LEE, NG LOUISE v. SILVER BELL UNIFORM LTD AND ANOTHER

CACV 62/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 62 OF 2011

(ON APPEAL FROM HCCW NO. 478 OF 2008)

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BETWEEN

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REASONS FOR JUDGMENT

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Hon Tang VP:

1.  I have had the advantage of reading Fok JA’s judgment in draft. I agree with it and have nothing to add.

Hon Kwan JA:

2.  I agree with the Reasons for Judgment of Fok JA.

Hon Fok JA:

Introduction

3.  This appeal arose from a shareholders’ dispute.  By his judgment dated 9 March 2011, Harris J ordered that the 2^nd respondent (appellant in this court) should buy out the shares of the petitioner (respondent in this court) on the basis of his finding that there was an agreement that, should the petitioner or Mrs Shen (whose family was the majority shareholder in the 2^nd respondent) wish to leave the company, the other shareholder would buy the departing party’s shares.

4.  The Judge also found that the manner in which the company was operated prior to Mrs Shen’s death gave rise to equitable considerations and made it unfair for the 2^nd respondent to insist on its de facto right to replace Mrs Shen with its preferred nominee without offering to buy the petitioner’s shares.

5.  The 2^nd respondent challenged both those findings in this appeal.

6.  At the conclusion of the hearing of the appeal, we dismissed the appeal with costs and indicated that we would give our reasons later, which I now do.

Background facts

7.  Save for one matter, it is not disputed that the background facts can be taken from the factual introduction in the Judgment below, which reads:

“1. On the 13 October 2008 Mrs. Lee, Ng Louise issued a petition for orders that the 2^nd Respondent purchase her shares in the 1^st Respondent (“Company”) alternatively that it should be wound up. The Company was incorporated in April 1992 in the following circumstances. In 1991 the petitioner and Mrs. Shen Liang Yien Hwa (“Mrs. Shen”) came to know each other when they both worked in a company called Hollywood & Co., which specialised in the production and sale of uniforms. In 1992, Hollywood & Co ceased business. Mrs. Shen and the Petitioner decided to set up the Company to do the same kind of business.

2. The Company initially had 10,000 issued shares of which the Petitioner held 40%, the 2^nd Respondent held 50% and a friend of Mrs. Shen, Ms. Chen Chak Yung (“Ms. Chen”) held 10% as Mrs. Shen’s Family’s nominee. The 2^nd Respondent was owned by Mrs. Shen’s Family and manufactured clothing. The Petitioner and the 2^nd Respondent paid $200,000 and $300,000 respectively for the shares allotted to them and Ms. Chen. In or about 2004 or 2005 Ms. Chen transferred her shares to Mr. Shen Chung (“David Shen”) and Ms. Ginam Shen (“Ginam Shen”). From then on, David Shen and Ginam Shen each held 5% of the issued shares of the Company. David Shen and Ginam Shen are the children of Mrs. Shen. They took no part in the operations of the Company.

3. Between the date of incorporation and 2008 the Company had 3 directors. They were the Petitioner, Mrs. Shen, and her husband Mr. Shen Meng Fai (“Mr. Shen”). Mr. Shen took no part in the running of the Company and I do not understand it to be in dispute that in practice he played little role as a director as the Company did not have board meetings, but was run informally by the Petitioner and Mrs. Shen, who were the decision makers. Mrs. Shen acted as the Company’s managing director and the Petitioner acted as its general manager. Both the Petitioner and Mrs. Shen received salaries. Mr. Shen did not receive any director’s fee.

4. The Petitioner and Mrs. Shen divided responsibilities. The Petitioner was responsible for sales, liaison with customers, designs and general administration. Mrs. Shen was responsible for the production of the uniforms. This arrangement proved successful. The Company was profitable and the Petitioner and Mrs. Shen appear to have maintained a good relationship.

