RE MW LEE & SONS ENTERPRISES LTD.

HCCW000467B/1998

HCCW 275/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 275 OF 1998

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	In the matter of HY & HT LEE BROTHERS & COMPANY LIMITED and In the matter of the COMPANIES ORDINANCE (Chapter 32 of the Laws of Hong Kong)
AND	HCCW 467/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 467 OF 1998

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In the matter of M.W. LEE & SONS ENTERPRISES LIMITED and In the matter of the COMPANIES ORDINANCE (Chapter 32 of the Laws of Hong Kong)

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Coram: Hon Chung J in Chambers

Date of Hearing: 21 November 2000

Date of Decision: 21 November 2000

Date of Handing Down Reasons for Decision: 23 November 2000

 

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REASONS FOR DECISION

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Introduction

1. After hearing the parties on 21 November 2000, I dismissed the 2 applications taken out by the petitioner respectively in these 2 sets of proceedings. The following are the reasons for the decision.

2. The nature of the applications is the same and they asked for a stay of the taxation of the respondents' costs alternatively a stay of execution of the taxed costs pending the outcome of the appeals in CACV 307 of 1999 (on appeal from HCCW 275 of 1998) and CACV 328 of 1999 (on appeal from HCCW 467 of 1998).

3. These applications arose from 2 Judgments of Le Pichon, J (as she then was) respectively dated 28 September 1999 (HCCW 275 of 1998) and 29 October 1999 (HCCW 467 of 1998) when she dismissed both petitions with costs on a common fund basis. Notices of Appeal were given on 3 November 1999 (CACV 307 of 1999) and 19 November 1999 (CACV 328 of 1999) respectively.

Were the Applications Made Pursuant to Ord. 59 r. 13?

4. The first issue between the parties was whether the applications were made pursuant to RHC Ord. 59 r. 13. The petitioner contended that they were not whereas the 1st and 2nd respondents ("the respondents") argued that they were. The Notices of Appeal themselves do not express ask for the costs orders to be set aside. Despite this, I conclude that the applications before me must have been made pursuant to Ord. 59 r. 13. Alternatively, even if they were strictly not made under those rules, the manner in which they should be determined should not be different than if they had been brought thereunder. This is because if in fact no appeal was intended to be brought against the costs orders, there would simply be no valid reason to ask for a stay.

5. There are several provisions in the Rules of High Court empowering the court to stay execution of judgments and orders: Ord. 45 r. 11 (matters occurring after judgment), Ord. 47 r. 1 (stay of execution by writ of fieri facias) and Ord. 59 r. 13 (stay of execution pending appeal). These applications clearly do not fall within Ord. 47 r. 1. Ord. 45 r. 11 provides:-

"... a party against whom a judgment has been given or an order made may apply to the Court for a stay of execution of the judgment or order or other relief on the ground of matters which have occurred since the date of the judgment or order ... " (emphasis supplied).

If it should be argued that they were brought pursuant to Ord. 45 r. 11, in the factual context of these applications, the "matters which have occurred since ... order" were the giving of the Notices of Appeal (and the pending appeal). Hence, the matters relied upon are in effect those provided for under Ord. 59 r. 13.

6. For the above reasons, I conclude that Ord. 59 r. 13 applies to these applications. Even if that rule does not apply, the Court should adopt the principles applicable thereunder when determining these applications.

Jurisdiction

7. Mr Fung for the respondents argued that since I was not the original trial judge, I do not have the jurisdiction to determine these applications. He relied on Ord. 59 r. 14(4) for this argument. This rule says:-

"Wherever under these rules an application may be made either to the court below or to the Court of Appeal, it shall not be made in the first instance to the Court of Appeal, except where there are special circumstances which make it impossible or impracticable to apply to the court below" (emphasis supplied).

An application made pursuant to Ord. 59 r. 13 is one of the applications falling within Ord. 59 r. 14(4):-

"Except so far as the court below or the Court of Appeal or a single judge may otherwise direct ... an appeal shall not operate as a stay of execution ... under the decision of the court below" (emphasis supplied).

8. Mr Coleman for the petitioner submitted that the phrase "the court below" refers to the level of court and not a particular judge of that level of court. Thus, even though the 2 Judgments were given by Le Pichon J (as a Judge of the Court of First Instance), an application for stay of execution of her orders can still be properly made to another judge of the Court of First Instance. On the other hand, Mr Fung contended that "the court below" refers to the particular judge who made the order against which an appeal has been brought.

9. Despite counsels' diligence, no authority directly in point has been found. It appears that there are at least 2 purposes for enacting Ord. 59 r. 14(4):-

(1) it is likely that the court below is more readily available (in terms of manpower) to hear an application than the Court of Appeal. Thus, this rule was enacted with judicial administrative efficiency in mind;

(2) the court below which dealt with the matter under appeal should have a better understanding of the issues involved (and/or the prospect of the appeal) than other courts which have not previously dealt with the matter.

10. Mr Coleman argued that there is no good reason why another judge of the same level of court cannot determine an application falling within Ord. 59 r. 14(4). He submitted that judges can become unavailable for a number of reasons, for example, they may retire, resign, pass away or (as in the present case) be promoted to a higher level of court. To adopt the respondents' argument would lead to great inconvenience to the parties as well as to the court. Mr Fung submitted that no inconvenience would be caused since any impossibility or impracticability of the court below only means that the application should be made to the Court of Appeal.

11. I consider that this issue can be resolved by a construction of Ord. 59 r. 14(4). This rule refers to "special circumstances which make it impossible or impracticable" to apply to the court below. The word "impossible" indicates that , when referring to "the court below", this rule intends to refer to the particular judge who made the decision rather than that level of court. If (as the petitioner contended) "the court below" merely refers to a level of court, such as the Court of First Instance, I do not see how it will ever be impossible to make an application to that level of court.

12. For the above reasons, I agree with Mr Fung that these applications should either be brought before Le Pichon J or (if it is impossible or impracticable to do so) the Court of Appeal.

Merits of the Applications

(1) The Application to Stay Taxation

13. Having disposed of these applications as a matter of jurisdiction, there is strictly no need to deal with them on their merits. I shall nevertheless do so for completeness.

14. Mr Coleman argued that whether a stay should be granted is ultimately a balancing exercise, relying on the observations made by the English Court of Appeal in Malliez v. Redland Plasterboard Overseas Ltd. & Another, unrep., 22 Sep 1992. That appeal also dealt with an application for stay of execution pending appeal of an order for interim payment. It was stated in the judgment that the appeal was originally not to be heard until at least a year after the order made by the first instance court. However, as a result of the Court of Appeal's intervention, the appeal could be heard about 2 months after the date of the judgment. The Court of Appeal in Malliez observed (at the 2nd page of the transcript) a balancing exercise should be made as between:-

(a) the undoubted delay which will be caused to the successful party if further proceedings (pursuant to the court order against which an appeal has been brought) are stayed pending the appeal and the appeal fails;

(b) time and money wasted by the said further proceedings if they are not stayed pending the appeal and the appeal succeeds.

The Court of Appeal also observed (also at the 2nd page of the transcript) that the exercise would involve taking a view as to the prospects of the appeal.

15. The parties have (correctly in my view) not taken me through the 2 Judgments and the Notices of Appeal in order to persuade me as to the merits or demerits of the pending appeals. Such an undertaking would be quite impracticable in the context of these 2 cases: in HCCW 275 of 1998, the hearing lasted some 14 days and the written Judgment is about 45 pages long whereas the hearing in HCCW 467 of 1998 lasted some 6 days and the Judgment is about 18 pages.

16. I consider that the following matters are relevant to the determination of this aspect of the 2 applications:-

(1) according to the petitioner, the 2nd respondent is either a person of no means or, if he is a person of means, he does not have assets within the jurisdiction which can be readily realized;

(2) the costs involved in the 2 cases respectively amount to about $7 million and $9 million (according to the respondents' bills of costs) or $3.7 million and $4.5 million (according to the petitioner). In short, quite substantial sums are involved whether according to the petitioner or the respondents;

(3) the bills of costs were lodged with court in June 2000 but an appointment for taxation (to last for 5 days) will only be available in early December 2000;

(4) despite the giving of the Notices of Appeal in November 1999, the applications to fix a date for the hearing of the appeals were not made until November 2000.

