RE LAI KAN CO LTD

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HEADNOTE

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                Petitions presented under section 177(1) (f) of the Companies Ordinance on the just and equitable ground and in the alternative under section 168A that the companies were being conducted in a manner unfairly prejudicial to the interests of the petitioner.

IN THE HIGH COURT OF JUSTICE

HONG KONG

COMPANIES WINDING-UP

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JUDGMENT

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1. I have before me petitions presented on the 24th October 1986 by Wong Sum Hui (the petitioner) to wind-up Safe Steel Furniture Factory Limited (Safe) and Lai Kan Company Limited (Lai Kan) under s. 177(1) (f) of the Companies Ordinance on the just and equitable ground, or in the alternative for an order under s. 168A of the Companies ordinance on the grounds that the affairs of the companies are being conducted in a manner unfairly prejudicial to his interests.

2. Safe was incorporated as a private company in Hong Kong on the 29th December 1951. One of the founders of the company was Lee Li Shiang, who at the time of his death in July 1971 was in control of the business. The main object of the company was to manufacture steel furniture and other steel products. The nominal capital of the company is $200,000 divided into 2,000 shares of $100 each. The amount of capital paid up or credited as paid up is $75,000.

3. The petitioner joined Safe in 1956 as an employee and worked for the company until 1962. From 1962 until 1968 the petitioner had his own business, but in 1968 returned to work for Safe and continued to do so until March 1986. When he returned to Safe, the petitioner states that Lee Li Shiang gave him a one-third interest in the company as a partner. He was also entitled to participate in the management of the company. After the death of Lee Li Shiang, the petitioner agreed, at the request of Lee Li Shiang's widow, Lee Can May to continue to run the business as the manager. He alleges that Lee Can May orally agreed to share the profits of the business with him, but this has been denied. However, it is not in dispute that the petitioner has been concerned with the day-to-day running of the business as the general manager whilst Lee Can May was a housewife and has done little more than countersign cheques. In 1973 Lee Can May transferred to the petitioner 200 shares of the 315 shares of her late husband that had been vested in her after his death, retaining the other 115 for herself.

4. Apart from Lee Can May, the family of Lee Li Shiang consists of Lai Ah Hong, a son by a previous marriage, two sons by Lee Can May, Lai Kwai Wan and Lai Kwei Cheung and four daughters, Lai Wai Kam, Lai Wai Ching, Lai Wai Fong and Lai Wai Fun. Lai Wai Fong is married to Choi Ming Li and Lai Wai Fun is married to Chan Wen Din.

5. Although the profits of Safe have grown over the years, no dividends have been declared. However, in 1974, it was decided to form another company to be used as a vehicle to purchase properties from the profits of Safe. As a result, on the 21st June 1974 La i Kan was incorporated with a nominal capital of $100,000 divided into 10,000 shares of $10 each. The full amount of the nominal capital has been paid up or credited as paid up. It is contended by the petitioner that both he and Lee Can May would participate in the management of Lai Kan as partners in the same way as they had done in Safe. Three properties have been purchased by Lai Kan, the first Sui Ki Industrial Building in 1974 for $365,832; the second Sunray Industrial Centre, 1st floor in 1980 for $2,492,480 and the third in 1982,Sunray industrial Centre, 9th floor, for $1,270,000. The purchase price for each property came from funds in the form of interest free loans from Safe and from bank loans secured by mortgages of the premises. Each mortgage has been the subject of a personal guarantee by the petitioner and Lee Can May. The original shareholders of Lai Kan were : the petitioner with 4,000 shares, Lee Can May 4,000 shares, Lai Wai Fong 1,000 shares and Lai Kwai Wan 1,000 shares. They were also the directors of the company.

6. The present shareholders in Safe are : the petitioner with 200 shares, Lee Can May 323, Lai Wai Fong 1, Choi Ming Li 1, Lai Ah Hong 100 and Cheng Chia An 125 whilst the directors are Lee Can May, the petitioner, Lai Wai Fong and Choi Ming Li . Lai Ah Hong was an employee of Safe in 1956 and remained with the company until about 1968 or 1969 since which time he has had no interest in the business. Although Cheng Chia An is registered as the holder of 125 shares in Safe, the evidence is to the effect that these shares had been transferred to Lee Li Shiang during his life time, but the transfer was never registered. However, nothing turns upon this omission.