5. Unfortunately Mrs. Shen became ill in 2006 and left the running of the Company largely in the Petitioner’s hand until she died in April 2008. It is not dispute that during the period of Mrs. Shen’s illness no steps were taken by Mrs. Shen or the 2^nd Respondent to appoint a replacement for her or for any other member of the Shen Family to take an active role in the management of the Company.

6. In May 2008 the Petitioner and members of the Shen Family began to discuss replacing Mrs. Shen. The Shen Family wanted to appoint a member of their Family as the managing director of the Company. Initially they suggested Mr. Shen, which did not meet with the Petitioner’s approval on the grounds that he was too old.

7. Mr. Shen and the Petitioner then held, what is perhaps best described as, an informal board meeting on 29 May 2008 attended by David Shen, who was not at that time a director. Mr. Shen made a proposal to appoint David Shen as Managing Director. The Petitioner objected to him on the grounds that he was not suitable as he did not have any experience of the Company. I note that the Petitioner did not suggest an alternative candidate and that she has accepted that in due course the position would need to be filled. The Shen Family took the view that, notwithstanding the Petitioner’s objections, David Shen should be appointed managing director and on 10 June they circulated an announcement to staff and customers informing them that David Shen would be managing director with effect from 16 June 2008. As David Shen was not at this time a director this was irregular, but nothing turns on it. It is not in dispute that given the Shen Family shareholding it was possible for them to appoint a new director to replace Mrs. Shen and cause their preferred candidate to be appointed managing director. It is also not in dispute that the Shen Family appreciated that the Petitioner would be unhappy if they insisted on replacing Mrs. Shen with Mr. Shen or David Shen.

8. As a consequence of the Shen Family’s insistence on appointing David Shen the Petitioner had discussions with Mr. Shen in early June 2008 in which she proposed that either the Shen Family buy her shares or the Company be wound up. It appears that Mr. Shen’s response was sufficiently positive that the Company’s accounts officer was instructed to get quotes for a valuation of the shares, but this did not progress as the quotes were considered too high.

9. In early September 2008, the Petitioner, David Shen and Ginam Shen had a meeting in Pizza Hut. At that meeting David Shen and his Sister made it clear that they wished the Petitioner to remain with the Company, and that the Shen Family did not wish to buy her shares or wind up the Company. The Petitioner explained that she did not wish to remain with the Company. She said that she wished to leave and set up a competing business. It is not in dispute that David and Ginam Shen accepted this and that the meeting was generally amicable. There is a dispute as to whether or not during the discussions the Petitioner said that she envisaged competing for business from existing customers of the Company and that David and Ginam agreed to this. Nothing turns on this issue. My impression of the evidence was that the discussions were probably fairly general with both parties trying to be polite and helpful and probably failing to make it clear precisely what they intended in the future.

10. On 12 September 2008, the Petitioner submitted her resignation letter resigning from the post as general manager with effect from 16 October 2008. The Shen Family then began to receive information that indicated that the Petitioner was beginning to approach the Company’s customers and staff, which was not what they expected to happen, so David and Ginam Shen told me in their evidence. They had expected the Petitioner to compete for new customers and not, as they saw it, plunder the Company’s contacts and staff. As a result the Shen Family purported to terminate her employment on 23 September 2008. The Petitioner wrote letters on 30 September 2008, 2 October 2008, 6 October 2008 and 8 October 2008 repeating her offer to sell her shares. The Shen Family maintained their refusal to buy them. The Parties’ respective positions polarised leading to the presentation of the Petition on 13 October 2008.

11. Although, both Parties have filed affirmations in which they argue about what precisely had been discussed and agreed at various meetings following Mrs. Shen’s death and, in particular, whether or not it had been agreed that the Petitioner could compete for orders from existing clients and approach the Company’s staff after the meeting on 10 June 2008 [sic] at Pizza Hut, both Mr. Fong, who appeared for the Petitioner, and Mr. Remedios, who appeared for the 1^st Respondent, accepted that the latter issue was immaterial and that many of the relevant facts were not in dispute. Those, which they agreed, are as follows:

(i) The Petitioner had not been excluded from the business of the Company. She had chosen to resign as an employee.

