HCCW425/95
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
COMPANIES (WINDING-UP) NO.425 OF 1995
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| IN THE MATTER OF Sections 177 and 168A of the Companies Ordinance, Cap.32 of the Laws of Hong Kong |
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| and |
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| IN THE MATTER OF Tai Lap Company Limited |
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| BETWEEN | | |
| HWANG DA-LIN | Petitioner |
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| AND | |
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| WONG CHING MAN | 1st Respondent |
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| WONG CHUNG KEUNG | 2nd Respondent |
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| WONG TO YEE | 3rd Respondent |
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| TAI LAP COMPANY LIMITED | 4th Respondent |
AND HCCW643/96
COMPANIES (WINDING-UP) NO.643 OF 1996
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| IN THE MATTER OF Sections 177 and 168A of the Companies Ordinance Cap.32 of the Laws of Hong Kong |
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| and |
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| IN THE MATTER OF Tai Lap Investment Company Limited |
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| BETWEEN | | |
| HWANG DA-LIN | 1st Petitioner |
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| WONG SHI HOI, CARSON | 2nd Petitioner |
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| AND | |
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| WONG CHING MAN | 1st Respondent |
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| WONG CHUNG KEUNG | 2nd Respondent |
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| TAI LAP INVESTMENT COMPANY LIMITED | 3rd Respondent |
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Coram : The Hon Mrs Justice Le Pichon in Court
Dates of Trial : 15, 16, 17, 18 and 23 September 1998
Date of Handing Down of Judgment : 8 October 1998
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J U D G M E N T
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1. There are two petitions before this court. The first relates to Tai Lap Company Limited ("TLC"), a company engaged in the trading of, inter alia, frozen seafood. The second concerns Tai Lap Investment Company Limited ("TLI"), a property investment company holding 39 out of 67 units in a commercial building known as Lap Fai Building.
2. Hwang Da Lin ("Mr Hwang") is the Petitioner in the TLC petition and one of two Petitioners in the TLI petition, the other Petitioner being his son Carson Wong Shi Hoi. These petitions arise out of disputes between two branches of the same family, with Mr Hwang as head of one branch and his late elder brother Wong Tai Lap ("WTL") as head of the other branch. WTL married Wong Ching Man ("WCM"), a Respondent in both petitions. WCM died shortly prior to these petitions coming on for hearing and her eldest son Wong Chung Keung has been appointed to represent her estate. Apart from Wong Chung Keung, WTL and WCM had a number of other children including Wong To Ming, Wong To Yee and Johnson Wong Chung Yung.
3. Mr Hwang holds 30% of the issued and paid up capital of TLC. Another 35% remains registered in the name of the late WTL notwithstanding that he died as long ago as February 1994. WCM, Wong Chung Keung and Wong To Yee are the registered holders of the remaining 35%. The surviving directors of TLC are Wong Chung Keung, Wong To Yee and Mr Hwang. Until their respective deaths, WTL and WCM were also directors. Accordingly, the Respondents to the TLC petition are the estate of WCM, Wong Chung Keung, Wong To Yee and TLC.
4. So far as TLI is concerned, Mr Hwang was to be allotted 30% of its shares in 1979. At his request, two-thirds of his 30% interest i.e. 20% of the issued shares were allotted to his son. 40% of the shares remain registered in the name of WTL notwithstanding his death over four years ago and the remaining 30% in WCM. Until their respective deaths, WTL and WCM were also directors and Wong Chung Keung was an alternate director to WCM. Mr Hwang is the only surviving director.
The Petitions
5. It is the Petitioners' case that TLI was set up in Hong Kong in 1972 by WTL with funds that came from a successful partnership business that WTL and Mr Hwang had carried on in Vietnam for many years. WTL and his wife left Vietnam in about 1968 leaving Mr Hwang to continue with the business in Vietnam which he did until 1975. Profits generated in the businesses in Vietnam were channelled to Hong Kong for WTL to start new businesses here. TLI which invested in property was incorporated in 1972.
6. After settling in Taiwan in about 1976, Mr Hwang came to Hong Kong from time to time and sought to participate in the businesses set up substantially by the monies earned in Vietnam through his efforts. TLC was incorporated in May 1978 to carry out trading and initially traded in electronic commodities. Then it switched to trade in fruit and eventually turned to trading in frozen seafood which is its business today. The nub of the Petitioners' case is that the Hong Kong businesses carried on by TLI and TLC were but a continuation of the family partnership business conducted by WTL and Mr Hwang back in Vietnam, and that the capital used in setting up the Hong Kong businesses originated from profits derived from the Vietnam businesses and that, therefore, Mr Hwang had a legitimate expectation to participate in the management of the companies. The allotment of a 30% shareholding in each of the companies to Mr Hwang in 1979 were made in recognition of his interest. Mr Hwang was made a director of each of these companies. At about the same time, Mr Hwang was also given 4% in a Thai company in which WTL had a 9% interest.
7. Mr Hwang's main grievance against the Respondents relates to the misapplication of TLI's funds and assets by the Respondents in employing them via TLC to "subsidize" Canadian businesses conducted by some of WTL's children in the name of Sea Giant Trading Limited and Sea Giant International Inc. (collectively "Sea Giant") to the detriment of both TLC and TLI. Mr Hwang's other complaints include the wrongful exclusion of Mr Hwang from the management of the companies' affairs; Wong Chung Keung's wrongful usurpation of director's powers in relation to TLI and other abuses; and the non-provision of documentation and information to the Petitioners.
