POON KA MAN JASON v. CHENG WAI TAO AND OTHERS

HCA 304/2011

[2022] HKCFI 773

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 304 OF 2011

________________________

________________________

___________

R U L I N G

___________

A. Introduction

1.  In this Ruling, I shall continue to adopt the definitions and abbreviations used in my Judgment [2019] HKCFI 1141 (“Judgment”).

2.  The claim in this common law derivative action was brought by Jason on behalf of himself and all other shareholders in the Company except Ricky, with respect to Ricky’s conduct in relation to D3-D31.  Mak and Wong were the new shareholders to whom Ricky had transferred shares.

3.  The Judgment summarises the rather contorted and long procedural background leading to the Notice of Sanctioned Payment filed on 25 April 2017 by Ricky and D3-D31 (giving notice to Jason that they had paid HK$40 million into court in settlement of the whole of his claim), and the subsequent argument as to whether the sanctioned payment should be accepted.

4.  Over four days in April 2019, I heard the Sanctioned Payment Summons dated 18 September 2017.  Though it was issued by solicitors purporting to act for the Company, the application must have been directed by Ricky, as he was the sole director of the Company.  In simple terms, the person making the sanctioned payment was the person controlling the Company’s attempts to force acceptance of it.  That person, Ricky, had already been adjudged to be a wrongdoer in control.

5.  The Company had, meanwhile, been directed not to participate in the hearing, because it would be an improper use of Company assets to argue points which would be bound to be raised in any event by the other parties.

6.  At the end of the hearing, I gave an ex tempore decision, which was subsequently reduced into writing in the 75-page Judgment.

7.  In the Judgment, I identified the clear battles lines, and what seemed to me to be the issues to be resolved, being: (1) a jurisdiction point on Order 22; (2) whether Mak and Wong and others were Ricky’s nominees and/or close associates; (3) whether the Shares Transfer was a sham; (4) the adequacy or sufficiency of the sanctioned payment; (5) whether the nature of the private agreement between Ricky and Mak and Wong meant that Mak and Wong could not bind the other shareholders; (6) whether the votes of the majority who passed Resolution 1 were invalid through those voters lack of bona fides; and (7) whether Ricky’s “approval” of the Shares Transfer was valid.

8.  In summary – but see more detail below – I found in my Judgment that the Sanctioned Payment Summons should be dismissed by reference to two out of the seven issues identified by me: first, because the application was not properly jurisdictionally founded, and secondly, because the Shares Transfer by Ricky to Mak and Wong was invalid, Ricky’s exercise of discretion as to whether to refuse to register the transfer and his decision to “approve” registration being an abuse of his power.

9.  As to (1) the jurisdiction point (which was not fact sensitive, and did not depend on finding any facts in dispute), either the Company could demonstrate that it is the party under and within the meaning of the provisions in Order 22 which could accept the sanctioned payment of which notice was given to Jason as plaintiff, or it could not.  My conclusion was that it could not.  That was determinative, and on its own would have led to the dismissal of the application.

10.  Nevertheless, because significant resources had been deployed in respect of the other issues, I went on to deal with the other aspects.  I held that: (2) Mak and Wong and others were not Ricky’s nominees; (3) the Shares Transfer was not a sham; (4) it was unnecessary to determine whether the sanctioned payment amount was adequate or sufficient, but the final figure from the accounting exercise may be more than the amount of the sanctioned payment; (5) the transfer agreement between Ricky and Mak and Wong were binding on other shareholders; (6) the votes of the majority could not be impugned for the alleged lack of bona fides; and (7) the transfers were invalid because Ricky did not act in the best interest of the Company when “approving” the transfer.

11.  Following the Judgment, the defendant parties made a number of applications, being:

(1)  Ricky’s and D3-31’s application for leave to appeal, and for a stay of further proceedings pending appeal;

(2)  Mak’s and Wong’s application for leave to appeal; and

(3)  the Company’s application for leave to appeal.

12.  Those matters were originally to be dealt with on paper submissions only, and submissions were indeed filed by the parties (in May, July and August 2019).

13.  Unfortunately, following an administrative oversight or failure, the applications were not then determined.  On the other hand, neither did any solicitor for any of the parties write to the Court at any time to remind that a decision was awaited, or to ask when a decision might be forthcoming (despite the fact that it might be generally known that I am ordinarily reasonably prompt in decision-making).  In those circumstances, until the papers ‘resurfaced’, the Court had lost sight of the fact that determination of the applications for leave to appeal might still be needed.

14.  Thereafter, in October 2021 the Court made telephone enquiry with the parties as to whether the matter might have otherwise been consensually resolved.  Only in response to that enquiry (but without mentioning it) did the parties jointly write to ask whether any further submissions should be provided to assist (apparently confirming a disposition was still required).

15.  To adopt a currently popular euphemism, this situation is “less than ideal”.  But – not so as to deflect all responsibility – perhaps it can usefully be remembered that, in addition to the duties placed on the Court to seek to achieve the underlying objectives of the Rules of the High Court, the same rules mandate the parties to any proceedings and their legal representatives to assist the Court in furthering those underlying objectives.

16.  Occasionally, there are gaps in even good administration.  If there is a concern that the Court may have overlooked something, surely the parties would be entitled, and arguably be obliged, to raise the question with the Court with some reasonable degree of promptitude.  Albeit more directly in a different context, it has long ago been established that ‘letting sleeping dogs lie’ is no longer an acceptable strategy for parties and their legal representatives.

17.  I recognize some natural degree of reluctance on the part of parties or their solicitors to ‘push’ the Court.  No litigant or his solicitor would want to offend the Court who is to decide their dispute.  But, as stated, the rules can be seen to promote effective collaboration between the Court, the parties and their legal representatives in achieving the underlying objectives.  Therefore, a busy Court (which might have been distracted by other pressures of work) should unlikely be affronted or offended by – and in circumstances like the present might even welcome – a courteous enquiry or reminder.  Further, such contact can perhaps ordinarily be made jointly by the parties.

B.      More Detail about the Judgment

B.1    Jurisdiction Point

18.  So as to understand the argument and my conclusions on it, I set out in my Judgment the various provisions of the rules and relevant court forms under Order 22 and Order 22A.  I then approached the various arguments, in a way which might be summarised as follows:

(1)  I rejected the idea that where Order 22 rule 17 says “the plaintiff may obtain payment out”, that is only permissive and does not bar payment out to someone else.  In my view the use of the word “may” identifies the creation of a discretionary power.

(2)  I held that the words “party entitled” in Order 22A rule 2(2) do not change what is the fundamentally clear sense of the regime in Order 22, namely that a notice of sanctioned payment is given by a defendant (the offeror) to a plaintiff (the offeree), and that notice of acceptance is given, if at all, by that plaintiff to that defendant.  Read with Order 22, Order 22A rule 2(2) simply provides that payment is payable to the plaintiff or his solicitor, as the plaintiff is the “party entitled” under Order 22.

(3)  Neither the unfettered discretion created by Order 22A rule 1, nor the underlying rationale of encouraging parties to take positive settlement seriously, can themselves change the identity of the parties and the respective roles they play within the regime under the rules.

(4)  There is more force in the argument that the Company is the “real plaintiff”, where it cannot be controversial that the cause of action in a common law derivative claim is a cause of action belonging to the company on whose behalf it is brought by the plaintiff, and that damages ultimately recovered are payable to the company.

(5)  But, insofar as it is suggested that the sanctioned payment is the fruit of a judgment, the Company in this case was in the first situation identified in Prudential.  After the ordering of the account, the Company did nothing, such that the plaintiff was entitled to issue the summons to proceed with the enquiry.

(6)  That a company in a different action might have taken control over the proceedings, or even decided to take no further action on the prior judgment, is beside the point.

(7)  In this case, the Company was named and could only have been as a defendant, because it remained under the wrongdoer’s control.  It might be added that, in practical terms, that would mean that the person making the sanctioned payment and the person controlling the Company in its assertion that it wished to accept the sanctioned payment were one and the same.

(8)  In any event, that the particular sum of money generated by the account of profits would be payable to the Company, and if not paid would be enforceable by the Company, does not quite deal with the question as to whether or not the Company is to be treated as the “plaintiff” for the purposes of the operation of the sanctioned payment regime under Order 22.

(9)  If Jason, as plaintiff, refuses to settle and fails to obtain a judgment better than the sanctioned payment, he alone will face the cost sanctions under Order 22 rule 23.  Further, if the sanctioned payment is not bettered by the account, that fact will likely show the continuing pursuit of the proceedings was not reasonable and prudent in the interests of the Company, meaning that Jason as plaintiff would likely remain personally liable for the costs.

(10)  If the Company cannot bring itself within the provisions of Order 22, read together with Order 22A, and because there is a statutory scheme delineating the jurisdiction of the court, there can be no recourse to the ‘inherent jurisdiction’.

(11)  The jurisdiction question is not fact sensitive. Either the Company can demonstrate that it is the party under and within the meaning of provisions in Order 22 which can accept the sanctioned payment of which notice was given to Jason as plaintiff, or it cannot.

(12)   On my above analysis, including the fact that the Company remained under the wrongdoer’s control, it could not.

B.2    Shares Transfer Point

19.  My analysis in the Judgment on this point might be summarised as follows:

(1)  Mak and Wong asked Ricky for a discount on the price for their intended purchase of the shares, and it was agreed by Ricky, in consideration for the ability to effect approval of the sanctioned payment.

(2)  Therefore, it may not matter that the transaction was not itself a sham.  It was clearly intended to provide the circumstances in which shares which otherwise could not have been used to vote for the sanctioned payment were put into the hands of persons who clearly would have exercised a vote in that way.

(3)  The price to Ricky of ensuring that shares which otherwise he could not vote were voted to accept the sanctioned payment was potentially significantly less than the benefit to him as sole or main shareholder if a full account required payment of more.

(4)  I rejected the suggestion that Ricky might seriously have thought that Mak and Wong might ultimately not vote to accept the sanctioned payment, including because it was his own evidence that the Shares Transfer was at least part motivated by a desire to procure acceptance of the sanctioned payment and to end these proceedings.

(5)  As sole director of the Company, Ricky continued to owe fiduciary duties to it.

(6)  Ricky must have understood that there was at least a significant risk that he would be required to account for a figure rather in excess of the amount of the sanctioned payment.

(7)  In approving the Shares Transfer knowing that the shares would be voted in favour of accepting the sanctioned payment, Ricky failed to act in the best interest of the Company.

(8)  The fiduciary duty owed by Ricky to act in the best interests of the Company required him to exercise his discretion either to refuse to register the transfer or choose not to exercise a refusal.  He could not just do nothing.

(9)  In any event, as a matter of fact, the Board resolution signed by Ricky recorded that he had “approved” the Shares Transfer.  So it was not open to Ricky to suggest that any default position might have been reached on an assumption that he might have not exercised his discretion to refuse to register the transfer.

(10)  As he constituted the entire Board, Ricky remained in the position of conflict, which was precisely the capacity in which he had already been found to be in breach of his duties.

(11)  The rule about avoiding a conflict of interest is strict and inflexible, and the question of fairness or unfairness of the transaction is immaterial.

(12)  The motives of other persons acquiring shares cannot get around the fundamental problem that they could only have acquired shares if the purchase was made the subject of a transfer effective to permit them to vote.  Ricky acknowledged in evidence that no transfer would have been affected but for his approval of the transfer, or the exercise of his discretion not to refuse the registration.

C.      Leave to Appeal

C.1    Applicable Test

20.  There is, and there can be, no real dispute as to the applicable test on this application.  The relevant test for the grant or refusal of leave to appeal is to be found in section 14AA of the High Court Ordinance Cap 4.

21.  Leave to appeal should not be granted unless the Court is satisfied that either (1) the proposed appeal has a reasonable prospect of success, or (2) there is some other reason why in the interest of justice the appeal should be heard.

22.  As to the first limb, an appeal which has a reasonable prospect of success means an appeal with prospects which are more than fanciful, but which do not need to be shown to be probable.  Hence, even if it is thought that the first instance decision might eventually be found to be correct on the substantive appeal, that does not necessarily mean that there has not been shown a more than fanciful prospect of success.

23.  As to the second limb, though there can be no exhaustive list given, one consideration would be where the Court of Appeal might give leave on a question of general principle, decided for the first time, or a question of importance upon which further argument and a decision of the Court of Appeal would be to the public advantage.  It is sometimes said that questions of law which are not settled should be settled, by the Court of Appeal.

24.  I will apply that test to the points raised by the parties, but noting that many of the arguments deployed by Ricky, Mak and Wong and the Company in support of their applications for leave to appeal are similar and/or overlapping.  As a result, many of the arguments deployed by Jason in response are also similar and/or overlapping.

C.2    Ricky and D3-D31

25.  As to the jurisdiction point, Ricky’s submissions essentially rehearse the same arguments as were deployed at the hearing in April 2019, namely that (1) the cause of action belongs to the Company, not Jason nor any other shareholder, (2) the claim is brought by Jason merely as a derivative claim on behalf of the Company, (3) any sums to be recovered are recovered on behalf of and payable to the Company, not Jason, and (4) the Company is joined as a “defendant” to recover any sum recoverable or to enjoy the benefit of any judgment.  Hence, the submission is that it is the Company which is the “real plaintiff”, and the sanctioned payment is properly to be regarded as the “fruit” of the relevant Court of Appeal Judgment, to which only the Company is entitled.

26.  It is also again submitted for Ricky that Order 22 and Order 22A, read together, mandate that the sanctioned payment shall be made to the “party entitled”, here said to be the Company, in accordance with the unfettered discretion to order payment out of money in Court in order to achieve justice amongst the parties.  So, it is said, it is therefore wrong to read the words “plaintiff” or “defendant” in Order 22 literally or restrictively.

27.  On behalf of Jason, it is submitted that there is a failure to explain why the analysis in the Judgment as to why the Company is not entitled to issue the Sanctioned Payment Summons is wrong.  I am not sure that is entirely fair.  Ricky has – and, indeed, the other intended appellants have – set out various arguments which they say identify sufficient merits for the grant of leave to appeal.  Ricky does – and the other appellants do – seek to explain in what way the Court went wrong, though in practical terms that is done by offering their own arguments as being what is said to be right.

28.  Those arguments are essentially the same arguments as were rejected in the Judgment.  Simply rehearsing them does not of itself likely meet the necessary threshold for the grant of leave to appeal – though of course I accept that the fact that the arguments were rejected in the Judgment also does not of itself mean that there is no realistic prospects of success on the intended appeal.  But having looked at the matter afresh, I do not think there are reasonable prospects of success in upsetting my conclusion.

29.  Also, I do think there is a failure to explain why – on the fact (which was not in dispute) that the Company remained under wrongdoer control – the Company was entitled to accept or force acceptance of the sanctioned payment made by the wrongdoer.

30.  Further, I agree with the submission made for Jason that he has probably no right to recoup his costs out of the Company’s assets without the assistance of a court order, but – as was already pointed out in the Judgment – if Jason fails to beat the Sanctioned Payment, he will likely not be regarded as having acted in a reasonable and prudent manner, hence would likely not be entitled to any order for indemnity.  I do not think Resolution 2 changes the analysis.

31.  Further, the attempted continued reliance on the Prudential case simply repeats the arguments run and dismissed in the Judgment, where the present case plainly falls within the ‘first situation’ in Prudential, not least because the Company did not take any steps to intervene before Jason elected to proceed with the account of profits.  Of itself, that is no surprise, where the Company remained in the control of Ricky – and so where the Company also could not have taken the second situation in Prudential of releasing Ricky from his wrongdoing.

32.  Lastly, it is suggested for Ricky that no provision of Order 22 or Order 22A abrogates the inherent jurisdiction of the Court, so that the Company can accept the sanctioned payment in reliance on the inherent jurisdiction.  But, as I held in the Judgment, I agree with the submission made for Jason that the court cannot assume a jurisdiction outside the statutory scheme – here delineated by Order 22 – which does not allow a defendant to accept (or to force a plaintiff to accept) a sanctioned payment.  I do not think there are reasonable prospects of success to argue otherwise.

33.  As to the Shares Transfer, reference is again made to Article 7 of the Company’s Articles of Association.  It is submitted for Ricky that refusal of registration requires a valid active exercise of the right of refusal, in the absence of which, the transfer is registered by default.  So, Ricky’s subjective thoughts are irrelevant, and insofar as any purported “approval” was invalid, that meant there was simply neither valid approval no valid exercise of discretion to refuse to register – leading to registration of transfer going ahead.

34.  Further, it is submitted for Ricky that the breach of fiduciary duty concerned only the registration of the Shares Transfer, and could not provide any basis for impugning the Shares Transfer. Also, by virtue of Article 29 of the Company’s articles, Ricky was entitled to vote to pass the board resolution, even if he had an interest in the registration of the Shares Transfer, where the application of Article 29 was not affected by Article 27.  It is submitted that the Court failed to give consideration to whether Ricky’s “interest” in the registration was “material”, and if so whether the “nature” of interest was sufficiently declared in the resolution when it expressly stated Ricky being the transferor.

35.  Lastly, it is suggested that until registration is set aside, which has so far not happened, the transfer and registration remained valid permitting Mak and Wong full rights as shareholders to vote in any general meeting.

36.  Therefore, it can be seen that as to the Share Transfer point Ricky again seeks to rehearse arguments, based on Article 7, already dealt with in the Judgment.  With respect, again I do not think there are reasonable prospects on that point.

37.  Then, Ricky seeks for the first time to argue that Ricky’s approval was a purported exercise of power in excess of the powers conferred, hence invalid.  But, I agree with the submission made on behalf of Jason that such an argument is against Ricky’s own evidence, and in any event reinforces the conclusion that the Shares Transfer was invalid because no transfer would have been effective but for Ricky’s approval of the transfer.

38.  Further, in so far as the points for intended appeal raise the argument that Ricky did not place himself in a position of conflict, I think that argument is wholly without merit.  The position of conflict was actually obvious: on the one hand, there was a real risk that the Sanctioned Payment was or might be inadequate, so that it was in the Company’s interest to reject it; on the other hand, it was obviously in the interest of Ricky (who made the payment) to accept it so as to limit his liability.  The submission that Ricky was not in a position of conflict is also against the very finding of the Court of Appeal which gave rise to the need to take the account of profits.  Further, I agree with the submission made on behalf of Jason that there are no reasonable prospects of successfully arguing that the issue of conflict is dependent on whether the Shares Transfer was a sham.

39.  As to the argument that Ricky was allowed to act in conflict because of Article 29, it can be noted that this is sought to be deployed for the first time.  I do not think it reasonably arguable that Article 29 is not subject to Article 27.  Further, a declaration of interest must be made out loud, and anyway the Article could not absolve Ricky’s separate duties to exercise his power for proper purposes and in the best interests of the Company.  Further still, had the point been raised before, Ricky and others would likely have been cross-examined on it, and still no good explanation has been given for the failure to have raised it earlier (even assuming, which I do not, that the point is one of law alone).

40.  Lastly, in answer to the argument that the Shares Transfer was only voidable (but not voided before the EGM), the submission for Jason correctly makes reference to the finding in the Judgment that, but for Ricky’s approval of the Shares Transfer, no transfer would have been effected and Mak and Wong could not have voted on the shares, so that it follows to hold that the votes ought not to have been counted in the vote for Resolution 1.  Further, it is obviously unrealistic to place reliance upon the fact that the Company has not rescinded or voided the Shares Transfer, when the Company remains under the wrongdoer control.

41.  In any event, where the Court has an unfettered discretion under Order 22 rule 15, no reason is given as to why the Court would not be entitled to take into account those matters when exercising the discretion against allowing the Sanctioned Payment Summons.

C.3    Mak and Wong

42.  Mak and Wong essentially make the same points, and in particular that the Court’s construction is “too literal” and fails to pay regard to the intent behind the rules which is to facilitate settlement of the action by payment into court including sanctioned payment.

43.  It is also submitted that, even on a literal reading, the construction adopted is not correct, this being a further reference to the words “party entitled”.  Further, it is submitted that the unfettered discretion on the question of payment out of money paid into court should be exercised so as to achieve justice between the parties, and it is “impossible to understand” why the Company did not fall within the second situation in the Prudential case.

44.  Mak and Wong also submit that the payment into court is to be regarded as the “fruit of judgment”, because the sanctioned payment was made because of the prior Court of Appeal Judgment, but anyway, the payment into court need not be the fruit of judgment for a person to be entitled to have it paid out.

45.  Those points are submitted to have a reasonable prospect of success.  But I have already identified why I do not think that to be correct.

46.  As to the Shares Transfer point, Mak and Wong seek to adopt the grounds intended to be advanced by Ricky (and D3-D31) and the Company on the question of the alleged “invalidity” of Ricky’s approval of the transfer of his shares to Mak and Wong.  It is further submitted that the Judgment overlooked the fact that the transfers did not arise in relation to transactional arrangement with the Company, but were private deals between Ricky and Mak and Wong.  Further, as no one can say with clarity that more might be obtained on the account than in the sanctioned payment, and where the test on conflict is to be applied realistically, and required answering the question whether reasonable men looking at the facts would think there was a real possibility of conflict, a realistic assessment in this case means that there could not be a conflict.

47.  Insofar as those points duplicate Ricky’s argument, I have dealt with them above.  As to the other points, I do not think the Judgment did overlook the private nature of the Shares Transfer, but it was transfer of shares in the Company for the reasons found by me as a fact.  Nor do I think it an argument with reasonable prospects of success to say that my assessment that there was a conflict would be interfered with by the Court of Appeal.

C.4    The Company

48.  The Company took no active role in the hearing of the Sanctioned Payment Summons, and its attendance was excused.  Indeed, in fact by Order dated 26 February 2019 it was directed by Au Yeung J that the Company should not be permitted to participate in the Sanctioned Payment Summons, on the basis that there is nothing additional which only the Company could address which was not already bound to be addressed by the other parties, and it would be unjust for the Company to incur costs in an unnecessary attendance.

49.  Nevertheless, the Company wishes to appeal on two points of law.  As to its locus to seek leave to appeal, in summary it submits that: (1) it is trite that any party to an action may appeal; (2) the Company remains a party to the present proceedings; (3) the Sanctioned Payment Summons itself was taken out by the Company, and sought to deal with money paid into court in satisfaction of liability owed to the Company; (4) the Company should be entitled to take the benefit of the appellate judgment: (5) the Company cannot adopt a ‘wait and see’ attitude; (6) Au Yeung J cannot by her previous order have intended that the Company would not be entitled to appeal against any Order made, as is in part made clear by the materials relating to the argument she heard.

50.  As to the two points of law, the first relates to the jurisdiction question.  Essentially, the Company wishes to advance the same arguments as would be put forward by the other parties (subject, perhaps, to one potentially additional point about Jason not owing a fiduciary duty as a shareholder).

51.  The second proposed point on appeal relates to the validity of the Share Transfer.  The Company submits that, regardless of the correctness of the finding that Ricky failed to act in the best interests of the Company, the Court did not address the consequences of such a breach. In short, where there is nothing in the Court’s finding that the Company has taken steps to avoid the Share Transfer, it must follow from the absence of rescission that Mak and Wong’s title to vote the shares remained valid at all material times (including at the EGM).  Reliance is also placed on the suggestion that the written resolution dated 4 August 2017 was merely confirmatory of the default position under Article 7 of the Company’s Articles of Association.

52.  First, I have already addressed why these two intended points do not seem to me to ground the grant of leave to appeal.

53.  Secondly, the almost exact similarity of these two points with the points intended to be raised by other parties demonstrates the abuse in the Company’s seeking to step in to provide a supporting role in the intended appeal.  For the Company to be able to say that its intended points are questions of law which are not coterminous with the points raised by the other defendants does not seem to me fundamentally to change the position. Even if not exactly coterminous, the high degree of overlap and repetition is evident.  I also see no reason why those points cannot be taken by any other party.

54.  The suggestion that an intended appeal does not fall within the scope of Au Yeung’s order directing the Company not to participate in the Sanctioned Payment Summons, with respect, makes no sense. The Company seeks by its intended appeal precisely the same relief as that sought under the Sanctioned Payment Summons.  In any event, the Company was precluded from participation because it sought to advance the same arguments as would in any event be put before the Court by other parties.

55.  Therefore, it does not assist to answer the criticism that the Company might be seeking (like the other defendants) to raise new points, by saying that is only because the Company was not given the opportunity to raise the points before.  In fact, Au Yeung J was satisfied that the Company was not in a position to raise points different from those which would be raised by the other defendants.  If that was wrong, the correct step would have been to appeal from the order of Au Yeung J; it is not correct for the Company to have sat back and waited to see how the Sanctioned Payment Summons was dealt with before deciding it might want to try to jump back into the fray.

56.  Nor do I think there is force in the suggestion made for the Company that the questions of who needs to be heard by the Court and who needs to be a proper party to an appeal have been conflated.  Contrary to the Company’s submission, I do not think the Company needs to appeal so that it can be bound by, or to take the benefit of, any appellate judgment.  Indeed, it might be thought that suggestion contradicts the argument put forward by the Company on Order 22.  Further, the Company is clearly not in fact suggesting it merely wants to raise an appeal but then not make representations on the appeal.

57.  For that reason of abuse, I would also dismiss the Company’s application for leave to appeal.

58.  It is also a settled matter of principle that a company in a derivative action should ordinarily remain a nominal defendant and take no active part in the proceedings.  The real ‘fight’ is between the shareholders, and it is a fight about the Company not with the Company.  Again, just as with the issue of the Sanctioned Payment Summons, it must be Ricky which has caused the Company to issue its application for leave to appeal. Though I do not need to decide the point now, that is arguably a misfeasance on the part of a director.  But it also emphasises that any point which the Company might be instructed to raise can be raised by Ricky.

59.  I also agree with the submission made on behalf of Jason that to permit the Company to participate in challenging the Judgment, on the instructions of Ricky, would be tantamount to allowing Ricky to use the Company’s funds to advance his personal interest and to act in a position of conflict.

C.5    Second Limb

60.  Most of the above is to deal with the merits threshold for an intended appeal.  But, as stated, it is also suggested that leave should be granted on the alternative limb that there is some other reason why in the interest of justice the appeal should be heard.

61.  It is submitted on behalf of Mak and Wong that the proper construction of Order 22 and Order 22A in the context of a derivative action is a ‘novel’ point which should be argued and determined in the Court of Appeal.  In response, the submission made for Jason is that the reason why it might be said to be ‘novel’ is simply because it is unarguable and inconsequential.

62.  My own view is that the point is not one of such novelty as justifies the grant of leave by me for it to be taken to the Court of Appeal.

63.  Mak and Wong also say that, in the context of the Shares transfer point, the Court of Appeal should be asked to decide on the test for conflict of interest.  It is submitted that the question is whether the no conflict rule is absolute in the present circumstances.  But I do not think there is any real contest as to the common law test of conflict, which needs to be resolved by an appeal.

C.6    Conclusion on Leave to appeal

64.  In conclusion, I dismiss each of the applications for leave to appeal.

D.      Stay

65.  On that basis, the application for a stay pending appeal falls away.  But I shall go on to express my thoughts on the application, had I granted leave to appeal.

66.  Against the “less than ideal” chronology I identified at the beginning of this Ruling, it may seem a little odd to be considering the question of any stay of proceedings.  The fact is that there is no order for any stay of the proceedings.  Though Ricky’s application for leave to appeal sought an interim stay pending the determination of the application, I have not granted any such interim stay.