7. During March 1986 several meetings took place between the petitioner and members of the Lai family who represented Lai Can May with regard to a proposed sale of the shares of the Lai family in Safe and Lai Kan to the petitioner. At a meeting held on the 17th March 1986 an oral agreement was entered into between the petitioner and the Lai family for the purchase of the shares in both companies for $1,050,000 with completion to take place within 45 days. A written memorandum was prepared by Chan Wen Din in which the terms of the oral agreement are set out. The memorandum was signed by the petitioner, Chan Wen Din, Lai Kwai Wan, Lai Kwei Cheung, Choi Ming Li and Lai Wai Fong. The agreement reads as follows:-

8. However, difficulties subsequently arose with regard to the amount of the deposit that was required to be paid and the petitioner's capability for raising the funds which the Lai's wanted to be paid in cash. Eventually on the 28th March 1986, the petitioner was informed by Choi Ming Li that the Lai's no longer wished to enter into the agreement. On the same day Choi Ming Li and Lai Wai Fong passed a resolution at a directors' meeting attended by them and the petitioner whereby they purported to dismiss the petitioner as manager of both Safe and Lai Kan. Notices were placed at the factory premises to the effect that the petitioner had been removed from his position as manager and that he would be replaced by Choi Ming Li. At a meeting held on the 19th April 1986 a resolution was passed confirming the dismissal of the petitioner from the two companies. Neither Choi Ming Li nor Lai Wai Fong gave evidence.

9. At the end of May 1986, the petitioner received a notice of an extraordinary general meeting of Lai Kan that was to be held on the 7th June 1986 to consider a resolution for increasing the capital of the company from $100,000 to $500,000. If passed the new shares would be allotted in the first instance to the existing shareholders on a pro rata basis to rank pari passu with the existing ordinary shares of the company, but if there should be default of acceptance of the allotment from any of the shareholders, the new shares would be allotted to other interested persons. The petitioner did not attend the meeting when the resolution was passed. The present shareholding in Lai Kan is Lee Can May 20,000, Lai Kwai Wan 21,000, Lai Wai Fong 5,000 and the petitioner 4,000. The present directors of Lai Kan are Lai Kwai Wan and Lai Wai Fong. A company search reveals that the petitioner and Lee Can May resigned as directors on the 14th June 1986.

10. After his dismissal as manager of the companies, the petitioner did not receive any salary in lieu of notice and has since been deprived of his income from the companies. He said that he is unable to subscribe to the new shares in Lai Kan and that by the increase in the capital of the company his shareholding has been reduced from 40% to 8%.

11. Lee Can May claimed that the petitioner was dismissed from Safe in 1962 on the grounds that there had been a substantial depletion in the stock of the company and that there were no entries in the account books and no money was credited in the bank or in the company accounting for the losses. Nevertheless, after the petitioner was dismissed, she says that he came from time to time to see her husband in order to borrow money, and that it was as a result of his impecunious state following the failure of his business, that the petitioner was permitted to rejoin Safe in 1968. No explanation was given as to why Lai Ah Hong could not have adequately carried out the petitioner's duties. Lee Can May denied that the petitioner was ever treated by her husband as a partner after 1968, but that at all times, he was an employee. Although she agreed that she asked the petitioner to continue as the manager of Safe after Lee Li Shiang's death, she said that he was not entitled to share in the profits of the business, but was only entitled to a share in any bonus. She said that the 200 shares transferred to the petitioner were intended to act as an incentive. She did not, however, give any explanation as to why 4,000 shares were allotted to the petitioner in Lai Kan.

12. Lee Can May alleged that the relationship between the petitioner and the other shareholders deteriorated towards the end of 1985 when the petitioner was suspected of dishonesty and because he had taken a number of arbitrary decisions without consulting the other directors or shareholders. Accordingly, it was decided to negotiate with the petitioner for the sale of the Lai shares.

13. When she was asked in cross-examination why the relationship had deteriorated, Lee Can May referred to an incident that occurred in 1984 when the petitioner wanted a cheque for $20,000 for the wedding party of his sister-in-law which request had been refused. Accordingly she believes that the petitioner bears a grudge against her arising from this disagreement. However, it is significant that this allegation was not put to the petitioner in cross-examination nor was it mentioned in either of her affirmations.

14. Before the petitioner was dismissed from the companies as manager, it appears that there had been some disagreement between him and Choi Ming Li with regard to the business of Safe. It appears that the petitioner wished to adopt a conservative approach whereas Choi Ming Li was desirous of expanding the business by investing in the purchase of new machinery. A complaint made by the Lai family is that there was a decline in business caused by the neglect of the petitioner and to his failure to submit a number of tenders that the company had been invited to make. After the petitioner's dismissal, Choi Ming Li continued to work for Safe until June or July 1987 when he set up his own business. He and Lai Wai Fong have made applications to emigrate to Canada, but at the present time their applications are still being considered.