8. The petitions were amended at the commencement of the hearing to include allegations of further misconduct notwithstanding the presentation of the petitions including, inter alia, the continued milking of TLI's funds to feed TLC's operations without the Petitioners' knowledge, the refusal to distribute dividends for the years 1996 and 1997 for TLI; the undertaking of risky trading activities by TLC; misappropriation of rental received by TLI since late 1997.
9. Based on these complaints, the Petitioners seek, inter alia, either an order that the companies be wound up on the just and equitable ground; or alternatively, that the Petitioners' shareholdings be bought out at a fair value as an alternative remedy under s.168A of the Companies Ordinance.
10. On the second day of the hearing, at the conclusion of the Petitioners' counsel's opening, counsel for the Respondents informed the court that his clients would not be contesting the winding-up of TLC on the just and equitable ground. They accept that the Canadian venture involving Sea Giant was wrong. In connection with the concession made, two undertakings were given to the court, namely,
(1) that the Respondents who are still shareholders of TLI will not, in any manner, interfere with the decision of the liquidator of TLC if he should decide to take action including misfeasance proceedings against anyone; and
(2) that because the Respondents have substantive shareholdings in TLI, if at the end of the day the Respondents were found to be liable in any action brought by the liquidator of TLC, the Respondents will pay any sum found due.
11. In view of the concession made and undertakings given, the only petition that remains outstanding is the TLI petition. Counsel for the Petitioners in the TLI petition applied to amend the TLI petition by, inter alia, deleting the winding-up of TLI as one of the reliefs sought. In essence therefore the issue is whether there has been oppression of the minority i.e. the Petitioner such as would entitle him to section 168A relief.
The evidence
12. Both Mr Hwang and his son gave evidence in support of the TLI petition. Mr Wong Chung Keung who is the representative of the estate of his late mother, the 1st Respondent, and who is himself the 2nd Respondent, chose not to give evidence. Only one witness was called by the Respondents, namely, Mr Leung Kwan Fu ("Mr Leung") an employee of TLI. Mr Leung dealt principally with the issue concerning rentals received since November 1997. For practical purposes, therefore, the Respondents were precluded from relying on any of the affirmations filed by or on their behalf in opposition to the petitions other than Mr Leung's affirmations.
13. I now turn to consider the complaints made against the Respondents.
(a) The misuse of TLI's funds : the Canadian wrongs
14. The evidence establishes that TLI was the source of finance for the trading activities undertaken by TLC. From about 1986 onwards, TLC engaged in the trading of frozen seafood and entered into contracts for the supply of such seafood to Sea Giant. TLC offered unusually favourable trading terms to Sea Giant : the goods were paid on credit terms without any security. Substantial outstanding invoice demands, totalling some HK$10 million by 1995 were never sought to be recovered from Sea Giant. Sea Giant were businesses owned by two of WLT's sons, namely Wong To Ming and Johnson Wong.
15. Set out below is a schedule showing the amounts advanced to Sea Giant by TLC each year from 1988 onwards as well as the interest incurred by TLC in subsidizing such advances to Sea Giant.
16. Financial Year Ended 31st March,
| 1988 b/f
HK$ | 1989
HK$ | 1990
HK$ | 1991
HK$ | 1992
HK$ | 1993
HK$ | 1994
HK$ | 1995
HK$ | 1996
HK$ | Total
HK$ |
| Amount advanced to Sea Giant during the year | 1,293,944 | 936,124 | (175,519) | 350,088 | 985,353 | 6,114,753 | 961,345 | 422,606 | | 10,888,694 |
| Interest incurred in subsidizing the Sea Giant loan | 102,395 | 235,938 | 269,780 | 243,712 | 304,691 | 495,721 | 569,260 | 601,850 | 533,681 | 3,357,028 |
| 1,396,339 | 1,172,062 | 94,261 | 593,800 | 1,290,044 | 6,610,474 | 1,530,605 | 1,024,456 | 533,681 | 14,245,722 |
| Cumulative effect on cash flow | 1,396,339 | 2,568,401 | 2,662,662 | 3,256,462 | 4,546,506 | 11,156,980 | 12,687,585 | 13,712,041 | 14,245,722 | |
The cumulative position of the advances made to Sea Giant (excluding the interest subsidy) is set out below.
| 1988 | 1989 | 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | 1996 |
| 1,293,944 | 2,230,068 | 2,054,549 | 2,404,637 | 3,389,990 | 9,504,743 | 10,466,088 | 10,888,694 | 10,888,694 |
17. So by 1995, advances made to Sea Giant totalled almost HK$11 million. The interest payment alone incurred by TLC in subsidizing the Sea Giant loans totalled $3.357 million. The fact that the credit facilities granted to Sea Giant were made without any security and/or guarantee speaks for itself. Not only were such arrangements commercially unjustifiable, it would appear from correspondence between Wong Chung Keung and his brothers who were in control of Sea Giant that the latter's credit-worthiness was suspect. It must follow that such loans were also risky.