67.  Yet the Court file identifies that no party has taken any step at all in the proceedings since May 2019.  To put it at its lowest, it seems that (for whatever reason) no party has shown any great enthusiasm for moving things along – or asking the Court to move things along.

68.  On behalf of Jason, it is submitted that the Court should only grant a stay where there are very good reasons or in rare and compelling circumstances, and that any stay must not cause injustice to the plaintiff, where the defendants must show that continuing the proceedings would be unjust to them.  Complaint is made that staying the proceedings will cause further, significant delay to the account-taking exercise, and would in any event save little costs or time on those steps of the accounting process which have already been performed.  Indeed, the reminder is given that the detailed directions on the account-taking exercise were in an order made with the agreement of all parties after the Sanctioned Payment had been made.

69.  On the other side, it is argued that if the intended appeal has good prospects of success, and no stay is granted, substantial costs will be wasted.  Further, it is said that Jason’s submissions about the time taken for the action to come to the present stage are misconceived, and his own stance in the accounting exercise has added substantially to the time required.  Further, the only possible prejudice would be suffered by the Company (not Jason), in the delay in the Company’s receipt of the amount to be accounted for – where such prejudice can be compensated for with an award of interest (there being no evidence to suggest that Ricky and D3-D31 would not be good for the interest).  Alternatively, it is argued that any condition for interest to be payable during the stay should be in a relatively limited amount.

70.  Had this application been disposed of shortly after the filing of written submissions, I think I would not have granted any stay pending an appeal.  Rather, I would have thought that the remaining steps in the taking of the account ought to be able to be concluded with relative economy of time and costs.  I acknowledge that over the significant period since, it appears that no further steps have been taken on the account, notwithstanding the absence of any stay.  That might suggest that the balance of potential prejudices would tilt in favour of the grant of the stay. However, my overall view remains the same, that even the grant of leave to appeal or not in the particular circumstances of this case to lead to a stay pending that appeal.

E.      Costs

71.  The applications having failed, I see no reason why costs should not follow the event.  Therefore, I order the Jason’s costs to be payable jointly and severally by (a) Ricky and D3-D31 and (b) Mak and Wong.

72.  By way of a Statement of Costs for Summary Assessment, the plaintiff seeks costs (including Counsel’s fees) in the total of $171,730.  Next to the costs as would have been claimed on summary assessment had I found in favour of those Defendants – the frankly extraordinary sums exceeding $725,000 and $600,000 respectively – the claimed figure seems modest.  Nevertheless, taking the usual approach to a summary assessment – looking in a broad brush manner at the proportionality against the complexity of the issues considered both overall and as regards individual costs elements – I assess the costs in the sum of $150,000.  This was, after all, only an application for leave to appeal based largely on arguments already previously deployed.

73.  As to the Company’s costs, for reasons which are evident from above, I do not think they have been properly expended. Instructions to pursue the application and incur the costs must have been on Ricky’s direction and instructions.  I direct that the Company’s costs shall be payable on a full indemnity basis by Ricky, assessed in the claimed sum of $469,000.  Though that figure is very high, and assuming they have actually been paid, I do not think the Company should bear any part of it.

HCA 304/2011

[2020] HKCFI 1327

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 304 OF 2011

____________

____________

_____________

D E C I S I O N

_____________

Introduction

1.  This is an application by the plaintiff for an order that D1 shall bear the Company’s costs of and incidental to the summons issued by the plaintiff on 30 January 2019 (“the January Summons”).

2.  The application was taken out pursuant to paragraph 37 of the 2019 Decision made by this Court on 26 February 2019 (“the 2019 Decision”), which gave liberty to the plaintiff to apply for personal costs, wasted costs or other appropriate costs orders, if so advised, against persons behind D2, the Company, who instigated this opposition within 28 days after judgment in the Sanctioned Payment Summons is handed down.

Background

3.  In gist, D1 who was the sole director of the Company lost on liability in a derivative action and was ordered to pay damages to the Company up to 2010.  He made a sanctioned payment of $40 million in settlement of the plaintiff’s entire claim in the derivative action.

4.  At the plaintiff’s request, an EGM of the Company was convened on 8 August 2017 to consider the settlement.

5.  However, before the EGM, D1 purported to delegate his power and authority as sole director to Simon Fung.  D1 also purportedly transferred all but one of his shares in the Company to D32 and D33 (whom the plaintiff says were D1’s nominees).  At the EGM, Mr Fung engaged a lawyer to be present at the EGM, in which a resolution was passed to accept the sanctioned payment.

6.  The Sanctioned Payment Summons was taken out by the Company on the instructions of Simon Fung on 18 September 2017 to give effect to the resolution passed at the EGM and to seek leave for the Company to accept the sanctioned payment.

7.  On 8 February 2018, I directed that the Company’s participation and attendance at the Sanctioned Payment Summons be excused.  However, at the invitation of counsel for D1, D3-D31 and out of abundance of caution, on 13 November 2018, this court was minded to permit the Company to participate at the Sanctioned Payment Summons (“the Nov 2018 Direction”).

8.  A few months later, the plaintiff filed the January Summons requesting this court to vary the Nov 2018 Direction.  In the 2019 Decision, I invoked the inherent jurisdiction of this court and made an order that the Company should not be permitted to participate in the Sanctioned Payment Summons.

9.  In Poon Ka Man Jason v Cheng Wai Tao & ors[2019] HKCFI 1141, Coleman J ruled in favour of the plaintiff and dismissed the Sanctioned Payment Summons (“Coleman J’s Decision”).

10.  The plaintiff took out this application on 16 May 2019.  It is the plaintiff’s case that:

(1)     D1, as the sole director of the Company, was the person who instigated the Company’s opposition to the January Summons (Ground 1);

(2)     It was wrong for the Company to oppose the January Summons because, as a matter of general principle, the Company in a derivative action should remain a nominal defendant and should not take an active part in the proceedings: 2019 Decision, §24 (Ground 2);

(3)     It was also wrong because there was simply no need for the Company to take part in the Sanctioned Payment Summons, given that all the issues could have been advanced by D1 and/or D3-D33: 2019 Decision, §31 (Ground 3); and

(4)     If D2 were to bear its own costs, the plaintiff’s camp (ie Jason Poon and Daisy Poon who together hold 34% shares in the Company) will have to bear 1/3 of the costs: 2019 Decision §35.  (Ground 4).

Legal principles

11.  Under section 52A(1) of the High Court Ordinance, Cap 4, and Order 62, rule 3(2) of the Rules of the High Court, Cap 4A, costs are in the discretion of the Court and the Court has “full power to determine by whom and to what extent the costs are to be paid”.

12.  It is a misfeasance to expend a company’s money in a shareholder’s dispute.  Hence, a company in derivative action should remain a nominal defendant and should not take an active part in the proceedings: Re CG & L Investment Ltd [1993] 1 HKLR 107 at pp 111‑112, CA.

Ground 1

13.  Firstly, D1 has confirmed on affirmation that the Company opposed the January Summons with his authority and approval.  D1 admitted that as early as July 2017 he had given a blanket authorization to Simon Fung to do so by delegating to him “to do whatever he deemed fit to conduct the EGM and to implement its results, whatever the result it might be, and he had the full power to do so”.  As found by Coleman J, Simon Fung was in fact not the Company Secretary but its representative: Coleman J’s Decision at §12.

14.  D1 confirmed in §108 of his 5^th affirmation that he specifically approved instructing solicitors to act for the Company.  Simon Fung did instruct the Company’s solicitors to oppose the January Summons.

15.  Secondly, Mr Edward Chan SC (leading Mr Lee Tung-ming and Mr Chan Chun Sang), counsel for D1, submits that D1 has been fighting his life because of his terminal stage pancreatic cancer which caused him to delegate to Simon Fung to handle the Sanctioned Payment Summons in accordance with the advice of an independent team of lawyers.

16.  Whilst the Court notes his illness, it would not be difficult for D1 to instruct Simon Fung not to allow the Company to take an active role in the Sanctioned Payment Summons.  D1 was ultimately responsible for Simon Fung’s acts.

17.  Thirdly, D1 endorsed Simon Fung’s decision to oppose the January Summons.  Despite the 2019 Decision and Coleman J’s Decision, D1 still maintained that it was “right” for the Company to oppose the January Summons.  Therefore, it was irrelevant that D1 did not specifically instruct the Company to oppose the January Summons beforehand because D1 would have done so had he been asked.

18.  Fourthly, D1 contended that the Company’s opposition was caused by this Court’s “wishy-washy stance” and Simon Fung would be in dereliction of his duties if he did not oppose the January Summons.

19.  This Court has already recorded in §27 of the 2019 Decision that the Nov 2018 Direction was made at the invitation of D1, D3-D31 without mentioning the Court’s earlier decision on 13 April 2018 (at the hearing of which the Court had already excused the Company’s attendance).

20.  That invitation was made, ignoring the plaintiff’s statement in a letter dated 23 August 2018 that it was wrong as a matter of law for the Company to take an active part in the Sanctioned Payment Summons.

21.  Further, the fact that the Court permitted (not compelled) the Company to participate in the Sanctioned Payment Summons did not undermine the need for the Company to consider carefully whether it really needed to attend.

22.  In the light of these factors, it was not the status of D1 as director that should attract liability on costs.  It was his being the person who solely gave authority and approval to the Company’s opposition to the January Summons that should.

Ground 2

23.  The plaintiff relies on the principle in Re CG & L Investment.  Mr Edward Chan SC sought to distinguish that caseon the ground that it was a case of winding-up on the just and equitable ground and so the company was a nominal party.  However, they say that the Company here was the applicant who would benefit from a determination of the Sanctioned Payment Summons and so should have been allowed to participate in that Summons.  Mr Edward Chan SC also drew to my attention that it was not an incontrovertible rule that a company may never participate in what started off as a derivative action: Waddington Ltd v Chan Chun Hoo Thomas [2019] 1 HKLRD 271, Chow J.

24.  With respect, it is not the type of proceedings but whether the nature of the proceedings is, in substance, a shareholders’ dispute that determines the applicability of Re GCL Investment.  If it is a shareholders’ dispute, then Re GCL Investment applies. 

25.  Although Re GCL Investment was an incontrovertible rule, there was nothing to controvert its application in the present case.  It was clear from the start that it was a shareholders’ dispute in the form of a derivative action.  After judgment on liability was given, the dispute extended to whether or not to allow the Company to accept the sanctioned payment at the EGM, and then the Sanctioned Payment Summons.  I hold that the rule is applicable here.

Ground 3

26.  Even if the Company needed to take out the Sanctioned Payment Summons as an applicant, paragraphs 25, 26, and 32 of the 2019 Decision were endorsed in Coleman J’s Decision at §27, ie “there were no additional legal or factual points which only the Company could address which was not already bound to be addressed by the different shareholders’ camps and it would be unjust for the Company to incur costs in an unnecessary attendance.”.  Mr Edward Chan SC has avoided refuting these observations of the two Courts.

27.  It was also no coincidence that Coleman J, having dismissed the Sanctioned Payment Summons, also made a similar direction as paragraph 37 of the 2019 Decision permitting the plaintiff to take out an application for personal, wasted or other appropriate costs order.

28.  I agree with the plaintiff that there was simply no need for the Company to take part in the Sanctioned Payment Summons: 2019 Decision, §31.

Ground 4

29.  D1 claimed that the Company had incurred costs of $367,591, being costs of and incidental to the January Summons.  This was a substantial sum.  If the Company is to bear its own costs, the plaintiff’s camp (ie Jason Poon and Daisy Poon who together hold 34% shares in the Company) will have to bear 1/3 of such costs.  This will be grossly unjust because it means that the winner has to reimburse the wrong-doer.

Conclusion

30.  The grounds advanced by the plaintiff in support of this application are established.  I hold that the Company’s costs of and incidental to the January Summons should be borne by D1 personally, with certificate for counsel.

31.  On a nisi basis, I order D1 to personally bear the costs of this application as well, with certificate for counsel.  Costs are summarily assessed and allowed at $55,000.

32.  I thank counsel for their assistance.

HCA 304/2011

[2019] HKCFI 1141

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO. 304 OF 2011

________________

________________

______________________

J U D G M E N T

______________________

INTRODUCTION

1.  The Summons now before the Court (“Sanctioned Payment Summons”) was issued on 18 September 2017.  As it is now over 18 months later, and despite the volume of materials and some complexity of argument, I will give my decision at once.

2.  As the title identifies, this is a common law derivative action.  The claim was brought by the plaintiff (“Jason”) on behalf of himself and all other shareholders in the 2^nd defendant (“the Company”) except the 1^st defendant (“Ricky”), with respect to Ricky’s conduct in relation to the 3^rd to 31^st defendants (“D3-D31”).

3.  Jason is a 10% shareholder of the Company, with 1,000 shares.  Until 3 August 2017, Ricky was the registered owner of 38% of the shares in the Company, with 3,800 shares.  The circumstances in which he transferred away all but one of his shares frame the issues to be decided.  Ricky has at all material times been and remains the sole director of the Company.

4.  As at the commencement of the derivative action, the remaining 52% of the shareholding of the Company was held as follows: 10% by Kong Yiu Wai (“Kong”), 8% by Mak Kin Shing (“Mak”), 4% by Sato Akira (“Sato”), 4% by Teraguchi Tadayoshi (“Teraguchi”), 2% by Wong Yui To (“Wong”), and 24% by Daisy Poon (“Daisy”).  Daisy is Jason’s sister.

5.  The Company operated a sushi restaurant under the name “Itamae”.  D3 to D10 inclusive each operated a sushi restaurant or connected business under the same name “Itamae”.  D11 to D31 each operated a sushi restaurant or connected business under the name “Itacho”.

6.  After the trial of the action, in her Judgment dated 24 May 2013, Mimmie Chan J held that Ricky had breached his fiduciary duties as a director of the Company by operating the Itacho restaurants.  She awarded damages to the Company up to 2010, when the Company ceased to operate its sushi restaurant.  But she dismissed an identical claim with respect to the Itamae restaurants.

7.  Subsequently, by its Judgment dated 21 January 2015, the Court of Appeal allowed Jason’s appeal and held that Ricky’s operation of both the Itamae and Itacho restaurants constituted breaches of Ricky’s fiduciary duties to the Company.  The Court of Appeal also held that Jason was entitled to elect between an account of profits and damages.  That decision was upheld by the majority decision of the Court of Final Appeal in its Judgment dated 1 April 2016.  

8.  The Order of the Court of Appeal specifically entered judgment in favour of the Company, brought on its behalf by Jason, and that his entitlement to the election between an account and damages was on behalf of the Company.

9.  Jason has elected an account of profits, so directions have been given by Order dated 16 May 2017 for that purpose, including: the appointment of an assessor with expertise in forensic accounting to review and assess the items in dispute as identified in Jason’s Notice of Objections to the Schedules of income/expenses/net profit provided as an exhibit to Ricky’s 3^rd affirmation; the requirement for various disclosure; and the obtaining of expert evidence.  That process has been in train, albeit interrupted to an extent by subsequent events, including by an Order for a stay (on terms) until after disposal of the current application.  

10.  Those events flowed from the Notice of Sanctioned Payment filed on 25 April 2017 by Ricky and D3-D31, giving notice to Jason that they had paid HK$40 million into court in settlement of the whole of his claim.  As Ricky until shortly beforehand had been sole director of D3-D31 (though he had added his wife as co-director in the circumstances of his illness), the Notice of Sanctioned Payment must have been directed by him. Indeed, he acknowledges that it was.

11.  On 20 June 2017, Jason gave notice to the Board of Directors of the Company requesting an Extraordinary General Meeting (“EGM”) of the Company to be called for the purpose of considering and, if thought fit, passing certain resolutions being:

“1. To consider and accept/reject the Sanctioned Payment made by the 1^st and 3^rd to 31^st Defendants in HCA 304/2011 as set out in the Notice of Sanctioned Payment filed therein on 25 April 2017.

2. To authorise Poon Ka Man Jason (“Jason”) to indemnify himself out of the assets of the Company, or alternatively to make an application to the Court authorising him to indemnify himself out of the assets of the Company for:

(a) the shortfall of all the costs of and incurred by him in pursuing HCA 304/2011 and the subsequent appeals in CACV 135/2013, FAMV 22/2015 and FACV 17/2015 to the extent that the same cannot be recovered by Jason from the 1^st and 3^rd to 31^st Defendants; and

(b) all the costs of and incurred by Jason in pursuing the account of profits ordered by the Court of Appeal on 21 January 2015 and affirmed by the Court of Final Appeal on 1 April 2016.”

12.  An EGM was called for 8 August 2017, and the Notice dated 11 July 2017 calling it was signed “By the Order of the Board” by Mass Secretarial Services Ltd (“Mass”), as Company Secretary.  The authorised representative of Mass is Fung Chi Keung (“Fung”).  Fung is also the proprietor of Fung Chi Keung & Company, the auditor of the Company and D3-D31.

13.  However, the first proposed resolution (“Resolution 1”) was slightly reworded in the Notice so that it read:

“That to accept the Sanctioned Payment made by the 1^st and 3^rd to 31^st Defendants in HCA 304/2011 as set out in the Notice of Sanctioned Payment filed therein on 25 April 2017.”

14.  There was also a proposed third resolution (“Resolution 3”) as follows:

“That this Company shall indemnify Mr Poon Ka Man Jason the difference between (1) the amount of the cost and disbursements in respect of HCA 304 of 2011 and any appeal therefrom paid by the said Poon Ka Man Jason to be taxed on common fund basis and (2) the amount recovered by the said Poon Ka Man Jason from the 1^st and 3^rd to 31^st Defendants in respect of the aforesaid action: Provided that nothing herein shall require the Company to pay the said Poon Ka Man Jason any amount which the said Poon Ka Man Jason is ordered by the Court to pay to the 1^st and 3^rd to 31 (sic) Defendants or any of them in HCA 304 of 2011 or to the Company as a result of the said Poon Ka Man Jason’s failure to accept any sanctioned offer made by the 1^st and 3^rd to 31^st Defendants or as a result of the said Poon Ka Man Jason’s voting in Resolution #1 herein in such a way that in consequence of which this Company will have resolved not to accept the sanctioned offer made by the 1^st and 3^rd to 31^st Defendants.”

15.  It is said that Resolution 3 was proposed by Mak, but against the chronology of certain documents Jason asserts that it must have been directed by Ricky.  Mak says he proposed it on the advice of and with the assistance of Fung, and not at the direction of Ricky.

16.  Immediately before the EGM began, Fung (representing the Company’s company secretary, Mass) announced that on 3 August 2017 Ricky had transferred 3,799 of his 3,800 shares in the Company (“the Shares Transfer”) to Mak (1,999 shares) and Wong (1,800 shares), retaining only one share.

17.  Ricky would have been ineligible to have voted on Resolution 1 relating to whether or not to accept the sanctioned payment.  Had he not transferred his shares, a majority of the shareholders eligible to vote would have voted not to accept the sanctioned payment.  Indeed, Jason and Daisy (who think the sanctioned payment should be rejected) together owned more than half of the remaining shares.  However, Mak and Wong voted to accept the sanctioned payment, the result being that it is said on behalf of the Company that a majority of shareholders have validly voted to pass Resolution 1 and so to accept the sanctioned payment.

18.  Jason argues that the Court should draw the inference that the Shares Transfer from Ricky to Mak and Wong was carried out, and Ricky approved the transfer as a director, for the sole purpose of pretending that the shares had been properly transferred and so that Mak and Wong could exercise the voting rights as directed by Ricky, but which voting rights Ricky himself could not have exercised, or that they were sold at a discount in return for voting according to Ricky’s direction.

19.  The second resolution (“Resolution 2”) was defeated and Resolution 3 was passed, each by the same voting pattern.

20.  It should also be mentioned that, at the same time as the Shares Transfer took place, the 400 shares previously owned by Sato were transferred to Mak and Shigemitsu Katsuaki (“Shigemitsu”), 200 shares each.  Before the business of the Company began, Shigemitsu had operated a chain of Ajisen Ramen restaurants in Hong Kong with Ricky, Jason and Daisy.  Shigemitsu had previously been a shareholder of the Company, indeed was one of the original shareholders, but had transferred his shareholding to Ricky on 12 March 2007.

21.  The transfer of all shares to Mak, Wong and Shigemitsu were approved by Ricky as sole director of the Company.

22.  On the back of the resolutions passed at the EGM, the Sanctioned Payment Summons was issued on 18 September 2017, by solicitors purporting to act for the Company.  As Ricky was the sole director of the Company, the application made by that summons must have been directed by him.

23.  The Sanctioned Payment Summons seeks an order that:

“1. Leave be granted to the 2^nd Defendant to accept the sanctioned payment made by the 1^st, 3^rd to 31^st Defendants on 25 April 2017 in the sum of HK$40,000,000.00 in full and final settlement of the Plaintiff’s claim;

2. Alternatively, leave be granted to the Plaintiff to accept the sanctioned payment made by the 1^st, 3^rd to 31^st Defendants on 25 April 2017 in the sum of HK$40,000,000.00 in full and final settlement of the Plaintiff’s claim;

3. Leave be granted for the said sum of HK$40,000,000.00 be paid out to the 2^nd Defendant in full and final settlement of the Plaintiff’s claims”

24.  The application was led by the affirmation of Fung, also dated 18 September 2017.  When he says he is duly authorised by the Company to make the affirmation, that must mean authorised by Ricky.  Essentially, that affirmation relies on the fact that Resolution 1 was passed by a majority of the members’ votes at the EGM.  But as the time for accepting the sanctioned payment had lapsed, and there was no agreement on the liability for costs, the Company issued the Sanctioned Payment Summons.

25.  The application was immediately opposed by Jason, first through the affirmation of his solicitor Shiu Ka Yip Arthur (“Shiu”) dated 26 October 2017.  In summary, the opposition was premised on three main grounds being:

(1)   In approving the Shares Transfer, Ricky exercised his power qua director for an improper purpose and failed to act in the best interest of the Company.  Thus the Shares Transfer is invalid and not binding upon the Company.

(2)   Even if (which is not accepted) the Shares Transfer were valid, Mak and Wong could not exercise the voting rights on those shares by voting for Resolution 1, as it was not in the interests of the Company’s shareholders (other than Ricky) to accept the sanctioned payment, in light of the magnitude of the profits for which Ricky and his companies are liable to account to the Company.

(3)   Further, even if (which is not accepted) Resolution 1 were valid, the Company would not have any right to decide whether to accept the sanctioned payment.  Since Mak and Wong are Ricky’s nominees and voted in favour of Resolution 1 for the purpose of advancing the interest of Ricky, and given that Ricky remains the sole director of the Company, the Company is clearly under the wrongdoer’s control.  Accordingly, the decision whether to continue with this action is a matter for Jason (not the Company).

26.  This obviously created issues involving Mak and Wong.  On their application, and by Order dated 8 February 2018, Mak and Wong were joined respectively as D32 and D33 solely for the purpose of supporting the Sanctioned Payment Summons, and directions were given for the further exchange of affidavits/affirmation evidence.

27.  By Order dated 26 February 2019, and contrary to an earlier judicial indication otherwise, it was directed by Queenie Au Yeung J that the Company should not be permitted to participate in the Sanctioned Payment Summons.  From her ruling it can be seen that, essentially, she considered that there is nothing additional which only the Company could address which is not already bound to be addressed by the other parties, and it would be unjust for the Company to incur costs in an unnecessary attendance.

28.  At this hearing, Jason was represented by Linda Chan SC and Thomas Wong; Ricky and D3-D31 were represented by Edward Chan SC, Lee Tung-ming and Chan Chun-sang; and Mak and Wong were represented by CY Li SC and Lawrence Cheung.  Each team had provided thorough written opening submissions of 31, 97 and 80 pages respectively (not including schedules and authorities).  After conclusion of the evidence, each team has made concise oral closing submissions with the benefit of written submissions or speaking notes running to 11, 35 and 53 pages respectively.  I have had the opportunity to read and reflect on those written submissions and notes, although it is also fair to point out that they understandably rehearse some of the matters already canvassed in the opening submissions.

The Issues

29.  The parties have been unable to agree a single list of issues, but the area of disagreement between them is probably just as to the appropriate granularity or level of detail.  The battle lines drawn are clear and, in any event, I think I can usefully approach the resolution of this application by looking at the following matters: (1) a jurisdiction point; (2) whether Mak and Wong and others were Ricky’s nominees and/or close associates; (3) whether the Shares Transfer was a sham; (4) the adequacy or sufficiency of the sanctioned payment; (5) whether the nature of the private agreement between Ricky and Mac and Wong meant that Mac and Wong could not bind the other shareholders; (6) whether the votes of the majority who passed Resolution 1 were invalid through those voters lack of bona fides; and (7) whether Ricky’s “approval” of the Shares Transfer was valid.

Whether Jurisdiction to make Orders Sought

30.  The first point which arises for consideration is a matter of law or procedure.  It is probably not fact sensitive and so does not require consideration of the evidence filed.  Depending on the way in which the point is decided it is capable of being dispositive of the application.

31.  Before dealing with this point directly, I will touch on another point made by Mr Chan in his submissions.  He says that the Sanctioned Payment Summons is an application made by the Company, and so ought to be pursued by the Company.  However, since the Court has (on the application of Jason) made an order that the Company should not be permitted to participate in this hearing, Ricky and D3-D31 “will endeavour to assist the Court by offering their submissions”.  It seems to me that the implied criticism of the order denying the Company participation in this hearing is misplaced for two reasons.  First, as stated above, the main rationale for excluding the Company from participation was to prevent unnecessary expenditure of costs in relation to an argument the full ambit of which was already going to be canvassed by Ricky, D1-D31, and Mak and Wong (none of whom were offering to step aside).  Secondly, the criticism ignores the fact that Ricky is the sole director of the Company, is clearly the person giving instructions on behalf of the Company, and that he has been found to be in breach of fiduciary duties owed to the Company which has justified the commencement and pursuit of this derivative claim.

32.  As to the jurisdiction point, on behalf of Jason, Ms Chan submits that the current application is misconceived.  She first says that the order sought by §2 of the Sanctioned Payment Summons – seeking leave for the plaintiff to accept the sanctioned payment – makes no sense, given that Jason has no intention of accepting the sanctioned payment so that it is meaningless to allow him to do so.

33.  As to the order sought by §1 of the Sanctioned Payment Summons – seeking leave to be granted to the Company to accept the sanctioned payment – Ms Chan submits that the rules simply do not allow a defendant to accept a sanctioned payment, as Order 22 rule 15 refers only to acceptance of sanctioned payment by “a plaintiff”.

34.  Ms Chan further submits that it is plain under the Order 22 regime that it is up to the plaintiff to decide whether or not to accept a sanctioned payment, and there is no basis for a defendant to accept one, or to force the plaintiff to accept one.  She says §3 of the Sanctioned Payment Summons – that leave be granted for the payment out to the Company in full and final satisfaction of its claims – is in substance identical to the primary order sought and objectionable for the same reasons.

35.  Mr Chan and Mr Li submit otherwise, Mr Li mainly echoing or relying on Mr Chan’s submissions.  First they say (and this is not controversial) that Order 22 and Order 22A ought to be read together.  Mr Chan then identifies that the sanctioned payment was made pursuant to Order 22 rule 8(2), that Order 22 rule 15 provides for the time for acceptance, and that Order 22 rule 17 contains provision relating to payment out of the sum in Court on acceptance of sanctioned payment, but that it is subject to the provisions in Order 22A rule 2.

