LEONG YUET WAH AND ANOTHER v. WONG WEI LIN AND OTHERS

cacv 397/2006 AND CACV 412/2006

in the high court of the

hong kong special administrative region

court of appeal

civil appeal noS. 397 of 2006 AND 412 OF 2006

(on appeal from HCMP NO. 428 of 2006)

______________________

______________________

______________________

______________________

JUDGMENT

______________________

Hon Rogers VP:

1.  This was an appeal from a decision of Kwan J given on 25 October 2006 whereby she refused an application by the first to third respondents to strike out the petition which had been presented under section 168A of the Companies Ordinance Cap. 32 (“the Ordinance”).  At the conclusion of the hearing of this appeal judgment was reserved which we now give.

2.  Before turning to the specific allegations in the petition and the arguments which had been raised, it is appropriate to observe that section 168A empowers any member of a company to present a petition on the basis that the company is being or has been conducted in a manner which is unfairly prejudicial to the interests of the members generally or of some part of the members including himself.  The section empowers the court to make a wide variety of orders.  Such orders include injunctions to restrain the commission of particular acts; the court can appoint a receiver or a manager over the property or business of the company; then there are broad powers for the court to make such order as it thinks fit, whether for regulating the conduct of the company’s affairs in future or ordering the purchase of the shares by any members of the company from other members.  The court is also empowered to award damages.

3.  The exercise of the wide and varying powers of the court to remedy the matters which are the subject of a petition clearly have to match the particular circumstances.  The relief which the court may grant is by its very nature discretionary and the court is tasked with the function of imposing the correct remedy for the particular situation.  It is thus vital for the court to know exactly the particular grounds of complaint and their cause in order for it to be able to grant the appropriate remedy.  To put it in another way, a person who presents a petition under the provisions of section 168A must make out a clear case.

4.  Cut to the bone the complaint of the respondents in this case is that the petitioners have changed their case to such an extent that the complaints in the petition are no longer the basis of the petitioners’ case.  The petitioners founded their complaints of unfairly prejudicial conduct on the footing that the respondents had obtained a majority shareholding in the company, as well as obtaining bank facilities for their own personal benefit, by the use of forged documents.  When that was shown to be incorrect and that the petitioners themselves had signed the documents which were said to have been forged, the petitioners shifted their case and filed evidence in which it was admitted that they had signed the relevant documents but they pleaded ignorance, carelessness to the extent which would not befit, in the case of the second petitioner, his own position as a director, and also parental indulgence.  There then arose a new allegation, namely false accounting in particular the creation of false debts.  That matter too is highly contested.

5.  Again continuing with the broad overview, the difficulty has been compounded by the fact that now not only is the original petition not verified as is required, but leave has been given to amend the petition in a manner which is by no means precise.  Although pleadings have been ordered they have been ordered on a one sided basis namely that the respondents have been required to file a defence and the petitioners thereafter a reply.  That, in itself, appears to me to be unsatisfactory since, apart from anything else, because of its very nature further and better particulars cannot be required of a petition.  Hence the petition is potentially liable to be heard on the basis of imprecise and alternative allegations.

6.  It is essentially for those reasons that, as will emerge, I consider that it is necessary that the present petition be struck out but without prejudice to the petitioners’ ability to file a further petition under section 168A.

The Company

7.  It appears that the Company was originally set up by the husband of the first petitioner.  He is the father of the second petitioner and first respondent.  The second respondent is the husband of the first respondent.  It is unnecessary to go into the background of the matter which is set out in the petition save to say that it appears that the Company’s business appears to have centred around four joint venture contracts concerned with making steel pipes in different parts of the Mainland.  It is evident that when the Company first traded the shareholding was in the ratio of one third each to the first petitioner, the second petitioner and the first and second respondents combined.  It was said in the petition, as originally filed, that there was “an implied agreement and/or understanding” amongst the father (who had never been a shareholder), the petitioners and the first and second respondents that the shareholding structure, which was apparently originally arranged by the father, would remain unless otherwise varied with the consent of all parties.  In the amended petition there is now an additional plea.  It is said that the father explained that the shareholding ratio was not to be disturbed without just cause and that the petitioners and first and second respondents understood and accepted that.  It is not altogether clear that this allegation on its own could give rise to any complaint by the petitioners since the question in this case turns upon whether the change in ratio of shareholdings was valid.