17. Having taken these matters into account, I consider that the balance points to refusing the application to stay the taxation.

(2) The Application to Stay Execution

18. In the course of his submissions relating to this aspect, Mr Fung informed me that the respondents' solicitors are willing to give the usual undertaking "to repay the costs if the appeal should succeed": see Shaw v. Holland [1900] 2 Ch 305, 313-4.

19. Mr Fung submitted that in order to succeed in an application for stay of execution pending appeal, an applicant has to show:-

(a) "special grounds" which warrant a departure from the general rule that the proceedings under a judgment should not be stayed pending an appeal: the Shaw case, p 313;

(b) "irreparable injury": Coleman & Co. v. Stephen Smith & co. [1911] 2 Ch 572, 580;

(c) "real hardship": In re JB Palmers Application (1883) 22 ChD 88, 90.

20. There is a dispute raised by the parties' respective affidavit evidence as to whether the 2nd respondent is a person of means. That factual dispute cannot be properly resolved at this stage. However, bearing in mind the matters set out above under the sub-heading "The Application to Stay Taxation" and the undertaking given by the respondents' solicitors, I agree with Mr Fung that the petitioner has not been able to establish the various matters referred to in the decisions set out above. Further, I agree with him that my discretion should be exercised in dismissing these applications.

21. The petitioner further argued that the 1st respondent has passed away and no one has yet been appointed to represent his estate. There is therefore a technical defect in representation. The evidence filed on the 1st respondent's behalf shows that the 1st respondent left behind a will. An application for a "carry on" order has been made by the executors named in the will. There is no basis (evidential or otherwise) to think that the 1st respondent would be unable to obtain a "carry on" order by early December 2000. I do not find any substance in this argument regarding a technical defect.

 

 

 

Representation:

Mr R Coleman, instructed by Messrs Denton Wilde Sapte, for the Petitioner

Mr P Fung, SC instructed by Messrs Liu, Chan & Lam, for the 1st and 2nd Respondents in HCCW 275/98/ 1st Respondent in HCCW 467/98

The 3rd Respondent (in HCCW 275/98) did not appear

The Official Receiver did not appear

HCCW000467A/1998

HCCW467/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO.467 OF 1998

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IN THE MATTER OF MW LEE & SONS ENTERPRISES LIMITED and IN THE MATTER OF THE COMPANIES ORDINANCE CAP.32, LAWS OF HONG KONG

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Coram : The Hon Mrs Justice Le Pichon in Court

Dates of Hearing : 14-15, 19-22 October 1999

Date of Handing Down of Judgment : 29 October 1999

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J U D G M E N T

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Introduction

1. This petition ("the Second Petition") is related to HCCW275 of 1998, a petition presented by Samuel Tak Lee ("the Petitioner") to wind-up a family company HY&HT Lee Brothers & Co Ltd ("the First Petition") heard in September and dismissed on 28 September 1999. The Second Petition affects another family company, MW Lee & Sons Enterprises Limited ("MWLS") which is a nominal Respondent. Like the First Petition, a winding-up order is sought based on the "just and equitable" ground. In the alternative, an order is sought pursuant to section 168A(2) of the Companies Ordinance, that the sum of $11,520,000 be repaid by TY Lee to MWLS.

2. Reference should be made to the reasons handed down on 13 October 1999 in the First Petition for the factual background. Because of the overlapping of issues between the First and Second Petitions, the evidence in the First Petition also stands as evidence in the Second Petition. The nomenclature used in the First Petition will be adopted here.

MWLS : shareholding structure

3. MWLS was incorporated on 3 April 1964. It was formed as a family investment company for Lee Man Wa ("MW Lee'), Ng Chun Wa ("Madam Ng") and their two sons TY Lee and the Petitioner. The 12,000 issued shares are registered in the names of the following shareholders :

Shareholder	No. of Shares
TY Lee	1,200
Lee Cheong Yan alias of TY Lee	3,600
MW Lee	1,200
Madam Ng	1,200
The Petitioner	1,200
Lee Cheong Yee	3,600

It is common ground that Lee Cheong Yan is an alias for TY Lee. Accordingly from inception TY Lee was a 40% shareholder. By her will, Madam Ng exercised her power of appointment over MW Lee's shares in favour of TY Lee. So, on any footing, upon Madam Ng's death in 1991, TY Lee became the beneficial owner of 6,000 of the issued shares or 50% of the equity. Madam Ng's own shares were bequeathed to the three sons of TY Lee and the two elder sons of the Petitioner in equal shares (i.e. 240 shares each). As regards the Lee Cheong Yee shares, an issue exists as to whether that is the alias for the Petitioner, or whether it was an alias for MW Lee, so that they would have been subject to the appointments made by clauses 7 and 8 in the codicil of Madam Ng's will, pursuant to which 1,800 shares were appointed to the Petitioner and another 1,800 to May Lee, to be held on the secret trust in the codicil. This issue falls to be determined in separate proceedings.

4. For present purposes, it is common ground that the Petitioner is beneficially entitled to at least 3,000 shares. If the bequests to the sons of the Petitioner are taken into account, the Petitioner's family has a 29% interest in MWLS. If he were to succeed in his claim that Lee Cheong Yee is an alias for him, that interest would increase to 44% as against a 56% interest of TY Lee and his sons.

5. MWLS has a wholly-owned subsidiary MW Lee & Co. Limited which holds 10 Prat Avenue and is managed by the Petitioner.

Management of MWLS

6. The Petitioner and TY Lee are the surviving permanent directors, the other two permanent directors, viz. MW Lee and Madam Ng having died in 1979 and 1991 respectively. There is an attendance note made by the Petitioner of a meeting between the Petitioner and TY Lee held on 9 January 1992 at a restaurant in which it is recorded that :

"S.T. Lee said that some time in 1981, he and T.Y. Lee met in M.W. Lee's room in General Commercial Building and both agreed just in one simple agreement i.e. T.Y. Lee to run M.W. Lee & Sons and S.T. Lee to run Prudential. That, S.T. Lee said he had been sticking to that principle."

That statement was clear, unequivocal and unqualified : being the Petitioner's own description of the state of affairs, it is reliable evidence of how MWLS was run between 1981 and 1992. Further, it is to be observed that there was no suggestion that that state of affairs was not to continue after the 1992 meeting. That was entirely consistent with the Petitioner's position some six weeks earlier when May Lee telephoned at about mid-night on 22 November 1992, some six months after Madam Ng's death requesting the Petitioner to sign the 1991 accounts. The Petition told her that he

"... would unconditionally 'follow the leader' and leave MWLS to be totally run by TY Lee."

The Petitioner's attempt to explain away his own statement on the ground that he was being pressurized by May Lee was simply not convincing. Rather, the note of the telephone conversation showed an intention to continue that state of affairs notwithstanding Madam Ng's death.

7. It is noteworthy that not a single board minute or resolution between April 1986 and the end of 1997 was signed by the Petitioner other than the following :

Date	Particulars
August 1988	Board resolutions relating to the acquisition of Prat Avenue from MWLS and the $20 million loan from Citibank to the subsidiary for that purpose
November 1991	Board minutes/resolutions relating to the sale of quoted shares held by way of investment
November 1992	Board minutes/resolutions relating to declaration of dividend and approving the 1992 audited accounts
November 1994	Board minutes/resolutions approving the 1994 audited accounts
November 1995	Board minutes/resolutions revoking two resolutions regarding the declaration of dividends for the year ended 3/95
November 1995	Board minutes/resolutions approving the 1995 financial statements
November 1996	Board minutes/resolutions revoking two resolutions regarding the declaration of dividends for the year ended 3/96 (NB According to the Petitioner he did not sign this until November 1997)
November 1996	Board minutes/resolutions approving the 1996 financial statements

So after 1991, the only minutes/resolutions the Petitioner signed related to (1) the declaration or revocation of resolutions declaring dividends and (2) the approval of audited accounts/financial statements and nothing else. Those minutes/resolutions were circulated for signature. There was never any complaint by the Petitioner that he was not given notice of board meetings or of general meetings or that any minutes were signed without his being present until shortly before the filing of the Second Petition.