18. Particulars of the Sea Giant account maintained by TLC were only made available to the Petitioners on 27 November 1997. These disclosed the following net outstanding bills :
Particulars of Sea Giant Account
The Settlement Account of Net Outstanding Bills
| Outstanding Bills | 31/3/88 | 1,293,944.09 | |
| 31/3/89 | 1,676,085.58 | |
| 21/7/89 | 450,244.46 | |
| 20/2/91 | 350,088.41 | |
| 14/5/91 | 10,810.80 | |
| 31/3/92 | 647,649.86 | |
| 31/7/92 | 326,891.65 | |
| 27/4/92 | 266,271.07 | |
| 27/4/92 | 266,271.07 | |
| 6/7/92 | 404,255.41 | |
| 3/8/92 | 415,545.12 | |
| 27/11/92 | 774,174.00 | |
| 31/12/92 | 220,665.13 | |
| 11/1/93 | 635,013.66 | |
| 11/1/93 | 928,372.82 | |
| 11/1/93 | 1,031,025.91 | |
| 11/1/93 | 691,127.58 | |
| 5/2/93 | 1,021,722.00 | |
| 27/4/93 | 695,874.00 | |
| 10/9/93 | 32,780.82 | |
| 27/1/94 | 387,389.97 | |
| 22/6/94 | 310,931.67 | |
| 12/9/94 | 298,692.30 | |
| Less : Cash Received | | 13,135,827.38 | |
| | 2,247,132.97 | |
| Total Amount due to TLC | | $10,888,694.41 | |
| | ============== | |
Although between 1988 and 1994, Sea Giant had settled bills of an aggregate value of $2.247 million, as noted above, there remains owing to TLC some $10.889 million. Moreover it has emerged from the ledger records obtained on discovery that three of the sums advanced, namely those made on 27 November 1992, 5 February 1993 and 27 April 1993 in the respective sums of $774,174, $1,021,722 and $695,874, were not in fact referable to any sale transaction. These advances were plainly not legitimate on any view. As will become apparent, a question has arisen as to the accuracy of the ledgers themselves.
(i) The Pointe Claire bad debt
19. An aspect of the so-called Canadian wrongs is the writing-off of a bad debt in the amount of $3.488 million by TLC for the year ended 31 March 1994. Invoices provided by the Respondents relating to the bad debt written off showed that these were issued by TLC to Pointe Claire. Yet, upon discovery of certain Canadian proceedings, it emerged that the sale agreement in issue was entered into between Sea Giant and Pointe Claire. The Petitioners' contention is that in writing off the bad debt, TLC was in fact letting off Sea Giant rather than Pointe Claire.
20. Further, the record of legal proceedings in Canada also disclosed that in February 1992, inventory worth some Can$600,000 had been returned to Sea Giant by Pointe Claire. This fact appears in a recital to a settlement agreement dated 14 April 1992 made between, inter alia, Pointe Claire and Sea Giant where assets listed in Schedule A to the agreement (worth Can$150,000) were recorded as having been returned to Sea Giant. Yet none of this information was disclosed to TLC's auditors. No part of that inventory was accounted for whether to TLC or to TLI.
(ii) Other subsidies to Sea Giant
21. The Petitioners also complain about other subsidies made to Sea Giant. The funding of Sea Giant was made from borrowings by TLI and/or TLC from banks secured on assets of TLI charged to the banks. Commercial rates of interest were payable on these loans.
22. In addition, there is evidence that TLC settled some of the bills of exchange issued by banks to facilitate trading activities undertaken by Sea Giant to relieve Sea Giant from pressure exerted on it by the banks in respect of these bills. Further, Sea Giant's failure to pay the bills of exchange drawn on them on time inevitably meant that additional bank interest had to be incurred.
23. There is also evidence that money had been advanced outright to Sea Giant to enable it to settle some of its outstanding bills. In particular, on 1 December 1992, a payment of US$100,000 was remitted to Sea Giant's Hong Kong Bank account but for some reason this did not feature in the ledgers produced by the Respondents relating to the Sea Giant account on 27 November 1997. The omission of this entry in the ledgers produced puts the accuracy of the ledgers themselves in doubt.
24. It is evident that for the purposes of this trial, the Respondents regarded the key issue being that relating to "the Canadian business". In so far as the conduct complained of is wrongful, as has been conceded, if it was wrongful in relation to TLC, it must follow that such conduct was also wrongful vis-à-vis TLI. Counsel for the Petitioners correctly submitted that the concession admitting wrongdoing in connection with the Sea Giant transactions such as to support an order that TLC be wound up on the just and equitable ground does not of itself purge the wrongs. Because the funding came from TLI, it must ultimately impinge on the position of Mr Hwang as a minority shareholder and a director of TLI.
25. As noted above, the Respondents chose not to give evidence themselves regarding the Petitioners' case. This meant that they could not be cross-examined. To meet the Petitioners' case, the Respondents relied on the evidence of Mr Leung and by cross-examining Mr Hwang. These were directed at two principal matters :
(a) that the Petitioners had no difficulty in obtaining information from Mr Leung prior to November 1997; and
(b) that Mr Hwang knew all along that TLI had been funding TLC's business.
26. Mr Hwang, though some 80 years of age, is remarkably fit and withstood more than a day's cross-examination very well. His evidence is that although he lived in Taiwan, he spent considerable periods of time in Hong Kong and when in Hong Kong, he would go to the office every day. Although he was not given the opportunity to play an active part in business, he was a director and was treated as such by the staff. He chatted to the staff and in particular, from time to time enquired of Mr Leung the amount of wages that were payable, the amount of outstanding receivables and the amounts owing to the banks. Mr Hwang accepted that he had been provided with the audited accounts from time to time, but as these were written in English, he could not read them. Even on the Respondents' case, it is not suggested that Mr Hwang was provided with every set of audited accounts.
