HO TUNG MING TOMMY v. PAL ACTIVE LTD AND OTHERS

HCCW 90/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 90 OF 2007

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J U D G M E N T

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1.  This is a petition presented by a contributory under section 177(1)(f) of the Companies Ordinance, Cap. 32.  The petitioner, Ho Tung Ming Tommy, seeks to wind up PAL Active Ltd (百威順有限公司; “the Company”), the 1^st respondent herein, on the just and equitable ground alleging that it is no longer possible for the equal shareholders to co-operate in running the Company as mutual trust and confidence has broken down and they are in deadlock.

2.  The petition is opposed by the 2^nd and 3^rd respondents.  The 2^nd respondent, Elite Focus Limited, holds the other 50% of the shares in the Company.  The 2^nd respondent is owned by Madam Ngai Chung Yuet Ming Rosamund, the 3^rd respondent herein, and her daughter.  The petitioner and the 2^nd respondent are the only directors of the Company.  The main protagonists in these proceedings are the petitioner and the 3^rd respondent.

3.  The respondents do not dispute that mutual trust and confidence has broken down.  They say that the petition should be dismissed because the breakdown was attributable to wrongful acts of the petitioner and that he did not seek equity with clean hands.  They further contend that if the Company were put into liquidation, substantial expenses would need to be incurred for the liquidator in Hong Kong to take steps in Mainland China to dissolve the wholly owned subsidiary in Kunming known as Kunming PAL Active Bio-Research Company Limited (昆明百威順生物研究有限公司; “Kunming PAL”), the only business and substantial asset of the Company, and that this is likely to exhaust all the presently available funds of the Company.  They claim that Kunming PAL should first be de-registered in China, so that the registered capital injected into it by the Company may be remitted back to Hong Kong.  Thereafter, the Company may be put into liquidation.

4.  Thus the respondents do not contend that the Company should not be wound up eventually.  Their position is that winding-up relief should not be granted to the petitioner on his petition, and that the liquidation of the Company should be deferred until after the de-registration of Kunming PAL.  The real dispute, as I see it, is a question of costs.  If the petition were dismissed, the unsuccessful petitioner would need to pay the costs of the respondents.  Conversely, if the respondents should fail in opposing the petition, they would need to pay the costs of the petitioner.

The background

5.  I will first set out the background matters which are not controversial.

6.  The petitioner met the 3^rd respondent and her husband in a Tai Chi class in about 2000 and they became friends.  The petitioner had worked as a senior audit clerk in an accounting firm.  Since 1981, he set up his own business conducting China trade.  His Hong Kong company deals with the control and energy saving system in hotel rooms and has a subsidiary in Shenzhen.  The 3^rd respondent is a housewife, her husband is a medical doctor.

7.  The 3^rd respondent became interested in alternative medicine and in exploring business opportunities in that area.  She came across a shampoo containing a substance extracted from farmed cockroaches, which can stimulate the growth of human hair.  In the latter part of 2005 and early 2006, the 3^rd respondent and her husband made several trips to Yunnan Province with the petitioner and his wife, in the course of which they made the acquaintance of two brothers surnamed Liao, called Liao Kat (廖吉) and Liao Yan (廖言).  They inspected a shampoo factory in Kunming run by Liao Kat and a farm in Dali producing the extraction.  The petitioner and the 3^rd respondent decided to form a limited company to explore the business opportunity of developing the extraction as alternative medicine.

8.  For this purpose, the Company, which was incorporated on 18 November 2005 under its former name, was acquired as a shelf company and its name was changed to its present name on 21 February 2006.  According to the minutes of the first directors’ meeting on 23 January 2006, the petitioner and the 2^nd respondent were appointed its first directors, the one subscriber share was transferred to the petitioner, 9,999 new shares of HK$1.00 each were allotted as fully paid, of which 4,999 were allotted to the petitioner and 5,000 to the 2^nd respondent.

9.  The Company had no business in Hong Kong.  It set up Kunming PAL for conducting research and trading in biological products.  Kunming PAL received a certificate of approval for its establishment as a wholly foreign owned enterprise on 23 May 2006.  The Company was registered as the sole proprietor of Kunming PAL.  The petitioner was registered as its legal representative, the sole director and the general manager.  The 2^nd or 3^rd respondent did not feature in any of the incorporation or registration documents of Kunming PAL, nor were they appointed to any position in that company.

10.  The petitioner and the 3^rd respondent had each injected HK$400,000.00 into the Company.  In turn, the Company remitted a total of HK$660,000.00 for the use of Kunming PAL, of which HK$160,000.00 was sent to Liao Kat and HK$500,000.00 was remitted to the bank account of Kunming PAL, as according to the incorporation documents Kunming PAL should have a registered capital of HK$500,000.00.

11.  On 24 February 2006, the Company entered into a tenancy agreement to rent premises for Kunming PAL for two years and purchased furniture and equipment for the latter.