8. The Petitioner readily acknowledged (in his letter of 11 May 1998) that MWLS's affairs had been managed by TY Lee since Madam Ng's death and that the Petitioner was 'a sleeping partner'. In the Petitioner's own words, TY Lee was the 'controlling director'. By the 11 May 1998 letter, the Petitioner revoked

"all prior express or implied authorities for [TY Lee] to take action unilaterally on behalf of [MWLS]."

9. Having regard to those matters, it is hardly surprising that 'exclusion from management' is not a ground of complaint advanced by the Petitioner as such. However the Petitioner does maintain that the transfer of shares to Raymond (considered below) was a matter about which he was entitled to be consulted and his agreement obtained.

Grounds for the petition

10. The complaints made in the Second Petition are numerous. As noted above, some overlapped with complaints already made in the First Petition. As will become apparent, most, but not all, of the overlapping issues which had been rejected in the First Petition were abandoned during the hearing. The central issue to which I now turn concerns a loan of $11.52 million to TY Lee.

The overpaid dividends/loans

11. Prior to as well as after the presentation of the Second Petition, the Petitioner demanded that TY Lee repay $29.7 million to MWLS. Although the complaint made in the Second Petition was confined to $11.52 million of that sum, there was some uncertainty as to whether the complaint as to $29.7 million was still being maintained by the Petitioner. The matter was cleared up in the course of the hearing and the complaint with which I am concerned relates only to the sum of $11.52 million.

12. For the financial year ended 31 March 1995, dividends in the sums of $1,000 and $800 per share respectively were declared on 12 December 1994 and 1 March 1995. For the financial year ended 31 March 1996, a dividend of $600 per share was declared on 8 May 1995. Although the board resolutions proposing the dividends were signed by TY Lee alone, it was in keeping with what appears to have been the practice at least since 1993. In any event, there is no question but that the Petitioner knew about the dividends : he acknowledged receipt of the dividends which were paid to him on 16 December 1994, 14 March 1995 and 15 June 1995 respectively by signing internal payment vouchers. The nature of each payment was apparent from the face of the vouchers where the number of shares held by the Petitioner, the amount of dividend per share and the year to which it related were clearly stated.

13. On 17 October 1995, the Company's accountants advised MWLS that the total interim dividends based on $4,300 per share exceeded the distributable reserves. They recommended that :

"... the Company's dividend should be : (i.e. $2,500 a share), and made the adjustments as follows :

Dr Directors Current account	(Lee Tak Yan)	$2,160,000
	(Lee Tak Yee)	$2,160,000
Various Current account	(Ng Chan Wa)	$2,160,000
	(Lee Man Wa)	$2,160,000
	(Lee Cheong Yan)	$6,480,000
	(Lee Cheong Yee)	$6,480,000
Cr Dividend prepaid		$21,600,000	"

Accordingly, TY Lee caused a board resolution revoking the two interim dividends referred to above for the financial year ended March 1995 to be prepared.

14. The Petitioner's evidence was that a bundle of papers was sent round to him for signature in early November 1995. They included the audited financial statements for the year ended 31 March 1995, the board resolution revoking two dividends and the audit confirmations. The relevant documents had already been signed by TY Lee. The auditors' letter of 17 October 1995 accompanied those documents. There was also a covering letter from Li Hak Hung dated 7 November 1995 to the following effect :

" The retained earnings of the Company became negative for the financial year 94-95, due to the overpayment of dividends. The auditors said that an adjustment is required and suggested to change the overpaid portion into shareholders' loan from the Company. A letter from the auditors is now enclosed for your reference.

Please return the documents to the Company after you have signed them." (emphasis added)

As requested, the Petitioner signed the financial statements, the board resolutions as well as the audit confirmation. A manuscript annotation made by the Petitioner or his staff appears on Li Hak Hung's letter to the effect that the documents were returned to Li Hak Hung on 8 November 1995.

15. According to the Petitioner, when he received the documents he asked his accounting staff whether he should comply with the auditors' advice to regularize matters and if so, whether he had to pay back the money that he had already received. Not only did the Petitioner accept the auditors' advice, he knew and understood from his staff that the 'overpaid dividends' were to be converted into loans such that he would not have to 'pay back the money in [his] pocket'. That could only have been achieved through a conversion of the overpaid dividend into loan. If nothing else, the audit confirmation would have brought that home.

16. In fact, in addition to those matters, the Petitioner also signed the 1995 audited accounts. The balance sheet as at 31 March 1995 disclosed that MWLS's current assets included the following :

"Amounts due from

- directors	[Note]6	$4,320,000
- a shareholder		$6,480,000"

The first point to note is the absence of corresponding items for the preceding year. In other words, these were 'new' items. Note 6 disclosed that each of the Petitioner and TY Lee had received advances of $2,160,000. There could not have been any great mystery regarding those advances, each reflecting and corresponding to dividends paid out in respect of 1,200 shares or 10% of the issued shares. Strictly speaking, these advances were incorrectly classified as advances to 'directors' since the dividends were paid to them qua shareholder and therefore due as such. Whilst there was no note to the loan made to "a shareholder", the amount was three times the 'advance' made to the Petitioner and therefore necessarily attributable to a holding that was three times that held by him. That could only have been referable to Lee Cheong Yan given the dispute over the ownership of the 30% held in Lee Cheong Yee's name since each of the other four shareholders held only 10% of the issued shares.

17. From the many days the Petitioner gave evidence in both Petitions before me, it is evident that he is an astute and careful businessman and good with numbers. Unlike the uninitiated, he is unquestionably familiar with company accounts and balance sheets. I do not accept that he would not have realized what that sizeable advance to "a shareholder" was all about. Were it otherwise, it would be almost unthinkable that he would not have queried it. Given the size of the 'loan', it would be reasonable to infer that it would have been a matter that would have attracted the Petitioner and excited his attention unless he realized exactly what that was at the time. As noted above, he did not sign the documents blindly : he asked his staff. Had he not been satisfied, he would surely have queried it further. It is common ground that he did not raise any queries about it at any time.

18. The amounts due as disclosed in the balance sheet is significant in another respect : they were the only loans. In other words, the number of loans clearly did not correspond to the number of shareholders on the register. That would have been obvious to anyone perusing the balance sheet. In view of the fact that the Blue Pool Road transaction was happening at about that time, the Petitioner could not but have known exactly who had what shareholdings in MWLS. That transaction involved the distribution by MWLS of the proceeds of $108 million it was to receive for its sale of No.5 Blue Pool Road to PEL. As is the current position, the only other registered shareholders were MW Lee and Madam Ng, both deceased and Lee Cheong Yee, an alias for either MW Lee or the Petitioner, a disputed issue which is subject to separate proceedings.

19. Another matter to be borne in mind is that MWLS continued to act as a 'banker' for family members generally including MW Lee and Madam Ng notwithstanding their deaths in 1979 and 1991 respectively. The shares in MW Lee's name were never registered in the names of his executors and probate of Madam Ng's will had not been granted which remains the position today. TY Lee's evidence as to MWLS's role as banker was not challenged and is amply borne out by a perusal of the ledgers kept by MWLS. Accordingly dividends had been credited to their respective accounts with MWLS but not paid out for obvious reasons and upon revocation, corresponding debit entries made. So it would have been apparent from the balance sheet entries when read in conjunction with the auditors' letter that the auditors' solution went beyond the 'regularization' and 'adjustment' of the overpaid dividend : it also encompassed the conversion of the dividends already paid out to shareholders into loans. Further, on the evidence (dealt with below under the heading "Abandoned grounds"), had the Petitioner so wished, he could have had access to the MWLS's ledgers which were freely available and which would have confirmed the position.

20. On 9 February 1996 a dividend of $1,800 per share was declared to offset the indebtedness to MWLS. This dividend together with the dividend declared on 9 February 1996 were revoked as appears from board minutes/resolutions signed by both the Petitioner and TY Lee. The Petitioner insisted that they were not signed by him until November 1997, a year later. The date of signature is not critical : it is the fact of his signature that is material. The effect is that a similar exercise was carried out for the overpaid dividend for 1996 as had been carried out for 1995.