(ii) The Shen Family (the 2^nd Respondent) had, prior to her resignation, wanted the Petitioner to remain with the Company.

(iii) The Shen Family had agreed in principle on 10 June 2008 to the Petitioner setting up a competing business when she left the Company and, in practice, and despite their complaints about the way she had gone about doing so, had not done anything to stop her competing for orders from existing customers of the Company or offering existing staff employment with her new company.”

(Underlining added)

8.  I shall adopt the abbreviations used by the Judge in this judgment.

9.  The only point in the above summary of the factual background that is not common ground between the parties is the underlined portion of the quoted extract (at §2), namely that the 2^nd respondent was owned by Mrs Shen’s Family.  I shall return to this point later.

The Judgment below

10.  The Judge identified the principal factual issue before him as being whether or not Mrs Shen and the petitioner had agreed at the time they established the Company that if either the 2^nd respondent or the petitioner wished to withdraw from the Company either the remaining shareholder would buy the departing shareholder’s shares or the Company should be wound up.

11.  There was also a dispute as to whether or not the Company was run in such a manner as to make it inequitable for the 2^nd respondent to insist on the petitioner remaining as a shareholder if the 2^nd respondent wished to replace Mrs Shen with a managing director of whom the petitioner did not approve (viz. David Shen).

12.  It was accepted on behalf of the 2^nd respondent below that, if the Judge were to find the buyout agreement had been reached, the petitioner was entitled to the relief she was seeking on the petition, in which case the 2^nd respondent would buy her shares rather than have the Company wound up.  This was also the petitioner’s preferred position.

13.  The Judge identified the issues he had to decide as being:

“14. …

(i) Whether or not the alleged agreement was made?

(ii) If no such agreement was made did the Petitioner and the 2^nd Respondent, through Mrs. Shen, conduct their affairs in such a way that the relationship between the Parties give rise to equitable considerations, which impact on their legal rights?

(iii) Whether or not the 2^nd Respondent’s insistence on appointing David Shen as managing director was unfair and prejudicial to the interests of the Petitioner?

(iv) What, if any relief, is the Petitioner entitled to?”

14.  As I have noted above, the Judge found that the agreement was made (Judgment §17).

15.  As for issues (ii) and (iii), the Judge held that the parties had conducted their affairs in such a way that their relationship gave rise to equitable considerations impacting on their legal rights (Judgment §§20, 21 and 24).  He concluded that the way in which the affairs of the Company were conducted made it unjust to require the petitioner to remain a shareholder (Judgment §22) and unfair for the Shen Family to insist on their de facto right to replace Mrs Shen with their preferred nominee without offering to buy the petitioner’s shares (Judgment §24) so that the petitioner was entitled to relief under s. 177(1)(f) and s. 168A of the Companies Ordinance, Cap. 32, respectively.

16.  As regards relief, the Judge made directions concerning a buyout of the petitioner’s shares by the 2^nd respondent.[1]

The issues on appeal

17.  Although a total of 14 grounds of appeal were included in the Supplementary Notice of Appeal dated 11 October 2011, it was clear from the skeleton argument of the 2^nd respondent and the oral submissions of Mr Leo Remedios, leading counsel for the 2^nd respondent,[2] that there were essentially three areas of challenge to the Judgment below, namely:

(1) First, that the Judge was wrong in finding that the 2^nd respondent was owned by the Shen Family;

(2) Secondly, that the Judge was wrong to find the agreement had been reached between the petitioner and Mrs Shen at the time of the incorporation of the Company;

(3) Thirdly, that the Judge was wrong in finding the manner in which the Company was operated and that this made it inequitable for the 2^nd respondent to require the petitioner to remain a shareholder of the Company.