12.  Prior to the incorporation of Kunming PAL, the petitioner had signed an authorisation on behalf of the Company to authorise Liao Yan to attend to matters concerning the name pre-approval.  Liao Kat came to Hong Kong in early May 2006 and the petitioner gave him the notarised documents, his photograph, and a photocopy of his Hong Kong identity card, for the Liao brothers to attend to the setting up of Kunming PAL.  At some time, Liao Yan was also given a chop of the Company.  Whilst Liao Yan was employed as the deputy general manager of Kunming PAL, Liao Kat did not hold any position in that company.

13.  After the incorporation of Kunming PAL in May 2006, a bank account was opened in its name with the Guangdong Development Bank in Kunming in June 2006.  Initially, the bank mandate only required the finance chop of Kunming PAL and the personal chop of the petitioner to operate the bank account.  In July 2006, the mandate was altered in that the personal chop of the 3^rd respondent was also required.

14.  The petitioner signed a letter of authorisation dated 22 June 2006 stating that he was to leave for Canada for personal reasons from 23 June 2006 to 30 September 2006 and authorised the 3^rd respondent to execute on his behalf all the matters concerning Kunming PAL within that period.

15.  On 25 June 2006, Miss Ho Sum Yin Sandy (“Sandy”), also known as Siu Ming, was employed by the Company as “the assistant to the executive deputy general manager” and was assigned to work for Kunming PAL. 

16.  From 22 July 2006 to 20 August 2006, the 3^rd respondent was on holiday in Canada.

17.  On 29 July 2006, Liao Yan left his post in Kunming PAL and with his disappearance, some cash and the memorandum and articles of association of that company were found missing.  The petitioner signed an application letter to the tax authorities dated 16 October 2006 as the legal representative of Kunming PAL seeking an extension of time to submit the national revenue tax ledger, citing among other reasons the sudden resignation of Liao Yan.  In the letter, it was stated that Kunming PAL had not yet engaged in production or commercial trading of any kind.  It was also mentioned that the petitioner had discovered that signatures on the documents of that company at the Kunming Commercial and Administration Bureau were forged and that he would soon go to Kunming to sort out these matters.

18.  On 20 October 2006, the 3^rd respondent sent the petitioner an e-mail asking him if she should be nominated the general manager as well as one of the directors of Kunming PAL.  In his response the following day, the petitioner answered yes.  He stated further it should have been arranged like that previously and asserted that the Liao brothers made the arrangements without the knowledge of him and the 3^rd respondent and without consulting them.

19.  Sandy was copied the above e-mail and prepared a set of documents on 22 October 2006 to be executed by the petitioner and the 3^rd respondent to appoint the latter as an additional director and additional general manager.  They were not executed.  In November 2006, she prepared a similar set of documents for the same purpose, and this time the petitioner and the 3^rd respondent did sign one of the documents headed “Appointment of director of foreign party” (外方董事委派書) and dated 21 November 2006, stating that both were appointed the directors of Kunming PAL.  Notwithstanding this, the 3^rd respondent has not been validly appointed a director, for reasons I will go into.

20.  The petitioner and the 3^rd respondent had two lunch meetings in hotels, on 1 and 10 December 2006.  There was a heated argument on 10 December 2006.  What was said in those meetings is in dispute.

21.  On 11 December 2006, the petitioner made enquiries with Miss Tang Mei Wah Stina (“Miss Tang”) of the steps to close Kunming PAL, stating that he planned to do so as he could not find any point to work with the 3^rd respondent.  Miss Tang was an employee of the Shenzhen subsidiary of the petitioner’s company.  On the same day, he gave Sandy one month’s notice to terminate her employment with the Company, and gave as a reason that the 3^rd respondent had decided to close the Kunming operation.  He asked Sandy to work out the amount payable to her regarding her outstanding salary for November 2006 and to revert to him.  He also asked her to find out the fees involved and the steps required to dissolve Kunming PAL.

22.  On 5 January 2007, the solicitors for the 2^nd and 3^rd respondents wrote to the petitioner seeking inspection of all the ledgers and bank statements of the Company.  The petitioner replied by a letter of his solicitors dated 12 January 2007 offering inspection of the bank statements on 15 January 2007 and stating that there was no ledger of the Company as it only commenced business on 14 March 2006.  The date for inspection of documents was later re-scheduled to suit the 3^rd respondent.  It eventually took place on 20 March 2007, after the presentation of this petition.

23.  On 16 January 2007, the petitioner’s solicitors wrote to the solicitors for the respondents stating that as the two shareholders and only directors “cannot work with each other and there is a deadlock”, they proposed to wind up the Company either voluntarily or by an order of the court.

24.  The respondents’ solicitors replied on 22 January 2007 expressing surprise there was no ledger for the Company.  They stated that the petitioner had failed to mention what was to happen to Kunming PAL, into which the Company had injected substantial cash and at least one project of the subsidiary was ongoing.  They were of the view that the winding up of the Company should be deferred until all the accounting matters in relation to the Company and Kunming PAL had been verified.