21. The net result of the revocation resolutions was that each shareholder's or director's account with MWLS (as the case may be) was debited with $2,400 per share in the aggregate. The amount attributable to the 1,200 shares registered in the name of and paid to the Petitioner stood at $2.88 million and the amount attributable to TY Lee in respect of the 4,800 shares registered in the names of TY Lee and Lee Cheong Yan and paid to TY Lee stood at $11.52 million in the aggregate. The 1995 loans were carried through to 1996 as is apparent from the 1996 audited financial statements. The loans as at 31 March 1996 were also carried through to the year following as appears from the 1997 audited financial statements. Both the 1996 and 1997 audited financial statements were signed by the Petitioner.

22. The Petitioner's complaint is that the two dividends referred to above for the year ended 31 March 1995 and the one declared in May 1996 were "unlawful distributions" contrary to section 79A of the Companies Ordinance and that as a result, both TY Lee and the Petitioner "were liable to restore the sums received by them as shareholders" to MWLS.

23. In early June 1998, the Petitioner advised TY Lee that he had opened a savings account in his own name with HSBC into which he had paid the $2.88 million. He requested TY Lee to repay the $11.52 million. The complaint is that TY Lee had refused to do so. Further, it was alleged that the amount advanced to TY Lee was inherently unfair to shareholders other than TY Lee and the Petitioner because those other shareholders received no benefit at all and in any event TY Lee's loan was disproportionate to his interest in MWLS.

24. Lest it be thought that the Petitioner was being entirely altruistic, the 'other shareholders' in reality meant TY Lee, the Petitioner, their respective sons to whom Madam Ng had bequeathed her own shares and possibly May Lee (subject to the secret trust) insofar as (contrary to the Petitioner's contention) the appointment to her of 1,800 Lee Cheong Yee shares was valid. As his counsel frankly but tellingly acknowledged, the Petitioner would not have complained had his loan been of an amount equal to that of TY Lee's or presumably had they been in the ratio 44:56.

25. In my judgment, the genesis of the 'loans' is highly significant : the loans were debts arising converted into loans and distinguishable from classic directors' loans' situations that section 157H is intended to address. This is not a case where the directors have helped themselves to the company's funds. As noted above, the payments were made to TY Lee and the Petitioner qua shareholder and due as such : conversion of these sums into loans would not have altered their intrinsic nature viz. payments to shareholders. It would appear that the misclassifications as "directors' loans" may have been due to the fact that the accounts TY Lee and the Petitioner maintained with MWLS are designated "directors accounts".

26. On the facts, TY Lee must be exonerated from any suggestion of mala fides or concealment of relevant facts. TY Lee relied and acted upon the 'practical' solution devised by MWLS's auditors to address the overpayment issue. This was not, as the Petitioner sought to contend, limited to 'regularizing' the problem by making the necessary 'adjustments'; it sought to obviate the need for the recipients of dividends already paid out from having to repay them. In my judgment, the Petitioner knew exactly what the 'loans' were about when he readily endorsed the solution to the overpaid dividends devised by the auditors. Whilst the letter of 17 October 1996 could have been more specific, read together with Li Hak Hung's covering note, the balance sheet where the 'loans' were disclosed and the audit confirmation, there was really little room for doubt. I do not accept that he did not appreciate that it involved the conversion of the dividends received by him and TY Lee into loans which the other shareholders to whom no payment had been made for the reasons stated above did not need to have. If and insofar as the solution had shortcomings, they lie squarely at the door of the auditors. In my judgment, it is not open to the Petitioner now to seek to disassociate himself from the solution he had so readily embraced, to complain about the loans or that he was being unfairly treated.

27. The Petitioner also sought alternative relief under section 168A(2) for repayment of the loan of $11.52 million by TY Lee. That was resisted on the ground that in any event as TY Lee and his family has the majority voting power, if the matter were formally placed before the shareholders, it would be duly approved. The Petitioner submitted that this would be valid as being an oppressive use of majority voting power and relied on Menier v. Hooper's Telegraph Works (1874) 9 Ch.App.350, 353 and Cook v. G.S. Deeks [1916] AC 554, 564-5. Suffice to say that whether it would be invalid would be an issue of fact since it does not automatically follow that a vote to approve the conversion would necessarily be an oppression on the minority.

28. In reality, other than the Petitioner and TY Lee, the only persons who have any conceivable interest in MWLS under the wills of MW Lee and Madam Ng are the five grandsons of Madam Ng to whom she had bequeathed her own 10% shareholding and May Lee, depending on the resolution of the Lee Cheong Yee and secret trust issues. On any view, the Petitioner and TY Lee are together beneficially entitled to at least 75% and possibly 90% of MWLS. The other beneficiaries have made no complaint about any possible disadvantage they may have suffered as a result of the interest free loans to the Petitioner and TY Lee. They are not parties to the Second Petition. It is therefore inappropriate for the court to speculate or consider whether or not they might have a legitimate complaint.

29. For the court to make any order under section 168A(2), the Petitioner must first establish that the affairs of MWLS are being or have been conducted in a manner "unfairly prejudicial to the interests of the members generally or of some part of the members (including himself)". Prejudice to some of the members of MWLS is not sufficient to warrant relief unless the Petitioner himself was also prejudiced. As I have held that the Petitioner was not himself unfairly treated, the precondition for relief under section 168A(2) has not been satisfied. Accordingly, no question of alternative relief under section 168A(2) arises.

The transfer of 100 shares to Raymond

30. In February 1998, TY Lee transferred 100 out of 1,200 shares registered in his own name to Raymond and to that end executed an instrument of transfer. Article 2 of MWLS's articles provides as follows :

"(a) No share in [MWLS] shall be transferred except with the previous written consent of the Directors.

..."

The Petitioner's written consent was neither sought nor obtained.

31. Relying on how MWLS has been managed since 1981, it was submitted that all management decisions were left in TY Lee's hands and that therefore he could take action "unilaterally". Having regard to the shareholding structure of MWLS and to TY Lee's own evidence as to the need to consult the Petitioner on important matters, the question comes to this : whether on the facts the Petitioner had relinquished (expressly or impliedly) the right he undoubtedly had to give or withhold consent to the transfer to Raymond.

32. It is necessary here to digress a little to refer to the Blue Pool Road transaction and the distribution of the proceeds of sale of $108 million which matters were dealt with in my judgment in the First Petition to which reference should be made. As noted above, Madam Ng bequeathed her own shareholding of 1,200 shares to five of her grandsons in equal shares i.e. 240 shares each. By clause 20 of her will, she had specifically directed her trustees "to transfer the [shares] in specie" to the five beneficiaries. This would entail the registration of the five grandsons as members. The distribution of the Blue Pool Road proceeds by MWLS was made on the basis of the bequest of Madam Ng in favour of her grandsons (including Raymond) taking effect. That is evident from the minutes of the special board meeting of 15 September 1995 and the resolutions approved. Significantly, Madam Ng's holding was divided into five lots of 240 shares each. Even if, as is maintained by the Petitioner, he did not see this resolution at the time, the cash/share distribution emanated from him and accorded inter alia with the shareholding structure and Madam Ng's bequest of her own shareholding. The transfer and registration of Madam Ng's shares into the names of the grandsons are held up only by reason of the pending caveat proceedings due to be heard in January 2000. Put differently, it would be difficult to envisage any bona fide grounds for refusing to consent to transfers to them or to register them as shareholders once the probate issue has been resolved.

33. Given that background and the fact that the Blue Pool Road transaction preceded this transfer by over two years, an inference may legitimately be drawn from those facts that the Petitioner had relinquished his right under article 2(a) in relation to a transfer that is to any of the five grandsons to whom Madam Ng had bequeathed her MWLS shares.

34. Even if I were wrong about this, and the transfer of the 100 shares to Raymond were in breach of the Petitioner's rights under article 2(a), of itself, the breach, being purely technical, would not be a matter that could conceivably justify the making of a winding-up order.

35. A side issue arising out of the transfer of shares to Raymond is the allegation that Raymond was wrongfully shown as a shareholder in the register of members ought to be mentioned.

