after the breakdown in relationship caused by Mr Chan; and all the payments were properly recorded in the accounting records of ASG;

(3)  The “agreed arrangement” comprises:

(a)  Dividend prepayments to Mr Chiang pursuant to “Prepayment Arrangement”[159];

(b)  Mr Chiang was entitled to receive Housing Allowance and Pickle Money in addition to his salary and director’s remuneration[160];

(c)  Mr Cheung/Mr Chiang were entitled to receive director’s remuneration[161];

(d)  Loans to Mr Cheung with interest at 2% p.a. as recorded in 4 loan agreements: (i) first one dated 16 December 2021 for HK$246,000; (ii) second one dated 16 December 2021 for HK$500,000; (iii) third one dated 17 January 2022 for HK$1,000,000; and (iv) fourth one dated 10 February 2022 for HK$800,000[162]; and

(e)  Terraform was entitled to receive service fee at the agreed rate[163].

117.  I have no hesitation in rejecting the Petitioner’s allegations that all the transfers, withdrawals and payments made out of ASG Account were “unauthorised” or that they constituted misappropriations of ASG’s assets.  Nor do I accept the Petitioner’s case that Mr Chan’s consent to all payments in excess of HK$50,000 was essential:

(1)  The allegations fly against the modus operandi in which the Group operated (see §21 above). 

(2)  The Petitioner cannot rely on Mr Chan’s refusal in co-signing all cheques irrespective of their purposes (which I consider to be wrongful and constitute a breach of his fiduciary duties owed to ASG), as the basis for alleging that all payments in excess of HK$50,000 without Mr Chan’s consent were unauthorised or invalid.       

(3)  As regards payment of (a) Pickle Money, (b) Mr Chiang’s remuneration as manager of Restaurant and director of ASG, and (c) the service fee paid to Terraform, all these were agreed by parties at the outset. There is no basis to impugn any of these payments simply because Mr Chan took a different view on the matters after the relationship between the parties turned sour. 

(4)  As for Housing Allowance, the evidence shows that all directors including Mr Chan agreed that Mr Chiang was entitled to be paid Housing Allowance until Mr Chan objected to the payment in July 2019 (see §§23(1), 28, 72(1) above). 

118.  At trial, Mr Ho submitted[164] an Annex 2 and Annex 3 which summarise the transfers (listed in §43 of SAF) to Mr Chiang and Mr Cheung respectively and their explanations for each of the transfers. 

119.  In respect of payments to Mr Chiang (Annex 2), the Petitioner confirms that it does not take issue with various payments of “director bonus”, but continues to dispute the payments of:

(1)  Pickle Money in the amount of HK$53,650 for the period from November 2020 to August 2021.  For the reasons stated in §117(3) above, there is no proper basis to challenge Mr Chiang’s entitlement to receive the same;

(2)  Unexplained transfers in the amount of HK$62,000, which comprise HK$22,000 paid to him on 7 July 2021  and 2 payments of HK$20,000 each on 6 January 2022 (“Unexplained Transfers”);

(3)  Prepayment of “dividend” in the amount of HK$164,000 paid to him on 2 November 2020 (“Prepayment of Dividend”); and

(4)  Personal loans in the amount of HK$1,778,000 advanced on 10 February 2021 (HK$200,000), 11 May 2021 (HK$150,000), 1 September 2021 (HK$500,000), 28 October 2021 (HK$300,000), 16 December 2021 (HK$328,000) and 4 January 2022 (HK$300,000) (“Personal Loans”). 