25.  The petitioner’s solicitors replied to the letter of the respondents’ solicitors on 25 January 2007 stating inter alia that the Company should be wound up by the court as there was a deadlock and the respondents would not agree to voluntary liquidation.

26.  The 3^rd respondent attended the office of the company secretary of the Company on 18 and 23 January 2007 when she was asked by a staff of the company secretary to sign cheques of the Company and a transfer slip to transfer money from the savings account to the current account of the Company at the Hongkong and Shanghai Banking Corporation Limited (“HSBC”) to settle Sandy’s salary.  The petitioner and the 3^rd respondent are joint signatories of the Company’s accounts at HSBC.  The 3^rd respondent refused to sign the cheques or the transfer slip.

27.  On 25 January 2007, the Company and the directors received a notice from the Labour Department to attend a mediation meeting on 31 January 2007 as Sandy had lodged a complaint for the non-payment of her salary.  The petitioner and the 3^rd respondent attended the mediation meeting and each paid up his or her share in settlement of the full amount claimed by Sandy.

28.  This petition was presented on 23 February 2007.  It was amended three times, the last amendment was made on 4 March 2008.

The allegations in the petition

29.  It is the petitioner’s case that the Company was operated as a quasi-partnership in that it was formed on the basis of the personal relationship between the petitioner and the 3^rd respondent and that the petitioner and the 2^nd respondent would have equal share in the management of the business of the Company.  This is not disputed by the respondents and I am satisfied that that was the case.  As mentioned earlier, it is also not disputed that mutual trust and confidence has broken down.  The only broad issue I am required to resolve is what brought about the breakdown of trust and confidence.

30.  It is alleged in the petition that the breakdown came about because of these matters:

(1) The 3^rd respondent has wrongfully accused the petitioner of refusing to allow her to inspect the books and accounts of the Company.

(2) The 3^rd respondent has refused to co-operate to sign cheques to pay Sandy’s salary.  As a result, the petitioner was summoned before the Labour Tribunal and this brought about “an adverse implication of a criminal nature on the character of the petitioner”.

(3) The 3^rd respondent made wrongful accusation against the petitioner that he kept a mistress in Shenzhen and verbally brought such accusation to the attention of the petitioner’s wife causing great distress to his family.

(4) At the meeting on 10 December 2006, the 3^rd respondent informed the petitioner that his personal chop for the operation of the bank account of Kunming PAL was kept in the private safe deposit box of the 3^rd respondent in a Kunming bank and she handed him a set of keys of the safe deposit box.  Even so, the petitioner was in no position to open that safe deposit box as it was the 3^rd respondent’s private box.  Without his personal chop and the finance chop of Kunming PAL (the latter was in the custody of the 3^rd respondent since about 10 January 2007), the petitioner could not run Kunming PAL.

(5) At the meeting on 1 December 2006, the 3^rd respondent told the petitioner that she no longer wished to continue the business in Kunming and on 10 December 2006, the 3^rd respondent and her husband confirmed to the petitioner and his wife they intended to close Kunming PAL, to which the petitioner made no objection.  Pursuant to the 3^rd respondent’s decision, the petitioner gave notice to terminate Sandy’s employment on 11 December 2006.  However, the 3^rd respondent retracted her words and alleged instead it was the petitioner who proposed to close down the Kunming business.  She further alleged the petitioner was the one who said that Sandy had committed misconduct. 

The respondents’ allegations

31.  The respondents claim that the breakdown of trust was due to the petitioner’s unreasonable conduct.  It is their case that the allegations in the petition were not the true cause for the breakdown of trust and they attribute the true cause to the following allegations:

(1) The immediate triggering point was the petitioner’s refusal to add the name of the 2^nd or 3^rd respondent to the official documents of Kunming PAL to reflect the 2^nd respondent’s investment through its 50% shareholding in the Company.  The petitioner had kept the 3^rd respondent in the dark about the formalities for the setting up of Kunming PAL and she only found out the true position in the official documents in September 2006.  Only the petitioner was recorded as the legal representative, the sole director and the general manager.  The 3^rd respondent had on many occasions asked the petitioner to add the name of the 2^nd or 3^rd respondent on the list of director of Kunming PAL and her title as general manager but he had wilfully and deliberately failed to do so.

(2) The petitioner bought expensive machinery when the laboratory in Kunming was set up without notifying the 3^rd respondent.  She later found out that the machinery was without warranty and a proper manual.

(3) The petitioner refused to reimburse the 3^rd respondent the expenses she incurred on behalf of the Company in connection with Kunming PAL in the total amount of HK$64,546.42.  She had given him a large number of the receipts of the expenses incurred with a breakdown in early October 2006.  On 6 January 2007, she chased him for reimbursement of the said sum or to return the receipts to her and he turned down her request.

