HARSEN INDUSTRIES LTD v. WONG YEE CHUK

HCMP 3363, 3365 and 3366/2016
and HCA 193/2018

[2024] HKCFI 1563

HCMP 3363, 3365 and 3366/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 3363, 3365 AND 3366

OF 2016

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BETWEEN

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(consolidated pursuant to the Order of the Honourable Mr. Justice Harris
dated 2 July 2020 with HCMP 3363/2016 being primary proceeding)

AND

HCA 193/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 193 OF 2018

BETWEEN

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(heard together)

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J U D G M E N T

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1.  There are before the court 4 proceedings.

2.  The first 3 petitions (“Petitions”) were presented by Mr Wong Yee Chok (黃宜祝) (“Wong”) on 1 December 2016 in which he complains that the affairs of the 3 companies described in §§(1)-(3) below have been conducted in an unfairly prejudicial manner and seeks buy-out relief under ss.723-724 of the Companies Ordinance (Cap 622) (“CO”) against the 1^st respondent, Mr Lo Po Wai Harry (羅保偉)(“Lo”), and the 2^nd respondent, Mr Pan Shi Liang (潘世良)(“Pan”). The 3 companies concerned (collectively “Companies”) are:

(1) Harsen Engineering Ltd (凱訊機電有限公司) (“HEL”) in HCMP 3363/2016;

(2) Harsen Industries Ltd (凱訊實業有限公司) (“HIL”) in HCMP 3365/2016. Wong’s wife, Ms Cheng Wai King Pat (鄭偉琼) (“Cheng”), is named as the 2^nd petitioner; and

(3) Harsen (China) Ltd (凱訊 (中國) 有限公司(“HCL”) in HCMP 3366/2016.

3.  The other action HCA 193/2018 (“Action”) is a statutory derivative action commenced by Pan in the name of HIL against Wong for breach of fiduciary duties pursuant to leave granted by Godfrey Lam J (as he then was) on 17 January 2018 under s.732 of the CO.

4.  The proceedings have a chequered history with prolonged period of inaction, procrastination and non-compliance with the directions given by the court. Although the parties had obtained an order from Harris J on 2 July 2020 on filing consolidated pleadings in the Petitions and a split trial on liability in the Action, it was only until February 2022 that the parties applied for leave to set down the proceedings for trial before a bilingual judge, which was granted by Harris J on 1 March 2022. The trial was fixed before this Court to commence on 10 January 2024 with 8 days reserved and was subsequently brought forward to 5 December 2023.

5.  Instead of proceeding with the Petitions, on 26 April 2022, Wong presented another petition seeking a winding up order against HCL on the “just and equitable ground” in HCCW 133/2022 (“WU Petition”) relying on (1) “Recent events provoking this Petition”[1]; (2) “Loss of substratum of HCL and loss of mutual trust and confidence”[2]; and (3) the absence of a reasonable offer to buy out Wong’s shares. In response, on 28 and 29 June 2022, Pan and Lo issued their respective summonses to strike out the WU Petition.

6.  After hearing the parties’ arguments on 7 December 2022, on 22 December 2022, this Court handed down a Decision [2022] HKCFI 3806 striking out the WU Petition for the following reasons (§§21-25):

(1) All the matters complained of in the WU Petition had already been raised by Wong/Cheng in the Petitions and will be determined at the trial.

(2) The loss of substratum ground was demurrable and in any event, could not form the basis for seeking a winding up order on the just and equitable ground. Wong should not be allowed to approbate and reprobate by complaining about the cessation of business of “NHEL” (as defined in §14 below), and seeking a buy-out order on the basis that HCL was a going concern in the Petitions and, at the same time, refusing to take step to apply for a combined licence so as to allow NHEL to continue to operate. Putting it another way, Wong did not come to the court with clean hands as the loss of substratum was caused by his refusal to comply with the order made by the Foshan court without any reason or justification.

(3) The absence of a reasonable offer to buy out Wong’s shares per se was not a ground to wind up HCL.

(4) It was not open for Wong to assert that Lo and Pan might not have the financial means to comply with any buy-out order to be made by the court as such assertion had not been pleaded.

(5) Wong had not demonstrated that it would be to his advantage or benefit for HCL to be wound up.