27. Whilst I accept that Mr Leung answered Mr Hwang's queries, those queries were of limited scope in that Mr Hwang had no reason to inquire into matters which have been described as the Canadian wrongs : he had no inkling that those wrongs were taking place, much less the scale and extent of such wrongs. Mr Hwang acknowledged that he knew that TLC's trading activities had to be funded by TLI and that for some years the funding had been of the order of $2 to 3 million. As far as he was concerned, such funding was not in itself a matter to complain about : it was the improper use made of such funding that forms the basis of the complaint. The gravamen of the complaint of course is that normal or proper trading would not involve any of the matters that constitute the Canadian wrongs.
28. Mr Hwang's evidence is that it was only after WTL's death in February 1994 that he began to feel that something was wrong. Debts had not been repaid and the amount had increased to $10 million. He was given this information by Mr Leung. Mr Hwang was aware of a figure of about $7 million for 1992. Mr Leung had given an explanation that the volume of business had increased with the turnover reaching $40 million and that therefore the flow of stock had also increased. It was only after WTL's death that he came to know of the $13 million figure for 1993.
29. The cross-examination of Mr Hwang was directed at establishing knowledge as would found a defence of laches and/or acquiescence. I confess to having some difficulty with the Respondents' strategy. It is wholly inconsistent with their concession regarding the Canadian wrongs. If they really believed they could make out a case of laches and/or acquiescence, then why should the concession have been made in the first place?
30. Be that as it may, not only were the Respondents not able (through cross-examination of Mr Hwang and/or through the evidence of Mr Leung) to satisfy the court that Mr Hwang had the requisite knowledge as would enable a defence of laches and acquiescence to be established by the Respondents as regards the Canadian wrongs, the record in these proceedings shows otherwise and wholly undermined their position regarding the provision of information to the Petitioners. Suffice to say that prior to the TLC Petition being filed in September 1995, the Petitioners, through their legal representatives, had to administer requisitions which remain outstanding. Further, the Respondents ignored the EGM summoned for 17 May 1995 when the demands for information were repeated by the Petitioners' solicitors. Then after legal proceedings commenced, the Petitioners' solicitors were forced time and again to seek orders for specific discovery. As noted above, the ledgers relating to the Sea Giant indebtedness were not disclosed until over two years after the filing of the TLC Petition. As will become apparent, the Petitioners were also forced to make various applications to ascertain the whereabouts of rentals received by TLI. These facts do not sit happily with the Respondents' stance that the Petitioners had no difficulty in obtaining relevant information and that in any event, Mr Hwang knew exactly what had been going on. In fact, the record renders their stance wholly untenable.
31. It is common ground that the Petitioners never had an interest in Sea Giant who was the principal if not sole beneficiary of the Canadian wrongs. As Warner J held in Re Elgindata Ltd. [1991] BCLC 959 at 1004 :
"By its very nature, the misapplication of a company's assets by those in control of its affairs for their own benefit or for the benefit of their family and friends, is unfairly prejudicial to the interest of the minority shareholders."
It follows that the Canadian wrongs which benefited the members of WTL's family to the exclusion of the Petitioner constitute unfairly prejudicial conduct vis-à-vis the Petitioner.
(b) The other complaints
32. Whilst, in my judgment, the Canadian wrongs alone are sufficient to warrant the grant of section 168A relief to the Petitioner, the other complaints (some of which are no less serious) are set out below in so far as these have been established on the evidence.
(i) Misappropriation of cash rental
33. It is a matter of record that upon the refusal of the Respondents to supply bank statements pertinent to the receipt of rentals received for the properties owned by TLI, the Petitioners applied for and obtained a discovery order on 3 June 1998. As a result of non-compliance with the June order, a further application was made and an order obtained in July which directed the 1st and 2nd Respondents to file an affirmation to explain why some of the bank statements for the period from July 1997 to date were not available. Pursuant to that order, Mr Leung filed an affirmation on 20 July 1998. On 30 July 1998, an application was made for further discovery in view of the fact that rental of some $2.8 million which had been accumulating since November 1997 could not be identified in the bank statements supplied. In response, Mr Leung filed a further affirmation producing schedules of particulars of rental income deposited with two banks and particulars of cash rental income. At the hearing on 4 September 1998, an order was made that the Respondents explain how the cash rental had been dealt with, whether any of the cash had been paid into a bank account, whether or not the bank account of TLI and if so, to produce the bank statements pertaining thereto, and that all rent received as from 4 September 1998 be deposited and paid into TLI's bank accounts.
34. Shortly before the commencement of the hearing, Mr Leung filed a 4th affirmation to explain that the cash rental received by TLI had been used to defray the daily expenses of TLI because its bank accounts were frozen as from 28 October 1997 when the Petitioners' solicitors wrote to the banks to advise them of the petitions. A cash book was exhibited containing entries up to date as to 31 July 1998 ("the specially prepared cash book"). In evidence, Mr Leung revealed that tenants had been asked to pay rent either in cash or by cash cheques with the name of the payee left blank. This was intended to overcome the difficulties caused by the freezing of the bank accounts. The amount of cash collected between 30 October 1997 and 31 July 1998 was over $4.3 million. Based on the entries made in the specially prepared cash book, after defraying the recorded expenses, a sum of $1.162 million remained as at the end of July 1998 which, according to Mr Leung's affirmation, was kept in cash at the registered office of the TLI.