36.  To understand the argument and my conclusions on it, it would help to set out the provisions of those and some other rules, and the Forms in Appendix A to which they make reference, as follows:

(1)   Order 22 rule 8(1) provides: “A sanctioned payment may relate to the whole claim or to part of it or to an issue arising from it.”

(2)   Order 22 rule 8(2) provides: “A defendant who makes a sanctioned payment shall file with the Court a notice in Form No. 23 in Appendix A …”

(3)   Form No. 23 is a notice directed “To the plaintiff (‘s solicitor) and to the Director of Legal Aid (if applicable)” and the form is to be signed in a box above the words “Defendant (‘s solicitor)”.  At the bottom of the Form is a “Note: To the plaintiff [.]  If you wish to accept the payment made into court and the Court’s leave for acceptance is not required, you should complete Form No. 24, send it to the defendant and file a copy in the Registry of the High Court.”

(4)   This tallies with Order 22 rule 9, which provides that: “A defendant who makes a sanctioned payment shall – (a) serve the sanctioned payment notice – (i) on the plaintiff; and (ii) where the plaintiff is an aided person, on the Director of Legal Aid; and (b) file with the Court a certificate of service of the notice.”

(5)   Order 22 rule 12(2) provides that: “A sanctioned payment is made when a sanctioned payment notice is served on the offeree.”

(6)   Order 22 rule 15 relates to the time for acceptance of a defendant’s sanctioned offer or sanctioned payment and rule 15(2) provides that: “If … the plaintiff does not accept [the sanctioned offer or sanctioned payment] within the period specified … then the plaintiff may - (i) if the parties agree on the liability for costs, accept the offer or payment without the leave of the Court; and (ii) if the parties do not agree on the liability for costs, only accept the offer or payment with the leave of the Court.”

(7)   Order 22 rule 15(4) provides that: “A notice of acceptance of a sanctioned payment must be in Form No. 24 in Appendix A.”

(8)   Form No. 24 is to be addressed “To the defendant (‘s solicitor) and to the Director of Legal Aid (if applicable)” and is to be signed in the box above the words “Plaintiff (‘s solicitor)”.

(9)   Order 22 rule 17 provides that: “Subject to … Order 22A rule 2, where a sanctioned payment is accepted, the plaintiff may obtain payment out of the sum in court by making a request for payment in Form No. 25 in Appendix A.”

(10)   Form No. 25 is to be signed in the box under the words “Plaintiff or solicitor’s full name/Director of Legal Aid”.

(11)   Order 22A rule 1 provides that: “Subject to Order 22 rule 17, any money paid into court in an action (whether or not in accordance with Order 22) may not be paid out except in pursuance of an order of the Court which may be made at any time before, at or after the trial or hearing of the action.”

(12)   Order 22A rule 2(1) provides that: “Where the party entitled to money in court is a person in respect of whom a certificate is or has been in force entitling him to legal aid under the Legal Aid Ordinance (Cap. 91), payment shall be made only to the Director of Legal Aid without the need for any authority from the party.”

(13)   Order 22A rule 2(2) provides that: “Subject to paragraph (1), payment shall be made to the party entitled or to his solicitor.”

(14)   Order 22 rule 23 provides for the costs consequences where the plaintiff fails to do better than the sanctioned offer or sanctioned payment.  The consequences are to be suffered by “the plaintiff”.

37.  Mr Chan says that where Order 22 rule 17 says “the plaintiff may obtain payment out”, that is in permissive terms and it does not say that only the “plaintiff” could obtain the payment out.  Anyway, he says, the opening phrase “Subject to … Order 22A rule 2” shows that the permission for the “plaintiff” to obtain the payment out is made expressly subject to that rule, and that rule identifies the overriding guiding principle that the payment out “shall be made to the party entitled”, which is in mandatory language.  Hence, he says, whilst the “plaintiff” under Order 22 rule 17 “may” obtain payment out of a sanctioned payment, that is subject to the governing rule that payment “shall be made to the party entitled”, from which he argues that it would be wrong to assert that only the plaintiff in an action may accept the sanctioned payment.

38.  Thus, he says, the pertinent question is: who is the “party entitled”?  In a derivative action, Mr Chan says the plain answer is the Company, not Jason.  This is because of the settled principles that in the context of a common law derivative action the claim is brought by the plaintiff on behalf of the company, and the cause of action is really that of the company. This is in effect to assert, as Mr Chan and Mr Li do, that the Company is the “real plaintiff”.

39.  As to the first part of that argument, I disagree.  The reference in Order 22A rule 2(2) to the “party entitled” is in distinction to the reference which follows it being “or to his solicitor”, that also being specifically subject to the provision in rule 2(1) that a party entitled to money if legally aided shall receive that money by payment only via the Director of Legal Aid.

40.  I do not think the words “party entitled” change what is the fundamentally clear sense of the regime in Order 22, namely that a notice of sanctioned payment is given by a defendant (the offeror) to a plaintiff (the offeree), and that notice of acceptance is given, if at all, by that plaintiff to that defendant.  Order 22A applies to circumstances including but wider than just those relating to sanctioned payments.  However, read with Order 22, Order 22A rule 2(2) simply provides that payment is payable to the plaintiff or his solicitor, as the plaintiff is the “party entitled” under Order 22.

41.  I do not think the provision in Order 22A rule 1 assists the argument one way or another.  That rule simply provides for an unfettered discretion, which it might be said must be exercised judicially and so as to achieve justice between the parties in the individual circumstances of any particular case.  But I do not think that helps to answer the jurisdictional question which has been posed.

42.  I also do not think that the rationale underpinning sanctioned payments under Order 22, being to encourage parties to take positive settlement seriously and to avoid unproductive and expensive prolongation of litigation, can itself change the identity of the parties and the respective roles they play within that regime as provided for under the terms of the rules.

43.  There may be more force in the argument that the Company is the “real plaintiff” and that references in Order 22 to the “plaintiff” should be read as including reference to the “real plaintiff”.  It cannot be controversial that the cause of action in a common law derivative claim is a cause of action belonging to the company on whose behalf it is brought by the plaintiff, and that damages ultimately recovered are payable to the Company.  It is thus trite that, in a derivative action, the company is joined as a defendant in order to receive any damages that might be awarded.

44.  Mr Chan relies on a passage from the judgment of To J in Grasberg Capital Asia Limited v Huchun Joseph Yung (HCMP 727/2014, 6 May 2015) where at §14 he observed that:

“It is therefore well settled law by the highest authority of our land that a shareholder suing in a derivative action is suing on behalf of the company which is the real plaintiff in the action”.

45.  He also refers to a passage in the decision of Anderson Chow J in Waddington Limited v Chan Chun Hoo Thomas [2019] 1 HKLRD 271 at §15, which dealt with money sitting in court

“… which it cannot be disputed was paid into court for the benefit of the 5^th defendant [the subject company in a multiple derivative action]. It is also indisputable that the money in court belongs to the 5^th defendant, being the fruits of this multiple derivative action brought by the plaintiff on behalf of and for the benefit of the 5^th defendant. That being the position, the 5^th defendant is, prima facie, entitled to be paid the money now in court.”

46.  Mr Chan also reminds me that the Order made by the Court of Appeal specifically gave judgment in favour of the Company.  Hence, he says that the Company is the party entitled to enforce and obtain the fruit of the judgment.  In this context, Mr Chan says, the fruit of the judgment is the sanctioned payment, and he refers to a passage in Prudential Assurance Co Ltd v Newman Industries Ltd [1982] 1 Ch 204, at 220B-E which reads:

“In the result [the judge] found that Newman was entitled as against Mr Bartlett and Mr Laughton [the fraudster directors] to damages for conspiracy and breach of fiduciary duty, and he directed an enquiry as to damages subject to a stay in case of an appeal. Thereafter, Newman had three choices, subject to the operation of the stay. First, it might do nothing. In this case the plaintiffs would be entitled, if they so desired, to issue a summons to proceed with the enquiry. Secondly, Newman might decide for some proper reason, assuming that a proper reason might exist, and duly resolve at a proper board or general meeting, to proceed no further with the claim against Mr Bartlett and Mr Laughton. In this event, assuming that the resolution of the board or of the company in general meeting was in all respects proper, the plaintiffs would be unable to proceed with the enquiry because a valid release could be pleaded by Mr Bartlett and Mr Laughton. Thirdly, Newman might adopt the order which the plaintiffs had obtained on its behalf and pursue the enquiry accordingly. This would occasion no procedural problem nor even any special procedural step. Any party, plaintiff or defendant, can issue a summons to proceed upon an order. It would not be necessary for Newman to apply to be made a plaintiff, or to start a fresh action and rely upon the principle of res judicata, as was suggested at one time in the course of the argument. The order has been made. Newman is a party to the action. Newman can enforce the order. If this course were adopted, the rule in Foss v Harbottle is irrelevant. The rule has no room to operate with the company itself is proceeding with an action, or to enforce a judgment, pursuant to a valid board or company resolution.”

47.  Thus, Mr Chan submits, it is clear that after a judgment in a derivative action, the company could take over control of the proceedings and even to decide to take no further action on the judgment.  Certainly, he says, it would also be open to the company to apply to proceed with acceptance of the sanctioned payment to put an end to the proceedings.

48.  In response, Ms Chan makes the short submission that to regard the Company as the “plaintiff” of the action would be wrong.  Like all derivative actions, the Company is named and can only be a defendant. It cannot be the plaintiff, because it was and remains under the wrongdoer’s control.  Ms Chan submits that the case of Waddington can be distinguished, because it concerned an application for payment out of the fruits of a derivative action which had been finally determined, and had nothing to do with a sanctioned payment.  In that case, unlike the present case, the company was no longer under the wrongdoer’s control as the wrongdoer had already left the company.

49.  For myself, I do not think the monies paid into court under a sanctioned payment can really be equated to the fruits of a judgment.  I accept that one might view the monies in court as the product of bringing the claim, perhaps a “forced” response to the claim, but one very purpose of making a sanctioned payment is to seek to avoid the necessity for the parties to get to a judgment.

50.  In the present context, I also accept that one might view the monies in court as the product of the judgment already obtained that Ricky has breached his fiduciary duties owed to the Company, but I do not think that makes those monies the fruits of the relevant judgment in the context of an ongoing ordered account of profits.  If, ultimately, the account of profits were to lead to an order that a particular sum of money should be accounted for, I agree that it would be the Company to which that money should properly be paid.  I also agree that, if not paid, the Company might enforce the order that it should be paid.  But that does not seem to me to deal quite with the current question as to whether or not the Company is to be treated as the “plaintiff” for the purposes of the operation of the sanctioned payment regime under Order 22.

51.  I agree with Ms Chan that if the plaintiff refuses to settle and fails to obtain a judgment better than the sanctioned payment, he alone will face the cost sanctions under Order 22 rule 23.  I do not think the passage in Wallersteiner v Moir (No. 2) [1975] QB 373 at 392B-D, to which Mr Chan makes reference, says otherwise.  That passage provides:

“But what if the action fails? Assuming that the minority shareholder had reasonable grounds for bringing the action – that it was a reasonable and prudent course to take in the interests of the company – he should not himself be liable to pay the costs of the other side, but the company itself should be liable, because he was acting for it and not for himself. In addition, he should himself be indemnified by the company in respect of his own costs even if the action fails. It is a well-known maxim of the law that he who would take the benefit of a venture if it succeeds ought also to bear the burden if it fails. Qui sentit commodum sentire debet et onus. This indemnity should extend to his own costs taxed on common fund basis.”

52.  In the context of arguments about costs following a sanctioned payment, it seems to me that if the sanctioned payment is not bettered by the amount obtained on the account of profits, it is likely that that fact will show that continuing to pursue the account after the sanctioned payment was made was not the reasonable and prudent course to take in the interests of the Company.  Although without needing to bind herself at this stage, Ms Chan accepted this statement of general principle and its likely effect.

53.  I can also refer to Wallersteiner at 399B-D and F, where under the heading “Costs” it was stated:

“A plaintiff in a minority shareholder’s action is personally liable to his own solicitor for costs and is exposed to the risk of being ordered to pay the taxed costs of any defendant. His position in this respect is precisely the same as that of any other litigant, notwithstanding that the plaintiff in a minority shareholder’s action normally has no cause of action of his own but is suing on a cause of action vested in a defendant company. … The minority shareholder, although he may be fully justified in instituting the action, is under no duty to do so; and he has no right or power to recoup his costs out of the company’s assets without the assistance of an order of the court. The fruits of the judgement recovered in suction action along to the company, but the expenses of recovering them, except so far as they may be recovered from some other party, fall not upon the company but upon the plaintiff. If the action fails the plaintiff is at risk of being ordered to pay the defendant’s costs as well as his own.”

54.  As Ms Chan submits, Jason has been bearing the expenses of the litigation, there is no order permitting him to recoup any costs out of the Company’s assets, and no such order has been sought.  It also seems to me implicit in the making of the sanctioned payment that the intention of Ricky was to put Jason himself (and, contrary to Mr Chan’s submission, not the Company) at the risk of the cost and interest consequences that might flow if the sanctioned payment is not accepted but is not later bettered.

55.  As for the points made on the back of the Prudential case, of the 3 “choices” available to the Company, technically we are in the first situation as the Company has done nothing and Jason has been entitled to elect, has elected, and has indeed pursued the account of profits.  Mr Chan is, of course, asserting that we are in the second situation, so that the focus is to examine whether the Company has decided for some proper reason, assuming that a proper reason might exist, and has duly resolved at a proper general meeting, to accept the sanctioned payment and thus proceed no further with the claim to an account.

56.  But Ms Chan points out that no step has been taken for the Company to take over the action and to pursue the account of profits.  For example, no summons has been issued by the Company to proceed upon the order holding Ricky and D3-D31 to account.  Indeed, that fact might simply be the corollary of the fact that we are in the first Prudential “choice” situation.  So, she says, the position is simply that Jason remains the plaintiff and thus it is up to him to decide whether or not to accept the sanctioned payment, which decision he makes at his own risk as to costs.

57.  I agree with Ms Chan that if the Company cannot bring itself within the provisions of Order 22 (as read with Order 22A), and because there is a statutory scheme delineating the jurisdiction of the court, there can be no recourse to the “inherent jurisdiction” which is also referenced in the margin note on the Sanctioned Payment Summons.

58.  I explored with counsel during submissions whether this jurisdiction question might in any way be fact sensitive.  On reflection, I do not think that it is fact sensitive.  Either the Company can demonstrate that it is the party under and within the meaning of the provisions in Order 22 which can accept the sanctioned payment of which notice was given to Jason as plaintiff, or it cannot.

59.  My conclusion is that it cannot.  In the circumstances, this point would be determinative and lead to a dismissal of the application.

60.  But, in case I am wrong, and because significant resources have been deployed in respect of the other issues, I will of course go on to deal with them.

The Evidence

61.  The other arguments are not limited to matters of law or procedure, but are factually sensitive.

62.  Voluminous evidence has been filed by affidavit/affirmation.  Unfortunately, there is significant duplication even in the body of the affidavits/affirmations, as well as in the exhibits.  I have also had the benefit of oral evidence, and have seen and heard the respective witnesses.  I do not need to traverse all of the evidence for the purposes of this decision, though I have it all freshly in mind.  Insofar as I need to make factual findings, I shall do so taking some account of demeanour, but moreso by looking at what arises from the contemporaneous documents and what seem to me to be the inherent likelihoods and probabilities.

63.  As to the objections made on behalf of Jason to some of the evidential material, my ruling is as follows.  The objection to the admission of the 1^st affirmation of Mak, which was filed in support of Mak and Wong’s summons to intervene in the action seems to me to be moot, as Mak’s 2^nd affirmation essentially repeated the contents of the 1^st affirmation verbatim and largely exhibited the same materials.  As to the other affidavit material, an order has already been made that the affirmations (in the case of Teraguchi, his unsworn statement) are not admissible unless their makers are tendered for cross-examination. 

64.  Further, Ricky’s various affirmations are relevant to this application and its context, and he was tendered for cross-examination on them.  I think it is artificial to exclude any of them on the basis that they were not strictly filed for the purposes of this application, or that they were filed not for Ricky himself but as a witness for Mak and Wong.

65.  As to the documents produced by Mak and Wong to show more recent borrowing in October 2018, they merely update the position, and would likely have come out through the answers to questions put to them, so advance notice of that material has been preferable.

66.  Jason has not been called to give evidence or been cross-examined, but it does not seem to be in dispute that I can refer to his evidence and that filed for him.  Of course, the main points are made by reference to, cross-examination of, and comment and submission on, the Defendants’ evidence.

67.  In passing, I would point out that I have not lost sight of the fact that it might be said that Jason did not exactly come out of the earlier trial “smelling of roses”.  The trial of this derivative claim was heard together with another action brought by Jason and Daisy through their corporate vehicle Fine Elite Limited.  That claim was dismissed by Mimmie Chan J, and there was no appeal from the dismissal.  In her review of the relevant evidence, the judge described some of Jason’s evidence as “disingenuous” and “unbelievable”.

68.  Mak’s evidence in his affirmations is simply confirmed by Wong in his affirmations, at least as to the reasons why they decided to vote at the EGM to accept the sanctioned payment.  Hence, unless the context otherwise makes clear, when I refer to Mak’s evidence I am also referring to the evidence of Wong.

69.  The application was originally led by the evidence of Fung, but he has not given evidence orally, so I will limit my observations on his evidence.  Fung is perhaps in the awkward position as adviser on all accounting matters for the companies in Ricky’s group of companies.  From what has been described by the witnesses as to what Fung has told them from time to time, the impartiality of his views is perhaps open to question.  But it is clear, for example, that one relied on what he was told by Fung in deciding his own approach to the consideration of Resolution one, albeit with the benefit of his inside knowledge of the operation and management of

70.  I have, of course, also had the benefit of very recent oral evidence, where I have seen and heard the witnesses speak to the matters dealt with in their affidavits or affirmations, and subjected to cross-examination.

Nominees and/or close associates

71.  In Shiu’s affirmation, he asserts that (at least) Mak, Wong and Teraguchi are Ricky’s associates and nominees.  In Jason’s 2^nd affirmation, he possibly extends the list to include Shigemitsu and Kong.  Reliance is placed on the statement of claim and Jason’s witness statement filed in these proceedings as well as §118 of the CFA judgment, which states:

“Jason also said at para 76 of his witness statement that “most of the current shareholders of [the Company] are either nominees or business associates of Ricky Cheng”. Ricky generally confirmed this in his evidence at trial (see Part B Tab 11).”

72.  Reference is also made to the similarity between a letter dated 4 July 2017, by which Ricky on behalf of the Company asks Jason to withdraw Resolution 2, and the terms of Resolution 3 proposed by Mak.  It is argued that given that the 4 July 2017 letter was sent to Jason alone, it was impossible for Mak to propose a resolution that was identical to the view expressed by Ricky in that letter unless Ricky asked Mak to do so.  I agree that the chronology reflects some likely liaison, if not collusion, between Mak and Ricky, albeit that that does not necessarily make Mak the nominee of Ricky.

73.  Indeed, there is to my mind a degree of imprecision in the way the description of “nominee or close associate” has been used.  I suppose somebody might be a nominee and a close associate, but the phrases tend to be used to identify alternates.  If someone is the nominee of another, it is irrelevant as to whether they are closely associated in other respects.  But the fact that two persons might be closely associated does not of itself render one the nominee of the other.

74.  The point also seems to me to be linked to the suggestion that the Shares Transfer was a sham.  Whilst I shall deal with that topic separately, it might be thought that if the Shares Transfer was indeed a sham, any idea as to Mak and Wong being the nominee of Ricky is irrelevant.

75.  In his first affirmation, Mak says that “not very soon after the Company ceased business” Ricky told him that the Company had a bank balance of about HK$22 million against the liability of around HK$2 million.  In other words, there was substantial surplus assets which could be distributed to its shareholders.  In light of the litigation between Ricky and Jason, Ricky asked Mak and Wong to be patient and wait, and that he would keep them posted about developments.

76.  This is to be contrasted with what Ricky said in oral evidence.  It was put to him that he chose not to distribute the HK$20 million to the shareholders as a way of maintaining leverage against shareholders.  Ricky denied this suggestion, and said he would have distributed the HK$20 million to the shareholders if anyone had asked for it.  Ms Chan was able to take him to a part of the transcript of the earlier trial when he was asked if he had any plan to deal with that cash, and he said he had in fact wanted to distribute the dividends but was not sure who the shareholders were.  Whilst I acknowledge that there was some issue as to whether the true owner of the shares held by Jason and Daisy might be someone else (Andrew Lee), Ricky himself had refused to register the transfer of shares from Jason and Daisy to their corporate vehicle Fine Elite Limited.  Further, as sole director of the Company, Ricky was the person who could have recommended and effected the distribution of the retained cash to the shareholders, and he did not require any of the shareholders to requisition a general meeting to pass resolution for that purpose.  In sum, I do not consider Ricky’s evidence in this regard to be convincing.

77.  I might also note that there is no suggestion that when (on their cases) Ricky was approached by Mak and Wong in June 2017 complaining about the delay in the receipt of their share of assets that Ricky said that he was happy to distribute those in any event.  Although this was not explored in evidence, had the HK$20 million been distributed to the shareholders in or before 2017, it might be that they would been content to await the outcome of the account to see if they could take the benefit of any further recovery for the Company.  I specifically have in mind Mak’s own reference to the amount of the sanctioned payment being a “windfall”.

78.  However, in any event, Mak’s evidence was that he considered they were “caught in the crossfire”, so that they could not obtain their respective shares of the assets of the Company, even though there was no reason to maintain the Company.  Mak says that had Jason approached him to seek his consent to commence these proceedings on his behalf (as one of the shareholders, other than Ricky), he would not have given consent as the effect of the proceedings has been to preclude him from obtaining his share of assets which he should have received in 2010.  Against Ricky’s oral evidence, that is not correct.  But anyway, this is a slightly odd statement to have made with the benefit of the hindsight that by virtue of these proceedings, and the amount of the sanctioned payment which it has generated and which they want to accept, Mak and Wong stand to recover a significant multiple of the amount that they might have received by distribution in 2010 (even ignoring, for this purpose, the additional shares purchased in 2017).

79.  As to the amount of the sanctioned payment, Mak and Wong say that it was explained to them by Ricky.  Ricky told them that Jason had essentially challenged almost every expense of the relevant companies, even though the account provided by Ricky was based on the audited accounts from which he made certain deductions (“the 5 Deductions”) not recorded in those accounts.  Mak says that Ricky explained the 5 Deductions, and that he thought that at least some of them were legitimate expenses which should be deducted from the net profit of the group.  Mak says he and Wong were satisfied about the deduction for trademark or image rights usage fees, the cash bonus to staff (which they knew about because they were also recipients) and the theft loss (which they also claim to have known about).  Having made deductions for those expenses, and adding back an interest element, that explained the settlement sum of HK$40 million.

80.  Having decided that that was a reasonable figure, and that it would be added to the net HK$20 million already held by the Company, Mak and Wong determined that they would seek to persuade other shareholders to accept that offered sum.  However, Fung confirmed to them the “hard fact” (which Ricky had himself earlier told them) that Ricky could not vote on the resolution for accepting the sanctioned payment because of conflict of interest.  It is that which led to Mak and Wong approaching Ricky (and, they say, not the other way round) about the purchase of his shares.  This was important to them because of their anxiety that Jason and Daisy would use their 34% shareholding to veto the sanctioned payment, meaning that the Company would continue to be embroiled in litigation with no end in sight as to when the Company’s assets might be distributed.

81.  Mak and Wong were also concerned about the terms of Resolution 2 which might mean that Jason and Daisy would have “carte blanche” to continue these proceedings without fear on legal costs because the Company would effectively underwrite the costs they incurred.  The dragging on of the proceedings, and the risk that substantial assets would be eaten up by costs, was “totally unacceptable” to Mak and Wong.

82.  In approaching Ricky in early July 2017, Mak and Wong expressly told him that the purpose behind the proposal to buy his shares was to obtain sufficient shares in the Company to pass the resolution approving the sanctioned payment.  They also contacted the other minority shareholders to seek to secure their support.

83.  Mak contacted Shigemitsu to try to contact Sato and Teraguchi.  Shigemitsu told him that Sato was in deep financial trouble and wanted to liquidate his shareholding, which is why Shigemistu and Mak later bought it.  Teraguchi would support accepting the sanctioned payment.

84.  The price agreed with Ricky came about as follows.  Adding the HK$20 million held by the Company to the HK$40 million of the sanctioned payment, that would mean the Company would have a net asset value of HK$60 million, giving a price per share of HK$6,000.  On the basis that the shares were being purchased to vote for acceptance of the sanctioned payment, Mak asked Ricky to give them a 25% discount to HK$4,500.  On that basis, if the sanctioned payment were approved and assets distributed, Mak and Wong stood to gain a total of HK$5.7 million from the purchase within a short time.

85.  Mak says that although the deal was “straightforward and lucrative”, neither he nor Wong had the surplus money to buy those shares.  Hence they came up with the idea of asking for payment by instalments over a period of time, and needed to look for a source of short term finance.

86.  Eventually in late July 2017, Ricky informed Mak that he had final stage pancreatic cancer, and (as well as other matters) was determined to sell his shares in the Company, as he hoped the litigation would end which had been taking a toll on his health.  Hence, Ricky agreed the price of HK$4,500 and proposed payment by 3 instalments, 40% within 2 months, 30% a year thereafter, and the last 30% a further year after that.

87.  The Shares Transfer and other relevant documents were all signed on 3August 2017, when Mak and Wong and Kong visited Ricky at the hospital.  The relevant documentation had all been prepared by Fung.  Mak and Wong say they signed 2 promissory notes in Chinese, stating that they owed Ricky the respective total purchase prices, against the instalment proposal.  They also signed the instrument of transfer and bought and sold notes for the Shares Transfer.  Mak also signed documents relating to the purchase of 200 shares from Sato, who had already signed the documents (as had Shigemitsu for his part).  The documents all show that they were duly stamped on 4 August 2017.

88.  As to actual payment for the shares, there are 2 loan agreements dated 30 September 2017, under which Mak and Wong borrowed term loans in the amounts of HK$5 million and HK$4.5 million respectively.  Repayment was due after 12 months, with interest of 10% to be paid at the same time.  All of Mak’s and Wong’s shares in the Company (that is, the original shareholding and those recently transferred to them) were pledged as security by way of share mortgages also dated 30 September 2017 in favour of the lender.  Cheque and payment advices were produced to show the first instalment payments made by Mak and Wong to Ricky, but although the cheques are dated 3 October 2017, which was the day the loans were drawn down by Mak and Wong, they were not in fact paid into Ricky’s account until 9 October 2017.

89.  Ms Chan says these matters identify that the loans and the payments made with the benefit of the loans, as late as 9 October 2017, were simply the response to the allegation made in a letter dated 9 August 2017 from Jason’s solicitors, which alleged that the Shares Transfer was a sham and which demanded all documents surrounding the transfer, including the bought and sold notes and instruments of transfer.  As it happens, the only documents ultimately provided in correspondence were only provided on 3 October 2017, and were limited to the bought and sold notes and instruments of transfer. No loan documentation was provided; no promissory note was provided; no proof of payment to Ricky was provided.  These only came with Mak’s affirmation to intervene.