A. BACKGROUND

7.  Unless otherwise stated, the following facts and matters are not in dispute.

A1. Companies

8.  HIL:

(1) was incorporated under the former Companies Ordinance (Cap 32) (“former CO”) on 30 July 1997;

(2) has 4 shareholders and their shareholdings are Wong (40%), Lo (40%), Pan (10%) and Cheng (10%);

(3) has 2 directors, Wong and Lo;

(4) has always been managed by Wong who directed all the affairs and made all decisions for HIL;

(5) engaged in the business of selling electrical products manufactured in the Mainland, all of which were carried on through the “Mainland Sales Companies” (as defined in the next paragraph); and

(6) is the registered owner of Workshop I, 15/F, Shield Industrial Centre, 84-92 Chai Wan Kok Street, Tsuen Wan, New Territories.

9.  For the purpose of selling electrical products in the Mainland (including those manufactured by NHEL), HIL appointed the following companies established in the Mainland as agents (collectively “Mainland Sales Companies”) to conduct the sales, which issued invoices and collected payments as agents and for the benefit of HIL[3]:

Name of company	Date of Establishment - Cessation of Operation	Legal Representative
Guangzhou Gaotian High-Tech Industries Development Co., Ltd (廣州市高田高科技實業發展有限公司) (“Gaotian”)	24/7/2000 - 12/2010	Wu Chi Wen (吳翅文)
Gaotian’s Shanghai Branch	9/11/2006 - 12/2010	Qiu Ai Juan (邱愛娟)
Dongguan Yangfan Electric Co. (東莞市洋帆機電有限公司) (“Yangfan”)	19/12/2003 - present	Lin Ting (林婷)
Dongguan Gaotian Electrical Equipment Co. (東莞市高田機電設備有限公司)	31/3/2004 – 4/2016	Zhang Tie (張鐵)
Guangzhou Yibao Electrical Equipment Co., Ltd (廣州市宜保機電設備有限公司) (“Yibao”)	12/6/2006 – present	Huang Jian Min (黃嘉敏)
Yibao’s Shanghai branch	11/1/2010 -  10/2018	Qiu Ai Juan (邱愛娟)
Guangzhou Donggao Machinery & Equipment Co. Ltd (廣州市東高機械設備有限公司)	1/4/2010 - 11/2016	Zou Hui (鄒慧)

10.  It is indisputable that:

(1) HIL conducted its sales in the Mainland through the Mainland Sales Companies, which had been set up by the employees on behalf of and as agents of HIL[4]. For ease of reference, I shall refer to the sales to the customers in the Mainland as “domestic sales” while the sales to customers outside of the Mainland as “overseas sales”.

(2) The Mainland Sales Companies have always been under the control of Wong/Cheng (see Section B3 below).

11.  HIL owned the following 8 trademarks registered at the China Trademark Office (“CTMO”)[5]:

Date of registration	Registration No.	Trademark
7/6/2002	1782984	Harsen
7/6/2002	1782986	JNH Harsen
7/6/2002	1782987	JNH
21/2/2006	3892771	TGM
28/3/2010	6424973	道凯达
21/11/2011	7832960	高田开关 TAKADA
21/11/2011	7832987	凯讯实业 Harsen JNH
28/8/2011	8578605	DAOKAIDA

12.  HEL:

(1) was incorporated under the former CO on 4 January 1999;

(2) has 3 shareholders and their shareholdings are Wong (40%), Lo (40%), and Pan (20%);

(3) has always had 3 directors who are Wong, Lo and Pan;

(4) has been used as the vehicle to record all the revenues generated and the expenses incurred by the manufacturing operations of Harsen entities namely, “Guangzhou Harsen” (as defined in §16 below) and NHEL, and hence the profits generated from manufacturing operations[6];

(5) has not carried on any substantive business in its own right[7]; and

(6) is the registered owner of Workshop J, 15/F, Shield Industrial Centre, 84-92 Chai Wan Kok Street, Tsuen Wan, New Territories.

13.  HCL:

(1) was incorporated on 13 October 2000 under the former CO;[8]

(2) has 3 shareholders and their shareholdings are Wong (40%), Lo (40%) and Pan (20%);

(3) had Wong, Lo and Pan as its directors until Wong was removed on 5 November 2022;

(4) had always been managed by Wong, who managed and directed all the affairs and made all decisions for HCL until he was removed as director; and

(5) holds 100% equity in NHEL and does not carry on any business in its own right.