15. Lai Kwai Wan, took over the position as manager of Safe after the petitioner left. He was formerly employed by Hopewell Holdings. Since he took over, he has made an examination of the documents of the company which he said verified the decline in business which it is contended was attributable to the neglect of the petitioner. He referred to the petitioner's failure to make submissions for 51 tenders, but conceded that the business of tenders only reflects about 20% of the whole business and that it amounts to a fall back position. Although he referred to the decline in the business of Safe he failed to mention until he was cross-examined that Safe had obtained a contract for the Kornhill project opposite to Tai Koo Shing that is worth between $700,000 to $800,000. This contract is likely to occupy Safe at full capacity for a period of one year.

16. Mr Glen, who appeared on behalf of the Official Receiver, did not support the making of a winding-up order on the grounds that the petitioner has alternative remedies open to him, the companies are solvent, and that a forced sale will not fetch the best price.

17. The petitioner seeks relief under section 177(1)(f) of the Companies Ordinance, that it is just and equitable to wind-up the companies on the grounds that the relationship between him and Lee Can May was one of mutual trust and confidence see In re Westbourne Galleries⁽¹⁾. That case held that equitable considerations will arise where the association formed or continued was on the basis of a personal relationship involving mutual confidence and trust. It is appropriate that I cite the often quoted passage from the speech of Lord Wilberforce who after reviewing the authorities said at page 379:-

"My Lords, in my opinion these authorities represent a sound and rational development of the law which should be endorsed. The foundation of it all lies in the words "just and equitable" and, if there is any respect in which some of the cases may be open to criticism, it is that the courts may sometimes have been too timorous in giving them full force. The words area recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhausive, equally so whether the company is large or small. The "just and equitable" provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a Personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.

 

It would be impossible, and wholly undesirable, to define the circumstances in which these considerations may arise. Certainly the fact that a company is a small one, or a private company, is not enough. There are very many of these where the association is a purely commercial one, of which it can safely be said that the basis of association is adequately and exhaustively laid down in the articles. The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence - this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be "sleeping" members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members' interest in the company - so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.

 

It is these, and analogous, factors which may bring into play the just and equitable clause, and they do so directly, through the force of the words themselves. To refer, as so many of the cases do, to "quasi-partnerships" or "in substance partnerships" may be convenient but may also be confusing. It may be convenient because it is the law of partnership which has developed the conceptions of probity, good faith and mutual confidence, and the remedies where these are absent, which become relevant once such factors as I have mentioned are found to exist: the words "just and equitable" sum these up in the law of partnership itself. And in many, but not necessarily all, cases there has been a pre-existing partnership the obligations of which it is reasonable to suppose continue to underlie the new company structure. But the expressions may be confusing if they obscure, or deny, the fact that the parties (possibly former partners) are now co-members in a company, who have accepted, in law, new obligations. A company, however small, however domestic, is a company not a partnership or even a quasi-partnership and it is through the just and equitable clause that obligations, common to partnership relations, may come in."

18. The powers of the court on the hearing of a Winding-up petition are set out in section 180 of the Companies Ordinance which provides where relevant as follows:-

19. During the course of argument I was referred by Counsel to In re A Company ⁽²⁾ where Vinelott, J. held that the court has a discretion to refuse a petition for winding-up under the 'just and equitable' ground if the petitioner has acted unreasonably in rejecting an alternative course.

20. However, the petitioner,in the instant case, seeks an alternative remedy under section 168A of the Companies Ordinance which where relevant provides:-

In order that an order can be made under section 168A it must be established that the affairs of the company are being conducted in a manner unfairly prejudicial to the petitioner which may be by an isolated act or a number of acts. The meaning of the words 'unfairly prejudicial' were considered by Fuad, J. in Re Taiwa Land Investment Co. Ltd.⁽³⁾ which concerned a petition brought under section 168A where he had this to say at page 304:-