36. The original complaint made in paragraph 47 of the Second Petition was that the Petitioner was refused access to the company's register of members and was therefore unable to determine whether or not the register showed Raymond as a member of MWLS. An amendment was made nine months later in April 1999 deleting the allegation that TY Lee had refused the Petitioner access to inspect the register; rather, it asserted that when the Petitioner was eventually accorded access, the register purported to record Raymond as the holder of 100 shares in the capital of MWLS. In May 1999, in the Fifth Affidavit of the Petitioner, the Petitioner accepted that Raymond was not registered as a shareholder, that a mistake had been made in the petition in so alleging, and that leave would be sought to amend the error. No leave to amend was ever sought as such but in his opening, leading counsel for the Petitioner acknowledged paragraph 47 (as amended) to be "incorrect".

37. In point of fact, four months prior to the Second Petition, the Petitioner had been given access to the register of members. The evidence is clear that on 10 March 1998, the Petitioner had a conversation with Li Hak Hung, the only employee of MWLS who responded with courtesy to his queries relating to the books and records of the company. On 13 March 1998, the Petitioner was granted access to them and amongst the documents copied by the Petitioner was the members' register. In those circumstances, there was simply no factual basis for the original allegation. Had the Petitioner been properly advised, the original complaint would either not have been made at all or been withdrawn at an early stage. Not only did that not happen, it was compounded by the allegation made by way of amendment in April 1999 referred to above. Even if the initial complaint resulted from an oversight (which is not at all apparent), there was really no excuse when it came to the amendment. The allegations made were both vexatious and irresponsible, having no conceivable factual basis. This is no way to conduct litigation : it only serves to bring discredit on the legal profession.

The Lee Cheong Yee dividends

38. Although this ground (which is one of the overlapping issues) has not been abandoned, no further submissions were made on it.

Abandoned grounds : denial of access to the books and records of MWLS and the secret fund

39. Although these grounds were formally abandoned on the second day of the hearing, they throw light on how this litigation has been conducted and the mindset of the Petitioner and his advisers.

40. The secret fund complaint was introduced by way of amendment to the Second Petition. The complaint as to the denial of access to books and records of MWLS was one of the original complaints but amplified by way of amendment by reference to events occurring after the date of the Second Petition.

41. As to the complaint regarding denial of access, that was entirely vexatious as will become apparent. I have already referred to the fact that the Petitioner was given access to MWLS's documents months before the filing of the Second Petition. On 28 July 1998, the Petitioner was given the opportunity to further inspect the books and records of MWLS. However, he spent the entire day with his team of six dealing with the inspection of documents of HY&HT Lee. At 5 p.m., he informed Li Hak Hung that he had no time that day to inspect MWLS's documents. He proposed to return. Although Li Hak Hung informed him that it would be possible for the inspection to take place the following day, i.e. Wednesday 29 July, or Friday 31 July, it would not be possible on 30 July because of Li Hak Hung's unavailability due to a hospital appointment. Not only did the Petitioner not take up Li Hak Hung's invitation and offer of two alternative dates for inspection, he decided that Li's 'excuse' as to his unavailability on 30 July was indicative of TY Lee's attempt to 'dodge' inspection.

42. Such a travesty of the facts is breathtaking : it is a manifestation of the Petitioner's apparent state of paranoia regarding anything done by TY Lee which, seemingly, has spilled over to his legal advisers.

Conclusion

43. To sum up, the Petitioner has failed to make out meritorious grounds for a winding-up order. For reasons already stated, no question of alternative relief pursuant to section 168A(2) arises. Accordingly the petition is dismissed.

44. I make an order nisi that the costs of TY Lee and MWLS be to the Respondents, with certificate for two counsel in the case of TY Lee.

	(Doreen Le Pichon)
	Judge of the Court of First Instance High Court

Representation:

Mr Ronny Tong SC, Mr David Richards QC and Mr Eugene Fung, instructed by M/s Denton Hall, for the Petitioner

Mr Daniel Fung SC and Mr Johnny Mok, instructed by M/s Liu, Choi & Chan, for the 1st Respondent

HCCW000467/1998

HCCW467/98

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H E A D N O T E

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Companies Ordinance section 182 - scope - meaning of "property of the company"

Moneys held by company on constructive trust - whether "property of the company"

HCCW467/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO.CW 467 OF 1998

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IN THE MATTER OF M.W. LEE & SONS ENTERPRISES LIMITED and IN THE MATTER OF the Companies Ordinance Cap.32 of the Laws of the Hong Kong

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Coram : The Hon Mrs Justice Le Pichon in Chambers

Date of Hearing : 4 March 1999

Date of Handing Down of Decision : 16 March 1999

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D E C I S I O N

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1. This is an application pursuant to section 182 of the Companies Ordinance, Cap.32.

The facts

2. On 10 July 1998, S.T. Lee ("the Petitioner"), one of two directors and a shareholder of M.W. Lee & Sons Enterprises Limited ("the Company"), presented a petition to wind up the Company on the just and equitable ground or alternatively, that his shares be purchased at a fair value pursuant to section 168A of Cap.32. The Respondents are respectively Lee Tak Yan ("the 1st Respondent"), the other of the two directors and a shareholder and the Company.

3. The Petitioner is the younger brother of the 1st Respondent. The Company is a family company in which both the Petitioner and the 1st Respondent are shareholders.

4. The late Lee Man Wa, the father of the Petitioner and the 1st Respondent died in 1979 and by his will (which was not in evidence) he apparently gave his wife Lee Ng Chan-wa ("the mother") a life interest in his residuary estate with a special power of appointment in favour of their children. Comprised in the father's estate are shares in HY and HT Lee Brothers & Co. Ltd. ("HY&HT"), another family company, viz. 860 shares registered in the name of Lee Man Wa and 2,750 shares registered in the name of Lee Cheong Yee said to be an alias of Lee Man Wa. The mother died in 1991 and appointed the 1st Respondent and her daughter Lee Wing Kim ("May Lee") executors of her will. Although an application for a grant has been made, a caveat has been entered by the Petitioner and there is a probate action pending. The mother exercised her power of appointment under the will of Lee Man Wa in respect of shares in HY&HT. Those registered in the name of Lee Man Wa (i.e. 860 shares) were bequeathed to the 1st Respondent and those registered in the name of Lee Cheong Yee, (i.e. 2,750 shares) were bequeathed to the Petitioner. The mother's own shareholding comprising 651 shares in HY&HT was bequeathed to her five grandsons, including 130 shares in favour of Christopher Lee, one of the sons of the Petitioner. The surviving executors of the father's will are the 1st Respondent and May Lee who, as noted above, are also the executors named in the mother's will.

5. It is common ground that dividends which accrued on (1) the 2,750 shares in HY&HT registered in the name of Lee Cheong Yee, (2) the 651 shares registered in the mother's name and (3) the 860 shares registered in the father's name (Lee Man Wa) were, at the direction of the 1st Respondent, paid into the savings account maintained by the Company with the Hang Seng Bank Ltd. on various occasions between 29 March 1995 and 14 February 1997 ("the diverted dividends").

6. Exhibited to the 3rd Affidavit of the Petitioner is an analysis prepared by Mr Peter Yu of the receipt of sums by the Company of dividends totalling $12,347,500 in respect of the Lee Cheong Yee shares and dividends totalling $583,700 in respect of the shares registered in the name of the mother bequeathed to Christopher Lee (i.e. 130 out of 651 shares) (collectively "the specified sums"). These form part of dividends accrued on the three blocks of shares described above which the 1st Respondent caused to be paid by HY&HT directly to the Company into the Company's savings account. The schedule below summarizes the payments of HY&HT dividends to the Company and the specified sums are those set out in columns 1 and 3 :

Date	(1) Lee Cheong Yee (2,750 shares)	(2) Lee Ng Chan Wa (651 shares)	(3) Christopher (130/651 shares)	(4) Lee Man Wa
29.03.95	5,000,000	2,150,000	429,340	-
03.04.95	1,000,000	-	-	-
08.05.95	3,100,000	-	-	-
23.06.95	827,500	200,100	39,960	300,010
04.10.95	825,000	195,300	39,000	261,000
05.03.96	825,000	-	39,000	-
14.02.97	770,000	182,280	36,400	243,600
	12,347,500	2,727,680	583,700	804,610

The total amount of diverted dividends (the aggregate of columns 1, 2 and 4 above) is $15,879,790 of which the specified sums form part.