14.  Foshan Nanhai Harsen Electric Co Ltd (佛山市南海凱訊電器有限公司) (“NHEL”)[9]:

(1) was established as a Sino-Foreign joint enterprise[10] in the Mainland with HCL as its “foreign” equity-holder;

(2) was granted a business licence on 6 January 2002 for an operating period of 20 years, that is, until 6 January 2022;

(3) has since September 2007 been wholly owned by HCL. Its paid-up capital is RMB18,115,332.51[11];

(4) engaged in the business of manufacturing and production of electrical products until 2016 when it ceased operation;

(5) owns a piece of land of about 15,162.40 sqm in Nanhai District, Foshan city in the Mainland (“Land”);

(6) owns a factory built in 2 phases on the Land (as described in §18 below) (“Factory”);

(7) carried on manufacturing and production of electrical products at the Factory;

(8) had Wong, Lo and Pan as its directors. Amongst them, Wong was the Chairman of the board and legal representative until a resolution was passed on 6 April 2022 to remove him from such positions (although Wong remained the legal representative of NHEL on the record kept at the State Administration of Industry and Commerce (“SAIC”)); Lo had been the Vice Chairman; and Pan had been the General Manager and was in charge of and managed the day-to-day manufacturing operations of the Factory; and

(9) has since October 2022 been in liquidation in the Mainland upon Yibao’s application[12].

A2. Inception of Companies

15.  Wong and Lo came to know each other when they were employed by Yardway Engineering Limited (“Yardway”) in Hong Kong. Wong was the general manager of Yardway and Lo was his subordinate. They came to know Pan, who was a resident in the Mainland at the time, through business dealings.

16.  In 1997, Wong and Lo left Yardway and set up their own business in the name of Guangzhou Haizhu Harsen Engineering Operation Department (“Guangzhou Harsen”) to engage in manufacturing and production of electrical products in the Mainland [13].

17.  In July 1997, Wong and Lo incorporated HIL. In January 2000, HIL allotted shares equivalent to 20% shareholding to Pan.

18.  In 2001, Wong, Lo and Pan decided to expand Guangzhou Harsen’s manufacturing operation and formed NHEL in December 2002 as the vehicle to acquire and hold the Land and subsequently the Factory.

(1) In 2002, a workshop of 1,808 m² and a dormitory of 977.30 m² was built on the Land.

(2) Thereafter, Guangzhou Harsen transferred its manufacturing operation to NEHL[14]. Wong was appointed as the legal representative and Chairman of the board of NEHL in 2002[15].

(3) In 2011, an additional workshop of 5,955.89 m² and dormitory of 1,356.88 m² were built on the Land.

(4) The Land and the Factory were acquired and built using the funds provided by HEL to HCL by way of interest-free loans.

A3. Financial state of the Companies

19.  Amongst the Companies, HEL was the only company which had declared and paid any dividends to the shareholders.

20.  According to HEL’s audited financial statements (“HEL’s AFS”) for the year ended 31 December 2014:

(1) As at 1 January 2013, HEL had retained profits of HK$13,554,565.

(2) In the year ended 31 December 2014, HEL declared and paid interim dividend of HK$2,500,000 to its shareholders.

(3) Taking into account the loss of HK$2,559,097 suffered in that year, HEL’s retained profits as at 31 December 2014 was HK$8,935,528.

21.  In August 2015, HEL paid interim dividends in the aggregate amount of HK$3,120,000 to Wong (HK$1,000,000), Lo (HK$1,080,000) and Pan (HK$1,040,000).

A4. Companies owned and/or controlled by Wong/Cheng

22.  The following companies featured in the complaints made by Pan and Lo are closely related to Wong/Cheng (collectively “Wong’s Companies”):