(4) At all times there were only a maximum of three or four staff recorded on the payroll of Kunming PAL.  However, the petitioner reported to the national revenue authorities in a tax registration form that Kunming PAL had eight employees.

(5) The petitioner was responsible for retaining Kunming Wen Yan Consultancy Service Limited (昆明雲歆咨詢服務有限公司; “Wen Yan”), which was paid RMB 18,000 for services allegedly rendered in setting up Kunming PAL.  Wen Yan was a fictitious entity.

The witnesses

32.  Only the petitioner and the 3^rd respondent attended court to give evidence.  Sandy has made an affirmation for the respondents but as she did not attend for cross-examination, her affirmation could not be relied on.

33.  The petitioner gave evidence in Cantonese and the 3^rd respondent testified in English.  Both appear to be well educated and intelligent.  Of the two, I have no hesitation in preferring the 3^rd respondent’s evidence.  I do not find her evidence contradictory, incredible or illogical as submitted by Mr. Chiu for the petitioner.  She came across as solid, straightforward, and has the hallmarks of an honest witness.  Regrettably, I cannot say the same about the petitioner.  Important parts of his case were not mentioned in any of the four affirmations he made, in particular his assertion that material documents relating to the setting up of Kunming PAL were signed without his knowledge at the time when they were submitted to the authorities, or when he first discovered his appointment as the sole director or general manager of that company.  I do not accept his explanation that this was because he did not regard such evidence as relevant or significant or that it was due to his oversight.

34.  I will first deal with the respondents’ allegations as to the true cause for the breakdown of mutual trust, as they were, by and large, prior in time to the allegations of the petitioner.

Failure to add the respondents to the official documents of Kunming PAL

35.  The 3^rd respondent gave evidence that before Kunming PAL was set up it was agreed between her and the petitioner that she would be the general manager.  The petitioner has not disputed this as he confirmed in cross-examination that there was such a common understanding and that the petitioner had caused her name cards to be printed giving her title as general manager of Kunming PAL.  However, in early September 2006, she discovered that her name or the 2^nd respondent’s name did not feature in the official documents of that company.  Before she sent the petitioner the e-mail on 20 October 2006 asking to be appointed general manager and a director, she had verbally requested him to do so.  Notwithstanding the petitioner’s reply on 21 October 2006 that the appointments should and would be made, and Sandy had prepared a set of documents for this purpose on 22 October 2006, the change was not effected.

36.  On 14 November 2006, the 3^rd respondent sent the petitioner another e-mail complaining of delay in effecting the agreed changes to the official documents and urging him to draft a “sole proprietor” resolution to add her name to the director’s list, to specify the ratio of shareholding of the 2^nd respondent, and her title in Kunming PAL.  She further stated that the petitioner should not delegate the entire responsibility in amending the official documents to Sandy.

37.  On the same day, the petitioner sent Sandy an e-mail to inform her that he would be coming to Kunming on 17 November 2006 and instructed her to have ready “another set of documents that require [his signature]”.

38.  The petitioner did go to Kunming on 17 November 2006 and signed on a number of documents that had been registered with the Kunming Commercial and Administration Bureau to rectify or confirm his signature on these documents in connection with the setting up of Kunming PAL.  They were among the documents produced by 3^rd respondent as exhibit 21 to her 2^nd affirmation.  He also signed one of the documents prepared by Sandy headed “Appointment of director of foreign party” (外方董事委派書) dated 21 November 2006 for the purpose of appointing the 3^rd respondent as an additional director.  He did not sign the draft minutes of Kunming PAL for the passing of a resolution to amend the director’s list in the Kunming Commercial and Administration Bureau by adding the 3^rd respondent as a director and general manager.

39.  The 3^rd respondent did not manage to add herself as a director, as she was given to understand by the Kunming Commercial and Administration Bureau on 6 December 2006 that the legal requirement in China is that the number of directors of a wholly foreign owned enterprise should be one or an odd number up to thirteen, to prevent deadlock.

40.  Furthermore, under the memorandum and articles of association of Kunming PAL, it is provided in paragraph 6.1 that the general manager is the legal representative of the company and there is one general manager in the company.  It would be necessary to amend that provision for the 3^rd respondent to be appointed as an additional general manager.

41.  The above hurdles were not insurmountable, but no or no serious step was taken to address them in order to add the 3^rd respondent’s title and position to Kunming PAL.

42.  The petitioner may have a point that it would not be necessary to make the 2^nd respondent an equal shareholder of the Kunming company, as that company is wholly owned by the Company and the 2^nd respondent is a 50% shareholder of the Company.  He does acknowledge there was no or no good reason that he should be the sole director and general manager of Kunming PAL as it was their common understanding that the petitioner should hold an official position in it.

43.  The failure to add the 2^nd or 3^rd respondent’s name to the official documents of Kunming PAL was the most serious dispute between the parties and this led to their subsequent discord.  The parties had a heated argument when they met on 10 December 2006, after the 3^rd respondent’s return from her unsuccessful trip to Kunming.  As stated by the 3^rd respondent, she felt that the petitioner had tricked her in that he had no intention of adding her as a director and arrange for the 2^nd respondent’s shareholding to be reflected in Kunming PAL.