18.  It is, of course well-established, that, where an appeal is essentially a challenge to a judge’s findings of fact, the appellant bears the burden of showing that the judge was “plainly wrong”: see Ting Kwok Keung v Tam Dick Yuen & Ors (2002) 5 HKCFAR 336 per Bokhary PJ at §42.  It is also well-established that, in order to disturb a finding of primary fact by a trial judge, this court must be satisfied that the judge’s conclusion is plainly wrong in the sense that either (i) there is no evidence to support it, or (ii) it is contrary to documentary or other incontrovertible evidence that the judge overlooked: Tin Kwong International Enterprise Co Ltd & Ors v San Tung & Anor [2006] 2 HKLRD 185 per Woo VP at §14.

Was the 2^nd respondent owned by the Shen Family?

19.  In the skeleton argument of the 2^nd respondent, it was submitted that the Judge was wrong in finding that the 2^nd respondent was owned by the Shen Family for the reasons set out in ground 1 of the Supplementary Notice of Appeal.  Essentially, the argument there set out is that the 2^nd respondent’s shareholders included other non-Shen Family members and that the Shen Family has only ever held about 66% of the shares of the 2^nd respondent.

20.  However, it is therefore clear that, at all material times, the 2^nd respondent was controlled by the Shen Family.  In this sense, the Judge was correct to say (Judgment §2) that the 2^nd respondent was owned by Mrs Shen’s Family.  The Judge did not purport to hold there that the ownership was 100%.  Further, it is to be noted that David Shen, in his cross-examination, accepted that, as a matter of fact, the Shen Family owned 60% of the Company through the 2^nd respondent.

21.  I do not consider there to have been any error on the part of the Judge in this regard.

Was there sufficient evidence for the Judge’s finding of the buyout agreement?

22.  This was the principal issue in the appeal in light of the parties’ respective positions referred to in paragraph 12 above.

23.  Mr Remedios’ first submission concerned the requisite standard of proof.

24.  In this regard, he referred to Yung Shu Wu v Vivienne Sung Wu & Ors, unrep., FACV 17 of 2009, 1.2.11 per Lord Walker at §73 and also §§74-76 in support of the propositions that where a claim was being made against a deceased person who cannot give evidence against the claim the court has always approached such claims with suspicion and that the court would look for clear and reliable evidence of where, when and what the deceased said.  In short, a higher evidential standard of proof was required.

25.  Mr Remedios submitted the Judge should have adopted this approach because: here, the petitioner was seeking to rely on an agreement which, if given effect, would significantly benefit her and prejudice Mrs Shen’s estate and other shareholders of the Company; Mrs Shen was the counterparty to the alleged agreement but she had died in April 2008 and was unable to give evidence at trial; the petitioner was therefore the only witness to the alleged agreement.  Although not a case of a gift, it was submitted that the substance of the case was one where one party to the transaction or agreement had died and was therefore unable to give evidence as regards the transaction or agreement.

26.  I do not agree that the Judge erred in not applying any higher evidential standard of proof in considering the question of whether the petitioner had proved the existence of the buyout agreement.

27.  It is correct that, in cases involving claims against an estate of a deceased person who cannot give evidence against the claim, the court is enjoined to approach the claimant’s story with suspicion: Yung Shu Wu per Lord Walker at §73 applying the dictum of Plowman J in Thomas v The Times Book Co. Ltd. [1966] 2 All ER 241 at 244.  However, it is not a rule of law that there must be corroborating evidence for a claim against an estate of a deceased person: Yung Shu Wu at §73.[3]  See also the judgment of Sir Balliol Brett MR in Re Garnett, Gandy v Macaulay (1885) 31 Ch. D. 1 at pp. 8-9:

“Another point was taken. It was said that this release cannot be questioned because the person to whom it was given is dead, and also that it cannot be questioned unless those who object and state certain facts are corroborated, and it is said that that was a doctrine of the Court of Chancery. I do not assent to this argument; there is no such law. Are we to be told that a person whom everybody on earth would believe, who is produced as a witness before the Judge, who gives his evidence in such a way that anybody would be perfectly senseless who did not believe him, whose evidence the Judge, in fact, believes to be absolutely true, is, according to a doctrine of the Courts of Equity, not to be believed by the Judge because he is not corroborated? The proposition seems unreasonable the moment it is stated. There is no such law. The law is that when an attempt is made to charge a dead person in a matter, in which if he were alive he might have answered the charge, the evidence ought to be looked at with great care; the evidence ought to be thoroughly sifted, and the mind of any Judge who hears it ought to be, first of all, in a state of suspicion; but if in the end the truthfulness of the witnesses is made perfectly clear and apparent, and the tribunal which has to act on their evidence believes them, the suggested doctrine becomes absurd. And what is ridiculous and absurd never is, to my mind, to be adopted either in Law or in Equity.”

28.  As Walton J observed in In re Gonin, decd. [1979] 1 Ch. 16, this is simply a matter of common sense.[4]  At p. 32, he said:

“Now it is common sense that all claims against the estate of a deceased person which had not been put forward whilst they were still living fall to be scrutinised with considerable care, for the obvious reason that the other party to the agreement is in the nature of things unable to give his or her version of events.”

29.  It is clear from the transcript of the hearing below that the Judge was clearly alive to this sensible and self-evident proposition of common sense[5] and I do not consider there to be any error of law disclosed in his rejection of Mr Remedios’ invitation to hold that corroboration was necessary or that clear evidence was required of where, when and what Mrs Shen said (Judgment §16(ii)).  That is not to say he did not require to be satisfied that the petitioner’s evidence was truthful, reliable and probative of the alleged buyout agreement, nor that he had to consider the inherent probabilities of its having been reached and reach a conclusion on the balance of probabilities on the basis of all the relevant and admissible evidence.

30.  That leads conveniently to Mr Remedios’ next submission which was that the evidence in support of the buyout agreement was insufficient.  Here, it was submitted that the only evidence in support was the petitioner’s affidavit verifying the facts set out in the petition, which included the averment (at §9(h)) that at the time the Company was formed there was an oral agreement reached between Mrs Shen on behalf of the 2^nd respondent and the petitioner that:

“If any of the 2^nd Respondent or the Petitioner shall decide to withdraw from the Company, the outgoing shareholder shall sell the shares held by it/her to the remaining shareholder on a price to be agreed, or alternatively to wind up the Company for distribution of the assets, in which event the production expertise and the clientele contributed respectively by the 2^nd Respondent and the Petitioner to the Company shall be reverted.”

31.  Mr Remedios contended that there was an absence of evidence such as: why the agreement was necessary; why the petitioner wanted the agreement; why the 2^nd respondent or Mrs Shen would agree to the agreement; how the agreement was arrived at; what the parties had said or discussed in arriving at the agreement; and whether any of the other shareholders of the 2^nd respondent were ever aware of or agreed to allow Mrs Shen to make such an agreement on its behalf.

32.  In my view, there are two answers to this criticism.  First, as will be seen below, I do not accept that the inherent probabilities weigh against the finding that the agreement was reached. Secondly, these are all matters that could have been put to the petitioner in cross-examination to test the credibility of her assertion that the agreement was reached.

33.  As to the latter point, it is to be noted that, apart from it being put to the petitioner that there was no such agreement, the petitioner was not cross-examined at the trial in any detail on this part of her evidence.  In particular, it was not put to her that there was no such agreement because it had not been referred to by the petitioner in pre-action correspondence (this being a point which was held to weigh against the asserted agreement in In re Gonin, decd., see p. 32F-H).  By doing so, the petitioner’s credibility on this aspect of her evidence could and would have been tested by reference to her evidence on these matters.