Name of company	Date of Establishment[16] - Deregistration	Shareholders	Directors
F.E.L. Company Ltd (快利來有限公司) (“FEL”)	9/3/1993 – present	Wong, Cheng	Wong, Cheng
Harsen China Investment Company Ltd (凱訊中國投資有限公司) (“HC Investment”)	14/3/2006 – 14/3/2014	Wong, Cheng (until 16/3/2009)   蔡顯彪, 蔡顯志 (from 17/3/2009)	Wong, Cheng (until 5/3/2009)
志成動力科技 (杭州)有限公司(“Zings”)	18/5/2006 – present (PRC)	HC Investment (60%), up to 21/8/2012	--
Harsen Industries (China) Company Ltd (凱訊實業 (中國) 有限公司) (“Harsen China”)	13/2/2015-4/8/2017	Wong, Cheng	Wong, Cheng
廣州港凱訊機械設備有限公司 (“Harsen Mechanics”)	10/8/2015 -28/7/2020 (PRC)	Harsen China (until 14/8/2016)   From 15/8/2016: 蔡建國, 吳翅文	Wong (until 14/8/2016)   From 15/8/2016: 蔡建國
Takada China Investments Company Ltd (高田中國投資有限公司) (“Takada China Investments”)	4/9/2014-23/6/2017	Wong, Cheng	Wong, Cheng
佛山市南海區新高田電氣有限公司 (“Foshan Xingaotian”)	29/5/2015 – present (PRC)	李杰鋒	李杰鋒
Yeepower Industries Ltd (“Yeepower”)	23/10/2015 – 23/11/2018	Wong, Cheng	Wong, Cheng
Jinzhu Environmental Technology Ltd (金株環保科技有限公司) (“JET”)	22/2/2017-15/3/2019	Wong, Cheng	Cheng

23.  Wong/Cheng do not dispute that they owned and controlled Wong’s Companies save and except:

(1) HC Investment: Wong/Cheng say that the positions are “nominal positions only”; and

(2) Zings: Wong/Cheng say they never assumed the position as directors, whereas Lo says that Wong/Cheng were directors from 18 May 2006 to 21 August 2012.

A5. Disagreements between shareholders

24.  In March 2015, the shareholders of the Companies began to have disagreements over how the business and operation of HIL and NHEL should be conducted. These form the subject matters of Wong/Cheng’s complaints under “Exclusion from Management of NHEL” (Section C4.1 below), “Material changes to Agreed Mode” (Section C4.2 below), “Diversion of business” (Section C4.3 below) and “Closure of NHEL” (Section C4.3 below).

25.  In the next few months, the following 3 companies were established in the Mainland, which engaged in the same business as the Mainland Sales Companies:

Name of company	Date of Establishment	Equity Holder/ Director	Legal Representative
Foshan Ruikang Electronics Science and Technology Co., Ltd (佛山市睿康電子科技有限公司) (“Ruikang”)	30/4/2015	Jiang Hua An (蔣華安)  (“Jiang”)   Lei Zhen Mei (雷振梅) (“Lei”)	Jiang
Foshan Zhuohui Machinery & Equipment Co., Ltd (佛山市卓輝機電有限公司) (“Zhuohui”)	6/5/2015	Zhang Wen Hui (張文輝) (“Zhang”)   Tsou Wei (鄒薇)	Zhang
Foshan Zhuorui Electronic Automation Co., Ltd (佛山市卓睿電子自動化有限公司) (“Zhuorui”)	28/8/2015	Xie Li Hua (謝利華) (“Xie”)   Huang Yong Hui (黃永輝)	Xie

26.  There is a dispute as to who owns Ruikang, Zhuohui and Zhuorui. Wong/Cheng’s case is that they are beneficially owned and/or controlled by Pan/Lo through the former employees of NHEL or Pan’s wife. Pan/Lo do not dispute that Jiang and Zhang were former employees of NHEL and Lei is Pan’s wife, but contend that these individuals own and manage the companies in their own right.

A6. Transfer of trademarks from HIL to Harsen China

27.  Without any knowledge of Lo/Pan or the approval from HIL, on 27 December 2015, Wong caused all the trademarks registered in HIL’s name be transferred to Harsen China, a company owned and controlled by him (70%) and Cheng (30%) who were its only directors.

28.  On 29 February 2016, Wong caused Harsen China to apply for registration of the trademark of “HARSEN” (registration no. 19168356) but the application was not approved by CTMO[17]. Thereafter, Wong caused Harsen China to register the following additional “Harsen” trademarks at the CTMO[18]:

Date	Registration No.	Trademark
21/9/2016	17514607	JNH
21/9/2016	17514608	Harsen
21/9/2016	17514609	JNH Harsen
7/4/2017	19168357	HARSEN

29.  It was only until 25 January 2017 that Wong caused Harsen China to transfer all the trademarks registered in its name to HIL. This was followed by the deregistration of Harsen China on 4 August 2017[19].

A7. Financial position of NHEL

30.  In each of the financial year from 2013 to 2016, NHEL’s audited financial statements (“NHEL’s AFS”) had been approved by the board of directors and confirmed by the auditors as reflecting the true and fair view of the financial state of NHEL.

