CHEUNG SAI LUN v. LAU TAI CHIN FRANCIS AND ANOTHER

HCMP 1344/2007

in the high court of the

hong kong special administrative region

court of appeal

MISCELLANEOUS PROCEEDINGS no. 1344 of 2007

(on an intended appeal from HCCW NO. 677 of 2004)

______________________

______________________

______________________

__________________________________

REASONS FOR DECISION

__________________________________

1.  This was an application by the first respondent for an extension of time for appealing the winding up order made by Barma J on 18 May 2007 which order was sealed on 31 May 2007.  At the conclusion of the hearing, the application was refused with written reasons to be handed down which I now do.

2.  The present application was taken out on 18 July 2007, 20 days after the expiration of the deadline for the filing of a notice of appeal.  The first respondent proffered a number of reasons to explain the delay, including his concern over costs and the fact that in the week or so prior to the expiration of the deadline, he was entirely preoccupied with the health of his mother-in-law and his wife: his mother-in-law had to undergo chemotherapy on 21 and 22 June and his wife’s medical condition required four medical appointments culminating in an urgent operation on 29 July 2007.  Then in the first two weeks of July he had to deal with the injunction obtained by the petitioner regarding the sale of his flat, the proceeds of which he needed to meet the various medical and legal expenses.

3.  In deciding whether or nor to the court’s discretion should be exercised to extend time, it is necessary to consider all the circumstances and decide whether the overall justice of the case requires its exercise in favour of the first respondent.  In this connection, the merits or otherwise of the intended appeal constitute an important factor in the evaluation exercise.

4.  To provide the relevant context for the purposes of the present application, it will be necessary to outline the essential facts of the dispute which are extracted from the lengthy and comprehensive judgment below.

Background

5.  The winding up order was made in respect of UPI Technology Ltd (“the Company”).  The Company was incorporated in 2000 and each of the petitioner and the first respondent held 50% of its issued share capital.  The petitioner sought to wind up the Company on the just and equitable ground under section 177(1)(f) of the Companies Ordinance, Cap. 32 for one or more of the following reasons:

(1)	loss of substratum in that the Company has been defunct since 1 March 2004; and/or
(2)	loss of mutual trust and confidence between the petitioner and the first respondent, that having been the basis on which the Company had been formed; and/or
(3)	unfairly prejudicial conduct on the part of the first respondent in mismanaging the Company and excluding the petitioner from its management.

6.  The first respondent resisted the petition on, inter alia, the following grounds, namely, (1) that the petitioner had in fact agreed to sell his shareholding in the Company to the first respondent for a nominal consideration on 17 January 2004 and (2) that it was the petitioner who was responsible for the breakdown in the mutual trust and confidence that had previously existed between the parties.

7.  The background to the setting up of the Company is to be found in §§ 7-18 of the judgment.  Suffice it to say that in about 1989 the petitioner established a sole proprietorship known as Kung Shing & Co carrying on different lines of businesses which, several years later, evolved into a family partnership.  One of the businesses consisted of the manufacture and sale of inks used in printing.  That business was carried on by the Kung Shing’s printing division known as the “New Printing Department”.

8.  The first respondent joined Kung Shing in about 1992 as a technical consultant in its New Printing Department.  He was also involved in sales.  He was paid a salary and was entitled to 25% of the profits of the New Printing Department.  After the petitioner’s family members retired from the family partnership, it was agreed that the petitioner and the first respondent would have equal interests in the New Printing Department.  Although the first respondent was never formally made a partner, there is no dispute as to his entitlement to a 50% interest in the profits and assets of the New Printing Department.

9.  The Company was set up in 2000 with a view to the business of the New Printing Department being transferred to the Company but that did not happen.  Rather, it was decided that the New Printing Department should continue to deal with its existing customers and the Company and the New Printing Department came to operate in parallel, each conducting sales of ink, although the manufacturing operation was taken over by the Company.

The judgment below

10.  The judge found that by October 2003 the relationship between the petitioner and the first respondent had soured.  There were conflicting versions as to how this happened.  The judge did not consider it important as to which was the correct version and accordingly made no findings in that connection but recorded that the upshot was that the petitioner and the first respondent began to discuss the possibility of the petitioner transferring his shareholding in the Company to the first respondent.

11.  It was common ground that terms were discussed on about 11 November 2003.  A copy of the trial balance of the New Printing Department dated as of 30 September 2003 was available at this meeting and this showed the first respondent’s interest therein to be approximately $1.8 million and his interest in the Company to be approximately $937,000.  The petitioner and the first respondent appeared to have agreed in principle that the petitioner would sell his shareholding in the Company to the first respondent for $1 million, that the first respondent would continue to sell ink products to the petitioner at a reasonable price, that the petitioner would continue to make use of the “UPI” trademark and that the petitioner should have a right of first refusal should the first respondent later wish to dispose of the Company.