7. Between 31 March and 11 May 1995, seven transfers were made out of the Company's savings account into fixed deposit accounts. These are deposit accounts Nos.20 to 26 inclusive, details of which appear below :

Fixed deposit number	Original principal HK$	Maturity value at 8 March 1999 HK$	Interest accrued at 8 March 1999 HK$
20	2,000,000.00	2,546,836.33	546,836.33 *2
21	2,000,000.00	2,546,836.33	546,836.33 *2
22	2,000,000.00	2,546,836.33	546,836.33 *2
23	1,000,000.00	2,272,153.93	272,153.93
24	2,000,000.00	2,531,793.32	531,793.32
25	2,000,000.00	2,508,163.34	508,163.34 *1
26	1,000,000.00	1,254,081.69	254,081.69 *1
	12,000,000.00	15,206,701.27	3,206,701.30

*1 Fixed deposits matured on 15 February 1999.

*2 Fixed deposits matured on 2 March 1999.

8. In proceedings brought by the Petitioner and his son Christopher against the 1st Respondent to recover the specified sums, an injunction was granted restraining the 1st Respondent from continuing to allow the Company to hold the specified sums on behalf of the estates of Lee Man Wa and Ng Chan Wa. The 1st Respondent was also ordered, within 14 days of the judgment of Findlay J dated 21 January 1999, as varied by order dated 10 February 1999 and subsequently extended by consent of the parties to noon, 8 March 1999, to "cause the sum of $12,347,500 and $583,700 plus all interest accrued, to be paid into a trust account with a licenced bank in Hong Kong in the names of the [1st Respondent] and May Lee as fiduciaries and executors of the estate[s] of Lee Man Wa and Ng Chan Wa." In his judgment, Findlay J observed that :

"If the [1st Respondent] is able to obtain some order in the winding-up proceedings enabling the Company to pay this money, well and good, but my order is not dependent on this."

The application

9. The summons issued by the 1st Respondent seeks the following relief :

"The Company be authorised to disburse out of the Company's fund and to pay to [the 1st Respondent] and May Lee as Executors of the Estates of Lee Man Wa and Ng Chan Wa the sums of HK$12,347,500 and HK$583,700 plus accrued interest thereon from the respective dates of receipt by the Company of the said sums to date of payment out."

For convenience, I will hereafter refer to the proposed payment of the two principals sums identified in the summons plus accrued interest thereon as "the proposed disbursement". Underpinning the application is the submission that the diverted dividends paid into the savings account of the Company do not belong to the Company but are moneys impressed with a constructive trust which arose because to the knowledge of the Company those moneys did not belong to it beneficially and therefore could not be applied for the Company's own purposes. Leading counsel for the 1st Respondent submitted that Re French's (Wine Bar) Ltd [1987] BCLC 499 and Re Margart Pty Ltd [1985] BCLC 314 apply so that in the context of section 182 of the Companies Ordinance, the diverted dividends do not constitute "property of the Company". In French's (Wine Bar) Ltd. (supra), the court had to consider whether completion of an unconditional contract entered into before the presentation of the petition was a disposition of the property of the company under the English counterpart to section 182. Vinelott J concluded that the section concerned only assets to which the company is beneficially entitled and which are capable of being realized for the benefit of its creditors. So where the contract is specifically enforceable and there is no defence to it, completion of the contract according to its terms would fall outside the section but if the contract is conditional or voidable by the company, the waiver or confirmation of the contract may constitute a disposition of the property of the company. Re Margart Pty Ltd (supra), was a case concerning a liquidator's claim to payments made into the plaintiff company's account with the defendant bank which represented moneys from the realization of assets covered by a floating charge created before the presentation of the petition, it was held (at 318g-h) :

"...whatever meaning the word 'disposition' may have when used in the phrase 'any disposition of property of the company' ..., it does not include the process by which a person with a beneficial interest in the property obtains that property, or the proceeds of its realisation, from the company at a time when he is entitled to have it. In all reality a person would not normally be described as disposing of his property when he hands it over to another to whom he had previously promised to deliver it on the happening of a certain event when that event occurs. This is only another way of stating in legal terms the proposition that the word 'disposition', when used with reference to property, normally has the meaning of connoting a change in the beneficial ownership of an asset by transfer or other type of dealing."

As observed by Helsham CJ in that case (at 319e) :

" What lies behind the section is the prevention of the improper alienation and dissipation of the company's property. I do not believe it was intended to reach out to transactions by which a secured creditor receives assets covered by his security at a time when he was entitled to have them."

In short, the 1st Respondent's position is that the present summons has been taken out only as a matter of prudence.

10. The application was strenuously opposed by the Petitioner. First, it was submitted that the court's jurisdiction under section 182 should not be invoked when the proposed disposition is not even claimed to be in the interest of the Company. Rhetorically, the Petitioner asks :

a) why should the court sanction the disposition at the instance of the 1st Respondent?

b) why should the court direct the Company to make the payment out now?

Second, he submitted that the 1st Respondent is asking the court to sanction the payment out for its own benefit and in so doing is short-circuiting a claim against the Company (which has not been brought) and thus the Company's right of set-off.

Is there a constructive trust?

11. The answer cannot but be in the affirmative. Constructive trusts are imposed by equity in order to satisfy the demands of justice and good conscience. See Snell's Equity 29th Edn. at 192, cited with approval by Edmund Davis LJ in Carl Zeiss Stiftung v. Herbert Smith & Co. (No.2) [1969] 2 Ch 276 at 301. They come into existence when the relevant circumstances arise and are not dependant on the intention of the owner of the property. See Pettit on Principles of Equity and the Law of Trust, 8th Ed. at p.60. The diverted dividends are inarguably trust assets belonging to the estates of Lee Man Wa and Ng Chan Wa. The Company was not a bona fide purchaser in any sense : it provided no consideration and accepted the transfer with knowledge that it was trust property. At all material times, there were but two directors of the Company : the 1st Respondent and the Petitioner. On the evidence, the Petitioner knew of the nature of the transfers at the latest by 2 August 1996. There is a memo of that date to the Petitioner which read as follows :

" (file : Ng Chan Wa file
c.c. file : HY&HT Lee Brothers
c.c. file : Secretaries )

Lee Cheong Yee: M E M O

JOB	Withhold (sic) dividend of H.Y.& H.T. Lee Brothers	Date 2/8/96
FROM	C. Lam
TO	STL [the Petitioner]
MESSAGE	牛叔說： per T.Y. Lee's instruction, starting from March 1995, all the withhold (sic) dividend of Lee Ng Chan Wa and Lee Cheong Yee have been paid to M.W. Lee & Sons Enterprises Ltd. It was because the withhold (sic) dividend could not generated (sic) interest income for the shareholders.
ACTION NEEDED	The amount had been paid for :- Lee Ng Chan Wa 28/5/91 - 5/3/96 $2,740,710.- Lee Cheong Yee 28/5/91 - 5/3/96 $11,577,500.-
FILE MEMO "

Whilst prior to that date, the Petitioner would not have known of the transfers, the 1st Respondent who caused the transfers to be made obviously knew : indeed, he dealt with the substantive day-to-day business of the Company. In the circumstances, there is no reason why the knowledge of the 1st Respondent should not be imputed to the Company. In my judgment, a constructive trust did arise : the consequence is that neither the diverted dividends which include the specified sums nor the interest accrued thereon form part of the Company's own assets. They belong to the estates of Lee Man Wa and Ng Chan Wa.

12. As I understand it, leading counsel for the Petitioner accepts that the Company will have no answer to any claim by the estates to the diverted dividends and interest. But it was submitted the present application must not be treated as an action by the estates to recover property subject to any constructive trust. It should not be so treated because the parties to the application are the 1st Respondent and the Petitioner only : the Company is not a party, nor is May Lee, the other executor of the estates. The application should not therefore be treated as an application by the executors of the estates but by the 1st Respondent in his personal capacity.