35. At the commencement of the hearing, the court directed that the sum of $1.162 million, being the alleged balance of cash rental received as at 31 July 1998 be paid into the TLI's bank account. It then transpired that notwithstanding what Mr Leung had stated in his 4th affirmation, the $1.162 million cash was not in fact kept at the registered office of the Company. Rather, it emerged from Mr Leung's evidence that since the end of October 1997, some of the cash had been deposited into his own personal accounts maintained with Citibank and with the Po Sang Bank. The sum eventually paid into the Company's account of $1.162 million was made up of three sums : approximately $252,000 came from Mr Leung's Po Sang Bank account, $400,000 from his Citibank account, and $510,000 came from the office. Mr Leung acknowledged that large amounts of cash had been kept in the office since late October 1997, the highest amount reaching some $600,000. It is quite obvious that such cash would not have earned any interest which in itself could not have been in the interest of TLI or its shareholders.
36. It is Mr Leung's evidence that after the Company's bank accounts became frozen as at the end of October 1997, his colleague Mr Hung who was responsible for collecting rental, had the idea of asking the tenants to pay rent due in cash or cash cheques with the name of the payee left blank. Mr Leung denied that this had been done at the 2nd Respondent's behest or instigation. He further asserted that it was his idea to deposit cash into his personal bank accounts and that Mr Wong Chung Keung had not orchestrated it.
37. I find Mr Leung's evidence difficult to accept. He is a mere employee and the freezing of the Company's accounts is obviously a serious matter. Mr Wong Chung Keung was at all times the managing director. It seems to me inconceivable that he would not have been told or did not know about the freezing of the Company's accounts. It seems to me also inconceivable that mere employees would have taken the initiative not only to request that rental be paid in cash which, on any view, must be a very unusual arrangement and open to abuse, but to cause large amounts of cash to be deposited into the personal accounts of Mr Leung. To make matters worse, these were neither recorded nor reflected in the specially prepared cash book which Mr Leung said he maintained in order to account for the cash.
38. So far as the specially prepared cash book is concerned, Mr Leung also accepted that the withdrawal of a sum of $400,000 made on 25 July 1998 would not be apparent to anyone looking at its entries. Moreover, it is not apparent from perusing the specially prepared cash book that it purported to be something different from the Company's routine cash book in that it did not account for a sum of approximately $190,000 which is the balance brought forward had it truly sought to reflect the cash book position.
39. Mr Leung has not shown himself to be an honest witness : his 4th affirmation was plainly misleading. He well knew that the Petitioner was anxious to track the whereabouts of cash rental received. Yet he had no compunction in stating half-truths. Another example of his lack of candour is his evidence concerning remittances made by WTL to Carson Wong in the 1980's. Whilst such remittances were made, they were debited from Mr Hwang's director's current account with TLI. Mr Leung could not but have been aware of this fact. Yet, he chose not to disclose this fact. In this sorry tale, Mr Leung might well have been a scapegoat. He is plainly loyal to Mr Wong Chung Keung who, whilst present in court throughout the trial, obviously could not stomach the prospect of being cross-examined.
40. The device resorted to of operating in cash is at minimum evidence of gross mismanagement on the part of the 2nd Respondent : it meant that large amounts of cash were at his disposal. Further to permit the payment of cash into an employee's personal bank accounts cannot, on any view, be deemed either good or prudent management : it exposed TLI's assets to unnecessary risks. Such conduct is not readily understandable when at all material times, the Respondents were legally represented and had ready access to legal advice.
(ii) Continuing unlawful advances by TLI to TLC after the date of the TLC Petition
41. A sum of approximately HK$3.5 million was advanced for the year ending 31 March 1996. As Mr Hwang who is one of the two surviving directors at the relevant date was not involved in any resolution authorizing the advance, the same could not have been valid in any event.
42. The timing between the advances and the two rice transactions undertaken by TLC in 1995 and 1996 suggests that the cost of acquiring the rice consignments must have come from TLI's advances. The bona fides of the transactions are questionable as they do not appear to be commercially justifiable. The bills were left unsettled for a long time and meanwhile TLC had to incur interest on the price of the consignments. Moreover, some $2.2 million of the advance appears to be unaccounted for : $1 million in respect of the first rice transaction. This payment cannot be traced nor can $1.2 million in respect of the second rice transaction. As the Respondents have chosen not to respond to these allegations, at a minimum, a prima facie case has been made out of misapplication of these advances quite apart from the irregularity and invalidity of the advances themselves.
(iii) Wrongful usurpation of director's powers by Wong Chung Keung
43. Despite the fact that he was only appointed an alternate director to WCM, the annual return made up to 6 October 1994 describes Mr Wong Chung Keung as a director of the Company. Although this was subsequently corrected upon objection by the Petitioners, Mr Wong Chung Keung did purport to assume the role as a director in addition to WCM. As the requisite quorum could not have been constituted by himself and his mother, the late WCM, the blocking of the TLI dividends for 1996 and 1997 (described below), the writing off of the Pointe Claire debt and continuing advances to TLC after the date of the TLC petition must have come about through Mr Wong Chung Keung usurping the powers of a director and I so find.