12.  A week later, on 18 November 2003, the first respondent presented the petitioner with a written document described as a preliminary agreement.  Apart from recording their respective interests in the New Printing Department and the Company and the terms of the basic agreement noted in the preceding paragraph, it also dealt with the first respondent’s interest in the New Printing Department by providing that, broadly speaking, that interest would be set off against what would be due to the petitioner for the transfer of his interest in the Company.   At about this time, the first respondent also asked for the accounting records of the Company and for the Company’s bank mandate to be changed so that in future they should be operated jointly and not by the petitioner alone.

13.  The petitioner was surprised that the first respondent’s draft agreement made the first respondent’s interest in the New Printing Department part of the overall deal.  So he prepared a draft of his own omitting any reference to the New Printing Department which he gave the first respondent on 30 November 2003.  But by early December, the petitioner was presented with a professionally drawn draft agreement which essentially reflected the set off the first respondent desired of his interest in the New Printing Department.

14.  The judge recorded that by this time because of the various difficulties that had arisen, the parties were finding it increasingly difficult to get along and were often having arguments.  After a major argument on 4 December 2003, the petitioner removed a substantial amount of the Company’s financial records from the Company’s offices the following day along with, inter alia, the Company’s cheque books and a computer.  Other incidents then occurred which exacerbated the situation with lawyers becoming involved and legal action being threatened.  On 10 January 2004 that the petitioner returned a large number of the documents he had removed from the Company.

15.  The first respondent convened a board meeting of the Company for 17 January 2004 to discuss the “latest decisions of the Company”.  The petitioner attended the meeting.  The first respondent was recorded as saying that “the atmosphere was good and that the parties were cordial”.  After the meeting the first respondent prepared minutes which were sent to the petitioner.  The judge said at §§ 50-51:

“	50.	… The minutes effectively recorded an agreement that the Company should cease business, stating that all staff with the exception of Patrick Leung should have their employment terminated on 29 February 2004, that the Company’s plant and machinery should be sold to [the first respondent] for $200,000 and that its stocks and raw materials should be sold to him in cost and that [the first respondent] should handle all matters relating to the Company’s cessation of business.
	51.	Although this was not recorded, and [the first respondent] said that at the meeting he and [the petitioner] also agreed that [the petitioner] would transfer his shares in the Company to [the first respondent] at a nominal consideration…[The first respondent] went on to say that he and [the petitioner] agreed to meet again the following Monday, 19 January 2004, at the offices of the Company’s auditors, Mak, Cheung and Co, to sort out the necessary documentation.  [The petitioner], however, while acknowledging that it was decided to close down the Company’s business, insisted that no such share transfer agreement had been made.”

16.  On 17 January 2004, the parties signed a director’s resolution recording that it was agreed that the first respondent should set up a new company with himself as the major shareholder to take over the existing customers and business of the Company.  A meeting took place at the auditors’ offices as scheduled on 19 January 2004.  Although the parties signed the documents that had been prepared by Mr Mak, in the course of the meeting, two further documents were created containing further conditions for the petitioner’s protection.  The second of these was referred to as the ‘Annexure’ in the judgment.

17.  On the question whether there was a binding and unconditional agreement for the sale of the petitioner’s shares at a nominal consideration, the judge rejected the first respondent’s evidence and held that no set off agreement had been agreed whether in the second half of November 2003 or thereafter.  The judge expressed himself to be entirely satisfied that the Annexure was not signed and concluded that no binding and unconditional agreement for the transfer of the petitioner’s interest in the Company to the first respondent or his wife was made in January 2004.

18.  As to the breakdown in trust and confidence, the judge found that the breakdown occurred shortly after the events described in § 14 above, namely, the major argument between the parties on 4 December 2003 and the subsequent removal by the petitioner of a substantial amount of the Company’s financial records and other property from its offices and for which the petitioner was largely to blame.

19.  Although the judge made the winding up order, he did not do so on the ground that there had been a breakdown in trust and confidence.  Indeed, it would be fair to say that he would have refused to make the order on that ground given his finding that the petitioner was largely responsible for the breakdown of the relationship.  But, as already noted, the winding up order on the just and equitable ground was sought on three separate and independent bases, including that of the loss of substratum.

20.  The judge observed (at § 5) that by the end of the trial, a number of potential issues were not in dispute.  He said:

“	Thus, it had become clear that:-
	…
	(4)	The Company had ceased operations by 1 March 2004, its stock, raw materials and inventory, factory premises and customers having been taken over in late January or February 2004 by a new company set up by [the first respondent] called Meta Ink Limited (“Meta Ink”).”

21.  The judge made the winding up order on the basis of the loss of substratum but not without first considering, at some length, the relevance of misconduct on the part of the petitioner.  The judge accepted (at § 92) that misconduct on the part of a petitioner repudiating the relationship of trust and confidence might, in an appropriate case, justify a refusal of a winding up order being made on the basis of a loss of trust and confidence but that, in general, such misconduct would not be a relevant factor in the context of an application to wind up on the basis of a loss of substratum.  He explained that that was because a loss of substratum provides an independent reason for winding up on the just and equitable ground: where the Company is defunct, and is incapable of carrying out the objects for which it is incorporated, it is, in general, unjust to require the shareholders to remain locked into it, as this would mean that their capital would remain locked up and idle, or (if still in being employed) used for a purpose other than that for which they had subscribed it.

