CHUAN WEN SZE v. USINE CO LTD AND ANOTHER

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NOS.25 & 26 OF 1997

(ON APPEAL FROM HCCW NOS. 104 & 105 OF 1990)

-----------------

JUDGMENT

-----------------

Mayo, J.A. (giving the judgment of the Court):

1. These appeals relate to two petitions which were lodged by Madam Chuan Wen Sze (Ms Chuan) to wind up these companies and obtain other relief. The two companies were essentially family business.

2. Due to a number of unfortunate circumstances this is long outstanding litigation. The events giving rise to the litigation occurred in 1989 and understandably it was necessary to weigh and consider background circumstances which occurred a number of years before that.

3. There was an abortive hearing in 1991. Following this the structure of the litigation changed significantly. The case eventually came on for hearing before Rogers J. (as he then was) in September and October 1996. The hearing lasted almost five weeks and it is true to state that an enormous amount of material was placed before the Judge for his consideration.

4. One of the main issues in dispute was the question as to the extent (if any) to which Ms Chuan was beneficially entitled to the shares in the companies. It was the 2^nd Respondent's (Mr Boon) contention that any shares held by her were held by her as trustee for him. Ms Chuan claimed that she had a 50% interest in the companies. The Judge after hearing all of the evidence and considering all of the documentation was satisfied on the balance of probabilities that she beneficially owned 25% of the shares in the companies.

5. He was also satisfied on the evidence which was before him that by his conduct Mr Boon had effectively excluded Ms Chuan from the management of the companies and exercising her rights as a director of the companies.

6. This being the case he ordered Mr Boon to purchase Ms Chuan's shares. The value of the shares was to be based on their value as at the 31^st December 1989 and this was not to be discounted by virtue of the fact that Ms Chuan's interest in the companies was a minority interest.

7. Ms Chuan started the business in 1979. Originally it was a sole proprietorship but at a very early stage a Mr Tsui joined her as a partner.

8. The business of the partnership was to manufacture specialised textiles for sale in Germany and Austria. The garments were sold almost exclusively to a Mr Schliessman. It was soon realised that more capital was required. Ms Chuan's former employer Mr Chau was invited to invest in the business. He did so. He invested $300,000. This was on condition that a limited liability company would be formed. The arrangement was that 1,500 shares would be issued to him and 750 shares each would be issued to Ms Chuan and Mr Tsui. They would not have to pay for the shares. They would run the company and Mr Chau would in effect be a sleeping partner.

9. At the same time a decision was made to continue to operate the partnership. Ms Chuan and Mr Tsui invited Mr Boon who is Ms Chuan's brother in law to invest in the partnership. He invested $200,000 in the venture. He resided in Singapore and did not initially at any rate take a very active role in the business. The partnership was separate and distinct from Usine Company Limited (UCL) and Ms Chuan gave evidence at the trial to the effect that although some of the business expenses of the partnership were borne by UCL Mr Chau was not informed of its activities. She claimed that Mr Boon was well aware of this. The partnership was referred to as UC2 in the proceedings below.

10. A considerable amount of time and energy appears to have been expended in attempting to resolve what were the respective interests of the parties in UC2. However the Judge gave his reasons for concluding that Ms Chuan, Mr Tsui and Mr Boon were all equal partners in the firm.

11. In 1980 Usine Garment Factory Limited (The Factory) was formed. It was closely connected with both UCL and UC2. 50% of the shares in The Factory were registered in UCL's name and the remaining shares were held in Mr Boon's name. The Judge appeared to be satisfied on the evidence that the shares registered in Mr Boon's name were held beneficially for UC2.

12. In 1982 Mr Chau informed the parties that he wished to sell his interest in UCL and that he wanted a lump sum immediately.

13. Of the interested parties Mr Boon was the only one in a financial position to be able to meet Mr Chau's requirements. The amount agreed to be paid to him was $300,000. Mr Chau was paid off by Mr Boon and one of the main issues between the parties was what the payments which had been made by Mr Boon represented. It was his case that he was purchasing all of the beneficial interests in the companies whereas it was the case for Ms Chuan that she and Mr Tsui still had a 50% interest.

14. It should be added at this juncture that almost immediately following Mr Chau's departure, Mr Tsui also retired and his interests were disposed of.

15. The amount which was paid to Mr Tsui to satisfy his interest was $160,000. There is no dispute on this issue.

16. However it is Mr Boon's case that when Mr Tsui's interest in the companies was relinquished so also were Ms Chuan's.

17. According to him an agreement was concluded between himself and Ms Chuan whereby in consideration of $165,000 she would transfer all her interest in the companies to him. She would however continue to operate the business and would receive 25% of the profits as remuneration.