120.  In respect of the Prepayment of Dividend and Personal Loans, Mr Chiang’s defence is that these were made under the Prepayment Arrangement.  In this regard:

(1)  Mr Chiang’s evidence is that these payments were made under the Prepayment Arrangement which he negotiated with Mr Chan and Mr Cheung at the outset as he wanted to receive his share of “dividend” regularly, and neither of them was against the Arrangement[165]. Under cross-examination, Mr Chiang says that in 2017-2018, it was Mr Chan who approved his requests for loans and prepared documents for him to sign.  The same practice continued after their dispute had arisen except that the documentation was handled by Mr Cheung.  Mr Chiang says that he is not familiar with and does not really know how the Prepayment Arrangement and the repayment actually operated as they were handled by Mr Chan or Mr Cheung with the assistance of the accounting staff.  All that he knows is that when he required to borrow money from ASG, the mechanism for prepayment of dividend was arranged by Mr Chan, to which Mr Cheung agreed.

(2)  The evidence of Mr Chiang is supported by Mr Cheung, who confirms that the Prepayment Arrangement was something which he, Mr Chan and Mr Chiang agreed upon as Mr Chiang was the key person in running the Restaurant.  Pursuant to the Prepayment Arrangement, Mr Chiang could “pre-emptively receive an amount of monies from ASG by way of interest-free loan”, and the amount would eventually be set out against his actual entitlement of “dividend” payout to be decided subsequently[166]. When it is put to Mr Cheung why Rs did not produce any documents showing the loans/payments to Mr Chiang pursuant to the Prepayment Arrangement, he explains that the Petitioner only complains about the payments post-November 2020 but not the earlier payments, that is why the documents relating to the earlier payments/loans have not been adduced.  I accept his explanation. 

121.  The Petitioner denies the existence of the Prepayment Arrangement.  Mr Ho submits that the assertion that Mr Chan approved or consented to the Prepayment Arrangement is wholly incredible for the following reasons:

(1)  In their WS and pleadings,[167] neither Mr Cheung nor Mr Chiang provided any particulars regarding when or how the Prepayment Arrangement was purportedly agreed upon by the parties.

(2)  Under cross-examination, Mr Cheung and Mr Chiang give different accounts as to how the Prepayment Arrangement came to be agreed upon:

(a)  According to Mr Cheung, there was a face-to-face meeting between himself, Mr Chiang and Mr and Mrs Chan at the beginning of their cooperation, whereby all 4 of them agreed to the Prepayment Arrangement. His evidence is that the Arrangement was agreed upon by the parties “from day 1”.[168]  Mr Cheung even claims that there were some documents signed by Mr Chan showing that he had approved certain prepayments to Mr Chiang in the earlier years.  When it is pointed out that these documents were never produced in these proceedings, he blames his lawyers (“可能我律師做得唔好”).[169]

(b)  On the other hand, Mr Chiang’s evidence is that Mr Chan arranged the making of prepayments to him.  He would sign some documents to acknowledge the receipt of the prepayments, but he has no clear understanding about when or how he is to repay ASG.  He suggests that the prepayments may be set off against his salary or bonus.  He cannot recall how many prepayments he had received over the years, although he said it was definitely more than once (“咁一定多過一次”).[170]

(3)  Mr Cheung/Mr Chiang are not able to come up with a coherent or consistent account as to how the Prepayment Arrangement came to be agreed.  Their allegation that Mr Chan had agreed to the Prepayment Arrangement is plainly incredible and unsupported by any documentary evidence.

(4)  In any event, Mr Chiang accepts during cross-examination that, in relation to the 6 payments made to him between 9 February 2021 and 31 December 2021, he did not discuss the same with Mr Chan nor did the 3 directors hold any board meeting to approve these prepayments.[171]  This admission leaves no room for Rs to contend that Mr Chan had consented to or approved the 6 alleged prepayments in question.

(5)  If Mr Chan had consented to or approved any of these prepayments, there would have been no need for Mr Cheung/ Mr Chiang to split the transfers into transactions below HK$50,000. 

122.  I do not accept the criticisms made by Mr Ho.  In my view, the evidence of Mr Chiang and Mr Cheung on the Prepayment Arrangement is consistent with and supported by the following undisputed evidence, which shows that the Prepayment Arrangement had been agreed between Mr Chan, Mr Chiang and Mr Cheung at the outset:

(1)  It is common ground that Mr Chiang did not have the means to invest the full amount required to obtain a 40% shareholding in the Company and he only paid HK$400,000. 