Developments since the winding up order

22.  It is an undeniable fact that the Company has been defunct since March 2004.  The liquidators (appointed in August 2007) who were in attendance, updated the court on the progress of the liquidation.  In short, there has been no recovery to-date; it is doubtful if there is any goodwill left since the Company has been defunct for almost 4 years; and the Company is probably insolvent such that even if the appeal were allowed to proceed and proved to be successful, in deciding whether the winding up order should be rescinded, it may well be that the creditors would have to be consulted.

Merits of the intended appeal

23.  Mr Ng who appeared for the first petitioner submitted that the intended appeal has reasonable prospects of success.  His main contentions were as follows:

(1)	the judge erred in holding that the petitioner’s misconduct did not disentitle him from seeking to wind up the Company on the basis of a loss of substratum;
(2)	the judge erred in law because his holding in (1) above was made without inviting submissions from the parties and without giving the parties an opportunity to be heard; and
(3)	the judge erred in failing to make any finding that the parties had entered into an agreement as recorded in the minutes of the meeting of 17 January 2004 which agreement is a bar to a petition based on the loss of substratum.

Loss of substratum and misconduct

24.  The judge did not find that the petitioner’s misconduct was causative of the loss of substratum.  Rather, as appears from the passage below, he did not consider that the petitioner could be held responsible for the loss of the Company’s substratum.  After the 12 day trial, the judge stated his conclusions in these terms:

“

94.

Further, although I would accept, by parity of reasoning with the Ng Yat Chi case, that it may be open to the court, in the exercise of its discretion, to refuse a winding up order even where a company’s substratum has been lost where the petitioner has been responsible for that state of affairs having come about (and this might sometimes be the case), it does not seem to me that it can be said here that it was [the petitioner] who was responsible for the loss of the Company’s substratum.  The Company is defunct because [the first respondent] has taken over its operations and business, which he is now carrying on for his own account through his new company, Meta Ink.  Although it may be that [the petitioner] was at one time agreeable to this being done, I do not think that this prevents him from seeking the winding up of the Company where there is good reason for him to do so.  Here, if the Company is not wound up, there will be no means of realising such assets as it still has (it should be borne in mind that the Company may well have had some bank balances, and should, if the arrangements for the transfer of its operations had been observed, have additional funds representing the consideration to be paid by [the first respondent] for its plant and equipment and for its stock and raw materials).”

25.  It is clear that the judge did not consider that the evidence justified any finding that the petitioner’s misconduct was causative of the loss of substratum.  Moreover, it is to be noted that this point was never taken by the first respondent in the court below.  Therefore, short of overturning the judge’s clear finding which is a formidable task, I do not see how my observations (at § 44) in re Power Point Engineering Ltd, unreported, HCCW 555/1999, 10/7/2010 (a case where it was found as a fact that the petitioners’ conduct was causative of the loss of substratum) can assist Mr Ng or how this first point can even get off the ground.

Opportunity to be heard

26.  It is clear from the transcript that in his closing submissions, the petitioner squarely raised the issue of the relevance of misconduct and the loss of substratum.  The fact that Mr Ng did not deal this aspect at the hearing below (whether or not this was because he had misunderstood Mr Pun’s submissions below) is not a matter about which he can now complain.  In any event, it is simply wrong to say that the judge had denied him the opportunity to make submissions on that issue.

Whether petition based on loss of substratum barred

27.  Mr Ng criticized the judge for failing to make a finding that the parties did enter into an agreement as recorded in the minutes of the board meeting held on 17 January 2004 appears to be unjustified.  But § 50 of the judgment recorded the terms of that agreement.  Be that as it may, the point now being made is that the agreement constituted a bar to a petition based on the loss of substratum or, at any rate, that such a petition was premature.  Mr Ng did not attempt to formulate a proposition of law or statement of principle.  He simply relied on Cox v Gosford Ship Company (1893) SLT 430.  I have to say that I am unable to derive any assistance from that case which does not appear to be on point nor am I able to discern any statement of general principle from it.

28.  It should not be overlooked that it was the first respondent’s case that although not recorded in the minutes of 17 January, the petitioner orally agreed to sell his shareholding to the first respondent for a nominal consideration.  Had the first respondent been able to make good that assertion, clearly no winding up order would have been made.  But that did not happen.  The judge held that there was no agreement.  While the first respondent has since early 2004 been carrying on what had been the Company’s operations and business on his own account through his new company, if Mr Ng’s point is correct, it would mean that the petitioner’s capital is to remain locked up indefinitely, at least until such time as an agreement can be reached.  That cannot be right.  In my view, on the facts of this case, there can be no bar to the petitioner petitioning for a winding up order because of the loss of substratum.

29.  Finally I would add that it would appear that at the end of the day the present exercise is all about costs and not about resuscitating the Company.