"There is no statutory guidance to the meaning of "unfairly prejudicial" in s. 168A and so the expression must be applied in its ordinary sense. The Shorter Oxford English Dictionary tells us, if we need to look up the word "unfair", that it means "not fair or equitable; unjust". "Prejudice" is defined as "injury, detriment, or damage, caused to a person by judgment or action in which his rights are disregarded; hence, injury to a person or thing likely to be the consequence of some action" and generally "injury, damage or loss." The verb is defined thus: "to affect injuriously or unfavourably; to injure or impair the validity of (a right, claim, statement etc.)." The definition given of "prejudicial" is "causing prejudice; detrimental, damaging (to rights, interests etc.)." Although there has yet to be a judicial pronouncement on the meaning of "unfairly prejudicial" either as used in s. 168A of the Hong Kong Ordinance or in s. 75 of the United Kingdom Companies Act of 1980, that expression occurs in s. 252 of the Companies Act of South Africa and there have been decisions interpreting that section. One such was Donaldson Investments v. Anglo- Transvaal Collieries [1979] 3 S.A. 713 where Preiss, J. referred to a number of South African authorities which had construed s. 252 as contrasted with a provision in a previous Act that had required oppressive conduct to be  established. It is necessary, perhaps, to note that South Africa's section speaks of an act or omission which is "unfairly prejudicial, unjust or inequitable" and as regards the additional words which do not appear in the Hong Kong section, Preiss, J. held that the word "unfairly" qualified only the word "prejudicial", for it would be tautologous to speak of any act or omission as being unfairly unjust or unfairly inequitable. In a sense, therefore, it can be said that the s. 168A is not so wide, in that conduct which is unjust or inequitable, without being prejudicial, will not suffice to found a claim for relief. Preiss, J., in discussing local authorities on the predecessor to s. 252 noted, at page 720, that the courts had from time to time given differing opinions as to the meaning of "oppressive conduct". In some of the cases the view had been expressed that oppressive conduct meant tyrannical conduct or a tyrannical abuse of power, while in other cases, a less stringent test had been applied, it being held that oppressive conduct involved no more than a visible departure from the standards of fair dealing, or a violation of the conditions of fair play, on which every shareholder who entrusted his money to a company was entitled to rely. He held that this less stringent level was appropriate for the application of the new section and said at page 722 - "Couched in another form, I agree that the applicants must establish that the majority shareholders are using their greater voting power in a manner which does not enable the minority to enjoy a fair participation in the affairs of a company. The emphasis is upon the unfairness of the conduct complained of. It must be conduct which departs from the accepted standards of fair play, or which amounts to an unfair discrimination against the minority. Of course, this is little more than an enunciation of the text; the circumstances of each case must be examined in order to decide whether it is such conduct entitling the court to intervene under s. 252."

If I were to attempt a similar enunciation of the general purport of the expression "unfairly prejudicial" in s. 168A, while recognizing the slight difference in the wording of the South African statute, I would respectfully follow the approach by Preiss, J.

However, difficult it may be to imagine circumstances where it would make any practical difference, it seems clear that elements of both unfairness and prejudice must co-exist for the section to come into play. Conduct which is intrinsically prejudicial to the interests of a shareholder, without also being unfair, will not be enough; conversely the section cannot be relied upon if the conduct of which complaint is made is merely unfair."

Fuad, J. also adopted the principles applicable to interpretation provided by section 19 of the Interpretation and General Clauses Ordinance which reads:-

"An Ordinance shall be deemed to be remedial and shall receive such fair, large and liberal construction and interpretation as will best ensure the attainment of the object of the Ordinance according to its true intent, meaning and spirit."

I am in entire agreement with the analysis made by Fuad, J. which I respectfully propose to follow.

21. Following his dismissal from Safe the petitioner instituted proceedings on the 1st April 1986 against Lee Can May, Lai Wai Fong, Choi Ming Li and Lai Kwai Wan inter alia for specific performance of the agreement made on the 17th March 1986 and damages for breach of contract. A defence was filed on the 20th May 1986, but no further steps have been taken since that time. The petitioner also presented petitions to wind-up the two companies on the 18th April 1986 on the just and equitable ground, but both these petitions were withdrawn on the 8th May 1986. A separate petition was presented against Safe on the 7th July 1986 under s. 168A of the Companies Ordinance which petition is still outstanding although Mr. Lai, who appeared on behalf of the petitioner, gave an undertaking that this petition will be withdrawn.

22. One matter to which I should make reference was the allegation put to the petitioner which he denied that he had received loans from Lee Li Shiang. The petitioner had to retract his denial when an I. O.U. was produced which revealed that he borrowed $1,000 from Lee Li Shiang in July 1966. Apart from this occasion which the petitioner said he had forgotten there was no evidence of any other loans. Having considered the petitioner's demeanour I accept that he had overlooked this matter which after a period of 21 years is quite understandable. This lapse of memory does not, in my judgment, affect his general credibility. In fact I found the petitioner to be an honest and reliable witness.