90.  As to the 2^nd and 3^rd instalments due on 3 October 2018 and 3 October 2019, it was Mak’s and Wong’s “plan and optimistic belief” that with the acceptance of the sanctioned payment, the litigation would end, the assets of the Company would be distributed, and they would be more than sufficient to repay the loans together with the interest, as well as to pay off the remaining instalments.

91.  As to the 200 shares transferred from Sato to Mak, the purchase price appears to have been paid by Shigemitsu, but Mak says he has paid HK$90,000 (10% of the price) to Shigemitsu, who is happy for the remaining HK$810,000 to be paid at any future convenient time for Mak, without interest.  Shigemitsu confirmed this in his evidence.

92.  With the acquisition of Ricky’s shares and the proxies given to Mak by Kong and Shigemitsu, he and Wong had already secured a total voting power of 61.99% of the total shareholding of the Company, thus securing the passing of Resolutions 1 and 3 and rejecting Resolution 2 at the EGM. 

93.  Mak and Wong say that they were happy to take no part in the previous elements of these proceedings, as whatever the outcome of the disputes their interest in the Company would not be affected and indeed “they might get a windfall (suchlike what happened now as a result of the account exercise)” if Jason won his claims.  But now, they see no reason why the Company should not accept the sanctioned payment, they are entitled to exercise their shareholders rights in what they perceive to be their best interest, the objections taken by Jason to the account rendered by Ricky are “groundless” and it is “entirely speculative that the Company would get more than HK$40 million after the account exercise is completed”.  Further they say that even if the Company could get more, the trade-off of time and costs would render the exercise worthless.

94.  From his point of view Ricky has explained the Shares Transfer as follows.  He has done so as a witness on his own behalf, as well as being a witness for Mak and Wong.  First, he emphasises that though Mak and Wong have been his long-time acquaintances and that they have worked closely together in business, they were not and are not his nominees.  He says the original shareholding allotted to Mak and Wong in the Company was held by them in their own right as the actual and true owner of those shares.  I accept that is correct.  The evidence is that they were allotted their relatively small shareholdings in the Company because of what they, like some others allotted shares, brought to or were expected to bring to the Company.

95.  So I accept that the 8% and 2% of allotments of shares in the Company originally made to Mak and Wong were allotted to them for them to hold and own beneficially, not on trust for Ricky or as his nominees.  At least to that extent they were, therefore, genuine minor shareholders of the Company.  The fact that they were close associates of Ricky, and owed him some loyalty, might make it likely that they would tend to support Ricky including in voting their shares in accordance with Ricky’s own voting or his wishes.  But I do not think there is anything necessarily nefarious in that, when they were long term associates and trusted working colleagues.

96.  Ms Chan has submitted that by virtue of the previous court decisions, not least that part of the CFA’s judgment which I have made reference, and estoppel arises to prevent the argument to suggest that at least Mac and Wong are not nominees of Ricky.  I reject that submission. First, it seems to me that the only implicit finding which was necessary to establish Jason’s locus to bring the derivative claim on behalf of the Company was that Ricky controlled the board.  In reality, that could not have been an issue, as he has always been the sole director.  Secondly, Mak and Wong were not parties to the earlier episodes in these proceedings, and the CFA itself recognised that there was no real need for them to have joined in, as they could sit back and await the result and any benefit which might flow from it.  It might also be noted that that expressed recognition is itself contrary to an assertion that the CFA found that Mac and Wong were merely nominees.

97.  Whilst there can be no doubt that Ricky was and is in “control” of the Company as its sole director, I do not think that it can properly be said that the “control” extends to the shareholders in general meeting, simply because of the relationships between Ricky and other shareholders.

98.  I have also had in mind that the argument advanced on behalf of Jason that there was a private bargain made between Ricky and Mak and Wong (which is said to vitiate their ability to vote the shares transferred) presupposes that the bargain was genuine, which is at least inconsistent with the suggestion that they were nominees, and probably inconsistent with the argument that the whole bargain was a sham.

99.  My conclusion is that none of the other shareholders, including Mak and Wong, are to be regarded as nominees of Ricky.

The reason for the Shares Transfer and whether it was a sham

100.  The principles for determining what in law is a sham are settled.  The classic definition is to be found in Snook v London and West Riding Investments Ltd [1967] 2 QB 786, as frequently restated in Hong Kong, for example in Alexina Investments Ltd v Keysberg Ltd (HCA 6359/1992, 8 January 2004, Waung J).  The essential ingredients to establish that a document is a sham are (1) the common intention of (2) both parties (3) that the document was not to create legal rights (4) but to give to 3^rd parties the appearance of the document creating legal rights between them (5) different from the actual legal rights between the parties.

101.  I bear in mind that the court should have proper regard to the fact that there is a strong presumption that parties intend to be bound by the provisions of the agreements into which they enter, and intend those agreements to take effect.  I also accept Mr Li’s submission that the burden of proof of the sham is carried by Jason, and that cogent evidence would be needed to establish a sham.

102.  I have of course dealt with some of the relevant material facts for this issue in dealing with the above issue.  I do not propose to repeat those matters, but have them in mind.

103.  As to the Shares Transfer, Jason (first through Shiu) has asserted that there was no apparent reason, and none had been provided (which was correct at least at the time the Shiu affirmation was made), for Ricky to dispose of all but one of his shares to his nominees/associates just days before the EGM, and that the irresistible inference is that the Shares Transfer was carried out, and the approval of the transfer was made by Ricky as director, for the sole purpose of pretending that the shares had been transferred to Mak and Wong so that they could exercise the voting rights which otherwise Ricky could not have exercised, to accept the sanctioned payment.

104.  It is specifically asserted that neither Mak nor Wong could have afforded to purchase the shares at the agreed price of HK$4,500 per share, totalling for Mak and Wong respectively HK$8,995,500 and HK$8,100,000.  This is not really in issue, even on Mak’s and Wong’s own evidence (see below).

105.  Complaint is also made by Jason as to the terms of the Fact Sheet purportedly sent by the Company to its shareholders on 1 August 2017, which was “heavily slanted” in favour of accepting the sanctioned payment.  The Fact Sheet only mentioned the account rendered by Ricky showed a net loss of HK$10 million during the period of account, but failed to mention that according to D3-D31’s own audited accounts, they had generated net profits of over HK$167 million.  Further, it is alleged that Ricky caused the fact sheet to be sent to Jason by registered post, even though the Company have been corresponding with Jason’s solicitors on the EGM for some time.  This was to ensure that Jason and Daisy did not see the Fact Sheet before the EGM, as indeed they received it only on the day following the EGM.

106.  It is also fair to note that Jason and Daisy might have learned of the content of the Fact Sheet had they chosen to attend the EGM in person, but they did not, sending their solicitors as their proxy.  Also, in the 4 July 2017 letter sent by Fung, they had been invited to provide information/material to the Company for it to circulate to the shareholders for their consideration before or at the EGM.  Jason was also told he might circulate materials to the shareholders at his own cost.  Jason and Daisy did not take up either offer or opportunity, when that might have re-balanced any alleged unfairness from the content of the Fact Sheet.

107.  Both Mak and Wong came across in evidence as well able to exercise their own will on the basis of opinions formed by themselves. (Incidentally, the same is correct for Shigemitsu and Teraguchi.)

108.  As noted, Ricky also says that the initiative in making an offer to purchase Ricky’s shares in July 2017 came from Mak and Wong. They had become fed up with the protracted litigation between Jason and Daisy and Ricky, which had prevented the distribution of some HK$20 million to the shareholders since the cessation of business in 2010.  They also expressed to Ricky a concern that Jason and Daisy would prevent accepting the sanctioned payment and would unreasonably continue to litigate with Ricky on the account of profits exercise at the expense of the Company by procuring an indemnity from the Company for Jason’s costs.

109.  Originally, Ricky had not been tempted to sell.  But that changed after he discovered in late July 2017 that he had a life-threatening illness of final stage pancreatic cancer.  Ricky thought that since he had known Mak and Wong for a long time and their services to his business had been good, their offer to purchase shares added 25% discount on the price might allow them to make a profit which could be his final gift to them as a token of appreciation for the long time services to his business.  Ricky says he also thought that if Mak and Wong could have the proceedings brought to an end, that would not be a bad thing for him, because even if the illness were to end with his death, the proceedings would not left behind by his wife.  Having agreed the price, he proposed the payment by instalments which was subsequently agreed.

110.  The relevant documents were all signed on 3 August 2017 in the hospital.  Amongst the documents were Ricky’s approval as director of the Shares Transfer as well as the transfer of shares from Sato to Shigemitsu and Mak.

111.  Ricky emphasises that the Shares Transfer was a genuine sale and purchase transaction with proper consideration.  He said in oral evidence that if it were not genuine he could have simply transferred the shares to either one of Mak and Wong and not both.

112.  In his responsive affirmation, Jason reiterates that the minority shareholders, including Mak and Wong were and are Ricky’s nominees/associates.  Amongst points previously raised, reliance is placed on the fact that they seem to have knowledge of the financial position of the Company in 2010, when Jason did not, not least because Ricky had refused to disclose the accounts of the Company at that time (albeit that he undertook to preserve the accounting and financial statements and supporting documents of the Companies and other companies operating the restaurants).  Thus, Jason says the allegation that the litigation had prevented the distribution of the Company’s assets to his shareholders has no merit.  Indeed, it must have been Ricky’s own decision as sole director not to make distribution or interim dividends of any kind.

113.  Jason also relies on the point that Ricky’s explanation for the calculation of the amount of the sanctioned payment – apparently given ex post facto, as it was never offered prior to or at the EGM – is said to have been told to and understood by the other shareholders before the EGM, which would confirm that they are nominees or close associates of Ricky.

114.  Jason also says that there is a conflict between the interests of Mak and Wong with those of the Company and other shareholders (particularly himself and Daisy) in part because Mak and Wong were senior management staff assisting Ricky with the business whose profits are to be accounted for, and that they would be remunerated according to the operating results of those companies, and because the private biking for the Shares Transfer was at a substantial discount with unusually attractive payment terms.

115.  Criticisms are also made by Jason as to the conduct of Ricky in the account taking exercise, which Jason says Ricky has attempted to delay and derail.  I do not think I can or need to decide this aspect.

116.  Ms Chan emphasises that the ongoing litigation between Jason and Ricky and his companies does not stop Ricky, as sole director, from paying dividends and thus distributing the HK$20 million cash at bank to the shareholders.  She submits that Ricky’s claim that no distribution could be made because the Company may need to indemnify Jason’s costs in this action is but a belated excuse which ought not to be accepted when no proposal was ever made to distribute any part of the funds.

117.  Ultimately, where the purchase price is specifically calculated with the intention to achieve a quick profit of $5.7 million – a sum vastly in excess of the money which either Mak or Wong could ever hope to earn through their ordinary employment in Ricky’s group of restaurants – and where Ricky himself has in effect described that some as a gift to them, it is not difficult to find that that money is precisely the incentive to vote in accordance with Ricky’s wishes.

118.  The payment terms are also instructive.  According to the audited accounts alone (that is, ignoring for the moment the 5 Deductions), the Company ought to receive funds to add to the funds already held so that it might have over HK$145 million (ignoring any interest which might attract).  If it did, each share would be worth over HK$14,500.  The purchase price of HK$4,500 was obviously a significant discount to that figure. But even on Mak and Wong’s own case, it was a discount of 25% offered for the “particular purpose” of approving the sanctioned payment.

119.  The instalment terms also permitted the Shares Transfer without any payment being made at all, and none being required until some 2 months later.  But that was only 40% and the remaining 60% would be paid into equal tranches a further one year and 2 years after that, with no interest payable.

120.  The price which Mak and Wong agreed to pay was apparently in excess of what they could have afforded, in circumstances where at the time they had not actually raised finance even for the delayed first instalment, and did not do so until very shortly before the delayed first instalment due date.  Mak did say in evidence that he might have had other funds which he could have deployed, but did not want to use them because he envisaged only a short-term borrowing and the terms of the loan including the 10% rate of annual interest were acceptable.  But he also accepted that he had just taken out a mortgage on a property, apparently to purchase another property, albeit he says that he knew he might borrow to buy the shares against the pledge of the shares bought.  Anyway, the fact is that no monies changed hands at the time of the Shares Transfer, necessitating the promissory note.

121.  I also accept that the transaction appears to have been carried out in haste, as indeed it needed to have been if Ricky’s shares were to have been voted by Mak and Wong at the EGM.  Clearly the timing was intended, and indeed it is openly admitted that it was intended, for Mak and Wong to be able to vote the shares at the EGM just days later to approve the resolution accepting the sanctioned payment.  There is no sale and purchase agreement to record its terms (and the payment by instalments) other than the one-page note signed by Mak and Wong but not Ricky.  I think there must be at least significant doubt that that document even existed at the date of the Shares Transfer, as it is difficult to understand why it would not have been signed by Ricky at the time that the other transfer documents were signed by the parties at the hospital so as to signify his agreement to its terms. 

122.  Ricky said in his oral evidence that perhaps if Jason had come to him, he might have sold the shares to Jason too.  I suppose this somewhat flippant addition to the written evidence may be correct, but the price would likely not have been the same as the sale price to Mak and Wong, and Ricky would unlikely have thought that selling his shares to Jason would have brought an end to Jason’s seeking for Ricky to make a full account of profits to the Company.

123.  Ricky agreed that a fair summary of his evidence was that whilst Mak and Wong had told him that they wanted to purchase his shares so as to vote at the EGM in favour of accepting the sanctioned payment, that he hoped that they would vote in that way, but that he was not sure that after purchasing the shares they would ultimately in fact vote that way.  I do not find this evidence convincing, when the whole purpose of buying the shares was explained as avoiding the problem caused by Ricky’s being unable to vote them, and where Mak and Wong had to promise to pay millions of dollars that they did not have and had not yet arranged to borrow.

124.  As it happens, it is Mak’s and Wong’s evidence that they thought they would only need to borrow enough to pay the first instalment of the purchase price, as they would be able to bring about acceptance of the sanctioned payment and distribution of the Company’s assets before they needed to repay the loan taken for that purpose or the due dates of the 2^nd and 3^rd instalments.  Though expressed as an optimistic hope, the level of confidence demonstrated Mak’s and Wong’s likely belief that they would bring about their intention.

125.  Ms Chan also relies on the extension which Ricky gave on 3 August 2017 (the date of the Shares Transfer) for the time within which the sanctioned payment might be accepted.  She says, and I agree, that this is some evidence of some confidence on the part of Ricky that the majority of shareholders would vote in favour of accepting the sanctioned payment.

126.  Indeed, there is another connection, in that LK Finance is apparently a company owned and controlled by a person who is a friend of Ricky, and who co-invested with Ricky in property in July 2012, which was later sold in September 2018.  That property was apparently used by one of the Itacho restaurants.  But Ricky denied in his oral evidence that he had asked his friend to loan the money to Mak and Wong, either at the time of the original loan in late September 2017 or the subsequent renewal and extension of the loan in October 2018.  Mr Wong, who is the one of the two who approached LK Finance, also denied that Ricky had directed him to that company; Mr Wong said that he had been recommended to it by a friend of his called Chan.

127.  I think the coincidence is, however, too stark to ignore.  I doubt it was anticipated that Jason and/or his legal team would make such enquiries as would identify the close relationship between Ricky and the lender to Mak and Wong on what objectively look like favourable terms (no ongoing interest payments required, no other collateral than the pledge of the shares themselves, in effect a rollover of the substantial principle of the first loan at the time of extending the loan to permit the 2^nd instalment payment on similar terms).  I also take account of the fact that there is little evidence to show how, and on what materials, LK Finance might have commercially sensibly agreed to lend such large sums of money against only the pledge of shares in a private company, the value of which would be difficult to establish.  Wong did say in evidence that he gave Fung’s telephone number to LK Finance, but he does not know whether or not anyone spoke to Fung.  I note that the security pledged did not change even when the amounts loaned against that security was increased by around 55%.

128.  Further, though the loans are secured by formal share mortgage documents to which blank instruments of transfer and bought/sold notes signed by Mak and Wong respectively are attached, the value of that security must be affected by the discretionary power given to the Board of the Company to refuse to register any transfer of shares if it thinks fit.  This would be an odd risk to run, unless the connection with Ricky as the current sole member of the Board was such as to give sufficient confidence to the lender.

129.  In oral evidence, Ricky described the Company, which had been the first Itamae restaurant, as his “baby”.  He said this explained his reluctance ever to sell his shares.  But he did so in the circumstances of his serious illness and a strong desire to bring these proceedings to a close.  I am prepared to accept this evidence, but I do not think it greatly assists Ricky’s or Mak’s and Wong’s position in the context of this application. Indeed, I think it only emphasises that Ricky not only wanted, but intended, and thought he had achieved bringing about the end of the proceedings.

130.  Ricky also said in oral evidence that part of his motivation to sell his shares to Mak and Wong was because he wanted the other minority shareholders to get what they deserved.  First, I would note that this presupposes confidence that the resolution to accept the sanctioned payment would be passed.  Secondly, this is a statement somewhat difficult to reconcile with the fact that Ricky was forced to account for the profit, and that the purpose of the sanctioned payment was to avoid the need for the accounting exercise to be completed.

131.  In this context, Ricky also said that Teraguchi had approached him in around 2016 asking why he could not receive his share of the assets retained by the Company.  In response, Ricky told him that was because the Company was embroiled in litigation.  But that evidence is inconsistent with other parts of Ricky’s evidence in which he stated that had he been approached by any shareholder asking the distribution he would have given.  I was not impressed by the attempt to get around this inconsistency by saying that no EGM had been requisitioned.  Again, I can point to the fact that, as sole director, Ricky could quite readily have arranged a dividend payment, if necessary with the assistance of Fung to deal with the technical company secretarial matters.

132.  In cross-examination of Ricky, Ms Chan suggested that the two matters dealt with in the above 2 paragraphs do not appear anywhere in Ricky’s various affirmations filed for the purposes of this application.  Therefore, she suggested, the evidence was made up.  In re-examination, Mr Chan drew Ricky’s and my attention to the fact that in his 6^th affirmation at §25 Ricky had made reference to the interests of the Company having been taken into account by him.  However, it seems to me that that paragraph was focused on an explanation as to why Ricky says it was appropriate for him not to have refused to register the transfer of the shares transferred under the Shares Transfer; I do not think that the paragraph fairly read extends to an explanation as to why Ricky says he decided to sell those shares.  Indeed, it might be odd had he actually said so, for that would have been a clear statement that he was intending by the sale to effect something which he knew he could not personally effect unless he sold the shares.

133.  Both Mak and Wong simply agreed with Ricky as to the reasonableness of the 5 Deductions, without asking any questions about it or asking to see any documents.  But, to be fair to them, both had some relevant knowledge from their own management activities of D3-D31 to be able to form some view as to the reasonableness of those deductions.

134.  I have considered whether the sale and purchase of Sato’s shares is in any way instructive.  It might be asked why Mak would bother to purchase just a further 2% of the shares in the Company (or 4% if he was confident, as it must have been, that Shigemitsu would vote in the same way) if he and Wong could purchase all but one share of Ricky’s 38%.  That the purchase was made of Sato’s shares might indicate the contemporaneous view that Sato was not safely to be taken to be in Ricky’s or Mak’s and Wong’s ‘camp’.  If it was a genuine purchase, that might also make it more likely that the purchase of Ricky’s shares was also genuine.

135.  Ultimately, it seems to me that the essence of the Shares Transfer was that the shares were to be genuinely transferred from Ricky to Mak and Wong, albeit in the circumstances and for the reasons I have identified and on which I have made the above findings.

136.  My conclusion is that the Shares Transfer was not sham transaction.

137.  Both Mr Chan and Mr Li have suggested that that would be the end of the analysis.  I disagree.  It seems to me that the following analysis must also be performed.

Adequacy of the sanctioned payment

138.  Permeating a number of the arguments is the question as to the adequacy or otherwise of the sanctioned payment in the amount of HK$40 million.  Therefore, I might deal with this issue next.

139.  Jason argues that the sanctioned payment is grossly inadequate.  This is said to be because the audited financial statements of D3-D31 show a generated total profit before tax of almost HK$208 million during the relevant period, and net profit after tax of over HK$167 million.  Yet Ricky has tried to suggest an overall net loss of something over HK$10 million.  This arises from (a) ending the period of account on 30 May 2010, rather than 31 December 2010, when Jason says there is no contemporaneous evidence to support that date, and (b) the making of five “conjured up” charges or expenses of over HK$135 million, that is the 5 Deductions, even though they do not appear in the audited financial statements.

140.  I do not think it falls to me in the context of this application to decide the issue as to whether the sanctioned payment is sufficient or not.  That issue can only properly be decided in the context of the taking of the account.  For that purpose, a suitably qualified forensic accountant has been appointed to review and assess most of the items in dispute identified in the Notice of Objections.  The Order appointing that assessor provides a detailed process by which the assessment shall be performed, and the assessor’s determination made.  It also provides that the assessor plays an evidential role in the accounting process, such that his determination on the questions identified for him are final and binding upon the parties.  As to the questions arising relating to the 5 Deductions, I specifically note that questions as to whether or not Ricky is entitled as a matter of law and fact to charge, and if so entitled, the quantum which he is entitled to charge as expenses from the 5 Deductions are questions specifically ordered to be determined by the Court at the hearing of the account: see §12 of the Order dated 16 May 2017.

141.  Mak says the Company ceased business operation on 30 May 2010, when the lease for the restaurant premises expired and the parties were unable to reach an agreement as to the future rentals which were significantly raised by the landlord.  The Company has not resumed any business operation since then.  Other than as to the date, it is agreed that the Company has not had business operation as such since it ceased operating the restaurant.

142.  Mr Chan has suggested that the idea that there is no contemporaneous evidence to support 30 May 2010 as the end of the period of account is “daft”.  Though I do not need to decide this point now, I tend to agree.  At this hearing at least, Ms Chan understandably did not appear to press the point.  The audited financial statements of the Company to year end 31 December 2010, and the materials provided to the Revenue, all state that the Company ceased its restaurant business on 30 May 2010.  It did so because its restaurant business was conducted at premises for which the lease expired, without renewal, on that date.  I have seen no evidence to suggest that the lease did not expire on that date, or to suggest any way in which the Company’s business could have or would have continued beyond that date.  The closure of the restaurant would have been visible to everyone.

143.  Hence, it seems the starting point is that the audited accounts of D3-D31 showed a profit of around HK$125 million over the period of account.

144.  As to the amount of the sanctioned payment, Jason says that even if one takes 30 May 2010 as the date when the Company ceased business, there would still be a total net profit after tax of over HK$131 million prima facie accountable to the Company.  Adding compound interest at the rate of 6% per annum with quarterly rests even up to March 2018 would give total accountable profits in excess of HK$222 million.  Therefore it makes no sense for shareholders to accept sanctioned payment representing less than 20% of the prima facie accountable profits.  Even that takes no account of expenses amounting to almost HK$890 million for which it is said Ricky has not so far identified or produced to the Assessor any supporting documents.

145.  Jason also says that reliance upon the auditors as having confirmed the financial statements is misplaced when the auditors’ fees were extremely modest, such that it would be absurd to think that they had reviewed the audited accounts by reference to supporting documents at the level appropriate to the account taking exercise.

146.  As to the 5 Deductions, they comprise: (1) trademark/image rights usage fee (adjusted to cut-off and without factory/other business), calculated at 6% of turnover, in the amount of HK$66,641,921; (2) Ricky’s management remuneration of HK$14,416,112; (3) Ricky’s services on setting up of the restaurants of HK$12,326,332; (4) year-end bonus paid to staff of HK$8,150,994; (5) theft loss of HK$34,100,543; together totalling HK$135,635,902.

147.  Jason says that the 5 Deductions have been created by Ricky for the purposes of avoiding the liability to account for profits to the Company, and had they been genuine expenses they would have been recorded in the audited financial statements.  Alternatively, at the very least, the veracity of the 5 Deductions is said to be highly dubious and that no reasonable shareholder would accept them at face value.

148.  The 5 Deductions aside, Jason also questions numerous other items of expense recorded by Ricky in his account of profits.  There is a Notice of Objections dated 29 November 2016, which on his own count objects to 311 out of 893 items claimed in the account of profits.  One particular complaint relates to approximately HK$202 million of “management fees” paid to 4 companies, being Speedy Winner (Asia) Ltd (“Speedy Winner”), Dragon Target Ltd (“Dragon Target”), Well Keen International Ltd (D6), and Joyful Gain Ltd (D3).

149.  Taking all these matters into account, Jason says that it is clear that the sanctioned payment of HK$40 million was a gross undervalue of the amount of profit for which the defendants are liable to account to the Company.

150.  Jason is criticized as being overly complaining and unnecessarily seeking vast documentary evidence for expenses the vast bulk of which have been audited.  Mr Chan identifies that all of the income shown in the account has been taken from the audited accounts of the companies and no basis for challenging the audited expense figures has been advanced.  Of the ‘expense’ figures, Mr Chan says 91.65% are extracted or derived from the audited accounts, and the 5 Deductions only account for 8.35% of the total ‘expenses’ of the relevant company defendants.  But even these percentages give rise to potentially wide differences in dollar figures.  I also take into account that the Notice of Objections has been drafted with the assistance of a forensic accountant.

151.  I accept that Jason might be more suspicious than is ultimately warranted.  But it seems to me that where Ricky has been found to have acted in breach of fiduciary duties owed to the Company, and has been forced only by Court Order to account for profit, it is perhaps unsurprising that he wishes to see real evidence to back what Ricky asserts in giving that account.  Also, at this stage I think the Court is entitled to bring some healthy skepticism to bear on the account explanations offered.  The incentive to reduce the amount to be accounted for is plain; whatever monies generated by the company defendants are not accounted for as profit and paid over to the Company (for its ultimate distribution to its shareholders) will increase Ricky’s funds as he will not have to share those funds with the other shareholders of the Company.

152.  Ricky has explained how figure of HK$40 million was calculated and why he says it is reasonable and an amount which could be accepted in the best interests of the Company.  The explanation of the calculation is said to be a later invention, but clearly there must have been some contemporaneous basis for reaching that figure and deciding to pay that figure in with the notice of sanctioned payment.  

153.  He says there were 2 approaches for calculating the HK$40 million figure.  One was to take the HK$125 million total net profits and deduct the Deductions for trademark/image rights usage fee, year-end bonus paid to staff and theft loss, leaving about HK$17 million to which would be added interest at 6% compounded annually in the sum of around HK$23 million.  The second is to take the same starting figure and make the same deductions except at a lower (5%) rate for the trademark/image rights usage fee, leaving about HK$28 million, and adding interest calculated after earlier losses have been offset from the profits made on a simple basis at 6%, of around HK$11 million.

154.  Ricky points to the account of profits of the defendant companies, and the 5 Deductions, which would leave a net loss of slightly over HK$10 million.  He argues against Jason’s points relating not just to the 5 Deductions back to the other challenges to expense items, including in particular the management fees.

155.  He points to the fact that the CFA specifically contemplated that there might be a deduction in the account of profits to make allowance for the use of the trademark owned by Ricky.  He says that the year-end bonuses paid to staff were genuine expenses, examined by the IRD demanded tax from the recipients, and that the theft loss was originally absorbed by himself but fairness required to be taken into account.