(2)  It is Mr Chiang’s unchallenged evidence that even for the initial investment of HK$400,000, he had to borrow half of the amount from Chiang Senior. 

(3)  Under cross-examination, Mr Chan confirms that he was responsible for monitoring the financials of the Restaurant.  His evidence is that Mr Chiang had to borrow money from time to time to pay his personal expenses, and he even advanced personal loans to Mr Chiang for such purposes. 

(4)  The above evidence is consistent with Mr Chiang’s evidence on his financial position and the need to obtain regular payments on account of his share of “dividend” before the actual distribution.

(5)  Although Mr Chan repeatedly denies that he agreed to the Prepayment Arrangement and maintains that he was not aware of or approved any loans advanced to Mr Chiang. To bolster his case, Mr Chan claims that in the WhatsApp message sent to Mr Chiang on 9 November 2021 where he said “還有, 你借了公司的錢, 要還的, 要賠償!!!!”, it was a reference to the 2 personal loans advanced by him to Mr Chiang.  It is only when Mr Chan is asked by this Court to explain why he referred to “你借了公司的錢” if he were referring to loans advanced by him to Mr Chiang that Mr Chan accepts that the 2 loans he referred to in the message were in fact the loans in the amount of HK$100,000 and HK$150,000 advanced by ASG to Mr Chiang.  Mr Chan says that the question of repayment of such loans were discussed at the meeting attended by Mr Cheung, Mr Chiang and Mr Chan at CRC in June 2020.  The existence of loans advanced by ASG to Mr Chiang before June 2020 reinforces the fact that the Prepayment Arrangement existed.    

123.  Mr Ho also seeks to impugn the Prepayment Arrangement as being (1) contrary to clause 7.3 of the Investors Agreement in that it had not been authorised by ASG’s board and it was not for the purpose of the Restaurant’s business; and (2) unlawful as neither ASG nor the Company has ever declared any dividend. 

124.  Neither ground assists the Petitioner:

(1)  If, as I so find, the Prepayment Arrangement was something agreed upon by Mr Chan, Mr Cheung and Mr Chiang at the outset, it is not properly open to the Petitioner to complain about it. 

(2)  Indeed, the undisputed evidence shows that Mr Chan, Mr Cheung and Mr Chiang did agree to the practice of allowing ASG to advance loans to other entities unrelated to the Restaurant’s business.  In ASG’s balance sheet made up to 30 April 2022, it recorded that (a) Gold Success was indebted to ASG in the amount of HK$550,563.94; and (b) International Ltd (HTL) owed HK$67,126 which represented the amount incurred by Wako’s staff for dining at the Restaurant.   

(3)  It cannot be said that the Prepayment Arrangement was not for the purpose of the Restaurant’s business.  As Mr Cheung says, Mr Chiang was the key person running the Restaurant and the Prepayment Arrangement was specifically agreed upon to cater for Mr Chiang’s financial position.

125.  In any event, I am unable to see how any of the payments to Mr Chiang can constitute misappropriations of ASG’s assets given that:

(1)  It is not in dispute that all payments to Mr Chiang were recorded in the books of accounts of ASG and evidenced by the documents which Mr Chan was able to obtain.

(2)  In respect of 4 payments in the total amount of HK$1,150,000 which remain unpaid, 4 loan agreements[172] were prepared and signed by Mr Chiang to acknowledge his liability to repay the loans in question.  The same amount was shown in ASG’s balance sheet made up to 30 April 2022 as owed by Mr Chiang.   

(3)  The fact that ASG had advanced loans to Mr Chiang in the amount of HK$1,150,000 was disclosed at the Investors’ Meeting and no objection was raised by any Investors (see §34(3) above).