34.  Having chosen to challenge the petitioner’s case on the grounds of her credibility alone, which was a course open to the 2^nd respondent, I do not think it can now be said that the petitioner’s evidence should be rejected simply on the basis of the absence of evidence of the matters referred to above.

35.  I would add that I do not agree that the Judge reversed the onus of proof when he was summarising the evidence on the issue of the buyout agreement when he observed that David Shen and Ginam Shen did not give any particular reason for disputing that their mother had made the buyout agreement with the petitioner (Judgment §15).  In my view, the Judge was merely noting that there was no particular reason given by Mrs Shen’s children for disputing the existence of the agreement.  It would have been open to them to give such a reason if one existed and, assuming the Judge thought the petitioner had shifted the evidential burden of proof onto the 2^nd respondent (which he clearly did), that would have been a matter to be taken into account by him in assessing the question of whether the 2^nd respondent had rebutted the petitioner’s case.

36.  I turn then to the final point advanced by Mr Remedios in respect of the buyout agreement, namely that the Judge erred in failing to hold that it was inherently improbable that the buyout agreement was ever reached.  It was submitted that it was inherently improbable the agreement was reached because of the lack of documentation, suspicion on the part of the petitioner and the lack of commercial sense.

37.  As regards the lack of documentation, the Judge dealt with this succinctly (Judgment §16(iv)):

“The agreement is not referred to in any contemporaneous documents. Neither are any of the matters that the 1^st [sic[6]] Respondent accepts were agreed.”

38.  In referring to the matters in the agreement which the 2^nd respondent accepted were agreed, the Judge had in mind Mrs Shen and the petitioner’s agreement as to how they would conduct the Company’s affairs and that the petitioner would become the general manager responsible for matters other than production and Mrs Shen would become the managing director and be responsible for production (Judgment §15).

39.  The fact that some of the arrangements for the operation of the Company were included in the Company’s articles of association does not, in my judgment, weigh materially against the existence of the buyout agreement.  The agreement as to what was to happen if one of Mrs Shen or the petitioner withdrew from the Company, which was run on informal lines and was essentially a business venture involving Mrs Shen and the petitioner, is one which is inherently plausible in the circumstances.

40.  The Judge was alive to the fact that the petitioner did not mention the agreement to the Shen Family after Mrs Shen died and that it was not referred to until the petition was issued.  The latter point was relied upon in support of the contention that there was suspicion regarding the petitioner’s evidence.  In respect of these matters, the Judge said (Judgment §§16(v) and (vi)):

“(v) There is no evidence that the Petitioner mentioned the agreement to the Shen Family after Mrs. Shen died. This is factually correct. It needs to be considered in context. It was not the fact of Mrs. Shen’s death alone that caused the Petitioner to decide that she wished to leave the Company. The catalyst was the Shen Family’s insistence that David Shen should be appointed managing director. It appears that after the meeting at Pizza Hut, during which it was made clear to her that the Shen Family insisted on this, that she quickly discussed with Mr. Shen selling her shares.

(vi) The Petitioner did not refer to the agreement until the Petition was issued. This is factually correct. The Petitioner did, however, write on 30 September 2008 repeating her proposal that her shares be purchased, alternatively that she purchase the Shen Family’s shares or the Company be wound up. Mr. Shen had not responded negatively when the subject was first raised (although I accept that his Children did at the Pizza Hut meeting) and it may have seemed to the Petitioner sensible and fair for the Shen Family to buy her out if she decided that she no longer wished to continue in business with them now the person she had been dealing with had died. The business had apparently been conducted successfully and amicably for 16 years and I do not think unreasonable that the Petitioner might have expected that, if the Shen Family were being fair, they would respect her views and buy her shares. I note that there had been no suggestion that they could not afford to do so and there was, on their own case, an affinity between the business of the Company and that of the 1^st [sic] Respondent. In these circumstances I do not think it surprising that she would have written in the way she did and not framed her proposal in terms of asserting a right to sell her shares because of what she had agreed many years before with Mrs. Shen. The alleged agreement was, it will be remembered, expressly referred to in the Petition which was issued the following month.”