44.  The petitioner’s case is that the arrangement for setting up Kunming PAL was done through the Liao brothers, who were the friends of the 3^rd respondent and were designated by her to represent her in setting up that company.  He denies that she was kept in the dark about the formal documents executed for the setting up of Kunming PAL.  The 3^rd respondent made no complaint to him about this after the incorporation of that company.  He claims he had agreed readily to add her as a director after she sent him an e-mail on 20 October 2006, as was evident in his e-mail reply to her the following day.  Further, he had signed the document headed “Appointment of director of foreign party” dated 21 November 2006 for this purpose.

45.  The petitioner has pointed to some e-mails he produced to support his allegation that the 3^rd respondent had at all material times given instructions to the Liao brothers and monitored them in the setting up of Kunming PAL.  These were the e-mails between the 3^rd respondent, Liao Yan, Liao Kat and the petitioner from 16 March 2006 to 29 May 2006 produced as exhibits 8, 14 and 15 to his affirmations.  Most of these e-mails only showed that she had given directions to the employees of Kunming PAL regarding its business from time to time, the only possible exception was the 3^rd respondent’s e-mail to the petitioner dated 29 April 2006 in which she stated that at a lunch meeting with Liao Kat in Hong Kong on 1 May 2006, Liao should be given all “all the notarised documents, stamps, photographs”.

46.  I am quite unable to see from these e-mails that the 3^rd respondent had any close involvement in the execution of official documents for the setting up of Kunming PAL.  I find that she was not aware of the absence of her name or the 2^nd respondent’s name from the official documents of Kunming PAL until September 2006.

47.  Mr. Chiu submitted that the evidence failed to establish that the petitioner did sign all or most of the documents when they were submitted to the Kunming Commercial and Administration Bureau in May 2006, or that he had affixed the chop of the Company to some of these documents by himself.  Whether he had signed or affixed the chop himself is quite immaterial.  The important thing is whether the petitioner knew about the execution of some of these documents appointing him as the sole director and general manager.  For one can readily see that the two signatures on a number of these official documents, both purporting to be his signatures, are quite different.  He said he signed on 17 November 2006 to rectify the earlier signature or to affirm these documents.  Nor I do not find it necessary to resolve the dispute between the petitioner and the 3^rd respondent as to when exactly was Liao Yan given the chop of the Company which was affixed on to some of the incorporation documents of Kunming PAL.  Contrary to Mr. Chiu’s submission that her account of Liao Yan throwing out the Company chop in anger on 20 July 2006 is a recent fabrication, I am inclined to think this has a grain of truth about it and was supported by her contemporaneous e-mail to the petitioner on 21 July 2006.

48.  I reject the petitioner’s evidence that he was kept equally in the dark by the Liao brothers that he alone was recorded as the sole director and general manager in the official documents (apart from being the legal representative).  His evidence on this is evasive and unsatisfactory.  He simply could not make up his mind when he learned of the omission of the 3^rd respondent’s name from the official documents – whether it was in July 2006, after his return from Canada on 30 September 2006 or on 17 November 2006 when he went to Kunming to append his signatures on various documents.  His answer that he thought this was not relevant to the breaking up of mutual relations is disingenuous.

49.  Furthermore, I find it probable that in June 2006, if not before, the petitioner would also have known from Miss Tang, who advised him on the setting up procedures of Kunming PAL and had brought back some of the incorporation documents, that he had been appointed the general manager and director.  The petitioner said it was possible she could have told him about the appointments but he did not take this to heart as he was only concerned with the operation of the bank account of Kunming PAL.  I do not find this credible.

50.  I decline to accept his bare assertion that the Liao brothers were designated by the 3^rd respondent to represent her in setting up Kunming PAL.  His evidence in cross-examination that the incorporation of that company was handled entirely by the 3^rd respondent with the Liao brothers does not sit well with his earlier assertion in his reply e-mail to the 3^rd respondent on 21 October 2006 that the Liao brothers made the arrangements without the knowledge of him and the 3^rd respondent and without consulting them.  He was just trying to shift blame to the Liao brothers or to the 3^rd respondent when it suited his purpose.

51.  I find it inherently improbable that the Liao brothers would have taken it upon themselves to effect the registration of the petitioner as the sole director and general manager without any hint, direction or approval from him, as it was the petitioner who was the only one to benefit from this arrangement.  As mentioned earlier, the petitioner admitted he had signed an authorisation on the Company’s behalf in May 2006 to authorise Liao Yan to attend to matters concerning the name pre-approval of Kunming PAL.  He had also given a power of attorney to Liao Kat referred to in the 3^rd respondent’s e-mail to him on 21 July 2006.  He had maintained contact with Liao Yan by internet telephone and by e-mail, which were either printed out to him as hard copies by the 3^rd respondent or by Liao Yan who scanned the messages for him after a scanner was purchased.  He was attempting to give an impression to distance himself from the Liao brothers.