156.  As to the challenge to the management fees, Ricky identifies by reference to certain audited financial statements of the respective defendant companies that the relevant management fees were provided by companies acting as central staffing and administration points within the group, that those companies did not make a profit, and that they simply provided fees that would otherwise have been paid for by the individual companies direct.  He points to the fact that these management fees are reflected in the audited accounts which were passed to the IRD, so that the fees are proper expenses accepted by the auditors and the Revenue.

157.  As stated, I am in no position to decide this within the context of the current application.  I can only take into account what broadly seem to me to be points to be made on the evidence as it stands.

158.  The starting point is the profit figure taken from the audited accounts, of around HK$125 million.  I accept that is prima facie the figure for which Ricky and D3-D31 need to account to the Company.  But just as Jason suggests that the audited figures may not be the correct figure (and indeed he challenges those figures), it seems to me that Ricky can also make a similar point.  Ricky does so by reference to the 5 Deductions.  Of course, it might be noted that deductions are only potentially relevant if they relate to expenses incurred as part of the generation of profit.

159.  As to the first of the 5 Deductions, relating to image use fees, there is a joint expert report which provides some assistance.  The experts agree that a fee for such use or rights might typically be charged at 5% to 6% of turnover, which is the basis put forward by Ricky.  Where they disagree is as to whether or not some or all of such fees would ordinarily be expected have been included within the significant “management fees” paid between the various corporate defendants.  I note that the explanation for the “management” fees of approximately HK$202 million was not offered by Ricky when he purported to give the account, but only came in the context of the evidence filed for the current application.  But now looking at that material, the companies which acted as central administrator or central staffing point appeared to have operated on a break-even basis, and it is not apparent to me at the moment how image use fees might have been somehow wrapped up in the services provided.  Therefore, on current materials, there seems to me to be some reasonable prospect that a significant deduction might be made from the audited account profits in this regard.

160.  As to the other 4 of the 5 Deductions, I take into account that they do not appear in the audited accounts and were raised only for the first time in August 2016.  The significant figure for “theft loss” exceeding HK$34 million does seem somewhat dubious in the absence of any report of theft to the police or an insurance company or any other institution, including the auditors.  In his oral evidence, Mak said that the figures relating to the amounts claimed for the “theft loss” had been checked by the accounting staff, some time after the theft had been discovered.  But, if these matters were known to the accounting staff, it is not clear to me why they were not taken into the companies’ financial statements and also drawn to the attention of the auditors.  I have not overlooked that Mr Chan has drawn attention to a list of documents, giving certain disclosure, which includes for example reference to copies of cheques said to have been made out to fraudulent payees evidencing the theft.

161.  There is also some real doubt about the proposed deduction of over HK$8 million relating to year-end bonus for staff, when staff bonuses are already reflected in the audited accounts.  Mak’s oral evidence on this point was at times apparently internally inconsistent, which at this stage does not provide wholly convincing support for the proposed deduction.  Indeed, Mak signed at least some of the employer’s returns provided to the Revenue which asserted the level of remuneration of the employees (including himself and Wong) which did not include the bonuses now suggested.  As it is Mak’s evidence which is part of the evidence to support Ricky’s deduction in this respect, the knock-on effect is that it may call into question the reliability of Mak’s support for other of the proposed deductions.

162.  As to the proposed management fees and restaurant set up one-off fees for Ricky, that they were not charged on an ongoing basis and so were not reflected in the accounts also raises a serious question as to whether they are proper deductions to be made against an account of profit.  Mak did receive director’s fees and accommodation, and so there is a real question as to whether he should be entitled to make the deduction based upon a “salary” of HK$25,000 per month for each company.  There is also a legitimate question as to whether such fees might properly now be regarded as expenses to be set off against generation of profit, when the accounts do not record such fees as any such expense.  Similarly, little confidence can be placed in the propriety of the one-off HK$500,000 fee for the Ricky’s setting up charge for each restaurant when that fee has been charged by Well Keen which Ricky himself says never in fact set up or operated any restaurant in the period of account.

163.  Whilst I have considerable sympathy with the suggestion that there ought not to be a complete re-auditing of D3-D31’s accounts, and there seems to be some force in the criticism of at least some of Jason’s objections in the Notice of Objections, this particular process for determining the profits for which a defendant is liable to account has been ordered in line with previous authority.  I agree that the relatively modest fees charged by the auditors of D3-D31 may suggest that there was not enormous scrutiny of the individual companies’ expenses reflected in the accounts.  Also, Ricky’s refusal to disclose the scope and basis of the alleged tax audit makes it difficult for the Court at this stage to place any great reliance on the underlying figures as having somehow been “audited” by the Revenue.

164.  So there is room to think that the Court may not ultimately accept Ricky’s case on the account, and may give a higher figure than that argued for by him.  That higher figure may be, but only may be, considerably so.

Whether the nature of the private agreement between Ricky and Mak and Wong meant that they could not bind the other shareholders

165.  Again, I have already set out the relevant facts relating to the agreement made between Ricky and Mak and Wong.

166.  Ms Chan also relies on the fact that Mak and Wong were at all material times senior management employees of Ricky and assisted him to manage the restaurants which constituted the breach of his fiduciary duties to the Company.

167.  I do not think the nature of the private agreement was such that, as a result of the terms of that agreement, they could not bind the other shareholders.

168.  I acknowledge that they bought shares at a discount which was apparently not offered to the other shareholders.  But that does not seem to me to address the real question on this issue.

Whether the votes of the majority passing Resolution 1 were invalid through their lack of bona fides

169.  In light of my finding that those shareholders who formed the majority which voted in favour of accepting the sanctioned payment under Resolution 1 were not nominees of Ricky, the question of bona fides seems to turn upon their own motives for voting as they did.

170.  I have dealt above with what Mak and Wong say were their motives.

171.  Shigemitsu confirms in his evidence the veracity of the matters covered by Mak, especially as concern himself.  He also adds that he believes that the Company should accept the sanctioned payment because it is a “fair amount” for settling Ricky’s liability to the Company.  But, in any event, whilst he understood the calculation of the HK$40 million figure has been based on the audited accounts with some further items of expense raised by Ricky which were quite legitimate, Shigemitsu states that his decision was based not so much on obtaining a return from the distribution of assets of the Company but rather that as a friend and long-time business partner of both Ricky and Jason/Daisy, he considers that the protracted disputes between them should come to an end as soon as possible, particularly considering the serious medical condition Ricky is suffering.  He also agrees that the shareholders should be able to obtain the return without further undue delay.  He strongly refutes any suggestion that he is a nominee of Ricky in deciding to accept the sanctioned payment.

172.  Of course, it was Mak’s evidence that Shigemitsu arranged to purchase the 4% shares from Sato on the specific request of Mak so as to outvote Jason and Daisy.

173.  Kong has given evidence to similar effect, indeed in an affirmation which in parts is word-for-word the same as Shigemitsu’s.  Kong says he thinks that the amount of the sanctioned payment is a fair amount for settling Ricky’s liability to the Company as, he says, “objectively it was calculated based on the audited accounts of the Group and some further expense items raised by Ricky which I consider to be legitimate and acceptable”.  Nevertheless, he immediately goes on to say that he does not really care about how the calculation came about as his primary concern was to obtain and make good use of the share of assets of the Company as soon as possible, and he was tired of waiting for the conclusion of the protracted litigation between Ricky and Jason and Daisy.

174.  Indeed, in his oral evidence, he first confirmed as correct and complete Mak’s description of what (he) Kong had told him (Mak), and that he had decided to accept the sanctioned payment and told Mak that fact, before he gave Mak the proxy on 3 August 2017.  He said at that time, though Mak had offered some explanation for the HK$40 million figure which he did not doubt, he did not pay much attention to whether D3-D31 were making a profit or not.  Yet he says he did take into account whether acceptance of the sum was in the best interests of the Company, though those interests (as he described them) were really to end the litigation soon to allow him to get his share of the assets.

175.  In the unsworn statement made by Teraguchi, which he adopted in oral evidence on affirmation, he explains that the main reason for him to vote to accept the sanctioned payment was that he believes the HK$40 million is adequate, and he can receive a fair return from his shareholding without further delay, especially because of his age and bad health condition.  He made reference to having been shown (perhaps sent by fax) some information on the matters relating to the sanctioned payment, parts of which he said had been translated into Japanese.  From his description of it, I think it might have been the Fact Sheet and the various attachments to it. Despite his age and health condition, he physically travelled to Hong Kong to vote in person at the EGM.  He stressed that he is not, and never has been, a nominee or puppet of Ricky.  He voted at his own free will and in his own interest.  I fully accept that.

176.  The first point made by Mr Li is that it is trite that shareholders do not owe any fiduciary duty to the Company.  Hence, they could not be in a position of conflict of interest.  Shareholders are free to vote according to their personal interests, because (subject to exception in specific circumstances, the voting rights of a shareholder is a proprietary right which he can exercise regardless of whether it is in the interests of the other shareholders all the company in question.

177.  All Council have referred me to the case of Hiew Fook Siong v Fung Tak Keung [2006] 3 HKLRD 762 in which To J identified the relevant to exceptions as being (a) shareholders’ decision to alter the articles of the company and (b) the majority practising a fraud on the minority. 

178.  I have also been referred to Sunlink International Holdings Ltd v Wong Shu Wing [2010] 5 HKLRD 653 in which Harris J restated the general principle that a shareholder does not owe fiduciary duties to a company, and that the right to vote shares is a proprietary right which in most circumstances can be voted as the shareholder wishes, without regard to the interests of other shareholders.  In that case, which involved an application made by the provisional liquidator of a listed company and its minority shareholder for an interlocutory injunction to restrain the majority shareholders from voting against a resolution on the restructuring of the listed company, Harris J accepted that there was an exception applicable to the general rule because the decision of the majority was irrational, so much so that they could be said not to be acting in good faith.  The irrationality was because if the resolution for restructuring did not take place, then it was certain that the company would be delisted, effectively destroying the economic value of the other shareholders.

179.  In Kim Lung Transport Co (a firm) v Ip Man Fai (HCA 271/2012 and HCMP 1002-1003/2012, 6 June 2012, DHCJ Pow SC) at §27, the Deputy Judge considered that the Sunlink case was an example which might be grouped under the umbrella of “fraud or oppression on the minorities”.  A similar observation was made by G Lam J in China Investment Fund Co Ltd v Guang Sheng Investment Development Group Ltd (HCA 411/2016, 27 May 2016) at §32.

180.  Here, Mr Chan and Mr Li both submit that it could not properly be said that the decision to vote for the sanctioned payment falls within the fraud on minority exception.  My attention was drawn to the facts that all shareholders, except Ricky and Jason and Daisy, voted in favour of acceptance; clear reasons have been given by Mac and Wong as to why they voted as they did, including wishing to take the return from their shareholdings, to take the additional reward, and to do so without waiting indefinitely for the conclusion of litigation which was in any event inherently uncertain; clear reasons had been given by Kong and Teraguchi that they also wish to obtain their return without further delay, and they considered the amount they (and the Company) would receive to be fair; Shigemitsu had explained that he was less concerned with obtaining his return on the acquired 200 shares, but rather wanted to bring the litigation to an end for the benefit of Ricky in his medical condition, and that even thought that it was good to bring the disputes between Ricky and Jason and Daisy to an end generally, as well as his view that the amount of the sanctioned payment was fair.

181.  For her part, Ms Chan submits that the principle that generally a shareholder is entitled to exercise his voting right as propounded in earlier cases was considered by the Privy Council in British America Nickel Corporation Ltd v MJ O’Brien Ltd [1927] AC 369, and she referred me in particular to the holding at 372-373.  Putting it into its necessary context the passage reads as follows:

“To give a power to modify the terms on which debentures in a company are secured is not uncommon in practice the business interests of the company may render such a power expedient, even in the interests of the class of debenture holders as a whole. The provision is usually made in the form of a power, conferred by the instrument constituting the debenture security, upon the majority of the class of holders. It often enables them to modify, by resolution properly passed, the security itself. The provision of such a power to majority bears some analogy to such a power as that conferred by s. 13 of the English Companies Act of 1908, which enables a majority of the shareholders by special resolution to alter the articles of association. There is, however, a restriction of such powers, when conferred on a majority by a special class in order to enable that majority to bind a minority. They must be exercised subject to a general principle, which is applicable to all authorities conferred on majorities of classes enabling them to bind minorities; namely, that the power given must be exercised for the purpose of benefiting the class as a whole, and not merely individual members only. Subject to this, the power may be unrestricted. It may be free from the general principle in question when the power arises not in connection with a class, but only under the general title which confers the vote as a right of property attaching to a share.”

182.  While Ms Chan has pointed out that the British America Nickel case was apparently not cited to To J, Harris J, G Lam J and DHCJ Pow SC in the cases I have canvassed above, I do not think that renders any of those decisions inaccurate.  As I read it, the restriction which may be imposed upon the private property rights attaching to a share are limited.  The specific limitation identified in the passage from British America Nickel quoted above does not seem to me to create some general requirement to be imposed on shareholders voting in every circumstance.  Rather the restriction of such powers as the shareholder might generally exercise is in – see the reference to “such powers” – the exercise of powers to alter the articles of association or something analogous.  I think this also fits with the statement made by the Court of Appeal at §144 of Re PCCW Ltd (CACV 85/2009, 11 May 2009, Court of Appeal), where the focus is on the authorities which established that “in a class meeting, a shareholder must exercise his voting power in the interests of the class as a whole and this is a restraint on his freedom to vote”.

183.  Hence, it seems to me that the relevant question is whether in considering Resolution 1, the shareholders were acting as a “class” in a situation which might be regarded as analogous.

184.  I think I am entitled to take into account the fact that the Company is no longer trading, indeed has had no business operation since 2010 when its only restaurant closed.  Its only purpose is to receive whatever might be due to it on the taking of the account of profits.  This might make it all the more justifiable that the shareholders vote entirely in their own self-interest as they see it, including by bringing the continued existence of the Company to an end by accepting the sanctioned payment and dissolving the Company for ultimate distribution of assets to the shareholders themselves, sooner rather than potentially much later.  It is wholly understandable that shareholders might prefer a ‘bird in the hand over two in the bush’.

185.  On the other hand, where the shareholders are avowedly voting in their own self-interest, and though they might also assert that they see those interests as aligned with those of the Company itself, this might be a rare example of the kind of circumstance in which the Court will intervene.  Indeed, where there is no other business except collecting in the profit from the account and distributing it amongst the shareholders this might be thought to be a situation more akin to other circumstances when shareholders vote as a class.

186.  The plaintiff has brought the action for the benefit of the Company, which must mean the intention is to conduct the action in the Company’s best interests.  The bringing and pursuit of the action have been fully justified by the subsequent findings of breach of fiduciary duty, and the requirement for Ricky to account for the profit.  I note that it is Mak and Wong’s own assertion that had they been asked to consent to the bringing of the action, they would have refused to give consent.  In other words, had they been able to outvote a resolution proposing to bring the action in the first place, they would have done so.  That necessarily means that the Company would have been deprived of whatever is ultimately the fruit of the account of profits.  I have already referred to the incongruity between the assertion that the action should not have been commenced, with the desire to take the benefit of its having been pursued, through taking a share of the increased assets flowing from the finding of breach of fiduciary duties.

187.  Ms Chan also made the submission that I should take into account the fact that ordinarily a decision facing a company as to whether or not to accept a sanctioned payment would fall to be made by the Board of Directors of that company.  As she identified, in this case, clearly the Board could not make the decision as it was comprised solely by the wrongdoer.  Hence, she said that the decision felt to be made by the shareholders in general meeting instead.  While she acknowledged that that would not of itself create fiduciary duties for the shareholders which would otherwise have been born by the directors, she did suggest that might give rise to a restriction on the otherwise general powers to vote as they saw fit in their own interest.

188.  In this context, Mr Chan also reminded me of what was said by Barma J in the PCCW case at §§202-203, where he said by reference, albeit by reference to the particular circumstances of that case:

“The consequence of this [the continued trading in the PCCW shares] is that shareholders voting at the meeting might take very different views of the commercial merits of the proposition that was put before them. A shareholder who had acquired shares in the company some considerable time earlier, when the share price was much higher than that offered under the scheme, and who felt that the company had prospects going forward that made it more desirable to remain a member of the company, might well think that the scheme was not commercially attractive enough to garner his support. On the other hand, it would be open to other individuals to purchase shares on the open market at less than the buyout price proposed under the scheme, in the hope that the scheme would be approved, so that they would be able to realise their investment in the company for a reasonably attractive short-term gain. Shareholders in such a position are, it seems to me, just as much shareholders in the company as those in the former situation, but they could quite rationally and sensibly vote in favour of the scheme.

In these circumstances, if (contrary to the views which this Court has come to) the court were satisfied that the result of the class meeting was fairly representative of the class, I do not think that the court should substitute its view of the commercial merits of the proposal for that of a truly representative majority of members of the class concerned, simply because, in the view of the court, the scheme was not one which the Court considered attractive.  Whether or not such flaws or drawbacks as they might be in the scheme were such as to justify its rejection is, in my view, ultimately a matter for the members of the class to determine, save in excess wholly exceptional cases – which I do not think is the case here.”

189.  This passage seems to me to identify that even in circumstances of what is generally regarded as a “class meeting”, shareholders within that class are perfectly entitled to vote as they see fit and to come to rationally reached, albeit varying, decisions as to whether or not to vote in favour of the proposal.

190.  I take account of the fact that in so far as the majority relied upon the fairness of the amount of the sanctioned payment, they did so simply by reliance on Ricky’s explanation, which was hardly tested and not checked against documentation.  I also take account of the fact that, rightly or wrongly, they appear to have taken the view that they were not otherwise entitled to share in the profits of D3-D31 via the Company, so that they were content to receive any significant additional distribution from the Company as was created by the HK$40 million.  This is, in effect, the “windfall” point.

191.  I reject Ms Chan’s submission that the voting not rational because those voting to accept the sanctioned payment had not looked at the relevant materials in the account, but had merely relied upon what Ricky told them, or ignored the question altogether.  I also reject the idea that there was “no downside” in rejecting the sanctioned payment.  Whilst there might not be downside relating to the cost of continuing the action for the account, clearly there is no guarantee that the amount of the sanctioned payment is the bottom line of recovery.  As at least Mak and Teraguchi said in evidence, and as must in any event be obvious, it is at least possible that the dollar figure for which Ricky and D3-D31 might be required to account after a trial of the account would end up lower than HK$40 million.

192.  Having accepted that none of them are nominees of Ricky, I accept their individual explanations for voting as they did.  None of the explanations are in my view irrational.  I do not see them as a fraud on the minority, but rather as perfectly comprehensible individual differences in points of view.  Differences in commercial view are as applicable to the interests of the Company as to the perceived self-interest of individuals.  Insofar as it is necessary for me to say so, I would reject the idea that voting in accordance with the rationale explained could properly be described as vitiating the decision-making process as being directed to an improper purpose.

193.  My conclusion is that the votes are not to be impugned for lack of bona fides.

Whether Ricky’s “approval” of the Shares Transfer was valid

194.  Ricky emphasises in his evidence that he did not see, and still does not see, any reason or possible justification for him as a director to exercise the discretion to refuse to register the transfer of the shares.  Ricky said that even if he had thought that Mak and Wong would vote in favour of accepting the sanctioned payment, that would be in the interest of the Company.  This was because, first with the deteriorated relationship between him and Jason/Daisy, there was no chance for the shareholders to resume pursuing any real business with the Company; secondly, because the Company had been dormant, but holding on to assets which had not been distributed because of the protracted litigation; and thirdly the sanctioned payment figure is a reasonable figure.

195.  Indeed, as noted above, it was Mak’s own evidence that he and Wong approached Ricky and expressly told him that the purpose behind the proposal to purchase sufficient shares in the Company was so that they could pass the resolution approving the sanctioned payment, and that as the proposed share purchase was for that particular purpose, Ricky should consider giving some discount over the price.  In other words, the discount was asked for and it was agreed in consideration for the ability to effect approval of the sanctioned payment.

196.  It may be, therefore, that it does not matter that the transaction was not itself a sham.  The transaction was clearly intended to provide the circumstances in which shares which otherwise could not have been used to vote for the sanctioned payment were put into the hands of persons who clearly would have exercised a vote in that way.

197.  Put another way, the price to Ricky (HK$5.7 million) of ensuring that shares which otherwise he could not vote were voted to accept the sanctioned payment was potentially hugely less than the benefit to him as sole or main shareholder of D3-D31 if a full account required payment of many millions more.

198.  Ricky himself admits that the Shares Transfer was at least in part motivated by a desire to procure acceptance of the sanctioned payment and to end these proceedings.  Indeed, he apparently told Mak that his determination to sell the shares in the Company was because of the hope that the litigation would end.  Undoubtedly, Ricky knew that Mak and Wong would vote the shares in favour of accepting the sanctioned payment if he was to effect the Shares Transfer.  I reject the suggestion that against everything discussed between them that Ricky might seriously have thought that they might ultimately not vote to accept the sanctioned payment and to bring the proceedings to an end.

199.  As sole director of the Company, Ricky continued to owe fiduciary duties to it.  Irrespective of what he thought was the correct figure for the account, Ricky must have understood that there was at least a significant risk (including just the litigation risk) that he would be required to account for a figure rather in excess of HK$40 million.  Indeed, there must be a real risk that the figure is inadequate, perhaps significantly so.

200.  Hence, in approving the Shares Transfer knowing that the shares would be voted in favour of accepting the sanctioned payment, it can be said that Ricky failed to act in the best interest of the Company.

201.  The argument deployed by Ricky in response is that no “approval” was required; the relevant article of the Company’s constitution merely provided the director a discretion to refuse to register shares after transfer.

202.  I do not think this argument helps Ricky, if his fiduciary duty was to act in the best interests of the Company, that would require him to exercise his discretion for that purpose.  The director cannot do nothing; he must either refuse to register the transfer or choose not to exercise a refusal.  If it was in the best interests of the Company to refuse to register the shares, the discretion should have been exercised by giving that refusal.  Further, as a matter of fact, the Board resolution signed by Ricky recorded that the Board had “approved” the Shares Transfer, as well as the transfer of shares from Sato, so it is difficult for Ricky to say he did not actually approve the transfer.  For this factual reason, it is not open to Ricky to suggest that any default position might have been reached on an assumption that he might have not exercised his discretion to refuse to register the transfer.

203.  Of course, the other factual problem which arose is that Ricky was the sole director, so he constituted the entire Board, and it was in precisely that capacity that he has already been found to be in breach of his duties and to have put himself in a position of conflict.  That is the context, and I accept Ms Chan’s submission that the rule to avoid conflict of interest is strict and inflexible.  Even if a director is acting in good faith intending to act in the best interests of the company, that is irrelevant to the question of whether there has been a breach of fiduciary duty.

204.  Therefore, the question of the fairness or unfairness of the transaction is immaterial: see, for example Pleasure International Ltd v Kao Wai Ho Francis (HCA 1753/2008, 25 June 2009) at §§45-51.

205.  This is perhaps a short answer to the arguments about whether or not HK$40 million is a fair and appropriate amount for the Company to accept from Ricky and D3-D31 as an account of profits payable by them as a result of his breach of fiduciary duty owed to the Company.

206.  Mr Chan has himself placed emphasis on the point that in the present case Resolution 1 was no a resolution to absolve Ricky from his wrongdoing, as the CFA has already confirmed that Ricky is liable to account.  Instead, Mr Chan says, it is a question of whether the court could refuse to recognise a decision by the Company to enter into a contract with Ricky to settle the amount of the liability and put an end to the litigation.

207.  This point seems to me to emphasise the existence of the conflict.  So, whilst there may be (as Mr Chan also submits) nothing unattractive or wrong on the part of other innocent minority shareholders who thought that the litigation should end to acquire as many shares as possible so as to achieve what they considered to be for the benefit of the company to end the litigation with the early distribution of assets, that does not get around the fundamental problem that they could only have done so if the purchase of the shares was made the subject of a transfer effective to permit them to vote.  As Ricky acknowledged in oral evidence, no transfer would have been effective but for his approval of the transfer, or the exercise of his discretion not to refuse the registration.

208.  I consider that Ricky’s desire to bring this litigation to an end was a perfectly natural desire in the context of his serious illness.  It is wholly understandable that Ricky would wish not to leave any litigation in which his wife might have to become embroiled.  But, it seems to me that point only tends to amplify the fact of the conflict in which Ricky was placed.

209.  I therefore hold that the shares were not validly transferred under the Shares Transfer.  Necessarily, this means that so many of the shares held by Mak and Wong were held by them as a result of the Shares Transfer ought not to have been counted in the voting on Resolution 1 (and indeed the other Resolutions 2 and 3).

Conclusion

210.  This ruling is perhaps longer than it might have been, had the decision been reserved, giving a longer time to write a shorter ruling.  But, ultimately, it will be noted that I would dismiss the application made by the Sanctioned Payment Summons for two primary reasons.  The first is that I consider that the application, made by the Company at the current stage of these proceedings, is not properly jurisdictionally founded.  The second is that the Shares Transfer was invalid to have permitted Mak and Wong to have voted the 3,799 shares at the EGM because the exercise by Ricky of his discretion whether or not to refuse to register, and his factual decision and resolution to “approve” registration, was an abuse of his power.

211.  Having dismissed the application, I will hear the parties on costs and any subsequent or consequential orders or directions.

HCA 304/2011

[2019] HKCFI 938

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 304 OF 2011

____________

____________

_____________

D E C I S I O N

_____________

1.  This is an application by the plaintiff for an order effectively to vary a direction previously made by this court that would prevent the 2^nd defendant (the Company) from participating at the substantive hearing of the Sanctioned Payment Summons.

2.  The relevant background has been set out in a decision dated 13 April 2018 at paragraphs 3 to 20.  In substance, the plaintiff in this derivative action, has won on the question of liability.  There is an order for an account of profits to be taken.

3.  D1 made a sanctioned payment of $40 million in settlement of the plaintiff’s entire claim.  At the plaintiff’s request, an EGM of D2 was convened to consider the sanctioned payment.  At the EGM, the plaintiff was told for the first time that D1 had purportedly transferred all but one of his shares in the Company to D32 and D33 (who the plaintiff says were D1’s nominees). The transfer was just five days before the EGM.

4.  Relying on that purported transfer, D32 to D33 voted and a resolution was passed to accept the sanctioned payment (“the EGM resolution”).

5.  D1 has, however, remained the sole director of D2 to date.  The plaintiff disputed the validity of the purported transfer.  Had there been no such transfer, D1 would not have been entitled to vote on his shares, as his interest was in conflict with that of other shareholders and the EGM resolution would have been defeated.

6.  D2, under the control of D1, issued a Sanctioned Payment Summons seeking leave for the Company, alternatively the plaintiff, to accept the sanctioned payment.  This summons is due to be heard substantively on 15 April 2019.

7.  On 8 February 2018, this court has directed that D2’s participation and attendance at the substantive hearing of the Sanctioned Payment Summons be excused, unless otherwise ordered by the court.

8.  The remaining parties were directed to prepare a list of issues and scope of matters for cross-examination.  In the joint list of issues, subsequently submitted to the court, some of the issues, as framed by the plaintiff were disputed.  Of importance are:

Issues 3 to 5: whether the share transfer from D1 to D32 and D33 was valid, and whether it was in accordance with D2’s constitution.