13. The substantive objection in the application is that what is sought to be disbursed is not trust moneys but moneys of the 1st Respondent. As there are outstanding loans of some $30 million shown in the accounts as being due to the Company from the 1st Respondent, if the moneys were disbursed, the Company's right of set-off would be lost.

Wallersteiner v. Moir

14. The nub of the Petitioner's case is that vis-à-vis the 1st Respondent, the diverted dividends are not trust moneys. This arises from a fiction which is said to apply in the present case that where a fiduciary misapplies trust moneys, he is deemed to have made the wrongful payment from his own personal funds. In Wallersteiner v. Moir (No.2) Buckley LJ held (at 397C) :-

" It is well established in equity that a trustee who in breach of trust misapplies trust funds will be liable not only to replace the misapplied principal fund but to do so with interest from the date of the misapplication. This is on the notional ground that the money so applied was in fact the trustee's own money and that he has retained the misapplied trust money in his own hands and used it for his own purposes."

And at 398C-E :

"...By acts of commission and omission as a director of those companies he procured the carrying out of the circular cheque transaction. By that transaction moneys of the defendant companies were applied for his benefit in connection with the purchase of the Hartley Baird shares in the manner described in the judgments of this court on May 21, 1974. The fact that the moneys did not actually pass through Dr.Wallersteiner's own hands is immaterial. He so conducted himself as a director that he benefited at the companies' expense. The fact that the extent of his own personal interest in the 'consortium' for whom the shares are alleged to have been bought has not been made clear is also, in my opinion, immaterial. To the extent that any part of these moneys may have been applied for the benefit of anyone other than Dr.Wallersteiner, the court should, in my opinion, treat him as having used his own money for that purpose and as having retained the companies' money in his own hands : compare Knott v. Cottee (1847) 2 Ph.192."

Applying the fiction to the present case, it was submitted that because the 1st Respondent was found by Findlay J to have been in breach of his fiduciary duties in causing the diverted dividends to be paid to the Company, the 1st Respondent must be deemed to have used his own moneys when he misapplied the funds and as having retained the diverted dividends in his own hands although it is an undisputed fact that the diverted dividends went directly from HY&HT to the Company by cheque or through the savings account. It was submitted that as in Wallersteiner v. Moir, it is immaterial that the moneys did not actually pass through the fiduciary's own hands. Note 9 to the 1997 Financial Statements of the Company is said to give substance to the fiction inasmuch it is consistent with the fiction in that the amount stated as owing to affiliates which included the sum of $12,347,500 was described as "non-trade advances which are interest free and have no fixed repayment terms".

15. In Wallersteiner v. Moir, Dr Wallersteiner was a person in a fiduciary position who had made a profit out of his trust. He was liable to account for that profit. It was held that in equity interest is awarded whenever a wrongdoer deprives a company of money which it needs for use in its business so that the company is compensated for the loss thereby occasioned to it. See per Lord Denning MR at 388E. The passages cited from Wallersteiner v. Moir have to be placed in context : they dealt with the question of whether a trustee or fiduciary liable for damages for breach of trust should be made to pay interest on the amount of damages awarded and the fiction formed part of the rationale for the award of interest.

16. This is evident from Knott v. Cottee 16 Beav 77 cited by Buckley L.J. That was a case where the court had to consider whether an executor who had made authorized investments ought to be charged with interest on the balance or, at the option of the plaintiffs, with the stock and accumulations which would have been produced if the investments had been made as authorized by the will. The fiction thus arose in a similar context.

17. The Petitioner also relied on the following passage in In re Hallett's Estate (1880) 13 Ch D 696 at 727 :-

"...Now, first upon principle, nothing can be better settled, either in our own law, or, I suppose, the law of all civilised countries, than this, that where a man does an act which may be rightfully performed, he cannot say that that act was intentionally and in fact done wrongly... Wherever it can be done rightfully, he is not allowed to say, against the person entitled to the property or the right, that he has done it wrongfully. That is the universal law.

When we come to apply that principle to the case of a trustee who has blended trust moneys with his own, it seems to me perfectly plain that he cannot be heard to say that he took away the trust money when he had a right to take away his own money."

But it does not assist the Petitioner given the context in which the fiction was applied, namely to a case where the "trustee has blended trust moneys with his own". All these authorities whilst pertinent to personal claims against the 1st Respondent, have no relevance to the present application.

18. The question before me is not one of the 1st Respondent's personal liability to the Petitioner and Christopher, a matter which was before Findlay J. The question before me is one relating to section 182 of the Companies Ordinance. Would the proposed disbursement by the Company be void as a disposition of the property of the Company? If the diverted dividends which necessarily included the specified sums are subject to a constructive trust for the reasons explained above, and in this connection, the Petitioner accepts that if a claim were made by the executors for repayment, the Company can have no answer to such a claim then, having regard to the recipient of the proposed disbursement, I do not see how the character of these moneys is altered by the fact that the other of the executors has not joined in this application. The moneys belong to the estates to whom the proposed disbursement is to be made. In my judgment, there is no scope for the application of the fiction so as to alter the character of the moneys received by the Company and in respect of which a constructive trust has arisen. Such a fiction may be appropriate in the context of charging a defaulting trustee or fiduciary with the payment of interest on misapplied funds but that is not the question before the court. Here, there is no question of the misapplied trust moneys having been squandered or lost irretrievably : they remain with the Company which, on the evidence, is plainly solvent and able to repay even if loans made to the 1st Respondent are irrecoverable for any reason. Unlike the plaintiff in Wallersteiner v. Moir, there is no evidence that the 1st Respondent has personally benefitted from the breach of trust through causing the specified sums to be paid directly to the Company.

Section 182

19. This provides that :-

" In a winding up by the court, any disposition of the property of the company, including things in action, and any transfer of shares, or alteration in the status of the members of the company, made after the commencement of the winding up, shall, unless the court otherwise orders, be void."

Objection was taken to the form of the summons. It was submitted that the court does not have power under section 182 to order a disposition. It can only say whether a disposition is valid or not.

20. I do not agree that what is sought is an order by the court to make the proposed disbursement. The order sought is that "the Company be authorized" to make the disbursement. That is not the same as seeking an order that the Company be directed to make a particular payment, non-payment of which would constitute a contempt of court. Moreover, it is to be observed that whilst it is usual for the company to be a party to such an application, it is not an indispensable party. For example, In Re French's (Wine Bar) Ltd (supra), the applicant was the purchaser of the leasehold premises under the contract for sale made prior to the presentation of the petition. The application was supported by the bank and opposed by the lessor, the owner of the reversion immediately expectant on the lease. The company itself was not party to that application. Thus the fact that the Company itself is not a party is not objectionable.

21. I agree with the holding in Re French's (Wine Bar) Ltd (supra) and Re Margart Pty Ltd (supra) that section 182 has no application to assets that are not free assets of the Company which it is beneficially entitled and which can be realized for the benefit of its creditors. For reasons already stated, the proposed disbursement being property subject to a constructive trust would therefore not constitute "property of the company" for the purposes of section 182.

22. Leading counsel for the Petitioner submitted that the principle can have no application unless the asset in question has been segregated. But nothing in either of those cases appears to lend support to the qualification suggested. Whilst the former case concerned the completion of a sale of leasehold property, the latter was a floating charge over the assets of the Company. In the present case, the obligation of the Company is to repay the trust assets to the estates. That obligation is not dependant on the moneys received by the Company having been segregated. The Company's obligation is not contingent on the moneys remaining traceable. If tracing were a relevant consideration, to the extent that the moneys are no longer traceable, and it is arguable on the facts that at least part of the moneys, in particular those paid after 8 May 1995 are no longer traceable, equity will treat money in a mixed account as charged with the repayment of the claimant's money. Re Diplock's Estate [1948] Ch 465 at 520, 539 and Space Investments Ltd v. Canadian Imperial Bank of Commerce Trust Co (Bahamas) Ltd [1986] WLR 1072, 1074C-H, an equitable charge will arise in favour of the estates.