8.  In the petition as presented the case was put that there were two increases in share capital followed by allotments of shares.  The first increase in share capital was in 1999, with a consequent allotment of the new shares to the third respondent, and the second increase in capital was in 2005, again with the shares being allotted to the third respondent.

9.  The plea in the petition as presented was that the first petitioner, the mother, was unaware that any resolution for increase of capital had been passed or that any allotment had been approved.  It was said that she had signed blank pieces of paper which were then completed.  That is a clear allegation that her signature was obtained, or at the very least used, fraudulently and that the first and second respondents had thus forged the relevant resolutions.

10.  The second petitioner’s case was similar in relation to the 1999 resolutions for the increase in capital and the corresponding allotments but in respect of the 2005 increase it was said that he had been approached by the second petitioner and told that the increase in capital was necessary because of the dire financial situation following write offs of two of the joint ventures in the Mainland.  By the time the petition was amended the second petitioner apparently recollected that the second respondent had had an “intimidating and imposing demeanour” when he made those representations.

11.  Dealing with the respondents’ answer to those allegations first, evidence was produced, in particular from the firm of accountants that was responsible for drafting the resolutions for increase in capital and the allotments, that the relevant documents had been drafted by that firm and had been sent for signature.  The petitioners then changed their allegations.  They admitted signing the documents.  The first petitioner affirmed that she did not recollect signing the 1999 resolution but said that her daughter, the first respondent, had never explained the document to her.  It might be thought that it would be incumbent on a person who had been the vice principal of the Singapore Chinese Girls’ School and had been teaching English for something like 30 years to go a little further and explain what it was she could not understand about such a simple document.

12.  Paragraph 36 of the petition read when it was filed on 3 March 2006 and still reads:

“	Your first petitioner was not aware of the 1999 resolution, the 1999 Increase of Capital, the 2005 Resolution and the 2005 Increase of Capital until the investigations were made subsequent to the incident in early June that January 2005 as stated in paragraph 29 above.”

Under the particulars it is said that the first petitioner had never been asked if she would agree to an increase in the capital of the Company and had never consented to increasing the capital of the Company and she would have refused to sign the 2005 Resolution had she been told of and explained its contents and effects.  Paragraph 36, in explaining the first petitioner’s case in respect of the 1999 and 2005 increase in capital refers to blank pieces of paper having been signed.

13.  In the first petitioner’s affirmation, which was filed three months later on 23 June 2006, it is clear that the first petitioner now admits that she did sign the relevant documents.  Furthermore, she admits that when she signed the 2005 resolution she was aware of the 1999 increase in share capital because relevant company searches had already been made in respect of it.  The first petitioner’s evidence does not, therefore, verify the petition.  It disputes it.  Put in another way the petition is false.  Importantly it makes allegations which amount to fraud the basis of which has been undermined by the first petitioner herself in her evidence.

14.  As regards the second petitioner, the petition suggests that the 1999 resolutions were signed in blank.  It is now not entirely clear from the second petitioner’s third affirmation as to whether he has entirely abandoned that suggestion or whether he is trying to maintain it along with a suggestion that he was required by the second respondent to sign documents whilst the second respondent stood over him and did not give him time to read them.

15.  The allotments to the third respondent were said to be in satisfaction of loans which the third respondent had made.  Those loans were shown in the accounts of the Company.  Paragraph 49 of the petition, as presented read and the allegation remains in the amended petition:

“	Although your second petitioner signed the 1999 Accounts as a director of the Company, he neither understood the contents thereof nor did he realise the existence of or reference to the Alleged Abacus Loan.”