(iv) Dividends
44. The diversion of funds from TLI to TLC to subsidize the Canadian wrongs meant that the amount of profit available for distribution as dividends in TLI were commensurately decreased. This aside, in 1996, WCM refused to pass the resolution to declare and distribute a dividend of $2.5 million despite the resolution taken at the directors' meeting to recommend such a dividend. This was followed in 1997 by a refusal on the part of the "directors" of TLI to recommend the payment of a dividend despite the fact that the accumulated profits amounted to HK$7.4 million for that year. In fact the two surviving directors of TLI as at this date were Mr Hwang and the late WCM. Yet, Mr Wong Chung Keung saw fit to inform Mr Carson Wong that the directors of TLI did not recommend the payment of a dividend. In fact no directors' meeting was held at which any such resolution was passed.
45. In this connection, whilst the Respondents have not put forward any answer to the allegations made, counsel for the Respondents sought to suggest that the reason for non-payment of dividend was due to Mr Hwang's own fault, brought about by the presentation of the petitions and the failure of Mr Hwang to apply for validation orders under section 182. It is an astounding and wholly unmeritorious submission to make, there being not a single piece of evidence that could support such a contention. I have to ascribe this to over-zealousness on the part of counsel for the Respondents in advancing his clients' cause.
46. On the basis of the evidence filed by and on behalf of the Petitioner, I find that the Respondents and Mr Wong Chung Keung did usurp the powers of a director of TLI (of which he was not one) and together with the late WCM frustrated the payment of any dividends to the Petitioners for the years 1996 and 1997.
(v) Exclusion of Mr Hwang from participation in the affairs of the Company
47. It is established on the evidence that the Hong Kong businesses were funded from profits made in the Vietnamese businesses carried on in partnership between WTL and Mr Hwang. I agree that that history is relevant in as much as it gave rise to a legitimate expectation on the part of Mr Hwang to be allowed to participate in the management of the Companies. The subsequent allotment of shares in and appointment as director of TLI and TLC reinforced that expectation.
48. This did not necessarily mean that Mr Hwang had to be involved with the day-to-day operations of the Company : at the very least, he had the right to expect to participate in all major decisions relating to the Company's affairs : see In re R.A. Noble and Sons (Clothing) Limited [1983] BCLC 273 at 290B. But on the facts established on the evidence, Mr Hwang was never consulted when important decisions were taken by the Company.
Section 168A Relief
49. In my judgment, the Petitioner has made out an overwhelming case for section 168A relief. The test for unfairly prejudicial conduct is an objective one. As Slade J stated in Bovey Hotel Ventures Limited (21 July 1981 unreported) cited in In re R.A. Noble & Sons (Clothing) Limited (supra) at 290 :
"The test, I think, is whether a reasonable bystander observing the consequences of their conduct, would regard it as having unfairly prejudiced to the petitioner's interests."
50. The following passage in Re Marco (Ipswich) Limited [1994] 2 BCLC 354 at 404 and 406 captures some of the essential elements of the present case :
"With respect of alleged mismanagement, the court does not interfere in questions of commercial judgment, such as would arise here if (for example) it were alleged that the companies should invest in commercial properties rather than residential properties. However, in cases where what is shown is mismanagement, rather than a difference of opinion on the desirability of particular commercial decisions, and the mismanagement is sufficiently serious to justify the intervention by the court, a remedy is available under s.459 .....
However, this is not a case where what happened was merely that quality of management turned out to be poor (cf Re Elgindata Ltd [1991] BCLC 959 at 994-1000). This is a case where there were specific acts of mismanagement by [the Respondents], which [the Respondents] failed to prevent or rectify. Moreover, several of the acts of mismanagement which the [Petitioners] have identified were repeated over many years... In my judgment, viewed overall, those acts (and [the Respondents'] failures to prevent or rectify them) are sufficiently significant and serious to justify intervention by the court under s 461."
The Canadian wrongs undoubtedly sought to enrich the members of WTL's family at the expense of the Petitioner. The manner in which the Respondents sought to deal with TLI's income since late October 1997 not only put TLI's assets at risk but is an egregious example of mismanagement and/or gross negligence on their part. On the facts I have found, I have no hesitation in concluding that the Petitioner has established a case of unfairly prejudicial conduct.
51. There is no merit in the Respondents' submission that because they now agree to TLC being wound up, whatever wrongs had been committed in relation to TLC would in due course be compensated for and that therefore there is no reason for the court to make any order in relation to TLI. With respect, that submission misses the point entirely. The Petitioner as a minority shareholder of TLI is entitled to redress for wrongs done to him qua shareholder of TLI.
The buy-out
The date of valuation
52. Counsel for the Respondents accepts that section 168A is framed in sufficiently wide terms to enable the court to do what is just and equitable depending on the particular facts of each individual case. With an uncharacteristic show of magnanimity, the Respondents submitted that since TLI is a going concern which is profit making, the petition date would operate to the Petitioner's disadvantage because he would not be entitled to share in the profits since the date of the petition. Accordingly, the Respondents submitted that the valuation should be based on the value of TLI at the date of the order. On closer examination, this seemingly generous stance appears to have been prompted by self-interest and nothing else. The reason for the Respondents' objection to the date of valuation being the petition date is none other than the significant decline in property values between that date (1 November 1996) and the date of the order. They submit that it would be unfair that they should be penalized for a fall in the property market that has nothing to do with the Respondents' misconduct but, rather, which has come about because of the worldwide/Asian financial crisis.
53. Counsel for the Petitioner submitted that the petition date is a fair and proper date. On the authorities, the petition date is one that is frequently adopted, that being :
"the date on which the petitioner elects to treat the unfair conduct of the majority as in effect destroying the basis on which he agreed to continue to be a shareholder, and to look to his shares where his proper reward for participation in a joint undertaking."