18. It was common ground that Ms Chuan had received $165,000 from either UCL or accounts belonging to Mr Boon in the period between May and August 1982.

19. Ms Chuan gave evidence at the trial that although she had physically received these amounts she had applied them either for the benefit of UCL or Mr Boon. One of the main issues which had to be determined in this litigation was who were the beneficial owners of the shares in UCL and The Factory.

20. It was Ms Chuan's case that prior to the departure of Mr Tsui in March 1982, shares in UCL were equally divided between Mr Boon, herself and Mr Tsui. She claimed that the moneys which had been paid to Mr Tsui had come from UCL's accounts and that after his interests had been discharged, she and Mr Boon had both been entitled to a 50% interest in both the companies.

21. It was Mr Boon's case that he was beneficially entitled to all of the shares in both of the companies.

22. Be that as it may Ms Chuan continued to manage and operate UCL after Mr Tsui's departure. Mr Boon took little part in the management of UCL until Mr Schliessman's death in 1986. Following this Mr Boon visited Hong Kong more frequently and assumed a more active role. In addition to this he appointed a Mrs Kroth as an agent in Germany to assist in the sale of UCL's goods.

23. After Mr Boon became involved in UCL's affairs the relationship deteriorated leading to the unhappy events when in effect Mr Boon excluded Ms Chuan from taking any active role in the affairs of the business. All of this is described in some detail in Rogers J's judgment.

24. The Judge resolved these issues in the manner indicated earlier in this judgment.

25. It has to be said that grounds 1-3 of this appeal are somewhat prolix and convoluted. What they boil down to is a contention that the Judge's findings on the issues referred to could not be supported by the evidence which lay before him.

26. Mr Hoo S.C. who represented Mr Boon explained by the use of a series of charts showing the respective interests of the parties in the businesses as the situation developed that it was mathematically impossible for the Judge to arrive at the conclusion that Ms Chuan had a 25% interest in UCL and The Factory after the reorganisation of March 1982. The charts he prepared reflected the different contentions which were being advanced by the parties.

27. It is accurate to state that if this logic is adopted, it was impossible for the Judge to conclude that Ms Chuan ended up with a 25% interest if the percentages depicted on the chart are taken in conjunction with the evidence which lay before the Judge.

28. It was completely impossible to reconcile the end result with the percentages on the chart if the Judge accepted the case which was being advanced by Ms Chuan that she was entitled to a 50% interest in the companies. Mr Hoo went on to submit that this was not a situation which lent itself to compromise as there were far reaching consequences flowing from the exact determination of the number of shares beneficially owned by Ms Chuan. This was clearly illustrated by the order eventually made by the Judge ordering Mr Boon to purchase Ms Chuan's shares in UCL.

29. Adopting this reasoning Mr Hoo went on to argue that five questions had to be asked before there could be a satisfactory resolution of this matter.

30. These questions were:

31. These questions would appear to accurately encapsulate the issues which had to be determined by the Judge.

32. It is clear from the judgment that all of these matters were carefully weighed and considered by him.

33. Question 1 was very much an issue of fact. The approach recommended by Mr Boon's accountant of attempting after the event to assess the value of the interest being acquired was seriously flawed. Mr Boon himself said in one of his earlier affirmations that he had simply placed reliance upon the representations which had been made by Ms Chuan.

34. This also overlooks the very basic fact that Mr Chau was only able to give title to the interest he had. If as the Judge found he only had a 50% interest in the equity of UCL that was all that he could transfer to Mr Boon.

35. Complaint was made by Mr Hoo that the Judge's finding on question 2 was perverse and contrary to the evidence which was before him. He based this contention on an argument that if Ms Chuan already owned a 25% interest in the companies it was hardly likely that she would voluntarily pay a further $125,000 to purchase what she already had.

36. This argument would suggest a rather simplistic approach to the situation. It has to be borne in mind that when Mr Chau retired from the business, he had to be paid off in a capital sum of $300,000. This payment was effected by Mr Boon. He had already contributed $200,000 thus bringing his stake up to $500,000. In such circumstances it would not be unreasonable for him to expect Ms Chuan and Mr Tsui to make a capital contribution to the venture of $125,000 each which sum incidentally was 25% of Mr Boon's stake. As it happened they each had profits of approximately $115,000 standing to their credit in the business. These profits were transferred to Mr Boon and the amounts were topped up by the payment of cheques by each of them of $9,480.86.

37. Ms Chuan and Mr Tsui may well have considered it to be in their interests to agree with these arrangements because if they did not Mr Boon might have been reluctant to increase his stake in the way he did. The Judge's finding was in no way contrary to the evidence which was before him.