41.  I do not think any material criticism can be made of these parts of the Judgment.  The Judge being alive to these matters, he clearly took them into account when reaching his conclusion as to the credibility of the petitioner’s evidence as a whole.  It is telling in this respect that, despite discrete criticisms of her evidence which he noted (Judgment §16(vii)), the Judge concluded that he found the petitioner “generally to be an intelligent witness, who gave her evidence clearly and explained her case coherently” (Judgment §17).  In this respect, she is to be contrasted with the appellant in Yung Shu Wu whose evidence was not found to be obviously reliable (see per Lord Walker at §76).

42.  I turn finally to the alleged lack of commercial sense of the buyout agreement.  Here, Mr Remedios’ submission was based essentially on the fact that the petitioner’s original proposal that she should own 51% of the Company was rejected by Mrs Shen and that, instead, the Company was majority owned and controlled by the 2^nd respondent, so the possibility for deadlock did not exist.

43.  The Judge disagreed with the submission that the agreement did not make commercial sense and said (Judgment §16(iii)):

“It seems to be perfectly sensible and the kind of provision I would have expected to be included, or its inclusion to have at least been considered, in a properly drafted shareholders agreement. It seems to me more likely than not that sensible business people discussing establishing a company would have considered what would happen if one of them wanted to leave the company and it is more likely than not that they would have agreed what the Petitioner says was agreed.”

44.  I see no reason to hold that the Judge’s conclusion is wrong in this respect.  On the contrary, I respectfully agree with his conclusion. Given the informal manner in which the Company was managed and the personal roles of Mrs Shen and the petitioner as the only two individuals involved in its management and business, it seems to me that the buyout agreement was one which would make commercial sense to the petitioner and Mrs Shen.  I do not accept that the existence of a small 10% minority shareholding (which, in any event, was held on trust for Mrs Shen’s children) would make the winding up alternative to the buyout agreement commercially improbable, as was submitted.  If the petitioner and Mrs Shen had together sought a voluntary winding up, there would not have been any basis for the other shareholder to resist this.

45.  Finally, I do not accept there is any basis for thinking, as Mr Remedios submitted, that the Judge reasoned backwards by assuming the existence of the buyout agreement.  This submission was made by reference to a question asked by the Judge in the course of Ginam Shen’s oral testimony.  I do not think the question asked discloses any such assumption in the Judge’s reasoning and there is certainly no indication of such a flaw forming part of the reasoning in his Judgment.

Did equitable considerations entitle the petitioner to the relief sought?

46.  The final issue raised concerns the petitioner’s reliance on s. 177(1)(f) and s. 168A of the Companies Ordinance.  The Judge’s conclusions on the equitable considerations were academic in the light of his finding of the buyout agreement.  However, the Judge indicated he would deal with these arguments briefly (Judgment §17).

47.  In respect of the argument that there was a breakdown of trust and confidence sufficient to engage s. 177(1)(f), the Judge held:

“22. It does not seem to me that it was unreasonable for the Shen Family to want to replace Mrs. Shen and it does not seem to me unreasonable for them to have proposed David Shen. On the other hand I accept that from the Petitioner’s perspective it might seem unsatisfactory to find herself dealing with somebody new. Nobody was to blame for the impasse that arose, it was an unfortunate consequence of Mrs. Shen’s death. I am not here concerned with allocation of blame, there being no blame to allocate in my view, I am concerned with whether or not the way in which the Company had been operated for 16 years and the understandings, implicit perhaps rather than express, underlying the way in which its affairs were conducted make it unjust to require the Petitioner to remain a shareholder. I have concluded that it does. In reaching this conclusion I have particular regard to the fact that between 2006 and 2008 the Shen Family did not take any steps to replace Mrs. Shen or assist the Petitioner in the management of the Company. This suggests that the Company was generally understood by the Petitioner, Mrs. Shen and the other members of her Family to be a venture between the Petitioner and Mrs. Shen. In those circumstances I consider it unjust to require the Petitioner to have to work with a new partner in whom she does not have the confidence she obviously had in Mrs. Shen.”