See Re Cumana Limited [1986] BCLC 430. As noted by Thomas J in Rankine v. Rankine [1996] 18 AC SR725 at 731 to 732,
" In most cases the order contemplates a valuation at the time of presentation of the petition (Re a Company (1983) 1 WLR 927; Re a Company (1986) 2 BCC 99, 453; Re a Company (1986) 2 BCC 99, 495). But of course other dates are possible (Coombs v Dynasty, [(1994) 14 ACSR 60]; Dalkeith Investments, [(1984) 9 ACLR 247]; Re D R Chemicals Ltd (1989) 5 BCC 39). One factor favouring the petition date is that it is the point at which the claimant elects to claim the remedy. Another consideration that can favour an early date is that equity leans against permitting a dilatory claimant to gain benefits in an expanding business. 'A man having an adverse claim in equity should show himself in good time willing to participate in possible loss as well as profit, not play a game in which he alone risks nothing' (Clegg v Edmondson (1857) 8 De GM & G 787, 814; 44 ER 593, 604, per Knight Bruce LJ, approved by the High Court in Warman International Ltd v Dwyer (1995) 128 ALR 201; 69 ALJR 362, 369). That comment was made in the context of a claim of constructive trust, but may be equally apposite in the context of a claim that a respondent be compelled to acquire the applicant's share."
54.Prima facie, the petition date is a convenient date, that being the point in time when the Petitioner crystallized his position in claiming to be entitled to cease association with or participation in the Company. But the Petitioner submitted, correctly, that on the facts of the present case, there are compelling reasons why that date as opposed to the judgment date or date of the order should be the fair date for valuation. There is evidence of further misconduct which adversely eroded the interests of the Petitioner in TLI since the date of the TLC petition. The adverse effect of such misconduct may be difficult to quantify :
- notwithstanding the TLC petition, the Respondents continued to make advances to TLC from TLI's assets. There is at least prima facie evidence that Mr Wong Chung Keung might have made a secret profit through the two rice transactions noted earlier where the purchase price was never paid to TLC but inexplicable sums amounting to $2.2 million had been paid into the TLI's accounts that were then credited to Mr Wong Chung Keung's personal account;
- no audited accounts have been prepared for TLC since 1996 and the Petitioner is simply not in a position to discover exactly what has happened with its borrowings from banks which were secured upon TLI's assets;
- staff like Mr Leung were paid by TLI yet they also worked for TLC and there is reason to believe that they also rendered services to Mr Wong Chung Keung to generate profits for him personally as would appear to be the case concerning the rice transactions;
- it would appear from the ledger records that there has been exceptional increases in terms of TLI's expenditure. This includes not only items such as the funeral expenses of WCM but also unspecified entertainment expenses (through the payment of credit card charges) entered as expenses of TLI;
- it is at least a possibility that some quid pro quo was offered to TLI's tenants who were prepared to be accommodating to the extent of paying rent in cash or by cash cheques. If so, this would be a further example of the depletion of TLI's assets which affects the value of its shares.
55. The Petitioner submitted that the appropriate date to value the shares of the Company should not be guided by the performance of the property market or the Hang Seng Index. The Respondents knew from the outset that they had no defence to the so-called Canadian wrongs. Yet, they continued to resist the proceedings and surrendered only partially after the Petitioner's opening submissions. They should therefore be visited with the consequences of the delay for which they were responsible.
56. It is to be noted that the Respondents' submission that the date of the order is the appropriate valuation date was based inter alia on "all things being equal". As is apparent from the Petitioner's submissions summarized above, that is not the present case : the continual wrong-doings in misusing TLI's funds after the presentation of the TLC Petition inevitably would have had an effect on TLI's assets and thus the value of its shares. Since this cannot readily be quantified, I agree that it would be unfair and inequitable to the Petitioner to adopt the later date.
Other directions
(i) Purchase by TLI should the 1st and 2nd Respondents fail to purchase
57. I agree that this is an appropriate case for the court to order and direct that in the event of the 1st and 2nd Respondents failing to complete the purchase as directed by the court, the Petitioner's shares be purchased by TLI and that consequentially, the capital of TLI be reduced.
(ii) Basis of valuation
58. As explained by Thomas J in Rankine v. Rankine at 729 to 730 :
"..... What needs to be assessed is the value of the shares at a selected date had it not been for the effect of the oppressive conduct (Scottish Co-Operative Wholesale Society Ltd v Meyer [1959] AC 324, 364; Re Golden Bread, above at 50, 55) .....
Subsequently Dalkeith and Sanford were referred to in Coombs v Dynasty Pty Ltd (1994) 14 ACSR 60; 12 ACLC 915 where Von Doussa J observed: 'In the valuation exercise the oppressive conduct and the effects which it may have had on the value of the shares is to be disregarded,' and these words are reflected in the headnote. The valuation exercise to which his Honour referred is the exercise by the court in fixing the price that should be paid. Taken in isolation the quoted statement is apt to mislead, because the ultimate exercise must focus directly upon the oppressive conduct and take into account so that its actual effect can be eliminated from the valuation. There is of course no doubt that Von Doussa J applied the correct principle as his Honour immediately went on to discuss various ways in which the effect of the oppressive conduct might be eliminated. His Honour finally concluded that the applicant's shareholding should be valued immediately before a company restructure which had been to his disadvantage, and that an interest factor should be allowed on that amount to arrive at a fair price at which his shares should now be purchased."