52.  I hold that the failure to add the 2^nd or 3^rd respondent’s name to the official documents of Kunming PAL was attributable in part to the petitioner and I find his efforts to amend the official documents to add the 3^rd respondent’s name were just half-hearted attempts.  He had not conducted himself in an above board manner and this had led to and triggered the breakdown of mutual trust and confidence.

Purchase of machinery without prior notification

53.  This allegation of the 3^rd respondent may be dealt with shortly.

54.  The 3^rd respondent’s complaint is that she was just given a quotation of the equipment and the purchase was already made by Liao Yan before she had given her consent.  Further, she found out later that the equipment had no warranty or a proper manual.  However, she admitted in cross-examination that she did not know if the petitioner had given instructions to Liao Yan to make the purchase.  It was possible that Liao Yan had acted on his own.

55.  I do not think this allegation against the petitioner is made out.  Even if it were, it did not seem to add much to the breakdown in relations.

Failure to reimburse the 3^rd respondent

56.  The 3^rd respondent claimed reimbursement for the expenses she had incurred for the Company during June to September 2006 of HK$64,546.42.  In early October 2006, she gave the petitioner all the receipts for the expenses with a breakdown.  I accept her evidence on this and reject the petitioner’s evidence to the contrary.  She had made this assertion in the letter of her solicitors dated 1 February 2006, to which the petitioner had made no reply.  There is no basis for the petitioner’s surmise that some of the expenses claimed might be related to another project not connected with the business of Kunming PAL.

57.  I also reject the petitioner’s evidence that the 3^rd respondent did not chase him for reimbursement on 6 January 2007.  On that occasion he had turned down her request for reimbursement or to return the receipts to her and gave no reason for his refusal.

58.  It was only in his 3^rd affirmation that he gave a reason why she was not reimbursed, stating that the only cash was and is in the bank account of Kunming PAL and as he did not have his personal chop to operate this account, he was not able to transfer money back to Hong Kong without the 3^rd respondent’s co-operation.  The 3^rd respondent only returned his personal chop to him through her solicitors on 27 April 2007.  This appeared to me to be a contrived reason.  I would have more to say about the personal chop of the petitioner when I deal with the allegation in the petition.

59.  In cross-examination, he suggested that the 3^rd respondent could have reimbursed herself from the bank account of Kunming when he was in Canada, as she had the chops required to operate the bank account.

60.  I find that all the above were after-thoughts of the petitioner to justify his refusal to reimburse the 3^rd respondent, and his refusal to do so without giving her any or any proper reasons had also contributed to the breakdown of mutual trust.

Untruthful reporting of number of employees to tax authorities

61.  According to a tax registration form of Kunming PAL bearing a permit issue date of the national revenue authority of 1 June 2006 and another permit issue date of the provincial authority of 1 December 2006, it was stated that the company had 8 employees and Madam Duan Jock Kuen was its accounting manager.  Such information provided was incorrect.  The form was filed by Wu Chi, the part-time accountant of Kunming PAL, with the date of 9 November 2006 and signed by the petitioner as the legal representative.  The petitioner did not fill in the date on the form as to when he signed.

62.  According to the petitioner’s explanation, there were less than three employees in Kunming PAL, as Mr. Wu worked part-time for the company and would not count as a full employee.  He had enquired with Mr. Wu why the latter reported eight employees on the tax registration form and was told it would look better for a foreign company to have more staff and that the reporting to the tax authorities was not significant.  There were e-mail exchanges between the petitioner and Sandy on 14 November 2006 asking her to ascertain from Mr. Wu the names of those who made up the eight employees and to make inquiries whether there would be problem if the company should just declare the actual number of staff.

63.  The reporting of false information to the tax authorities was not sorted out by the time the parties’ relationship broke down after the meeting on 10 December 2006.  Subsequent e-mail exchanges between the petitioner and Sandy in late December and early January 2007 focussed on a staff list of eight employees that Sandy claimed she had seen in Kunming PAL and was taken away by Liao Yan.

64.  Whether the petitioner had known who made up the eight employees or whether the staff list is still in existence is immaterial.  The fact remains that some of the information provided to the tax authorities was incorrect and the petitioner as the legal representative who signed the form had a duty to provide correct information.  I do not think he had given an entirely satisfactory explanation as to why he signed the tax registration form with false information.  This, in my view, also contributed to some extent to the breakdown of trust and confidence between the parties.

Payment of fees to fictitious company

65.  The 3^rd respondent gave evidence that when she conducted checks on the incorporation documents of Kunming PAL in late December 2006, she came across a receipt which aroused her suspicion.  It was an official receipt dated 28 May 2006 and issued by Wen Yan, which, to her knowledge, purportedly handled the drafting of the memorandum and articles of association of Kunming PAL and rendered assistance in its setting up.  According to the receipt, charges of RMB 18,000 were paid for the service of Wen Yan.  Her enquiries revealed that Wen Yan was not registered as a company in Kunming.