(4)  The court should also take into account the amount (HK$1,200,000) which Mr Chiang would be entitled to receive by way of (a) repayment of shareholders’ loan (HK$400,000) and (b) dividend from the Company (HK$800,000) had Mr Chan performed his duty as director of ASG for the reasons explained in §§133-136 below.  The net amount owed by Mr Chiang would be HK$804,000[173].

(5)  To the extent that the amount received by Mr Chiang exceeds his entitlement to receive repayment of shareholders’ loan and dividend from the Company, he should pay interest at 2% p.a. to ASG given that this was what he and Mr Cheung represented to the Investors at the Investors’ Meeting (see §34(3)(b) above).

126.  As for Mr Cheung, Mr Ho confirms that the Petitioner only takes issue with the payments in the total amount of HK$2,557,400 in Annex 3 which, the Petitioner contends, constitute misappropriations of ASG’s assets.  The payments comprise:

(1)  4 loans in the total amount of HK$2,546,000[174] advanced to Mr Cheung (collectively “4 Loans”) as follows:

Date	Repayment Date	Amount HK$
16.12.2021	16.12.2022	246,000
16.12.2021	16.12.2022	500,000
17.01.2022	17.01.2023	1,000,000
10.02.2022	10.02.2023	800,000

(2)  2 other payments in the total sum of HK$64,000. 

127.  For the reasons explained below, I reject the Petitioner’s complaint that the payments to Mr Cheung constitute misappropriations of ASG’s assets or that they are unfairly prejudicial to the interests of the Petitioner or the Company.   

128.  First, it is not in dispute that the 4 Loans were recorded in the loan agreements entered into between Mr Cheung and ASG and were signed by Mr Cheung (as borrower), Mr Chiang (on behalf of ASG as lender) and witnessed by the staff named.  This shows that there was never any intention on the part of Mr Cheung to misappropriate the funds in question. 

129.  Second, the fact that in the beginning of 2022, HK$1,800,000 (i.e. the third and fourth loans) had been advanced to Mr Cheung personally which carry interest was disclosed at the Investors’ Meeting (see §34(3)(b) above).  The disclosure reinforces the fact that Mr Cheung had no intention to misappropriate the amounts paid to him.    

130.  Third, as regards the “repayment” of the first 2 loans (in the total amount of HK$746,000), which had fallen due on 16 December 2022, by his solicitors’ letter dated 17 January 2023, Mr Cheung informed the Petitioner that:

“…both loans together with interest thereon was duly repaid, by way of set off against firstly the dividend [Sky Prosper] (on behalf of [Mr Cheung][175]) was entitled to receive from [ASG], through [the Company], in the sum of HK$738,000, and secondly the reimbursement of the sum of HK$30,000 previously paid by [Mr Cheung] to [Mr Chiang] in about 2020 as part of [Mr Chiang’s] salary which was a result of [Mr Chan’s] refusal to sign the cheque for the payment of the full amount of [Mr Chiang’s] salary”.

131.  In response, the Petitioner through its solicitors[176] characterised the reply as “completely absurd” and required Mr Cheung to explain when and how did the board of ASG resolve to distribute dividend to its shareholders and why Sky Prosper, not being a shareholder of ASG was allegedly entitled to receive dividend from ASG.

132.  For the reasons explained in §§133-136 below, the Petitioner is not entitled to rely on Mr Chan’s failure to perform his duty as director of ASG as the basis for impugning what was in substance a repayment of the first and second loans advanced by ASG to Mr Cheung.

133.  Clause 14.1-14.2 of the Investors Agreement provide that upon determination of the Restaurant’s business, the board shall (1) cause the realisation of all assets on terms to be determined by the board; (2) on receipt of the proceeds of realisation of all assets, discharge all outstanding obligations and liabilities; and (3) cause a final account to be prepared showing the total net profit after tax.  Upon such account being approved by the board, the shareholders shall under the direction of the board receive from ASG its share of the net profit in the agreed proportions after taking into account any interim distribution of profit or cash surpluses. 