23. Objection was also taken to the application on the basis that it is not even suggested by the 1st Respondent that the payment is in the interest of the Company. In re Burton & Deakin Ltd. [1977] 1 WLR 390, Slade J held (at 397G-H) :

"...If on an application under section 227 relating to a solvent company, (a) evidence is placed before the court showing that the directors consider that a particular disposition, falling within their powers under the company's constitution, is necessary or expedient in the interests of the company, and (b) the reasons given for this opinion are reasons which the court considers that an intelligent and honest man could reasonably hold, it will in the exercise of its discretion normally sanction the disposition, notwithstanding the opposition of a contributory, unless the contributory adduces compelling evidence proving that the disposition is in fact likely to injure the company."

Given that the Company is a constructive trustee of the diverted dividends and accrued interest, it is self-evident that repayment to the estates entitled to the same must be in the interest of the Company : in fact, the sooner payment is made the better. The Company's liability to restore the moneys to the estates is not dependant on a proprietary claim : that would arise even under a personal claim. The fact that May Lee is not a party to the application is not fatal because the critical factor is the identity of the recipient of the proposed disbursement. It would be a different matter if the moneys were to be paid into the 1st Respondent's personal account or to an account that is not that of the estates.

24. The present application is not an action by the executors against the Company : in substance, the order sought is that the proposed disbursement into a segregated account in the name of the executors of the estates will not be void under section 182. To the extent that the assets do not belong to the Company beneficially, section 182 is irrelevant; in so far as the proposed disbursement might constitute a disposition of "the property of the Company" if, for example, contrary to my view, to come within the principle in Re French's (Wine Bar) Ltd, the assets have to be segregated, the proposed disbursement is still inarguably in the interest of the Company.

25. As to the question why an order has to be made now at the behest of the 1st Respondent, the short answer is why not? There is no good reason for the Company not to make the proposed payment which it is to be emphasized does not extend to the diverted dividends other than the specified sums since the application is limited in terms to the specified sums. In fact, a proposal made by the 1st Respondent relating, inter alia, to the proposed disbursement for payment into a separate account within the Company or, alternatively, to be transferred out of the Company and placed into a trust account in the names of the executors was rejected by the Petitioner in early November 1998. Thereafter, there followed the proceedings heard by Findlay J as a result of which the 1st Respondent was enjoined from allowing the Company to retain the specified sums.

Accrued interest

26. What interest has accrued on the specified sums? The 1st Respondent's case is that the moneys placed in deposit accounts nos.20-26 inclusive constitute trust moneys and that therefore all interest accrued on these accounts are trust moneys subject to one qualification. That pertains to deposit account no.24. Only 50% of that is said to come from trust moneys so that only half of that interest is to be taken into account. According to the 1st Respondent, the amount of interest accrued shown in the summary set out earlier in this judgment in the sum of $3,478,855.20 should be adjusted to read $3,206,701.30.

27. The evidence shows that when the $7.15 million of trust moneys were paid into the Company's savings account on 29 March 1995, that account had a credit balance of over $1.463 million. The fixed deposits, (i.e. accounts 20-23 inclusive) were not established until two days later on 31 March. On 30 March, there were three payments into the savings account so that immediately before the four deposit accounts were created, there was standing to the credit of the savings account the sum of $9,185,544.12. The submission that all the moneys in accounts nos.20-23 totalling $7 million were trust moneys appears to be based on the fact, first, that this 'approximated' the amount of diverted dividends paid into the savings account and secondly, that the Company's internal memo dated 2 August 1996 reproduced earlier in this judgment shows that the purpose of the exercise was to generate interest income for those entitled to the dividends so diverted. The 1st Respondent's case might be on stronger ground had the amounts placed on fixed deposit matched exactly the amounts paid in which is not the case. So far as the internal memo is concerned, it is hardly determinative in that it is equally consistent with simply placing the diverted dividends in the savings account which presumably attracted interest although no evidence was adduced as to the terms and conditions governing the savings account. Nor would it appear to be the case that prior to receiving the diverted dividends, the Company had never placed its moneys on fixed deposits. The passbook shows that on the same day as but prior to the payment in of the $7.15 million, $2 million was withdrawn and placed on time deposit.

28. In my judgment, so far as concerns the interest accrued on the fixed deposits, since the trust moneys had intermingled with the Company's moneys, only a pro rata share of the first four deposits is attributable to trust moneys, the balance being the Company's moneys. It follows that only a pro rata share of the accrued interest constitutes trust moneys. As the application is limited in terms to the specified sums rather than the diverted dividends as a whole, to the extent that dividends caused to be paid to the Company belong to the 651 shares registered in Ng Chun Wa's name, it will have to be pro-rated, Christopher's share thereto being 130/651ths. So far as interest accrued on deposit accounts 24 to 26 inclusive is concerned, an account may have to be taken to ascertain the precise amount attributable to the specified sums adopting the same approach. By the same token, part of the interest which accrued on the savings account (if any) would have been attributable to the specified sums. In that connection, I note that other than for time deposits, withdrawals were made from time to time from the savings account. Unlike the wrongly paid charities in Re Diplock (supra) which were paid under a mistake of law, the Company knew that the diverted dividends did not belong to it beneficially. Having intermingled the moneys, the rule in Re Hallett's Estate (supra) applies. The trustee is deemed to draw on his own money first even if it was the most recently paid in and to draw on the trust funds only after all his own money has gone. See Snell's Equity (supra) at 301. Accordingly, withdrawals made to meet the Company's expenses should be deemed to have been made out of the Company's moneys.

29. Unless the parties are able to reach agreement, an account may have to be taken to establish the interest which has accrued on the specified sums on fixed deposit accounts other than accounts 20, 21, 22 and 23, and on the savings account and for that purpose, it may be necessary for ancillary orders to be settled in Chambers.

Set-off

30. The Petitioner contended that he would be seriously prejudiced by any validation order made by the court. This is because the 1st Respondent is shown in the Company's accounts as owing substantial sums (of the order of $30 million) to the Company. The 1st Respondent has filed evidence to explain why a significant part of this amount is not in fact owing to the Company. That is an issue that will have to be resolved on some other occasion. So far as any right of set-off that the Company may have against the 1st Respondent, it is not affected by any validation order unless the specified sums and accrued interest are not trust moneys but the personal property of the 1st Respondent. That would only be the case if the fiction referred to in Wallersteiner v. Moir were applicable. In view of my holding that those sums are trust moneys, it follows that any validation order has no impact or adverse effect on any rights of set-off to which the Company might otherwise be entitled.

The Order

31. As Slade J observed in Burton v. Deakin (supra) at 398A-B :

"...No limits are placed by the sections on the court's discretion to grant or to refuse an application under section 227, and such a discretion will of course be exercised in every instance having regard to the particular circumstances of the particular case."

In the circumstances of this case, the following order is to be made on the 1st Respondent's summons :

1. The disbursement out of the Company's funds to pay Lee Tak Yan and Lee Wing Kim also known as May Lee as Executors of the Estates of Lee Man Wa and Ng Chan Wa of the amounts specified in paras.(a) and (b) below if and so far as they involve any disposition of the property of the Company shall not be void under s.182 of the Companies Ordinance, Cap.32 in the event of an order for the winding up of the Company being made on the Petition:-

(a) the sums of HK$12.347,500.00 and HK$583,700.00 ('the specified sums'); and

(b) interest attributable to the specified sums ascertained in accordance with paragraph 2 below.

2. Interest attributable to the specified sums shall include a pro rata share of interest accrued on amounts (of which the specified sums form part) placed on fixed deposits and on the savings account. In computing such pro rata share of interest, withdrawals made to meet the Company's expenses shall be deemed to have been made out of the Company's income.

This order includes the terms set out in the letter of 5 March 1999 to the parties. The only addition relates to savings account interest (if any) accrued on the specified sums.

32. There is to be an order nisi for costs in favour of the 1st Respondent.

	(Doreen Le Pichon)
	Judge of the Court of First Instance High Court

Representation:

Mr Benjamin Yu, S.C., inst'd by M/s Denton Hall, for the Petitioner

Mr Patrick Fung, S.C. and Mr Johnny Mok, inst'd by M/s Liu, Choi & Chan, for the 1st Respondent

Remarks:
On appeal by the Petitioner to the Court of Appeal: Appeal dismissed with costs. Please refer to judgment CACV000118/1999.