Issue 10: whether Order 22, rules 15 and 18 of the Rules of the High Court, or the inherent jurisdiction of the court, allow the defendant, such as the Company, to accept the sanctioned payment or allow the court to require the plaintiff to accept the sanctioned payment against his wish.

9.  D1, D3 to D31, stated that if issues 3 to 5 or 10 were allowed, then the court would be invited to make an order for the participation and attendance of D2 at the substantive hearing of the Sanctioned Payment Summons.

10.  By paragraph 5 of the direction made on paper on 13 November 2018, this court directed that out of abundance of caution and at the invitation of D1, D3 to D31, the court was minded to permit D2 to participate at the hearing of the Sanctioned Payment Summons (“the direction”).

11.  No order regarding the direction has been drafted up.  By a summons dated 30 January 2019, the plaintiff applied to vary the direction pursuant to Order 1B, rules 2(2), (4), (5) and (6)(a) and Order 32, rule 6 of the Rules of the High Court and the inherent jurisdiction of the court.

12.  Alternatively, the plaintiff suggested that D2’s participation should only be permitted on certain conditions.  The defendants opposed this application on various procedural and substantive grounds. 

13.  D2 makes clear it does not intend to take an active role in the conflict between different camps of shareholders, but wishes to address the court on issues 3 to 5 and 10.  D2 claims that it cannot rely on other defendants to protect interests of its shareholders.  See for example, paragraph 34 of Mr Nip’s submission on behalf of D2.

Procedural Objections

14.  The direction was not an ex-parte order as it was made after the parties made submissions on other matters.  Order 32, rule 6 of the Rules of the High Court did not apply.  Although the parties were fully engaged in the process of making representations to the court, the direction itself was made without a summons taken out by D1, D3 to D33 and was made in the context of a discussion to settle the list of issues.

15.  The plaintiff had not then sought leave to respond and the court carefully stated that it was minded to permit D2 to participate in the proceedings.  It was, in substance, an order made by the court on its own volition.

16.  Unfortunately, the direction did not state the time within which a party could apply to vary it, so the default time was 14 days.  The plaintiff’s present application was made beyond time: Order 1B, rule 2(6)(b).

17.  However, I do think I can invoke the inherent jurisdiction of the court to vary the direction if there are exceptional circumstances or good reasons to do so.  See HKSAR v Tin’s Label Factory Ltd (2008) 11 HKCFAR 637, §§31-32.

18.  Li CJ held, amongst others, that:

“31. … the occasion when the court is reconvened to consider the reopening of a decision should be exceptional, the judge must be vigilant in not allowing an unsuccessful party to invoke this power in order to re‑argue his case. Where the judge has properly considered his original decision, it would rarely occur that he would need to re‑open it on his own motion. …

32.     … in exceptional cases where the court is reconvened, the judge must exercise great caution in determining whether to alter his original decision.  Where the judge is firmly satisfied that his previous decision was incorrect and that alteration is necessary to ensure that justice is done, alteration would be justified.  In such cases, the delay, expense and uncertainty involved in a further appeal would be avoided.”

Analysis of the Application for Variation

19.  As pointed out by the defendants, there has been no material change of circumstances since the giving of the direction.  But having heard D2, I am not convinced that issues 3 to 5 require D2’s presence at the April hearing.  Those issues involve disputes between shareholders, in particular the plaintiff on the one hand and D1, D32 to D33 on the other.  D2 simply needs only to abide by the court’s order.

20.  Mr Nip refers to the need for D2 to address the court on interpretation of certain articles of the company.  With respect, that interpretation is something to be dealt with by the two opposing camps of shareholders anyway. Mr Nip is unable to point to anything additional which only D2 could address, but not the relevant defendants and the plaintiff.  I do not see the need for D2 to be present, as regards issues 3 to 5.

21.  Next is issue 10, which the parties describe as ‘jurisdictional challenge’.  The plaintiff’s case, on affirmation, is that the Sanctioned Payment Summons was wholly misconceived. Neither rule 15 nor 18 of Order 22 enable a co‑defendant to accept sanctioned payments made to the plaintiff or compel the plaintiff to accept a sanctioned payment.

22.  This part of the plaintiff’s case arguably did not form part of paragraphs 7(a) to (c) of Shiu-1^st, but only first appeared in paragraph 8 of Poon-2^nd dated 19 April 2018, after the court has directed that D2’s participation be excused.

23.  It seems to be a jurisdictional challenge which does not depend on which shareholder was in the right and which was in the wrong.  Ms Linda Chan, SC, for the plaintiff, has explained that this is simply to argue the construction of Order 22, rules 15 and 18.  She claims that the court has no jurisdiction to allow a defendant to accept a sanctioned payment since those rules only refer to acceptance by a plaintiff.  This is a legal point which can be addressed by any of the opposing camp of defendants.

24.  I do accept, as a matter of general principle, that whilst the company is a nominal defendant, and should not take an active part in the proceedings, it is not an incontrovertible rule that the company may never participate in what started off as a derivative action.  Mr Nip has referred me to the case of Waddington Ltd v Chan Chun Hoo Thomas & ors [2019] 1 HKLRD 271, 5 December 2018, Chow J, where the company applied for payment out of moneys in court.

25.  From paragraph 44 of Mr Nip’s written submission, it appears that all that D2 wants to advance, is that it was acting independently in taking out the Sanctioned Payment Summons to give effect to the EGM resolution.  D2 could not simply rely on representations from the defendants’ camp when the Company also has interests of other minority shareholders who are not parties to protect.

26.  Without disrespect, D2’s stance is nothing beyond stating the obvious primary facts.  Whether D2 is bound to give effect to the EGM rests on resolution of issues 3 to 5.  The so‑called jurisdiction point is a question of interpretation of the rules which the plaintiff’s camp and the defendants’ camps have to address anyway.  In fact, leave was first granted to D32 and D33 to be joined as parties to support the Sanctioned Payment Summons.

27.  More importantly, D1, D3 to D31, have not referred me to my decision dated 13 April 2018, when they invited me to consider letting D2 participate at the substantive hearing for the Sanctioned Payment Summons.  At the hearing which led to that decision, D2 was already excused from attendance and participation.  Paragraph 46 of that decision, in effect, contained in substance what is issue 10.

28.  The plaintiff’s stance has not changed on issue 10.  D2 has never, since the decision of 13 April 2018, seen fit to apply to participate at the Sanctioned Payment Summons hearing.

29.  Mr Nip’s certificate as to estimates of hearing time for the substantive hearing indicated that D2 would need to spend only about 5 minutes on each witness, just in case cross-examination is needed.  The time to address the court, if allowed to participate on issue 10, is probably not more than half an hour’s oral submission, in my estimation.

30.  D2’s participation would not derail the substantive hearing of the Sanctioned Payment Summons.  However, these are not good reasons to let D2 incur costs for an unnecessary attendance.

31.  The court does not favour issue-based applications or unnecessary interlocutory applications.  However, taking all circumstances into account, I do find that the court has mistakenly been over cautious in allowing the Company to participate on issues which have not been newly raised by the plaintiff, and which will be dealt with by the opposing camps of defendants anyway, at the substantive hearing.

32.  It would be unjust to require D2 to incur costs in an unnecessary attendance, especially since the plaintiff represents about one‑third of the shareholding.

33.  I do find that all these factors, taken together, to be exceptional circumstances which require this court to vary the decision which was then made without hearing the plaintiff.

34.  I therefore make an order in terms of paragraph 1 of the plaintiff’s summons.

35.  As to costs, as a matter of principle, costs should follow the event. All the defendants should bear the costs of the plaintiff.  However, as stated before, if D2 were to bear costs, effectively the plaintiff representing about 1/3 of the shareholding, will have to bear 1/3 of the costs.

36.  Since D1, D3 to D31, D32 and D33 have admittedly supported D2 at this hearing and counsel admitted that those defendants ought also to bear part of the costs, I make an order nisi that D1, D3 to D31, D32 and D33 should bear the costs of the plaintiff with certificates for two counsel.

37.  There shall be summary assessment of costs of the plaintiff on the papers on 4 March 2019.  A cost statement is to be filed and served by the plaintiff on 27 February 2019, before close of business.  Grounds in opposition are to be filed and served by 4 pm on 1 March 2019.  I also give liberty to the plaintiff to apply for personal costs, wasted costs or other appropriate costs orders, if so advised, against persons behind D2, the Company, who instigated this opposition within 28 days after judgment in the Sanctioned Payment Summons is handed down.

HCA 304/2011

[2018] HKCFI 771

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 304 OF 2011

____________

____________

__________________

D E C I S I O N

__________________

INTRODUCTION

1.  There are 3 summonses before the court:

(1)   The summons of D1, D3-D31 (collectively “the Defendants”) for stay of proceedings (“the Stay Summons”) pending determination of D2’s summons for leave to accept a sanctioned payment of $40 million (“the Sanctioned Payment Summons”);

(2)   The application of the Defendants for leave to appeal out of time (“the Appeal”) against a Master’s order that the Stay Summons and Sanctioned Payment Summons be heard together;

(3)   The Plaintiff’s summons for leave to adduce the affirmation of the Plaintiff for the purpose of providing an update on the current status of the proceedings (“the Evidence Summons”).

BACKGROUND

2.  The background facts are not in dispute and are taken from the skeleton submission of Ms Linda Chan SC, leading Mr Thomas Wong.

3.  The Plaintiff and D1 are shareholders of D2 (“the Company”), which operated a well-known sushi restaurant in Hong Kong.  D1 was and is the Company’s sole director.  Until recently, D1 has been the sole director of D3 to D31 and their sole shareholder (except D14).

4.  The Plaintiff is a minority shareholder who commenced this derivative action against D1 for breach of fiduciary duties owed to the Company by using D3 to D31 to operate competing sushi restaurants.

5.  On 24 May 2013, Mimmie Chan J gave judgment in favour of the Plaintiff in respect of D1’s operation of some of the Defendants and ordered damages to be assessed.

6.  On 21 January 2015, the Court of Appeal allowed the Plaintiff’s appeal, holding that D1’s operation of D3-D31 constituted breach of his fiduciary duties owed to the Company.

7.  On 1 April 2016, the Court of Final Appeal dismissed the appeal of the Defendants.

8.  On 27 April 2016, the Plaintiff elected account of profits.

9.  On 15 June 2016, Mimmie Chan J ordered the Defendants to exhibit and verify an account of all the profits made by them during the period of account.

10.  The Defendants filed an account alleging that expenses totalling about HK$135 million (“5 Alleged Expenses”) which did not appear in any of their audited financial statements should be charged against the profits made by the Defendants; and that the Defendants had suffered net loss of about HK$10.25 million during the period of account (“the Account”).

11.  The Account was disputed by the Plaintiff.

12.  On 25 April 2017, D1 made a Sanctioned Payment of HK$40 million in settlement of the Plaintiff’s entire claim.  This figure represented less than 25% of the net profits (about HK$167 million) made by D3-D31 as shown in their audited financial statements during the period of account.

13.  On 16 May 2017, Mimmie Chan J gave detailed directions for the accounting exercise, based on a draft order substantially agreed upon by the parties (“the Assessment Order”).  Those directions included:

(a)   A court-appointed assessor will make a determination on each of the disputed items, after considering submissions from the parties. The determination is binding upon the parties.

(b)   The court will determine whether the Defendants were entitled to charge the 5 Alleged Expenses at the hearing of the account; and

(c)   The parties may adduce expert evidence on the appropriate quantum of the trademark/image rights usage fee.

14.  At the request of the Plaintiff, the Company held an EGM on 8 August 2017 for the purpose of deciding, amongst others, whether to accept/reject the Sanctioned Payment.

15.  At the EGM, the Plaintiff was told, for the first time, that D1 had purportedly transferred all but one of his shares in the Company (ie 3,799 out of 3,800 shares) to his nominees/associates, Mak Kin Shing (“Mak”) and Wong Yui To (“Wong”) just 5 days before the EGM (“the Impugned Transfers”).

16.  At the EGM, the proposal:

(a)   To accept the Sanctioned Payment was purportedly passed by 6,599 out of 10,000 shares (resolution 1);

(b)   To indemnify the Plaintiff of all costs including the costs of the accounting exercise was purportedly defeated by 6,599 out of 10,000 shares (resolution 2);

(c)   To indemnify the Plaintiff of the costs of the action but not the costs as a result of the Plaintiff’s failure to accept the Sanctioned Payment was purportedly passed by 6,599 out of 10,000 shares (resolution 3).

17.  On 18 September 2017, the Company, allegedly under the complete control of D1, issued the Sanctioned Payment Summons.

18.  In opposition, the Plaintiff avers that if the shares had not been transferred to Wong and Mak, D1 would not have been entitled to vote on those resolutions because of conflict of interest.  Resolution 1 would have been defeated by a vote of 3,400 shares (cast by the Plaintiff and Daisy Poon) to 2,800 shares (cast by Wong and Mak). 

19.  It is also the Plaintiff’s case that even if the Impugned Transfers were valid, a power of the majority to bind the minority must be exercised for the purpose of benefitting the class as a whole.  Hence, unless Wong and Mak can demonstrate that it is in the interest of all shareholders to accept 25% of the profits as the amount for which the Defendants are liable to account, their majority votes will not bind the Plaintiff and Daisy Poon.

20.  On 26 September 2017, the Defendants issued the Stay Summons.

21.  On 28 September 2017, Master S Lo directed, in paragraph 5 of his order, that the hearing of the Sanctioned Payment Summons and Stay Summons be heard together and adjourned for substantive argument before a judge (“the §5 Order”).

22.  On 23 October 2017, the Defendants took out a summons for interim stay of these proceedings (“the Interim Stay Summons”) pending determination of the Sanctioned Payment Summons and Stay Summons.

23.  On 8 November 2017, the Interim Stay Summons was heard before DHCJ Seagroatt.  Whilst dismissing the Interim Stay Summons, DHCJ Seagroatt commented that the Defendants should have appealed against the §5 Order despite the lapse of time for appeal.

24.  On 20 November 2017, the Defendants sought leave to appeal against the §5 Order out of time.

25.  On 8 December 2017, there was a hearing of the Plaintiff’s summons for specific discovery of 5 classes of documents (“the Discovery Summons”). Master Kwang directed that that Summons be adjourned to a date to be fixed for argument after disposal of the Sanctioned Payment Summons.  He also directed that a direction hearing be fixed before a judge to give proper case management directions for, amongst others, the Sanctioned Payment Summons and the Stay Summons.

26.  On 8 February 2018, this court held a directions hearing and gave, amongst others, the following directions:

(a)   Leave to Wong and Mak to be joined as defendants solely for the purpose of the Sanctioned Payment Summons;

(b)   Filing of evidence regarding the Sanctioned Payment Summons;

(c)   That the Sanctioned Payment Summons be fixed for argument with 5 days reserved because of the need to cross-examine 3 witnesses on the Impugned Transfers;

(d)   Interim stay of these proceedings;

(e)   Fixing hearing of the Stay Summons and the Appeal.

27.  The substantive hearing of the Sanctioned Payment Summons has been fixed to commence on 15 April 2019.  Filing of evidence is not yet closed.

28.  The Stay Summons, the Appeal and the Evidence Summons now come before this court. 

29.  There is not much dispute over the Evidence Summons.  The purpose of the Plaintiff’s further affirmation is to update the court on the parties’ progress under the Assessment Order and to correct various assertions made by the Defendants’ counsel at the hearing on 8 February 2018.  I give leave to the Plaintiff to file the affirmation.

THE APPEAL

30.  The Defendants are 5 weeks out of time in launching the Appeal.  The court will consider their reasons for delay, merits of the Appeal and prejudice to the Plaintiff if leave is granted.

31.  Insofar as the Appeal itself is concerned, an appeal from a master’s decision is by way of rehearing: Hong Kong Civil Procedure 2018, Vol 1, §58/1/2. 

32.  The Defendant’s main argument is that the §5 Order was erroneous.  The Master ought to have directed that (i) the Stay Summons be heard separately from the Sanctioned Payment Summons and (ii) there should be an interim stay of proceedings pending determination of the Stay Summons. 

33.  Given that the court will determine the Stay Summons substantively, paragraph 32(i) and (ii) have effectively been granted.

34.  The fact that legal advisers took the wrong procedural step is not in itself, a good reason for granting leave to appeal out of time.

35.  Ultimately, it is the merits of the Appeal and lack of prejudice to the Plaintiff that will justify the extension of time for appeal.  These are closely tied to the outcome of the Stay Summons.

THE STAY SUMMONS

Legal principles for stay

36.  The court has discretion, as a matter of case management, to grant a stay of proceedings generally or until a specified date or event: High Court Ordinance, Section 16(3); Order 1B, rule 1(2)(e) of the Rules of the High Court (“RHC”).

37.  Where, as here, the action was commenced as of right, the court should only grant a stay when there are “very good reasons” and in “rare and compelling circumstances”.  The stay must not cause injustice to the Plaintiff, and the Defendants must show that continuing the proceedings would be unjust to them.  See: Zhang Xiuhong v Liu Wenchen & ors (HCA 2118/2012, 20 July 2017), §34, per Au-Yeung J, citing Ng J’s judgment in AIG Europe Ltd & ors v Fast-Link Express Ltd & ors (HCAJ 114/2014, 10 January 2017), §§9-13.  The ultimate question is what would serve the ends of justice.

38.  Exercise of discretion would involve balancing between (1) possible wastage of Court’s time and resources and also parties’ time and costs (if there is no stay) on the one hand and (2) possible delay of the proceedings for a short period of time (if there is a stay) on the other hand: see The Al Dhabiyyah [1999] 4 HKC 414, at p 420A-F.

39.  The court must bear in mind that the underlying objectives of the court is to increase cost-effectiveness of court proceedings; ensure that a case is dealt with as expeditiously as is reasonably practicable; promote reasonable proportion and procedural economy in the conduct of proceedings; and to facilitate settlement of disputes: Order lA, rule 1(a), (b), (c) and (e) of the RHC.

The parties’ respective submission

40.  The Defendants submit that there is no real urgency in the accounting exercise having regard to the history of this case.  The Sanctioned Payment Summons and Discovery Summons are pending and the former may be dispositive of the whole action.  There are yet further steps to be taken in respect of the accounting exercise which are complex, involving voluminous documents, re-auditting, further work by the assessor and experts on both sides.

41.  On the other hand, the Plaintiff submits that the Sanctioned Payment Summons is misconceived.  There is no good reason for the court to allow the Defendants to retract from the Assessment Order made with consent of all parties.  The stay will deprive the Plaintiff of crucial evidence relevant to the determination of the Sanctioned Payment Summons.  Further, the stay will cause further delay to the accounting exercise.  The Defendants’ assertion that a stay will save costs is overblown and disingenuous.

42.  In my view, as a starting point, the Plaintiffs have won on liability since 2013.  The Assessment Order was made by consent after the Sanctioned Payment was made.  The parties are bound to proceed pursuant to the Assessment Order, unless there are very good reasons to justify a stay.

43.  Having regard to the parties’ submission, the issues boil down to whether or not the stay will:

(1)   Save costs;

(2)   Cause delay to the accounting exercise;

(3)   Cause prejudice to the Plaintiff; and

(4)   As raised by this court on its own volition, justify the imposition of conditions for the stay.

(1)  Whether stay of proceedings will save costs

44.  There are 2 summonses pending and an accounting exercise ahead.

45.  The Sanctioned Payment Summons may have a dispositive effect on the accounting exercise if the court were to direct the Plaintiff to accept it.

46.  Ms Linda Chan SC submits that the Sanctioned Payment Summons was misconceived because under Order 22, rules 15(2)(b) and 18 of the RHC, only the plaintiff may accept a sanctioned payment.  Nowhere in the RHC is it prescribed that a defendant can accept a sanctioned payment made to the plaintiff or compel the plaintiff to accept it.  If the Plaintiff ultimately fails to beat the Sanctioned Payment, he will have to bear adverse cost consequences under Order 22, rule 23.  In proposing resolution 3, the Defendants were to ensure that only the Plaintiff will have to bear such costs consequences.

47.  Without disrespect to Ms Linda Chan SC, it was the Plaintiff who (properly) requisitioned, after expiry of the 28 days for acceptance of the Sanctioned Payment, for an EGM to decide if the Sanctioned Payment should be accepted. Upon discovery of the Impugned Transfers, the Plaintiff requested for cross-examination of D1, Wong and Mak.  Given the total number of witnesses to be cross-examined, 5 days had to be reserved.

48.  Notwithstanding Ms Linda Chan SC’s indication that she no longer wishes to cross-examine the witnesses, and request that the hearing be brought forward, there is at yet no application to do so.  Accordingly, this court has to proceed on the premise that the Sanctioned Payment Summons will be heard a year later.

49.  The Sanctioned Payment Summons is not, in my view, something that can be disposed of summarily as it involves arguable questions of law and of facts. Were it plainly misconceived, the Plaintiff would have applied to have it struck out in the first place.

50.  In respect of the Discovery Summons, the Plaintiff is seeking 3 classes of documents: (i) all documents submitted by the Defendants to their auditors in respect of the audited financial statements; (ii) all correspondence passing between each of the Defendants and their tax representatives and the IRD and all documents submitted to the IRD in respect of the tax audit allegedly carried out between May 2013 and May 2015; and (iii) organization charts, list of employees and their employment contracts with each of the relevant restaurant.  The Defendants contest it, describing it as tantamount to a request for re‑audit.

51.  Logically, the sequence of hearing should be the Sanctioned Payment Summons, the Discovery Summons and then the accounting exercise.

52.  As for the accounting exercise itself, it involves accounts of 25 restaurant operator companies that covered a period of 5½ years from December 2004 to May 2010.

53.  The Account was based on audited financial statements which have also been vetted by the Inland Revenue Department in a tax audit.

54.  The Plaintiff challenges the Account by a List of Objections running into 50 pages but without a verifying affirmation.  It raised objections to almost all the expenses including the 5 Alleged Expenses.  Effectively this was to put the Defendants to strict proof and to demand for re‑auditting.

55.  In terms of documents, the Defendants have filed 3 lists of documents in support of the Account.  There are 750 carton boxes of papers.  The supporting documents for just 20 odd items of objections already provided by the Defendants have come to 1,500 pages.  There may be further documents to produce under the Discovery Summons.

56.  The Assessor is expected to do further work, namely, prepare his draft report, consider the parties’ further submissions and prepare the Assessor’s final report.

57.  With regard to expert evidence, the experts are yet to exchange their signed final reports.

58.  Ms Linda Chan SC submits that the bulk of the costs in relation to assessment of the disputed items have already been incurred. Similarly, expert evidence for assessing one of the 5 Alleged Expenses (trademark/image rights) has been completed.

59.  Even if I accept her submission, one can see from the above summary of the proceedings ahead that substantial costs will have to be incurred on discovery and the Assessor’s work.  If the court were to decide the Sanctioned Payment Summons in favour of the Defendants, substantial costs incurred and court’s time in the meantime would be wasted.

60.  Ms Linda Chan SC submits that the Defendants’ conduct shows that they were not concerned about saving costs:

(a)   The Stay Summons was only issued in late September 2017, more than 5 months after the Sanctioned Payment was made and more than 5 weeks after the EGM.  It was prompted by the Assessor’s request for information/ documents on 11 August 2017 and 12 September 2017.

(b)   Between 8 August 2017 and 18 September 2017, the Defendants continued to incur costs in these proceedings, among others, by filing an affirmation to oppose the Discovery Summons and serving their submissions on the disputed items.

(c)   The Defendants did not take any step to fix a hearing for the Sanctioned Payment Summons or the Stay Summons even though Master S Lo had given leave for them to do so.  Even after the directions hearing before this court on 8 February 2018, it was the Plaintiff, not the Defendants, who initiated the fixing of a date for the substantive hearing of the Sanctioned Payment Summons.

61.  With regard to item (a), apparently, the Plaintiff himself intended the EGM to be a bona fide meeting of shareholders to consider the Sanctioned Payment.  The “delay” of 5 months should not be held against the Defendants. The additional 5 weeks was not unreasonable delay in the circumstances of this case. 

62.  With regard to item (b), there was no interim stay order and costs did continue to be incurred. 

63.  With regard to item (c), subsequent to Master S Lo’s order to set down, there had been hearings before Deputy Judge Seagroatt, Master Kwang and this court.  The Defendants, of course, could have acted with more expedition but it cannot be said that they were not concerned with saving of costs.

64.  Overall, the stay of proceedings is likely to save costs.

(2)  Whether stay of proceedings will cause delay to the accounting exercise

65.  The answer to this issue is an obvious yes.  If a stay is granted until after disposal of the 2 Summonses, it is unlikely for the accounting exercise to take place earlier than the end of 2019.  It will be 6 years since judgment on liability. 

66.  Further, Ms Linda Chan SC points out that the Defendants have persistently defied court orders and hindered the accounting exercise, eg in filing an affirmation a year out of time of an order by consent dated 17 June 2015, ignoring the Assessor’s repeated requests to produce documents, and the Defendants’ expert saying that he was not aware of the Plaintiff’s proposed meeting or any order requiring the experts to meet.

67.  It is not necessary to resolve Ms Linda Chan SC’s submission in the preceding paragraph.  Suffice to say that at this stage, one cannot exclude the possibility that the Impugned Transfers, the subsequent Sanctioned Payment Summons and this Stay Summons may be held to be delaying tactics of D1.  The delay caused to the Plaintiff as a result of a stay should not be taken lightly.

(3)  Whether stay of proceedings will cause prejudice to the Plaintiff

68.  Delay in itself will cause prejudice to the Plaintiff.

69.  Ms Linda Chan SC also submits that the assessment of the disputed items of the Account and the 5 Alleged Expenses will shed light on the reasonableness and bona fides of the votes cast by Mak and Wong at the EGM, the reasonableness of the Sanctioned Payment, whether D1 acted for an improper purpose in the Impugned Transfers, and whether it was in the interest of the Company to accept the Sanctioned Payment.  A stay will deprive her of crucial evidence relevant to the determination of the Sanctioned Payment Summons.

70.  I am unable to agree.  The Plaintiff can put before the court any evidence relevant to the Sanctioned Payment Summons.  The Assessor’s views do not bind Wong and Mak anyway.

FINDINGS

71.  Balancing all factors, granting a stay may cause delay and prejudice to the Plaintiff.  On the other hand, continuing the proceedings may be unjust to the Defendants if the Sanctioned Payment Summons is decided in their favour.  To serve the ends of justice and for proper case management, I find that there are very good reasons to grant a stay of proceedings pending disposal of the Sanctioned Payment Summons.  It is more cost-effective and may reduce wastage of court’s time.

72.  Given that it is appropriate to grant a stay, I give leave to the Defendants to appeal out of time.

(4)  Conditions for stay

73.  Mr Edward Chan SC gives an undertaking that the Defendants will not apply for withdrawal of the HK$40 million paid into court without leave of the court.  I accept this undertaking.

74.  Interest will continue to incur before the hearing for the accounting. The Plaintiffs should be given some protection.

75.  Counsel are in dispute as to the appropriate quantum of payment into court.  Mr Edward Chan SC submits that all shareholders except the Plaintiff had voted in favour of acceptance of the Sanctioned Payment.  The Company is worth HK$125 million based on audited account but D1 is entitled to image cost. The Plaintiff’s share is 34%.  Therefore, a sum of about HK$3.5 million should be paid into court as security for the Plaintiff’s personal share of the interest (say, $120 million x 34% x 8% p.a.).