38. It would appear that the Judge answered question 3 in Mr Boon's favour.

39. Questions 4 and 5 can conveniently be dealt with together.

40. There was a marked lack of credible evidence to support the contention that any such agreement was entered into.

41. The entries in the accounts indicating that $165,000 was taken from Mr Boon or the company accounts by Ms Chuan was almost entirely inconclusive. All that it established was that Ms Chuan had withdrawn these moneys. In her evidence she freely accepted this. She did however go on to provide explanations as to what she had done with these moneys. She claimed to have applied them either for the benefit of Mr Boon or the companies.

42. All of this evidence had to be considered in the overall context of the case and the inherent improbability of the evidence which was adduced by Mr Boon and his advisors.

43. It would appear to be extraordinary that Ms Chuan should, shortly after paying $125,000 in respect of her stake in the companies to agree to relinquish it for $165,000 and agree to continue running the companies simply for a 25% share of the profits.

44. The Judge's approach to these questions cannot seriously be called into question. Certainly it cannot be said that his findings were in any way contrary to the evidence which was before him.

45. Mr Hoo's submission that it was necessary for the Judge to proceed only upon the basis of the division of the interests he found to exist prior to the reorganisation in March 1982 cannot withstand any serious scrutiny.

46. There was no reason whatever to attempt to place the Judge in such a strait-jacket. It also overlooks the obvious fact that the situation was a fast developing or evolving situation and that each of the parties involved changed their respective interests.

47. Viewing these grounds as a whole it is difficult not to obtain the impression that all that we were being asked to do was to retry the same issues which lay before the Judge.

48. This is a misconceived approach to an appeal. There is no merit in these grounds and they are dismissed. The re-amended ground 4 is as follows.

49. Mr Westbrook for Ms Chuan identified the passages in the judgment upon which he placed particular reliance. These were at pages 42,44 and 45 and were as follows:-

50. Notwithstanding the fact that a complaint is made in the ground that the Judge erred in his factual findings no such complaint was made before us. It is accordingly necessary for us to proceed upon the Judge's findings of fact.

51. The main argument advanced by Mr Mok who had the conduct of this part of the appeal for Mr Boon was that Ms Chuan had to establish something more than the fact that the business had originally been a partnership and thus be considered as a quasi-partnership.

52. He submitted that unless something more than this could be established the requirements of S.168A had not been met. What he had in mind was some specific agreement or arrangement between the parties such as to override the provisions contained in the Articles of Association of the Companies. He went on to complain that this additional agreement had not been pleaded and his client had been afforded no opportunity of contesting any claim to such an agreement.

53. The first question which has to be considered is whether it is necessary to look for any additional agreement or arrangement.

54. Lord Wilberforce discussed the circumstances when a shareholder would have a legitimate expectation of being involved in the management of a company at p.379 of Re Westbourne Galleries Ltd. [1973] AC 360.

55. The re-amended petition is sufficiently drafted to adequately meet two of the circumstances referred to by Lord Wilberforce, namely the fact that the business relationship was originally a partnership and the fact that for all practical purposes at the time when Mr Boon joined the company he was in effect a sleeping partner. The arrangement between the parties was essentially that Mr Boon provided the financing and Ms Chuan provided the expertise and the connections which enabled the products of the company to be sold.

56. It is not possible to fault the Judge's analysis of the situation on this. There were more than sufficient grounds to justify him in making the order he did.

57. This ground must also fail.

58. The final ground relates to the Judge's order for costs. The Judge discounted 10% of the costs to be recovered by Ms Chuan.

59. The reason for this discount was that Ms Chuan had in her amended petition claimed that she was the beneficial owner of 50% of the shares in the companies rather than 25% as found by the Judge.

60. Mr Hoo argued that this discount was not nearly generous enough to his client. He claimed that a very substantial amount of time had been spent in ventilating this issue as it had had a knock on effect on other issues. He argued that but for this complication the issue could have been confined to the final question as to whether Mr Boon had or had not bought out Ms Chuan in 1982 and whether she had received the $165,000.

61. This contention can only be advanced with the benefit of hindsight. What is very clear from the voluminous papers in this litigation is that every issue was hotly contested and the parties changed their positions with depressing regularity. Without the undoubted advantages the trial Judge had we are in no position to fault his analysis of the position.

62. What is very clear is that Mr Hoo has not been able to demonstrate that the Judge was plainly wrong which is the threshold he must surmount to succeed on this ground. This being so this ground also fails.

63. All of these grounds fail and this appeal is dismissed. We make an order nisi that Ms Chuan is to have the costs of this appeal and her costs should be taxed in accordance with the Legal Aid Regulations.