16.  It was said that there were no need for the Abacus loans.  The dispute between the parties stems from the fact that it is the respondents’ case that the Abacus loans arose from the provision of machinery for use in the joint ventures in the Mainland.  It is the petitioners’ case that the joint ventures required no input of any capital nature from the Company because the input into the joint ventures was the second petitioner’s expertise.

17.  Whether or not the second petitioner will ever be able to establish that rather surprising scenario for a joint venture in the Mainland remains to be seen.  Nevertheless the appalling admission by the second petitioner that he was prepared to sign the Company’s accounts without understanding them is made even worse, in my view, because the accounts were so simple that the loan was virtually the only matter in the accounts.  Sections 122 and 123 of the Ordinance places upon the directors the obligation to lay before the company at the annual general meeting the accounts which must contain the profit and loss accounts and balance sheet.  Those documents have to give a true and fair view of the state of affairs at the company at the end of its financial year.  A director who is prepared to say that he did not understand the contents of something so simple as the balance sheet and the 1999 accounts of the Company and indeed did not realise the existence of the alleged Abacus Loans but nevertheless went ahead and signed the accounts, of his own mouth, raises, if not establishes, grounds that he is not fit to be a director.  I find it difficult to know what relief it might be expected that the court should grant in respect of such a petition other than to make an order that that petitioner should cease to be a director.

18.  Complaint is made in the petition of a charge to UBS AG.  That charge was to secure an indebtedness of the first and second respondents.  Whether or not the indebtedness was incurred for the purposes of the Company is a matter which may have to be investigated later.  What is clear, however, is that that charge was discharged in April 2005 without any loss to the Company.  Complaint is made in the petition about it and it is said that the petitioners were not informed or consulted in respect of the creation, existence and/or continuation of that charge.  That allegation is made without dealing with the clear fact that both the petitioners were signatories to the charge.  Again, this appears to me to be another matter of self-confessed unsuitability to be a director.  If a director is prepared to sign a bank document of this nature without understanding it and knowing exactly the reason for it and its purpose, he has an unenviable task in trying to establish that he is fit to be a director.

19.  The petition also prays for an injunction to restrain the first and second respondents from removing the second petitioner as a director of the Company and as a director and chairman of the Shanghai joint-venture.  It does not seem entirely clear from the petition as to why it is said that to do so would be unfairly prejudicial to the second petitioner.  Nevertheless, even if some ground could be made out, this is a matter of some contention between the parties.  The first and second respondents claim that the second petitioner has so badly handled the joint ventures and has refused to account to the Company for the joint ventures which are now said to be valueless that his removal was justified.

20.  For the reasons which I have endeavoured to set out above the petition as presented is now no longer viable because the major complaints have been refuted by the petitioners themselves.  I have also set out at the commencement of this judgment why it is vital in any petition, particularly those under section 168A, that clear and precise grounds of complaint are made out in the petition because it is on that basis and that basis alone that the court can grant relief.

21.  Without going into the matter in any great detail, I diverge from the decision of the judge below because it was considered that the petitioners could not only amend their petition but could present evidence which significantly departed and disputed the allegations in the petition itself.  That I do not consider can be allowed to happen.  Furthermore, if there are to be pleadings in a petition it is very important, particularly in cases such as the present, that the petitioner itself must present its case in a pleading.  The respondents to a petition are entitled to clarity of the allegations made and thus entitled to be able to ask for further and precise particulars as to any allegation.

22.  Whilst I consider that the present petition has to be struck out I do not rule out the possibility that the petitioners may be able to articulate complaints which could found a viable petition under section 168A.  Whether or not the disputes between the parties, which appear at present to be irreconcilable can be resolved under a section 168A petition remains to be seen.  A viable resolution which includes the continued existence of the Company is not immediately apparent.

23.  I would therefore allow this appeal, strike out the petition and make an order nisi of costs here and below in favour of the respondents.

Hon Le Pichon JA:

24.  I agree.