76.  On the other hand, Ms Linda Chan SC submits that interest should be computed at (HK$125 million – HK$40 million) x 8% p.a. for about a year, ie HK$6.8 million.  There should also be security for the Plaintiff’s costs at about HK$6 million because the Plaintiff does not know what D1 is doing about his assets.

77.  The court can only do its best estimates.  The interests that can be earned on the $40 million in court are much lower than judgment rate. Also, given the concerns of the Plaintiff as to the delaying tactics on the part of the Defendants and the Impugned Transfers, I adopt the formula for interest proposed by Ms Linda Chan SC.  This will also ensure that if new shareholders shall emerge their interests will not be prejudiced.  I adopt a period of 15 months to cater for the time needed for hearing and handing down a written decision on the Sanctioned Payment Summons.  The amount to be paid into court will be HK$8.5 million (ie HK$85 million x 8% p.a. x 15 months).

78.  As for security for the Plaintiff’s costs, there is lack of evidence as to D1’s (or any Defendant’s) dissipation of assets and no costs estimate to assist the court.  It is not appropriate to impose an order for security for costs.

COSTS

79.  The Appeal is out of time and so the Defendants should bear costs for seeking leave.  The 3 Summonses are closely tied and their costs should be treated together.  I apportion 20% of the overall costs to be borne by the Defendants in any event.

80.  As for the Stay Summons itself, the stay is not an indulgence to the Defendants like a stay of execution of judgment.  The stay is for the benefit of all parties despite the departure from an order by consent.  The appropriate order should be 80% of the overall costs be in the cause of the Sanctioned Payment Summons.

ORDER

81.  Upon the undertaking of D1, D3-D31 through senior counsel not to withdraw the payment of HK$40 million without leave, I order that:

(1)   There be leave to the Plaintiff to adduce the affirmation of the Plaintiff under the Evidence Summons;

(2)   There be leave to the D1, D3-D31 to appeal against Master S Lo’s order dated 28 September 2017 out of time;

(3)   The Appeal is allowed such that paragraph 5 of Master S Lo’s order is set aside;

(4)   The Stay Summons and the Sanctioned Payment Summons be heard separately;

(5)   Subject to payment by the D1, D3-D31 of HK$8,500,000 into court by 4:00 pm on 30 April 2018, there be stay of all further proceedings until after disposal of the Sanctioned Payment Summons;

(6)   On a nisi basis, the costs of the Evidence Summons, the Appeal and the Stay Summons be treated as one set of costs (“the overall costs”);

(7)   On a nisi basis, costs of the application for leave to appeal out of time be to the Plaintiff with certificates for 2 counsel, apportioned at 20% of the overall costs;

(8)   On a nisi basis, 80% of the overall costs, with certificates for 2 counsel, be in the cause of the Sanctioned Payment Summons; and

(9)   There be liberty to apply.

82.  I thank counsel for their assistance.

HCA 304/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 304 OF 2011

____________

____________

_____________

D E C I S I O N

_____________

1.  On 24 May 2013, Judgment was handed down in this case after trial. I will adopt the same definitions as they were used in the Judgment.

2.  Before the Judgment order was perfected, the plaintiff Jason invited the court to reconsider and vary paragraph 68 of the Judgment and the order made that Smart Wave is entitled to claim damages from Ricky as a result of his breach of fiduciary duties as a director of the company. 

3.  The court’s jurisdiction to vary its own judgment before it has been perfected and sealed is not disputed.  The issue is whether the court should exercise its power so to vary, and the Court of Appeal in Hong Kong has held that such power should only be exercised where it can be justified by strong reasons.  There must be finality in litigation, but the jurisdiction serves the purpose of enabling the court to deal with the just resolution of disputes in accordance with the parties’ substantive rights. 

4.  I have considered the decisions of the Court of Appeal in  Andayani v Chan Oi Ling [2000] 4 HKC 233 and Sun Jianqiang v Trans-Island Limousine Service [2004] , and I am satisfied that there are strong reasons in this case to exercise my power to reopen and reconsider paragraph 68 of the Judgment.  As I have indicated in the written directions on 6 June 2013, I had omitted in the Judgment to deal with Smart Wave’s right to elect for damages or an account of profits, and the parties had not in the course of trial argued this issue which had been identified in the Joint List of Issues agreed between the parties before trial.  In balancing the interests of finality of a judgment after trial on the one hand, and the interests of doing justice to the parties on the other hand, I consider that I should give to both parties the opportunity to make submissions and argue on the issue not canvassed at trial, as to whether the court should order that Jason suing on behalf of Smart Wave be allowed to elect between an account of profits or an inquiry as to damages, instead of limiting Jason on behalf of Smart Wave to damages, as now provided for in paragraph 68 of the Judgment.  Incidental to that, directions on discovery may have to be given in order to enable an informed election to be made by Smart Wave, and the parties should also be given a fair opportunity to make submissions to the court on that.

5.  The parties have now made submissions, not only on the power of the court to vary its own judgment, but also on whether an account of profits should be ordered against the defendants, and the scope or terms of the order and directions to be made.

6.  Although I am prepared to reconsider the order made in paragraph 68 of the Judgment, I have made clear to the parties at this hearing that the finding in paragraph 68 is clear: and that the remedies to which Smart Wave is entitled are granted on the basis that Ricky was in breach of his fiduciary duties as director, in operating sushi restaurants under the “ITACHO” name, in competition with Smart Wave’s business until it was ceased in 2010.  Whether this is right or wrong is to be canvassed on appeal, and any further directions to be made by me on the application for variation can only be made on the basis of the findings made and expressed in the Judgment.  I agree that in deciding whether to reopen the Judgment and what directions to make on discovery if the Judgment is to be varied to permit an account of profits, it is entirely inappropriate to embark, and have refrained from embarking, on “an exposition such as would be presented to a court of appeal” (the expression used in Noga v Abacha [2001] 3 All ER 513).  That should be done before the Court of Appeal, and it would be a waste of time and costs to repeat the exercise.

7.  Having found that I have the jurisdiction and should exercise my power to reopen the Judgment and to reconsider the orders to be made, the next issue is whether I should order and give the plaintiff the option to seek an account of profits.

8.  In this regard, as I have been reminded by Leading Counsel for Ricky, I have found Fine Elite, and effectively Jason, who was the only relevant protagonist acting on behalf of Fine Elite, and in effect its alter ego, as well as the only shareholder of Smart Wave now pursuing the claim against Ricky, to have acted in bad faith in applying for and seeking registration of the “ITAMAE” Service Marks.  Jason’s conduct amounting to bad faith is as described in paragraphs 37 to 39 of the Judgment.  I found in paragraph 57 of the Judgment that Fine Elite is not entitled to the remedy of specific performance by virtue of such bad faith and conduct falling short of acceptable commercial behavior.  I rejected Jason’s claim that his application for registration of the Service Marks was made and held on trust for the benefit of the Itamae Companies including Smart Wave. 

9.  An account for profits is similarly a discretionary and equitable remedy. HCA 1269/2008 which are proceedings commenced by Fine Elite, and HCA 304/2011 which are proceedings commenced by Jason on behalf of Smart Wave, are substantially connected in terms of the rights to the use of the Service Marks and the operation of the Itamae restaurants, and were tried together with common questions of fact.  Jason’s application for registration of the Service Marks was held to be repudiation of the Hero Elegant Agreement (paragraph 40 of the Judgment), and Ricky’s operation of the ITACHO restaurants commenced after the repudiation, in 2007.  The court is entitled to withhold the grant of a discretionary and equitable remedy to Jason, who is the only shareholder complaining of the operation of the ITACHO restaurants by Ricky, on the basis of his conduct in the trade mark proceedings which is tantamount to an abuse of process, and on the basis of the findings made against him in HCA 1269/2008.   I consider it to be within the power of the court, after hearing all the evidence at trial and finding that there is abuse, to decline the exercise of its discretion to grant the equitable and discretionary relief sought, notwithstanding the absence of any pleading made in HCA 304/2011 that Jason’s claim for equitable relief is barred. 

10.  The mere fact that the parties had included, in a Joint List of Issues for trial, the issue of “what consequential directions should be given to enable election to be made between the alternative remedies of damages/equitable compensation… or account of profits”, does not mean that Jason as plaintiff will not have to establish his entitlement to an order for accounts and other remedies sought, before the directions are made.

11.  On the other hand, having heard submissions from the parties on whether the court should exercise its power to vary the Judgment, the fact that there is or will be an appeal against the Judgment or variation itself is not per se a reason for the court not to vary the Judgment (subject to the caveat referred to in paragraph 6 above) and to make directions on discovery, if it is indeed proper and appropriate in the circumstances of the case so to do.

12.  In all the circumstances of this case, including the limited nature of Smart Wave’s rights in the operation of one Itamae restaurant, Jason’s conduct in relation to his claim to registration of the “ITAMAE” Service Marks, and the information which Smart Wave and Jason already have before commencement of and at trial, I consider that it would be more just and equitable to order Ricky to make payment to Smart Wave of the damages sustained by Smart Wave as a result of Ricky’s breach of duties as director, as opposed to an order for an account of profits.  Such damages are to be assessed in the usual way, as originally ordered in paragraph 68 of the Judgment.

13.  For the above reasons, after hearing the parties’ submissions, I decline to make an order giving Smart Wave the right to elect for an account of profits.  It becomes unnecessary to decide further on the scope and terms of the directions for discovery to enable election.

14.  I order that the costs of the application for variation are to follow the event, and are to be paid by Jason to Ricky, with certificate for 2 counsel. 

15.  However, the costs of the parties’ submissions for leave to file evidence for the hearing of this application for variation should be borne by Ricky, since I ruled on 20 August 2013 that no such evidence should be filed.

HCA 1269/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 1269 OF 2008

____________

_____________

J U D G M E N T

_____________

Background

1.  Jason Poon (“Jason”), Daisy Poon (“Daisy”) and the defendant Cheng Wai To (“Ricky”) were business partners engaged in the operation as franchisees in Hong Kong of a successful chain of Japanese style noodle restaurants under the trade name “AJISEN RAMEN” and “味千拉麵”.  Ricky was a self-made man who started his career as an apprentice working in a restaurant in Japan.  His interests in Japanese cuisine and Japanese culture led to his establishing contacts in Japan, one of which was Mr Shigemitsu (“Shigemitsu”) who in turn brought Ricky and Daisy together to operate the Ajisen franchise in Hong Kong.  Daisy was at that time in the food export business.  The business of the Ajisen ramen restaurants in Hong Kong (“Ajisen Business”) was operated through a group of companies (“Ajisen Group”), of which Daisy, Jason, Ricky and Shigemitsu were shareholders.  In 1996, the first Ajisen ramen restaurant was opened in Hong Kong.  The Ajisen Business continued to grow thereafter, with each Ajisen restaurant being held by a separate company within the Ajisen Group.  The Ajisen Business became so successful that it was eventually listed in Hong Kong in 2007.

2.  Daisy and her brother Jason claim that in around late 2003, the shareholders of the Ajisen Group decided to expand their business beyond Japanese style noodle shops, and began to look for suitable premises to operate a Japanese style bar/restaurant.  The idea of a Japanese style bar/restaurant was later abandoned, and it is claimed that in around 2004, the shareholders of the Ajisen Group orally agreed (“2004 Agreement”) to develop a chain of Japanese style sushi restaurants, using corporate vehicles in which the shareholders of Ajisen Group would take up shares, which sushi restaurants were to be an extension of the Ajisen Business, and would be managed and operated by Ricky.

3.  According to Daisy and Jason, Smart Wave Limited (“Smart Wave”) was incorporated in pursuance of the 2004 Agreement, as the corporate vehicle to manage and operate the first Japanese style sushi restaurant under the name “ITAMAE SUSHI” “板前壽司” at Granville Road, in Tsimshatsui. Ricky is and was at all material times the sole director of Smart Wave and the registered holder of 38% of its shares.  Daisy and Jason were at all material times the registered holder of 24% and 10% respectively of the shares of Smart Wave.  Shigemitsu and others were also allotted shares in Smart Wave.

4.  It is claimed that Ricky had acted in breach of the 2004 Agreement in setting up companies to operate sushi restaurants, but failed to allot shares in these companies to Daisy, Jason or the other shareholders of the Ajisen Group.  Between December 2004 and September 2006, 6 Itamae restaurants were established and operated by 6 different companies (“Itamae Companies”), of which Ricky was the sole beneficial owner.  These Itamae sushi restaurants apparently became an instant success, and inevitably, success breeds dispute.  Daisy and Jason claim that despite their demands, Ricky failed to allot to them any shares in the companies under which the Itamae restaurants were operated.

5.  On his part, Ricky denies that the Itamae restaurants were an extension of the Ajisen ramen restaurants.  He claims that he had planned the operation of the Itamae sushi restaurants as his own chain, and not as a mere franchisee of a Japanese corporation, to bear his own style and his personal stamp.  According to Ricky, the trademarks “ITAMAE”, “板前” and the associated logo were his own creation, and he had offered shares in Smart Wave to Daisy and Jason with the intention that Smart Wave was to operate the first Itamae restaurant only.  Ricky claims that it was all along his intention to remain the sole owner of the Itamae name and to retain the right to use the “ITAMAE” trade marks for other sushi restaurants in the chain to be owned and operated by him.  However, he admits in his testimony in court that he had not informed Ricky and Daisy of this in 2004.

6.  At around the same time as the successful opening of the second and third Itamae restaurants, plans were underway for the listing of the Ajisen Group.  In addition to the disputes as to Daisy’s and Jason’s entitlement to shares in the companies holding the Itamae restaurants operated by Ricky, there were also disputes about the ownership of the chain of Ajisen restaurants which had been opened in Mainland China.  Ricky had also complained about not receiving his entitlement to dividends from the Ajisen Group. 

The compromise

7.  In September 2006, the disputes between Ricky, Jason and Daisy in relation to their respective shareholding in the Itamae restaurants and the Ajisen restaurants were resolved, as part of the preparatory steps taken for the listing of the Ajisen Group.  The compromise involved the execution by Ricky on the first part, and Daisy and Jason acting through their corporate vehicle Fine Elite Group Ltd (“Fine Elite”, the plaintiff in these proceedings) on the other part, of a shareholders’ agreement dated 16 September 2006 (“Hero Elegant Agreement”).  The Hero Elegant Agreement governed the rights of Ricky, Daisy and Jason as shareholders of Hero Elegant Ltd (“Hero”). By then, at least 2 other Itamae restaurants had been established, each held by a company of which Ricky was the sole shareholder and director.  Hero and its subsidiaries were intended under the Hero Elegant Agreement to manage and operate the sushi restaurants using the “Itamae” “板前” trade marks.  Under the Hero Elegant Agreement, Ricky was to have 69% of the shares of Hero, whereas Fine Elite was to hold (on behalf of Daisy and Jason) 31% of the shares of Hero.

8.  At the same time, Ricky and Daisy entered into a separate shareholders’ agreement (“Favor Will Agreement”), to govern their rights as holders of 11% and 82% respectively of the shares in Favor Will Ltd (“Favor”).  The Favor Will Agreement mirrored the Hero Elegant Agreement.  Favor and its subsidiaries were to manage and operate the ramen restaurants using the “Ajisen” trade marks.

9.  Effectively, whatever the merits of the respective claims made by Jason and Daisy on the one part, and Ricky on the other part, to the Itamae Companies and the ITAMAE trade marks, the Hero Elegant Agreement was entered into to provide for their respective rights to, and for the future operation and management of the Itamae restaurants and, under the Favor Will Agreement, the Ajisen Business.  Whatever rights Jason and Daisy might have had in the Itamae Companies and the Itamae restaurants by virtue of their contribution to the setting up costs of the Itamae restaurants, they agreed (through Fine Elite) to accept 31% of the shareholding in Hero (which was to hold the interests in all the Itamae restaurants) instead of their 34% in Smart Wave (which held the first Itamae restaurant), or any other percentage Daisy had argued for in early 2006.

The dispute

10.  Daisy and Jason claim that in breach of the Hero Elegant Agreement, Ricky continued to manage and operate the Itamae restaurants using Itamae Companies which were solely owned by him, and failed to transfer the shares in the Itamae Companies to a holding company in which Fine Elite would be allotted with 31% of its issued shares, as provided for in the Hero Elegant Agreement.  By HCA 1269/2008, Fine Elite seeks specific performance of the Hero Elegant Agreement and alternatively, an account of the profits made by Ricky in breach of the Hero Elegant Agreement.  Separately, by HCA 304/2011, Jason (suing on behalf of himself and other shareholders of Smart Wave) claims that Ricky had acted in breach of his fiduciary duties as director of Smart Wave, in failing to allot or transfer shares in the Itamae Companies to Smart Wave; in failing to account for the profits made to Smart Wave; and in operating the Itamae restaurants using the “Itamae” marks.  It is also claimed by Jason, on behalf of Smart Wave, that Ricky had acted in breach of his fiduciary duties in operating Japanese style sushi restaurants under the trade names and marks “ITACHO SUSHI” and “板長壽司”, which are confusingly similar to the “ITAMAE SUSHI” “板前壽司” marks.

11.  In defence, Ricky claims that the Hero Elegant Agreement had been repudiated by Fine Elite, and that such repudiation had been accepted by him, such that he was discharged from further performance under the Hero Elegant Agreement.  He further maintains that he is the owner of, and at all material times retained the right to use, the “ITAMAE SUSHI” “板前壽司” name and mark, and that Smart Wave never had the exclusive right to use the same.

The issues

12.  The following issues arise for determination from the pleadings, evidence and arguments made at trial:

(1)   whether Ricky is entitled to registration of the “ITAMAE SUSHI” “板前壽司” marks and the associated logo (collectively “Service Marks”);

(2)   whether Fine Elite was in repudiatory breach of the Hero Elegant Agreement;

(3)   whether Ricky had accepted Fine Elite’s repudiatory breach;

(4)   whether Fine Elite is entitled to an order for specific performance of the Hero Elegant Agreement, or to damages;

(5)   whether Ricky was in breach of fiduciary duties as director of Smart Wave; and

(6)   the remedies to which Smart Wave may be entitled as against Ricky.

Whether Ricky is entitled to registration of the Service Marks

13.  Ricky and Jason have made competing claims to be the creator of the design of the Service Marks.  They have filed witness statements in these proceedings as well as affirmations in the trademark opposition proceedings.  In brief, prior to the execution of the Hero Elegant Agreement, Ricky had instructed his lawyers in May 2006 to apply for registration of the Service Marks in Mainland China before seeking registration in Hong Kong.  When Jason found out about this in August 2006, he applied for registration of the Service Marks in the name of Fine Elite in Hong Kong.  It was this application for registration of the Service Marks in Hong Kong (“Fine Elite Application”) which led Ricky to claim that the Hero Elegant Agreement had been repudiated.  Ricky initiated opposition proceedings in Hong Kong, claiming that the Service Marks were his and that Jason and Fine Elite had acted in bad faith in seeking registration of the Service Marks in Fine Elite’s name.

14.  I regard Jason’s evidence as to his alleged design and ownership of the Service Marks to be totally unconvincing and incredible.  His claim was that he had come up with the name “板前”, that he had been responsible for the decoration works of the first Itamae restaurant, and that his staff at Design Union Interior Contracting Ltd had created the design of the Service Marks for him.  In the original Reply filed in HCA 1269/2008 in November 2008, it was claimed that the Service Marks were designed by Jason and that he was entitled to apply for registration of the Service Marks in his name.  These pleas were abandoned when the Reply was amended in September 2009.  At trial, Jason could only maintain in his testimony in Court that he had participated in deciding on the colour of the design or the Chinese characters, in the course of producing the signage for the restaurant.  Nor could Jason give any clear answers when he was asked for details of which of his staff had designed the Service Marks, and how they had come up with the design.  It is clear from Jason’s evidence that he or his staff had obtained the design of the Service Marks from the computer file sent by Mr Akira (“Akira”), who was instructed by Ricky.   

15.  Ricky claims that he had made rough sketches of the design of a logo for the Itamae restaurant, and commissioned his friend Akira to produce the computer-generated design of the logo and the style of the Chinese characters for the name “板前” and of the Japanese styled English name “ITAMAE”.  Akira acknowledged in the affirmation he filed in the trademark opposition proceedings that the design of the logo he produced for Ricky was based on Ricky’s drawing of the design. 

16.  I do not consider that it is necessary in these proceedings to make a conclusive ruling on the ownership of the Service Marks.  In my judgment, Fine Elite (and Jason and Daisy through it) is not in a position to deny that Ricky had the right to apply for registration of the Service Marks in his name.  Whether or not Akira had rights in the design, which do not appear to have been asserted by him, Fine Elite expressly acknowledged and agreed in the Hero Elegant Agreement that Ricky was the person who was entitled to apply for registration of the Service Marks in his name.

17.  Under the Hero Elegant Agreement, the Service Marks are defined to be the marks “bearing the name of “ITAMAE SUSHI (板前壽司) used in the course of or associated with the Business and currently applied for registration in the name of Party A” (emphasis added).  Party A to the Hero Elegant Agreement is Ricky. “Business” is defined in clause 2.1 of the Hero Elegant Agreement to mean “the business of establishing, managing and operating Japanese style chain restaurants and related business using the Service Marks”.  Under clause 14.4 of the Hero Elegant Agreement, Ricky grants to Hero an exclusive licence to use the Service Marks worldwide during the continuance of the agreement. 

18.  Ricky’s pleaded case is that it was an express, and alternatively implied, term of the Hero Elegant Agreement that the Service Marks would be owned by and belong to Ricky, whose title and rights were recognized by Fine Elite, Jason, Daisy and Hero, but that Ricky would be obliged under the Hero Elegant Agreement to grant an exclusive licence to Hero.  Ricky claims that Fine Elite, Jason and Daisy are not entitled to dispute Ricky’s right to apply for and seek registration of the Service Marks, and that Jason’s filing of the Fine Elite Application in August 2006 was a repudiatory breach of the Hero Elegant Agreement.

19.  I agree that reading the definition of Service Marks in clause 1 and clause 14.4 of the Hero Elegant Agreement together, the parties should be taken to have acknowledged and agreed that Ricky was the person entitled to apply for and to seek registration of the Service Marks in his name, so that Hero could be granted the exclusive licence contemplated under the Hero Elegant Agreement, to use the Service Marks for the purpose of the Business during the continuance of the Hero Elegant Agreement.

20.  Jason claims that the ownership of the Service Marks cannot be construed as a term of the contract, as the Service Marks had never been an issue which was discussed prior to the execution of the Hero Elegant Agreement.  It was argued that the objective of the Hero Elegant Agreement was the vesting of the 31% of the shareholding in the Itamae Companies and restaurants in Fine Elite, for the benefit of Daisy and Jason.  Hence, it was denied that Ricky’s sole ownership of the Service Marks and his right to use and grant licences to use the Service Marks was the “common basis” for the execution of the Hero Elegant Agreement, or a condition precedent for Ricky’s execution of the Hero Elegant Agreement, as Ricky claims in his Re-amended Defence. 

21.  It must be noted that the Hero Elegant Agreement was executed by the parties who were at all material times acting under legal advice.  The agreement went through various drafts, and was revised as a result of discussions and negotiations made by the parties, all at a time when the preparatory work for the listing of the Ajisen Group was in its final stages.  Even if it was true that the matter of the Service Marks application and registration was not specifically raised for detailed discussion (which Ricky denies), I cannot accept that any party can suggest that it was not aware of the existence of the definition of Service Marks in clause 1, and clause 14 of the Hero Elegant Agreement.  It would be just as futile to suggest that any party should not be bound by clauses 1 and 14 of that Hero Elegant Agreement because it did not know the existence of the provisions and did not understand their meaning and effect.

22.  Although Jason did claim in his testimony in court that he had not read clause 14, nor the provision in the Hero Elegant Agreement which refers to the Service Marks being applied for in the name of Ricky, and that he was not concerned about the Service Marks, he accepted that he had left the preparation of and discussions on the Hero Elegant Agreement to Eugene Wong (“Eugene”), who was a director of the Ajisen Group and agent for Jason and Daisy, to Eugene’s staff, and to Francis Chan (“Francis”) who was the solicitor acting for the Ajisen Group, if not for Jason and Daisy.  The evidence of Jason and of Vincent Lee (“Vincent”, the General Manager of Ajisen and a relative of Daisy and Jason) was that he had read, checked and explained the Hero Elegant Agreement to Jason.  Vincent himself was aware of the provisions of clause 14 and the definition of Service Marks.  His evidence was that he had doubts as to whether Ricky was in a position to grant a licence to Hero for the use of the Service Marks in Hong Kong (since he knew that Ricky had only applied for registration in PRC) but had kept silent about his doubts as he considered that it was Ricky’s problem.  Jason and Vincent also accepted that Francis had explained the contents of the Hero Elegant Agreement to Jason and Daisy.

23.  Whether or not Jason knew of or understood the definition of the Service Marks and clause 14 of the Hero Elegant Agreement before he signed the Agreement, he is bound by them.

24.  On construction of the Hero Elegant Agreement as a whole and in the context of the factual matrix of the case, I reject the argument that the ownership and Ricky’s successful registration of the Service Marks was not important and should not constitute a condition of the Hero Elegant Agreement. I do not consider that the Hero Elegant Agreement was only to vest 31% shareholding in Hero to Jason and Daisy through Fine Elite.  The Hero Elegant Agreement was a shareholders’ agreement, to govern the rights and liabilities of the shareholders, so as to “maximize profits for Hero” as the Agreement recites.  The Hero Elegant Agreement was something which Jason and Daisy had been pressing for, to regularize (on their case) the operation of the Itamae restaurants as an extension of the Ajisen Business.  An important aspect of the Hero Elegant Agreement was to provide for the Business to be carried on by Hero (the corporate vehicle to be set up for this business) in the operation and management of the chain of sushi restaurants using the Service Marks.  The Service Marks were obviously of importance and value to the Business of Hero, and it was important that Hero should be able to use and exploit the Service Marks.  It cannot be that the application for registration of the Service Marks was not important, such that it would not be raised or considered during the negotiations for the Hero Elegant Agreement and for the licence to be granted thereunder to Hero.  I accept on the evidence that it was raised and accepted by all concerned that Ricky had applied for registration of the Service Marks. This is borne out by the evidence of Ricky’s solicitor, Gary Leung (“Gary”) and from the documents adduced at trial.

25.  Although Ricky came to accept in his testimony in court that he had not told Daisy and Jason at the time of the 2004 Agreement that the Service Marks belonged to him and that he could open further Itamae restaurants on his own, he maintained that he had informed Eugene during the negotiation of the Hero Elegant Agreement in July or August 2006 that it must deal with the ownership of the Service Marks, as a “precondition” to his execution of the agreement.  This is corroborated by Gary’s evidence, that after Gary had informed Ricky that the draft of the Hero Elegant Agreement Gary had received did not contain any reference to Ricky’s ownership of the Service Marks, Ricky had said to him that he had told Eugene before that the Service Marks were his, and that he had applied for registration of the same.  According to Gary, Ricky told him that he would speak to Eugene directly on the draft agreement, and following that, the next drafts of the Hero Elegant Agreement Gary received contained references in the definition of “Service Marks” to Ricky’s current application for registration of the same, and amendments to what ultimately became clause 14 of the agreement.  Whether Ricky had used the term “condition precedent” in his discussions is immaterial to my judgment.  This is more likely to be legal jargon employed in pleadings.  On the whole, having regard to Ricky’s involvement in the initial setting up of the Itamae restaurants and the design of the Service Marks, it is more likely than not that Ricky would have made it clear to Eugene that the Service Marks was his.  It was more consistent with his egoistic character that he would make such a claim in the negotiations for the Hero Elegant Agreement.