134.  It is the unchallenged evidence of Mr Cheung that following the cessation of the Restaurant’s business, he wanted to perform the directors’ obligation to realise all the assets and distribute the funds to the shareholders as required by the Investors Agreement.  He was not able to do so as the “pre-condition” for distribution was completion of an audited accounts (as final accounts) but Mr Chan refused to sign the same.  He therefore made his own calculation and came up with the amount of HK$35,000 to be distributed to each Investors as announced at the Investors’ Meeting, and all but one Investors received the distribution.

135.  In my view, clauses 14.1-14.2 impose an obligation on the directors to take the necessary steps to realise its assets and distribute the surplus funds to the shareholders after ASG had ceased to carry on business:

(1)  ASG’s inability to realise its assets and formally declare and pay any “dividend” to the shareholders was the result of Mr Chan’s refusal to perform his duty as director in that he failed (a) to sign the AFS of ASG for the years 2020 and 2021; (b) to sign the final account as required by the Investors Agreement after the Restaurant had ceased business; and (c) to attend the Investors’ Meeting convened for the purpose of discussing ASG’s affairs including how to deal with its surplus funds.  Had Mr Chan attended the Investors’ Meeting, it would have been possible for the shareholders of ASG to discuss and agree on the declaration and payment of “dividend”.  This, in turn, would enable the “dividend” be paid up to the Company which, in turn, would able the Company to repay the shareholders’ loans in accordance with clauses 9.4-9.5 of the SHA. 

(2)  The mere fact that the Petitioner intended to commence proceedings against Rs does not provide a justification for Mr Chan not to perform his duty.  This was particularly so when he knew full well that without his participation, ASG would not be able to take steps to liquidate its affairs and distribute its surplus funds to the shareholders. 

(3)  Mr Chiang/Mr Cheung cannot be criticised for taking steps to inform the Investors of the impasse between the parties and to cause ASG to pay HK$35,000 for each 1% shareholding in ASG as “dividend”.  Nor can Mr Cheung be criticised for calculating his share of “dividend” which he would be entitled to receive from ASG through the Company, and treat the amount as having been paid to him by way of set off. 

(4)  It is not open to the Petitioner to complain about the validity of the distribution of “dividend” announced at the Investors’ Meeting when it was Mr Chan’s refusal to perform his duty which resulted in ASG not being able to formally declare and pay any dividend to the shareholders. 

136.  Based on the 2017-2019 AFS and the Unaudited FS:

(1)  The total net profit after tax generated by ASG from in the 5 years of its operation is HK$7,170,012 (see §§24-25 above).

(2)  The Company would be entitled to receive at HK$5,879,409.84 being 82% the net profit as “dividend”. The amount would be sufficient to repay the shareholders’ loans to the Petitioner (HK$1,300,000), Sky Prosper (HK$1,300,000) and Mr Chiang (HK$400,000).

(3)  Subject to payment of the Company’s expenses and liability (which would not be substantial as it is merely an investment holding company), the balance in excess of HK$2 million could be distributed to the shareholders by way of dividend, with the Petitioner and Sky Prosper being entitled to receive HK$600,000 each and Mr Chiang HK$800,000.

137.  Fourth, in any event, the advancement of the 4 Loans cannot be prejudicial to the interests of ASG or the Company.  It is the uncontradicted evidence that the interest rate on the funds kept in ASG Account was only 0.2% p.a..  By lending the funds to Mr Cheung as loans, ASG was able to obtain a much higher rate of interest at 2%.   

138.  It follows that the complaint about misappropriation of assets also fail.   

F.   DISPOSITION & COSTS

139.  For all the above reasons, the Petition is dismissed. 

140.  As for costs, I make a costs order nisi that the Petitioner is to pay the costs of and occasioned by the Petition including all costs reserved to the 1^st to 5^th respondents, to be taxed if not agreed.