48.  In respect of s. 168A, the Judge held:

“24. In my view the way in which the affairs of the Company were conducted prior to Mrs. Shen’s death gives rise to equitable considerations, which I have referred to in the earlier paragraphs of this judgment dealing with section 177(1)(f), that made it unfair for the Shen Family to insist on their de facto right to replace Mrs. Shen with their preferred nominee without offering to buy the Petitioner’s shares.”

49.  Mr Remedios submitted that the Judge’s findings in this regard could not be supported by the single fact that between 2006 and 2008 the Shen Family did not take any steps to replace Mrs Shen or assist the petitioner in the management of the Company.  He submitted that the Judge’s findings were insupportable in light of the fact that: the Judge did not accept that the Company was a quasi-partnership (Judgment §20); there was no agreement between Mrs Shen and the petitioner as to how the vacant post of managing director was to be filled; the Company was majority owned by the 2^nd respondent and it had the right to appoint two directors to the board whereas the petitioner could only appoint one director to the board; to allow the petitioner to object to the 2^nd respondent’s choice of managing director would be to defeat the purpose of the 2^nd respondent being the majority shareholder and would, in effect, mean that any decision taken by the majority shareholder could be considered to be unfair prejudice.

50.  In my judgment, however, the Judge’s finding was open to him on the facts of this case.  The Company was one which was jointly set up by two individuals and run by them alone for 16 years.  Although the Judge did not find the Company to be a quasi-partnership, it is clear he must have been satisfied that the Company was “an association formed or continued on the basis of a personal relationship, involving mutual confidence”[7] since this was the basis on which the Judge considered that equitable considerations were brought into play (see Judgment §19).  The association was not “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”[8] as Mr Remedios submitted.  Mrs Shen and the petitioner having worked together for 16 years and having managed the Company in the informal manner they did prior to the former’s death, it was, in my judgment, open to the Judge to reach the conclusion that for the 2^nd respondent to insist on its strict legal rights to appoint any person as managing director regardless of the petitioner’s wishes engaged the court’s jurisdiction under s. 177(1)(f) and was unfair within s. 168A.

51.  Mr Remedios relied upon Lord Hoffmann’s statement in O’Neil v Phillips [1999] 1 WLR 1092 that the adoption of the criterion of fairness in the English equivalent of s. 168A did not mean the court could do “whatever the individual judge happens to think fair” (at p. 1098D-E).  He also submitted that it was wrong to disregard the fact that, as Lord Hoffmann pointed out (at p. 1098G-H) “a company is an association of persons for an economic purpose” and that the terms of the association are those contained in the articles of association so that “the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed”.

52.  However, in those passages Lord Hoffmann was addressing the first of two features peculiar to company law.  The second feature is the carrying over into company law of the role of equity “to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith” (see p. 1098H).  Thus, although the facts in O’Neil v Phillips [1999] 1 WLR 1092 led to a finding at first instance that there was no unfair prejudice, it is clear from the House of Lord’s decision (upholding the trial judge’s finding) that a breach of strict legal duty was not necessary for the court’s equitable jurisdiction to be engaged since, as Lord Hoffmann observed (at p. 1099B):

“… unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith.”

(Underlining added)

53.  It is this second feature that is engaged in the present case and which formed the basis of the Judge’s finding of unfairness.  I do not agree that the Judge’s finding is wrong.  On the contrary, I respectfully agree with it.