26.  I also accept the submissions made by Leading Counsel for Ricky that in the circumstances of this case, adverse inferences can be drawn from the fact that Fine Elite had chosen not to call Eugene and Francis as witnesses to refute Ricky’s case.  As early as November 2009, Ricky had asserted in his affirmation that he had discussed his ownership of the Service Marks with Eugene and had made it clear to Eugene that he would only be signing the Hero Elegant Agreement if the Service Marks were to be solely owned by him, and to be registered in his name.  Ricky continued so to assert in his witness statement filed in October 2011, and to claim that in their negotiations on the Hero Elegant Agreement, he had discussed matters directly with Eugene, and not Jason, Daisy or Vincent, as to the ownership of the Service Marks, and the licences to be granted for the use of the Service Marks.

27.  The evidence of Eugene and Francis are also important in relation to Ricky’s claims of his repudiation of the Hero Elegant Agreement in December 2006.

28.  I consider that Ricky’s evidence establishes a prima facie case of his insistence on the ownership of the Service Marks and that the Hero Elegant Agreement had to provide for his ownership of, and his rights in, the Service Marks.  Notwithstanding that, Fine Elite chose not to call either Eugene or Francis, who should be able to give evidence on matters concerning the negotiations and discussions with Ricky.  I agree that in the circumstances of this case, an inference can be drawn that even if Eugene or Francis were to be called, their evidence would not displace Ricky’s evidence (Ip Man Shan v Ching Hing Construction [2003] 1 HKC 256).

29.  It was argued on behalf of Fine Elite that clause 14 does not amount to a term or condition that Ricky was entitled to register the Service Marks in his name or that he was the owner of the Service Marks.  If the Service Marks are not or cannot be registered in his name, there is no breach of clause 14 and the only consequence is that Fine Elite would not be entitled to compel or require Ricky to grant the exclusive license to Fine Elite pursuant to clause 14.  It was also argued that clause 14 was inserted for purposes of imposing undertakings only on Ricky for the protection of the interests of Fine Elite and Hero.

30.  If it was important for Fine Elite and Hero to have the undertakings of Ricky to grant a licence to Hero to use the Service Marks for the Business, it was important that there be a licence which would confer the benefits of the use of the Service Marks on Hero for its Business.  Although Hero can use the name and mark “ITAMAE SUSHI” “板前壽司” without registration, the parties knew that Ricky had made an application for registration of the Service Marks, and clearly intended that the benefit of the registration of the Service Marks should vest in Hero.  The benefits of a registered mark are obviously more than those of an unregistered mark.  It is easier for the owner and licensee of a registered trademark to institute proceedings for infringement of the mark.  I do not accept that either the application for the registration of the Service Marks, or the licence for use of the Service Marks, can be said to be unimportant provisions, simply because there can be a licence without the registration of the Service Marks.

31.  Although it is true that clause 14 and the definition of Service Marks do not expressly provide for Ricky being the owner of the Service Marks, as between Ricky and Fine Elite, the latter acknowledged by these provisions that Ricky had applied in his name for registration of the Service Marks, that the application was still current or pending, and did not dispute or object to these matters, but recognized them in express terms.  In my view, clause 14 is clearly an acknowledgment that Ricky had the right to grant a licence for the use of the Service Marks, a right which only the owner of a trade mark can have. I cannot see how Fine Elite can in the circumstances turn around and deny that Ricky had the right to apply for and to pursue his application for registration of the Service Marks, or take steps to oppose or defeat Ricky’s application. 

32.  I accept Ricky’s case that the Hero Elegant Agreement was executed on the common basis that Ricky was the owner or otherwise the person entitled to apply for the registration of the Service Marks and to grant the licence for the use of the Service Marks to Hero. 

33.  I also accept that it was an implied term of the Hero Elegant Agreement that neither Fine Elite nor Jason and Daisy (who used Fine Elite as the corporate vehicle to obtain the benefit of the Hero Elegant Agreement) would dispute, prevent, obstruct or hinder Ricky’s application for registration of the Service Marks.  Having considered the Hero Elegant Agreement as a whole and the background facts at and before the date of the Hero Elegant Agreement, I am satisfied that the insertion of the term is necessary to give business efficacy to the Hero Elegant Agreement, and that the term is one which the parties would obviously have intended if they can be assumed to be reasonable (adopting the criteria in BP Refinery (Westernport) Property Ltd v Shire of Hastings (1978) 52 ALJR 20, and Shell UK Ltd v Lostock Garage Ltd [1976] 1 WLR 1187).

34.  The definition of Service Marks refers to Ricky’s “current” application for registration, without reference to the application being made in or confined to PRC.  The licence granted by Ricky to Hero under clause 14 extends to worldwide.  I see no basis for reading clause 14.4 of the Hero Elegant Agreement to have effect only with regard to Ricky’s application for registration of the Service Marks in the PRC.

Whether Fine Elite was in repudiatory breach of the Hero Elegant Agreement

35.  It was argued that Fine Elite’s application for registration of the Service Marks cannot constitute a breach of any condition of the Hero Elegant Agreement, so as to entitle Ricky to repudiate the agreement as he purports to do.

36.  I find that the provisions in the Hero Elegant Agreement with regard to Ricky’s application for and right to seek registration of the Service Marks are important and essential stipulations, and form the basis of the Hero Elegant Agreement.  I have found that considering the Hero Elegant Agreement as a whole, it was not merely to vest 31% shareholding of Hero in Fine Elite, as Jason and Daisy contend.  An essential purpose and stipulation of the Hero Evidence Agreement was for Hero to be licensed to use the Service Marks, with the benefit of a trademark registration.  Ricky agreed to grant the licence to Hero for the use of the Service Marks which are the subject matter of his current application.  It was one of the practical objects which the Hero Elegant Agreement was intended to achieve.  I am satisfied that the application for registration of the Service Marks and the licence to confer the benefits of the use of the registered Service Marks go directly to the substance of the Hero Service Agreement, and are essential to its very nature.

37.  On 9 August 2006, Fine Elite applied to register the Service Marks in Hong Kong, after Jason found out that Ricky had applied for registration of the Service Marks in PRC.  This was before the execution of the Hero Elegant Agreement.  Jason claimed in his witness statement that since Ricky had failed to allot shares in the second and third Itamae restaurants to Daisy and himself, and as they doubted Ricky’s sincerity in honouring the 2004 Agreement, the application by Fine Elite was made “to protect the proprietorship of the Itamae Service Marks from future abuse and use it as a leverage” to ensure that Ricky would honour the 2004 Agreement. 

38.  Notwithstanding the provisions and acknowledgments contained in the Hero Elegant Agreement, the Fine Elite Application made in August 2006 was never mentioned to Ricky prior to the execution of the Hero Elegant Agreement.  Nor did Jason take any step to withdraw the Fine Elite Application after the execution of the Hero Elegant Agreement. 

39.  Ricky had to take steps to oppose the Fine Elite Application, since the Service Marks could not be registered in Ricky’s name in view of the earlier application made by Fine Elite.  In making the Fine Elite Application, Fine Elite was asserting to be the owner of the Service Marks, when there was no basis for it so to claim.  As Leading Counsel for Ricky highlighted, Fine Elite was only acquired by Jason in June 2006, by which time 3 Itamae restaurants were already in operation.  There is sound basis to refer to the Fine Elite Application as having been made in bad faith.   In pursuing its application instead of withdrawing it after the execution of the Hero Elegant Agreement, Fine Elite was continuing the assertion and claim in its application to be the owner of the Service Marks and to be entitled to registration of the Service Marks in its name.  This was in breach of the Hero Elegant Agreement in so far as its express acknowledgment of Ricky’s right to make the application for registration of the Service Marks in his name is concerned, and in breach of the implied terms referred to in paragraph 33 above.

40.  In view of my finding (paragraph 36 above) that the provisions in the Hero Elegant Agreement with regard to Ricky’s right to apply for registration of the Service Marks in his name are important to the contract, and that the breach of Fine Elite goes directly to the substance of the Hero Elegant Agreement, I find that the breach may fairly be considered by Ricky as a substantial failure by Fine Elite to perform the Hero Elegant Agreement (Wallis, Son & Wells v Pratt & Haynes [1910] 2 KB 1003, 1012).  The breach of these provisions amounts to Fine Elite’s repudiation of the Hero Elegant Agreement.

Whether Ricky had accepted Fine Elite’s repudiatory breach

41.  In short, Ricky’s claim of repudiation and acceptance is that after he had discovered the Fine Elite Application, he confronted Jason and then had called off the Hero Elegant Agreement in December 2006.  Ricky’s case has been attacked as being unreliable, for having evolved through various versions between August 2008 when the Defence was filed, and when evidence was given by Ricky and Gary at trial.

42.  The dispute on Ricky’s alleged acceptance of Fine Elite’s repudiation turns on events which took place in November or December 2006.  I would not expect the witnesses to be able to recount in small details the events which allegedly took place at a meeting in December 2006, such as the exact words spoken during a conversation, where exactly the conversation took place, all the persons present when the words were spoken, and the response of the persons present when various words were spoken.

43.  The evidence shows that after the execution of the Hero Elegant Agreement, the parties were attending to matters in the final stages of the listing of the Ajisen Business, and many meetings took place in the offices of iOne at Chater House.  These meetings were often attended by Eugene and Francis, and some or all of Ricky, Gary, Jason, Daisy and Shigemitsu.  Ricky’s applications for registration of the Service Marks in PRC were granted in September 2006.  On 26 October 2006, Gary filed the applications for registration of the Service Marks in Hong Kong on Ricky’s behalf.  Gary’s evidence is that he learned of the Fine Elite Application on 27 November 2006, and thereafter, he confronted Jason at a meeting in iOne.  According to Gary, he asked Jason to rectify or put right the Fine Elite Application, or he would have to tell Ricky about it, and that Ricky would blow his top.  The evidence of Gary is that he had also spoken to Eugene and Francis at iOne about the Fine Elite Application.  According to Gary, Jason refused to withdraw the Fine Elite Application, and when Gary informed Ricky that Fine Elite had applied for registration of the Service Marks in Hong Kong, Ricky became very angry, and declared that he would no longer regard the Hero Elegant Agreement as binding.

44.  Leading Counsel for Fine Elite has criticized the evidence of Gary and Ricky as being inconsistent, and unbelievable.  However, it appears to me that there are in fact common features in the evidence of Gary, Ricky and Jason as to the events of the meeting in December 2006.  These common features are as follows.  Gary had spoken with Eugene and Francis and told them of the Fine Elite Application filed by Jason.  Jason had spoken to Eugene and Francis, who asked him about the Fine Elite Application and whether he was prepared to withdraw or return it (“take it back out”).  Gary had informed Ricky of the Fine Elite Application.  Ricky had thrown a tantrum at the offices of iOne and claimed (at least) that he would not proceed with the listing of Ajisen.

45.  Bearing in mind that the confrontation had taken place in December 2006, and that there had been a regular series of meetings taking place at iOne at the material time at the end of 2006, both before and after the material meeting in question, I cannot expect any of the witnesses to have a clear recollection of whether the dialogue between Gary and Ricky had first taken place in the corridor outside the large conference room, or at the door of the large conference room, or inside the large conference room.  Nor would I expect either Ricky or Gary to have a clear recollection of whether Daisy was in the conference room, when Gary spoke to Ricky about the Fine Elite Application, and when Ricky lost his temper and declared that he would not be bound by the Hero Elegant Agreement.  However, I accept from the evidence of both Gary and Jason that it is more probable than not that when Ricky learnt of the Fine Elite application from Gary, he would have lost his temper and kicked up a storm.  From his perspective, he had agreed to the Poons’ taking 31% of the Itamae restaurants.  He had told Eugene that the Hero Elegant Agreement had to provide for the Service Marks being his.  He had signed the said Agreement on that basis, and on the basis that the Service Marks would be licensed to Hero.  Then it transpired that Jason had in fact applied for registration of the Service Marks behind Ricky’s back.  If, as Jason claims, Ricky would lose his temper over even a small matter, these would constitute significant reasons for Ricky to kick up a storm and to disown the Hero Elegant Agreement.

46.  Gary’s evidence is credible.  Being the person who was first informed of the Fine Elite Application after he lodged Ricky’s application in Hong Kong, he was obviously surprised by the news.  According to Gary, and as Jason also claims, relations between Ricky, Jason and Daisy were already strained before the negotiations on the Hero Elegant Agreement and the Ajisen listing.  Gary knew that if Ricky should find out about the Fine Elite Application, he would blow his top and the listing of the Ajisen Group might be jeopardized.  According to Gary, he made attempts to resolve the problem peacefully, and during one of the meetings at iOne, he spoke to Eugene and Francis as intermediaries, to seek their help with confronting Jason.  Gary claims that both Eugene and Francis were shocked when they heard of the Fine Elite Application, and he told them that unless Jason would agree to withdraw the Fine Elite Application immediately, he would have to break the news to Ricky.

47.  Jason’s evidence is that he had received a call from Gary, who had found out about the Fine Elite Application and asked Jason if he would rectify or take care of it.  On Jason’s own testimony, he did not give Gary a reply, or indicated that he would only do so if Ricky would transfer the shares in the Itamae restaurants to Daisy and himself.  This in all probability led to Gary speaking to Eugene and Francis, as he claims, to seek their help before breaking the news to Ricky.

48.  Jason also accepts that at a meeting in the offices of iOne in early December 2006, the “two professionals” (which can only mean Eugene and Francis) spoke to him about the Fine Elite Application. 

49.  In my view, Jason’s denial of any knowledge of Ricky’s purported cancellation of the Hero Elegant Agreement is disingenuous.  He attempts to do this by first denying any direct communication with Ricky, then by denying knowledge that Ricky was angry after being told of the Fine Elite Application.

50.  On the first point, Jason conceded in cross-examination that he had spoken to Gary, and then to Eugene and Francis, about the withdrawal or rectification of the Fine Elite Application, and claimed only that the intermediaries did not tell him that Ricky had cancelled or denounced the Hero Elegant Agreement.  Although Jason originally claimed that he had not said no to Gary’s request to rectify the Fine Elite application, he claims that his response to Eugene and Francis was that he would only rectify the Fine Elite Application if Ricky transferred the 31% shareholding in the Itamae restaurants back to Daisy and himself, and this was tantamount to a refusal to withdraw the Fine Elite Application.  As Leading Counsel for Ricky pointed out, the vesting of the Poons’ 31% shareholding in the Itamae restaurants had already been dealt with in the Hero Elegant Agreement, which the parties had signed in September 2006.  The evidence also shows that documents for the issue and investing of the 31% shares in Hero Elegant had been prepared in June 2006, first to Liang Yan Ping and then to Vincent, as instructed by Jason and his camp. 

51.  Jason’s attempts to deny any knowledge of Ricky’s angry outbursts at iOne are likewise unbelievable.  This is demonstrated by his own evidence that after speaking to Eugene and Francis, he left in a hurry or wanted to leave in a hurry, as he expected that Ricky would become angry and that quarrel would ensue after his learning of the Fine Elite application and what Jason had told Eugene, Francis and Gary.  It is the evidence of both Gary and Jason that the atmosphere at iOne became very tense and awkward.

52.  Gary’s evidence is that when he learned from Eugene and Francis that Jason refused to return the Service Marks to Ricky, he told Ricky, and that Ricky was first shocked, then infuriated.  Gary heard Ricky demand in a loud voice that the Service Marks should be returned to him as they were his, and that if they were not returned, he would not recognize or comply with the Hero Elegant Agreement, and would not proceed with the listing.

53.  Whether Ricky had declared in the conference room in the presence of Daisy, or in the corridor in Jason’s presence or at the door of the conference room within Jason’s earshot, that he would not recognize the Hero Elegant Agreement, or that he did not consider the Hero Elegant Agreement to be binding, I consider that Ricky had made it clear to Francis and/or Eugene, as Jason’s representative and “go-between” (as Jason referred to Eugene and Vincent), that he considered himself as no longer bound by, or having been discharged from, the Hero Elegant Agreement.   Daisy admitted in cross-examination that she had heard, either from Jason or from Vincent, in December 2006 that Ricky had claimed to cancel the Hero Elegant Agreement.  Her attempt to change her evidence to having heard about the cancellation only after the listing of Ajisen is not convincing.  She had confirmed in her evidence that it was before the listing of Ajisen that she had heard from Francis and Eugene that Jason had made the Fine Elite Application.  It is also her claim that she had not known about the Fine Elite Application before it was raised by Ricky’s side.  This lends some support to Gary’s and Ricky’s evidence on the events and timing of the meeting in iOne.

54.  Again, Eugene and Francis were not called as witnesses on the important issue of Ricky’s alleged acceptance of repudiation of the Hero Elegant Agreement.  For the same reasons set out in paragraphs 26 to 28 above, I consider that I can draw the inference that even if called, their evidence would not displace Ricky’s and Gary’s.

55.  From the evidence, it appears that neither Ricky nor Fine Elite/Jason took any step in the performance of the Hero Elegant Agreement after December 2006.  Even Jason accepted that the professionals involved in the listing all knew that the Hero Elegant Agreement had become stale.  I have taken into account the fact that in February 2007 there were e-mails from Eugene which suggest that the parties picked up negotiations again on the possibilities of Ricky purchasing Jason’s and Daisy’s interests in the Itamae restaurants.  However, it is equivocal whether these negotiations on the eve of the listing of the Ajisen Group evidence the parties’ acknowledgment of the existence or continuation of the Hero Elegant Agreement.  Daisy accepted in cross-examination that such negotiations were in respect of Ricky’s purchase of her and Jason’s shareholding in the first Itamae restaurant, which they continued to hold, through Smart Wave, irrespective of the Hero Elegant Agreement.  On the other hand, the more overwhelming evidence is that around March 2007 and after the Hero Elegant Agreement had been purportedly terminated by Ricky, Daisy set-off the balance of monies due by the Itamae Companies to the Ajisen Group against the dividends payable to Ricky in relation to the Ajisen Group, evidencing the treatment of the Itamae Companies as belonging to Ricky personally.  These all support the fact that the parties had treated the Hero Elegant Agreement as having been discharged, as Ricky claimed in December 2006.

Whether Fine Elite is entitled to an order for specific performance of the Hero Elegant Agreement, or to damages

56.  I have found Fine Elite to be in repudiatory breach, which repudiation was accepted by Ricky.  As such, it is not necessary to find whether Fine Elite is entitled to specific performance, or to damages for Ricky’s alleged breach.

57.  If I should be wrong on repudiation and acceptance, I consider that Fine Elite is not entitled to specific performance, since it purported, by the Fine Elite Application, to be the owner of the Service Marks and to be entitled to registration of the Service Marks in its name, when it had no basis at all so to claim.  An application for registration made by someone not entitled to the mark is made in bad faith, even if the course of action falls short of dishonesty.  “Bad faith” has been held to be wide enough to cover advertent behavior which involves no breach of duty, not necessarily dishonest, but falling short of acceptable commercial behavior (DAAWAT Trade Mark [2003] RPC 11, DEMON ALE Trade Mark [2000] RPC 345).  On the evidence adduced in this case, neither Jason nor Fine Elite can be shown to have any right to claim ownership of the Service Marks.  In view of Jason’s evidence on his design of the Service Marks, which I find to be incredible, and his admission that the Fine Elite Application was filed as a leverage in his own negotiations with Ricky, I consider his claim, of the Fine Elite Application having been made for the benefit of the Itamae Companies, to be a bare assertion made after the event. 

58.  In any event, the claim that the Fine Elite Application was held on trust for, or for the benefit of, Smart Wave or Hero, is contradicted by the fact that after Fine Elite had assigned the Fine Elite Application to Jason in January 2007, when Jason sold his interests in Fine Elite to Got’a Place Holdings Ltd (“Got’a Place”) in March 2007, the sale included the Service Marks.  There was no reference to the Service Marks being held on trust for Hero, or any other party.

59.  The Fine Elite Application was not made in good faith, and having come to court with unclean hands, Fine Elite should not be allowed any equitable or discretionary relief from the court.

Whether Ricky was in breach of fiduciary duties as director of Smart Wave

60.  Jason claims in the derivative action on behalf of Smart Wave that Ricky acted in breach of his fiduciary duties as a director of Smart Wave in using the Service Marks to operate sushi restaurants other than the one operated in the name of Smart Wave.

The Itamae restaurants

61.  Irrespective of whether Ricky is the owner of the Service Marks, it has never been pleaded that Smart Wave is the owner.  On Jason’s or Fine Elite’s case in HCA 1269/2008, the shareholders of the Ajisen Group (Daisy, Jason, Ricky and Shigemitsu) agreed to develop Japanese-style chain restaurants using corporate vehicles in which all of them would be interested as shareholders, and it was pursuant to such agreement that Smart Wave was incorporated in 2004 to manage and operate the Itamae restaurant at Granville Road only.  Under the Hero Elegant Agreement, which was signed to resolve the disputes over Daisy’s and Jason’s claims to the Itamae restaurants, Ricky and Fine Elite were to become shareholders of Hero, which with its subsidiaries were to continue and carry on the business of operating chain restaurants using the Service Marks. 

62.  On the case advanced by Jason and Daisy, the shareholders of the Ajisen Group had agreed “to develop chain sushi restaurants in furtherance of the then existing business” (of the Ajisen Group), and had further agreed that “separate corporate vehicles would be formed to hold the interest of the said chain sushi restaurant business to be established” (emphasis added), following the same shareholding of the Ajisen Group (paragraph 12 of Jason’s witness statement made on 24 October 2011).  There is no doubt that, even on the Poons’ case, the intention was for a chain of Itamae restaurants to be established, using different corporate vehicles to hold and to operate different restaurants in the chain, all using the Service Marks.   The Hero Elegant Agreement also envisaged this.  Clause 14.5 provides for all chain restaurants conducting the business defined in the agreement to be owned and operated by “a Group Company”, with Hero being the holding company of all such group companies owning and operating the business of the sushi restaurants.

63.  Hence, as one of the restaurants in the chain, Smart Wave was never intended by its shareholders to have the exclusive right to carry on the sushi restaurant business using the Itamae name or Service Marks.  Even on Jason’s and Daisy’s case, the shareholders of Smart Wave knew, intended and agreed that other companies would be set up to operate other sushi restaurants, using the Itamae name and Service Marks.  I agree with Leading Counsel for Ricky that Smart Wave is not in a position to complain about the use of the Service Marks by other companies, or of the existence and operation of other sushi restaurants in the chain.  Ricky, as a director of Smart Wave, cannot be said to have acted in breach of his duties to Smart Wave by operating other sushi restaurants using the Service Marks.

The Itacho restaurants

64.  In my view, the operation of the “Itacho板長” restaurants is another matter.  It is not Ricky’s case that the Itacho sushi restaurants is part of the Itamae chain.  He claims that the “ITACHO板長” trademark which he developed is different to the Itamae mark.  He also claims that as the owner of the ITACHO trademark, he is entitled to use and license others to use the mark in the operation of sushi restaurants.

65.  Whereas I accept that the shareholders of Smart Wave knew and hence had consented to the operation of other sushi restaurants in the chain by use of the Service Marks and the name “Itamae”, there is no evidence in this case on which I can find that the shareholders of Smart Wave had consented to the operation of sushi restaurants under the “ITACHO” name.  As a director of Smart Wave, it is undisputable that Ricky was under a fiduciary duty to act in the best interests of Smart Wave, and prima facie, it is against the interests of Smart Wave for its director Ricky to operate and consent to the operation of a competing sushi restaurant, under the name of “ITACHO 板長” which I consider to be confusingly similar to the name “ITAMAE板前”.  Due to the similarity between the names “ITAMAE 板前” and “ITACHO板長”, I consider that the inevitable inference is that customers of the Itamae restaurants would patronize the Itacho restaurants in the belief that they are connected or related, such that the Itacho restaurants benefit from the goodwill in and reputation of the Itamae name.  Leading Counsel for Ricky argued on his behalf that the Itacho restaurants complement, rather than compete with, the Itamae restaurants and the Itamae business, but there is no evidence whatsoever from Ricky to support such claim.

66.  It was further argued for Ricky that the Hero Elegant Agreement was a global compromise and Jason, Daisy and Fine Elite should be taken to have consented to Ricky’s operation of the Itacho sushi restaurants as well, when they had acknowledged Ricky as the owner of the Service Marks.  The argument is that Smart Wave should likewise be taken to have waived or settled any claim it may have in relation to Ricky’s operation of any competing sushi restaurant in the name of Itacho.  These are matters which were never pleaded in Ricky’s Defence to either HCA 1269/2008 or HCA 304/2011. 

67.  In any event, Smart Wave is not a party to the Hero Elegant Agreement.  Its shareholders are different to the shareholders of Fine Elite.  I accept the submission made by Leading Counsel for Smart Wave that in the absence of assent by all shareholders of Smart Wave (as required under the principle in Re Duomatic Ltd [1969] 2 Ch 365) ) the Hero Elegant Agreement cannot be binding on Smart Wave.  The Hero Elegant Agreement makes no reference to the “ITACHO” mark, nor to Ricky’s rights in the “ITACHO” mark, since the business of the Itacho restaurants only commenced in May 2007, and was not in operation at the time of the execution of the Hero Elegant Agreement.  Nor does the Hero Elegant Agreement make provision for the relationship between Fine Elite’s shareholding of 31% in Hero, and the 34% shareholding held by Jason and Daisy in Smart Wave, and whether and how the difference was to be resolved.  The court cannot rewrite the Hero Elegant Agreement for the parties, so far as their respective rights and interests in Smart Wave are concerned, after the Hero Elegant Agreement.  I can find no basis to conclude that Smart Wave had knowledge of, or in any way compromised or waived, its claim and remedies against Ricky in respect of his operation of the Itacho sushi restaurants.

The remedies to which Smart Wave may be entitled as against Ricky

68.  Smart Wave continued its operation of the first Itamae restaurant until 2010, when it ceased business.  After that, there was no business of Smart Wave with which the sushi restaurants operated under the Itacho name could compete. I find that Smart Wave is entitled to claim from Ricky such damages as it may have sustained as a result of Ricky’s breach of his fiduciary duties as director, in operating sushi restaurants under the “ITACHO板長” name, in competition with Smart Wave’s business until this was ceased in 2010.  These damages are to be separately assessed.

Conclusion

69.  I dismiss Fine Elite’s claims made in HCA 1269/2008, with costs to Ricky, which costs include certificate for two counsel.

70.  I allow Smart Wave’s claim against Ricky in HCA 304/2011 for damages to be assessed, but since the claim only relates to Ricky’s operation of the Itacho restaurants, I make an order nisi that Ricky is only liable for 50% of the costs of HCA 304/2011. 

71.  In view of the fact that the substantial part of the trial was devoted to HCA 1269/2008 and the claims made in relation to the Service Marks and the Itamae restaurants, I will further make an order nisi that Ricky is entitled to 75% of the costs of the trial.