23. I accept his evidence that he was invited by Lee Li Shiang in 1968 to join him and that he was treated as a partner in Safe with a one-third interest and with a right to participate in the management of the company. In my judgment it would have been inconceivable that if, as has been alleged, he had been dismissed for dishonesty in 1962 he would have been taken back into the firm in 1968. Again there is no likelihood that Lee Can May would have allowed the petitioner to continue to run the business and to transfer 200 shares to him if he had been dishonest. Accordingly, I am quite satisfied upon the facts that the relationship between the parties was a personal one that depended upon mutual trust and confidence which therefore brings into play the principles that were enunciated by the House of Lords in In re Westbourne Galleries to which I have already referred.

24. It is clear that the petitioner has been in charge of the day-to-day running of the business since the death of Lee Li Shiang and that nothing which happened subsequently would have alerted him to the possibility of being dismissed from his position as general manager. It came as he said, and I accept his evidence, as a complete surprise. The reasons given for his dismissal, according to Lee Can May, arose because of the decline in the business of Safe which was attributed to his neglect and to dishonesty. However, she was unable to give any particulars of these allegations except with regard to the matter of $20,000 which had been requested by the petitioner in 1984 for his sister-in-law's wedding. However, this evidence, which was not put to the petitioner in cross-examination came as an after thought for the first time during the course of her cross-examination. I have no hesitation in rejecting this evidence which did not bear the ring of truth. In any event even if it had been true it was not an act of dishonesty. The allegations of dishonesty in fact amounted to a general assertion that was wholly unparticularised and unsubstantiated. Lee Can May appeared to be very uneasy in the witness box and her evidence lacked candour. Where her evidence conflicted with that of the petitioner I have no hesitation in accepting that given by the petitioner.

25. Lai Kwai Wan, has been placed in an embarrassing position, in my opinion, for he no doubt considered that it was his duty to support the family. He appears to have been doing well with Hopewell Holdings before he left that firm to join Safe. His evidence was essentially limited to the decline of the business by reason of the figures that he produced coupled with the petitioner's failure to submit the tenders. However, he was not prepared to give the petitioner any credit for the Kornhill project until he was asked about it in cross-examination. There was no evidence to support the contention that the petitioner had neglected the business nor with regard to the allegation that he was in the course of diverting business away from Safe to his present company Horizon Steel Furniture Factory before his dismissal.

26. Until February 1986 the petitioner and Lee Can May were on friendly terms for they had played mahjong together during the Chinese New Year. The memorandum that was drawn up and signed on the 17th March 1986 sets out the terms agreed for the sale of the Lai shares, but it was not completed because of the differences that arose about raising the funds and whether if the Lai Kan properties were to be used there would be a contravention of the provisions of s. 48 of the Companies Ordinance. However, the Lai's by their conduct appear to have resiled from the agreement. The subsequent dismissal of the petitioner as manager on the 28th March 1986 was wholly unjustified. The petitioner not only lost his job but he was given no notice of the termination of his employment and received no salary in lieu of notice or any other compensation. This treatment of the petitioner was both unfair and prejudicial.

27. Again by the increase in capital of Lai Kan the petitioner's interest had been diluted from 40% to 8%. The reason given was that money was required to pay the arrears of instalments due in respect of the loans to the banks. However, the company had constantly fallen behind in payments in previous years whilst there was no evidence to show that the properties if sold would not be more than sufficient to discharge the amounts due. In fact the property Sui Ki was sold at a profit in November 1986 for $1,150,000. I am not satisfied that the reason given for the increase in capital of Lai Kan was genuine and that it was carried out in a manner that was intended to be oppressive unfair and prejudicial to the petitioner. No explanation was provided as to why the capital of Lai Kan had been increased rather than that of Safe.

28. The petitioner's exclusion from the business after 18 years service has placed him as a minority shareholder at the mercy of the Lai's for he is locked into the companies and is unable to transfer his shares.

29. In my judgment the petitioner has shown good cause for the two companies to be wound up on the just and equitable ground. Nevertheless both companies are solvent whilst Safe is trading and is a going concern. It is also probable that a forced sale of the assets will not be as satisfactory as the alternative remedy sought under s. 168A from which it is clear that the petitioner wishes to have a proper price paid for his shares in the two companies. By the actions of the Lai's in dismissing the petitioner from his position as general manager, and by their resolution to increase the capital of Lai Kan, the affairs of the companies have been conducted in a manner both unfair and prejudicial to the interests of the petitioner. He is, therefore, entitled to an order under s. 168A. For this purpose it will, be necessary for an expert valuation to be made of the assets of the two companies and to assess the value of the petitioner's interests. I shall, therefore, hear further argument from Counsel as to the order that I should make.

(1)    [1973] A.C. 360

(2)    [1983] 1 W.L.R. 927

(3)    [1981] H.K.L.R. 297