66.  The official receipt had a number of odd features.  It was purportedly printed by the national revenue authority when this should have been printed by the local tax authority, according to the legal opinion obtained by the 3^rd respondent from a Mainland law firm, as the agency fee received by Wen Yan would come under the category of profit tax and should be administered by the local tax authority.  Only a legally registered unit or person is entitled to apply to the relevant authority to acquire an official receipt to be issued to a payer of goods or services and it is not permissible for the tax payer to transfer or lend his official receipt to another.  As mentioned earlier, Wen Yan was not a registered unit.  The number on the official receipt indicated that the receipt was acquired by a hardware company in Kunming on 9 March 2006, so it should not bear the chop of Wen Yan.  Further, the receipt had already been verified by the tax authority on 10 April 2006.  This meant it had been used already and should not be issued again by the tax payer on 28 May 2006.

67.  The 3^rd respondent also found an authorisation agreement dated 15 May 2006 between the Company and Wen Yan by which the Company authorised the latter to apply for registration of a business license for a wholly foreign owned enterprise in Kunming, namely Kunming PAL, and to undertake a number of tasks in connection with its incorporation as set out therein.  Wen Yan was to be paid an all inclusive fee of RMB 18,000.  The agreement was signed on behalf of the Company by Liao Yan and it bore the chop of the Company, which was the same chop used in other incorporation documents mentioned earlier.  She was unable to find any document issued by Wen Yan, other than the official receipt, in connection with the work it was supposed to undertake for the Company.  One of the items of work that Wen Yan was required to carry out was the drafting of the memorandum and articles of association.  That document of Kunming PAL was dated 12 May 2006, prior to the date of the agreement by which Wen Yan was authorised to undertake the drafting work.

68.  The 3^rd respondent contended that the payment to Wen Yan, a fictitious company for work which did not appear to have been carried out by that entity, must have been authorised or approved by the petitioner.

69.  The petitioner’s only response in his affirmations to the above allegations is that the Liao brothers approached a “media window company” to register Kunming PAL, that this media window company was Wen Yan and the 3^rd respondent had full knowledge of this.  In support of this, he pointed to an e-mail of the 3^rd respondent to him dated 17 April 2006 in which she referred to “the mediator window company to register our company”.  I am satisfied from the 3^rd respondent’s evidence in cross-examination that the “media window company” or “mediator window company” had nothing to do with Wen Yan, and the petitioner was just trying to create confusion.

70.  I find the petitioner’s evidence on this issue unsatisfactory and evasive.  He did not explain the many suspicious circumstances regarding Wen Yan.  I am satisfied he did know about the engagement of Wen Yan, as according to the authorisation agreement, the Company was required to provide a letter of authorisation signed by the legal representative.  Further, I accept the 3^rd respondent’s evidence that there was another authorisation agreement between the Company and Wen Yan, similar to the one signed by Liao Yan, but was signed by the petitioner on behalf of the Company.  She had specifically referred to this other agreement in her e-mail to the petitioner on 21 July 2006, and he never denied its existence in any e-mail to her.  She had returned this agreement to the petitioner in October 2006.

71.  I find that the engagement of Wen Yan at the fee of RMB 18,000 was with the authority of the petitioner.  His failure or refusal to give a proper explanation on a matter which he has acknowledged is serious also contributed to the breakdown of trust and confidence.

72.  To sum up, I find the respondents’ complaints established and that the breakdown of trust and confidence was attributable to the petitioner’s wrongful or unreasonable acts.  It would not be right to grant him relief on his petition.

73.  In view of this conclusion, it is strictly unnecessary to consider the grounds relied on by the petitioner to contend that mutual trust has broken down.  I propose to deal with them succinctly.  In summary, I do not think the petitioner’s allegations, even if established to some extent, constituted the true reasons for the breakdown of relations.  It is clear from the way events developed that by mid January 2007, the petitioner was bent on dissolving the Company as the parties were unable to co-operate any more and he was looking around for a ground to present a winding-up petition.

Wrongful accusation of refusal to allow inspection of books and accounts

74.  I have considered the evidence, in particular the correspondence between the parties’ solicitors.  By the time the inspection of documents took place in March 2007, the petition had already been presented.  The 3^rd respondent’s stance is that even though she had inspected the documents in connection with the setting up of the Company, she did not have sight of the ledger (as this was not compiled) or the bank statements (as they were sent to the petitioner’s home address).  The petitioner was simply too eager to present his petition without waiting to see whether the 3^rd respondent would be satisfied with the outcome of her inspection of books and records.  This is not a material cause that brought about the breakdown of co-operation.