31.  In each of the subsequent financial year from 2017 to 2020, the auditors expressed either qualified opinion (in respect of 2017 AFS) or disclaimer of opinion (in respect of 2018, 2019 and 2020 AFS) primarily because they had not been able to verify the existence or recoverability of the cash and receivables recorded in those AFS.

32.  In July 2015, the Mainland Sales Companies stopped purchasing the products manufactured by NHEL. According to its AFS, NHEL began to suffer a loss from 2015:

Year ended 31 December	Loss for the year (RMB)	Retained profit/accumulated loss (RMB)
2015	-36,073.16	1,238,635.37
2016	-696,843.47	348,114,62
2017	-1,501,601.51	-1,322,464.27
2018	-1,882,428.72	-3,457,916.16
2019	-1,735,277.43	-5,232,137.93
2020	-746,571.96	-5,984,011.97

33.  By 2016, the business of NHEL had deteriorated to such a state that it did not have much operation and the Factory became idle.

34.  Pan, with the agreement of Lo, decided to lease the Factory to a third party. Pursuant to a tenancy agreement (廠房租賃合同) dated 24 June 2019 entered into with Foshan City Aluminium Nest Technology Company Limited (佛山市鋁巢科技有限公司), the primary production area on the first level (大車間首層) (1,947 m²); the secondary production area (簡易車間) (1,218 m²); 9 rooms on the second floor of the dormitory building (宿舍樓二樓共9間房間); green/planted area (綠化空地) (1,450 m²); and road (路段) (821 m²) were let at the monthly rent of RMB82,500.

A8. Inspection Proceedings

35.  On 25 May 2021, Lo commenced proceedings in HCMP 719/2021 against Wong and HIL for inspection of the books and records of HIL pursuant to ss.374-375 of the CO and the common law.

36.  On 6 January 2022, this Court ordered Wong to provide the following documents for Lo’s inspection within 42 days (“Inspection Order”):

(1) In respect of HIL, its general ledgers, bank statements, contracts and invoices for products purchased and sold, list of inventories and lists of accounts payables and receivables from 2014 to the date of the Order; and

(2) In respect of Mainland Sales Companies, their audited accounts, bank statements, lists of accounts payables and receivables, list of inventories and records of products sold to customers and lists of all their customers from 2014 to the date of the Order.

37.  Wong did not comply with the Inspection Order. By summons issued on 10 May 2022, Lo applied for a further order to compel Wong to comply with the Inspection Order within an extended time limit. On 27 May 2022, this Court ordered Wong to comply with the Inspection Order within 21 days.

38.  Lo was not satisfied with the documents produced by Wong. On 1 September 2022, Lo obtained leave from this Court to commence contempt proceedings against Wong. This was followed by the contempt proceedings in HCMP 1444/2022 commenced against Wong, which was scheduled to be heard before Keith Yeung J on 6, 7 and 22 February 2024. In the Judgment handed down on 12 March 2024, Wong was found to be in contempt of court. At the hearing of mitigation and sentencing held on 20 May 2024, Wong was fined HK$150,000 and was ordered to pay indemnity costs to Lo.

B. PROCEEDINGS IN MAINLAND

39.  During the period from 2017 to 2022, NHEL became embroiled in many legal proceedings in the Mainland, which were either brought by Yibao against NHEL, or by NHEL against Yibao or Wong. Amongst them, the following proceedings and the findings therein are relevant to the issues raised by the parties in the Petitions and the Action.

B1. NHEL’s claim vs Yibao for unpaid purchase price (RMB1,016,184.75)

40.  On 10 August 2017, NHEL (under the control of Pan/Lo) commenced a claim against Yibao in Guangzhou City Haizhu District People’s Court (“Haizhu court”) (2017) 粵0105民初7225 號 for unpaid purchase price in the amount of RMB1,016,184.75. As recorded in the judgment given by Haizhu court on 16 July 2018 (“2018 Judgment”), the bases of NHEL’s claim and Yibao’s defence, may be summarised as follows:

(1) Upon NHEL and Yibao’s verification of their respective accounts, on 23 March 2015, Yibao confirmed that as at 31 December 2014, it owed NHEL the amount of RMB2,242,205.33 for the products sold and supplied by NHEL;

(2) The parties continued to have business transactions. As at 30 June 2015, upon verification of their respective accounts, Yibao owed NHEL the amount of RMB1,016,184.75;

(3) Yibao did not dispute that after verification of the accounts on 23 March 2015, it owed NHEL RMB2,242,205.33, but contended that it had paid an aggregate amount of RMB2,619,429.82 to NHEL and did not owe any amount;

(4) Yibao further claimed that the parties’ relationship had deteriorated to such a state that from July to October 2015, NHEL wrongfully retained all the products which Yibao had purchased and paid for together with other products temporarily kept at the Factory (collectively “Retained Products”) as a result of which Yibao suffered a loss of RMB1,847,477; and

(5) NHEL admitted that it had not complied with Yibao’s request for taking the Retained Products but claimed that it was due to Yibao’s inability to produce documents for taking the products (提貨證明).