In other words, valuation should involve an assessment of the value of the shares as at the Petition had it not been for the effect of the oppressive conduct. Applying that concept to the facts of the present case, adjustments must be made to reflect the following matters :
(a) current assets of TLI
The Petitioner submitted that the entire "current assets" should include the whole of the indebtedness of TLC for the purposes of valuation. But the entire indebtedness includes earlier losses in respect of TLC's trading in electronics and in food, which are matters not specifically the subject of the Petitioner's complaint. In my judgment, it would be appropriate to include under "current assets" all advances made by TLC to Sea Giant, interest incurred by TLC attributable to the loans to Sea Giant (which have been set out earlier), the Pointe Claire debt of $3.488 million which has been written off as well as all advances of approximately $3.5 million made by TLI to TLC since the date of the TLC petition.
(b) unnecessary interest incurred by TLI
The valuation should also be made on the basis that the sums advanced to Sea Giant as well as all advances made after the presentation of the TLC petition had been repaid timeously which would have enabled TLI to reduce its own indebtedness to banks and other creditors.
(c) bank borrowing by TLC secured on TLI's properties
TLI's assets were charged to secure bank loans, overdraft and general banking facilities for TLC. So far as any of the encumbrances were made after the death of WTL they were made without the concurrence of Mr Hwang as director. Since there would not have been the requisite quorum, such encumbrances must be invalid and must therefore be disregarded.
Encumbrances over TLI's properties should also be disregarded in respect of bank borrowings by TLC attributable to the Canadian wrongs as well as advances made after the presentation of the TLC Petition.
(d) dividend for the year ended 31 March 1996
I agree with the Petitioner's submission that the valuation be made on the basis that a dividend in the sum of HK$2.5 million was paid in respect of that year.
(e) whether valuation to be at a discount
Counsel for the Respondents submitted that in making the valuation, an appropriate discount ought to be ordered to reflect the minority shareholding of the Petitioner. In the case of a private company, valuation orders do not normally provide for any discount in respect of a minority holding. In the absence of any relevant authority to the contrary, I reject the Respondents' submission and hold that no reasonable basis has been shown in the present case as would warrant discounting the value of the Petitioner's 30% holding.
Interest
59. Counsel for the Respondents' submitted that the court has no power to make any order for payment of interest prior to the order for the buy-out. He relied on a dictum of Peter Gibson J in Re D.R. Chemicals Limited [1989] 5 BCC 39. But that was a case where the appropriate valuation date was considered to be the date of the order rather than the date of the petition. As explained by the trial judge in Dynasty Pty Ltd. & Ors v. Coombs [1966] 138 ALR 64 cited in the judgment of the Full Court at p.85 :
" To arrive at a fair value to be paid now by valuing the shareholding at some date in the past and by adding to that value an allowance for the fact that the shareholder has been kept out of the enjoyment of that value in the meantime, to borrow the words of Lord Denning, is to give to the oppressed shareholder what is in effect money compensation for the injury done to [the shareholder]: but I see no objection to this. The section gives a large discretion to the court and it is well exercised in making an oppressor make compensation to those who have suffered at his hands."
The Full Court upheld that approach since the trial judge did not award interest qua interest : rather he used interest as a proxy to measure the increment in the value of the petitioner's investment in the company appropriate to reflect the fact that the respondent's interests had the use of the petitioner's investment since the date of the petition, that being the valuation date.
60. I agree. As explained by Thomas J in the passage in Rankine v. Rankine (supra) cited above, an interest factor should be allowed as the value of the Petitioner's shareholding to arrive at a fair price at which his shares should now be purchased. Accordingly, the Petitioner is entitled to interest on the amount to be paid by the Respondents at 10% per annum as from the date of the Petition.
Identity of the valuer
61. The Petitioner seeks an order from the court that an appropriate expert be appointed pursuant to Order 40 of the Rules of the High Court. It is anticipated that if matters were left to be agreed between the parties, given their relationship, no agreement will in fact be reached and it will therefore only further delay matters.
62. It would be unsatisfactory if delays were to result from any inability to agree the identity of an expert to make the valuation. Whilst I consider that it would be an appropriate case for the exercise of this power, it remains necessary for the parties to come forward with their own proposed appointments. Accordingly, I direct that each side submits to the court within seven days of this judgment two names of proposed experts to conduct the valuation.
Other relief
63. The Petitioner also seeks the appointment of a receiver and manager of TLI. In view of the conduct of TLI's affairs in recent months, a prima facie has been made out for a receiver to be appointed. However, this does not mean that the Petitioner can simply leave it to the court to formulate the necessary powers, or indeed to identify an appropriate person to act as receiver. I direct that the Petitioner submit, for the court's approval, a minute of order together with the relevant consent(s) and affidavit(s) of fitness.
Costs
64. These should follow the event and I make an order nisi that the costs be borne by the Respondents.
| (Doreen Le Pichon)
Judge of the High Court Court of First Instance |
Representation:
Mr Wong Yan Lung, inst'd by M/s K.C. Ho & Fong, for the Petitioners
Mr Benjamin Chain, inst'd by M/s Y.S. Lau & Partners, for the Respondents
Appeal by the respondents to Court of Appeal dismissed. Please refer to CACV300/1998 dated 25 May 1999