Refusal to co-operate to sign cheques to pay salary of employee

75.  This is again an immaterial complaint.  The 3^rd respondent had not been co-operative in signing cheques and the transfer slip to settle the salary and other claims of Sandy.  Be that as it may, the parties had, at the mediation meeting in the Labour Department on 31 January 2007, issued their respective cheques to pay Sandy in full.  Sandy had not filed any claim in the Labour Tribunal.  She had merely made a complaint to Labour Department for non-payment of salary.  The petitioner was not summoned before the Labour Tribunal, and there is no substance in the complaint that this incident had brought about “an adverse implication of a criminal nature” on his character.

Wrongful accusation of a mistress

76.  This is also an allegation blown out of proportion.  The 3^rd respondent admitted that on 18 November 2006, she had made a remark to the petitioner’s wife that the special treatment given by the petitioner to Miss Tang should deserve her special attention.  The petitioner claimed this remark had caused great friction between him and his wife.  The petitioner and the 3^rd respondent were still on friendly terms after this as they had a lunch meeting on 1 December 2006.  Further, the 3^rd respondent had apologised for this in her letter to the petitioner dated 24 January 2007.

Withholding the chops for the operation of bank account

77.  The petitioner alleged that the 3^rd respondent kept his personal chop for operating the bank account of Kunming PAL in her private safe deposit box and he was in no position to open it even though she gave him both keys on 10 December 2006.  There is no substance in this complaint. There is also no substance in the complaint that the 3^rd respondent has kept both his personal chop and the finance chop of Kunming PAL so that he could not run the company.

78.  The safe deposit box referred to was not the private box of the 3^rd respondent.  It was opened for the purpose of Kunming PAL in July 2006 (when the petitioner was in Canada) and either the 3^rd respondent or Sandy could open it with a key to each and their identity document.  The petitioner had known of its existence all along.  This was box No. 383.

79.  In the 3^rd respondent’s e-mail to Sandy which was copied to the petitioner on 14 November 2006, he was reminded to bring a key of box No. 383 when he visited Kunming.  On 17 November 2006, he brought his personal chop to Kunming and asked Sandy to keep his chop and the key.  In early December 2006, when Sandy asked the 3^rd respondent to take custody of the petitioner’s chop, she suggested to Sandy to deposit his chop in box No. 383.  On 10 December 2006, the petitioner handed over both keys of box No. 383 to the petitioner.  She had offered to go to Kunming with him to open the box.

80.  When Sandy’s employment was terminated in December 2006, she wanted to return the company chop of Kunming PAL and its finance chop to the petitioner, as is apparent from her e-mail to him on 2 January 2007.  The petitioner however instructed her to hand over the chops to the 3^rd respondent for safekeeping.  As the 3^rd respondent had already handed over both keys of box No. 383 to the petitioner and he did not return any of them to her until 13 March 2007, she opened another safety deposit box to keep the other chops.  The 3^rd respondent brought back the petitioner’s personal chop to him after he returned both keys to her.

The closing down of the Kunming operation

81.  The allegation, as I understand it, is that the 3^rd respondent proposed to wind up the Kunming operation but retracted her words.  I do not understand what was meant by the further allegation in the petition that the 3^rd respondent alleged it was the petitioner who had said Sandy had committed misconduct, as this was not covered in any of the affirmations filed by the petitioner.

82.  It is not necessary to make any finding as to who had proposed to close down the Kunming operation, or whether any agreement to do so was reached at the meeting on 10 December 2006.  It is not in dispute there was some kind of consensus after 10 December 2006 that Kunming PAL should be closed down and the 3^rd respondent had made no objection when Sandy’s employment was terminated owing to the closure.

83.  In an e-mail from the petitioner to Sandy dated 2 January 2007, he imposed these conditions before he would cancel or close down Kunming PAL: firstly, this was subject to a confirmation in writing from the 3^rd respondent that she would assume full cost and responsibility for suing the Liao brothers; secondly, the 3^rd respondent would have to confirm in writing that it was the decision of herself and her husband to close down the Kunming company.  The 3^rd respondent would not agree to these conditions and so changed her mind about dissolving Kunming PAL immediately.

84.  I do not think any blame could be attributed to the 3^rd respondent in this respect.

Conclusion and orders

85.  For the above reasons, I hold that the breakdown of mutual trust and confidence was not due to the matters alleged in the petition but due to the complaints made by the respondents against the petitioner.  As he has not sought equity with clean hands, no relief would be granted to him on his petition and the petition is dismissed.

86.  Now that the present dispute is determined by the court, the parties should put their differences behind them and do what is required to dissolve Kunming PAL and the Company.  If the closing down of the Kunming operation is to be done expeditiously and inexpensively, it would be necessary to have the petitioner’s co-operation, as it is provided in paragraph 12.2 of the memorandum and articles of association that the winding-up procedure is to be initiated by the general manager who is the petitioner.

87.  I make an order nisi that the petitioner is to pay the costs of the 2^nd and 3^rd respondents in these proceedings, to be taxed if not agreed.