41.  After considering the evidence and submissions of NHEL and Yibao, in the 2018 Judgment Haizhu court held that:

(1) Yibao had confirmed that as at 31 December 2014, it owed NHEL the sum of RMB2,242,205.33;

(2) After 31 December 2014, NHEL sold products at the aggregate price of RMB1,672,862;

(3) After 31 December 2014, Yibao paid RMB2,619,429.82 to NHEL;

(4) Taking into account the purchases and the payments, Yibao still owed NHEL the sum of RMB1,295,637.51;

(5) As the amount claimed by NHEL (RMB1,016,184.75) was less than the amount owed by Yibao, the court found in favour of NHEL;

(6) Yibao was ordered to pay RMB1,016,184.75 to NHEL within 10 days of the 2018 Judgment together with interest accrued thereon from the date of NHEL’s claim (“2018 Judgment Debt”); and

(7) Yibao’s cross-claim for loss of the Retained Products was dismissed on the grounds that (a) NHEL was entitled to ask for documents before it released the Retained Products but Yibao refused to provide the same; and (b) there was no sufficient evidence to prove that Yibao had suffered a loss of RMB1,847,477.

42.  Yibao appealed to Guangzhou City Intermediate People’s Court (“Guangzhou court”) against the 2018 Judgment. The appeal was dismissed by Guangzhou court in its judgment dated 28 October 2021 in (2018) 粵01民終結17357號 (“2018 Appeal Judgment”). In the 2018 Appeal Judgment, Guangzhou court:

(1) observed that prior to the dispute, the parties’ established mode of dealings had been that: (a) NHEL would manufacture electrical products in accordance with Yibao’s requirements; (b) the products manufactured would be treated as having been transferred to Yibao even though the products were kept at the Factory, and Yibao would sign a receipt to acknowledge the transfer (轉倉簽收單) (“Transfer Receipt”); (c) Yibao would not take the products, but would instruct NHEL to deliver the products to the end customers directly;

(2) held that once Yibao signed the Transfer Receipt in respect of the Retained Products, the transfer was completed, and NHEL should be regarded as having fully discharged its obligation to deliver the Retained Products to Yibao; and

(3) further held that although the parties disputed the manner in which Yibao should take delivery of the Retained Products, they could resolve their difference through communications. There was no evidence to prove that the Retained Products had been destroyed or lost, and Yibao’s cross-claim failed.

43.  On 23 November 2018, NHEL applied to Haizhu court for enforcement of the 2018 Judgment against Yibao. On 26 July 2019, Haizhu court in (2018) 粵0105執9307 號 handed down its judgment noting that Yibao had bank balance of RMB27,313.10, no other assets had been identified and Yibao had ceased to carry on business at its address whereupon the case was closed.

B2. Yibao’s claim against NHEL for Retained Products (RMB1,672,862)

44.  On 28 June 2021, Yibao commenced another claim at Foshan City Nanhai District People’s Court (“Nanhai court”) against NHEL in (2021) 粵0605民初2373 號 for compensation for loss of the Retained Products in the amount of RMB1,672,862.

45.  Nanhai court in its judgment in (2021) 粵0605民初2373 號 (“2021 Judgment”) considered the issues (1) whether Yibao should be allowed to re-litigate its claim for the Retained Products; (2) whether the Retained Products had been lost in whole or in part; and (3) if the Retained Products were lost, whether NHEL was at fault and the extent of its liability.

46.  In respect of the aforesaid issues, Nanhai court held in the 2021 Judgment that:

(1) Yibao’s claim did not constitute a re-litigation of the issues decided in the 2018 Judgment as the factual basis of the claims was different. The basis of Yibao’s cross-claim was that NEHL had refused to transfer the Retained Products, whereas in the new claim, the basis of Yibao’s claim was that the Retained Products had been lost.

(2) There was no dispute that the Retained Products had been sold to Yibao as evidenced by the Transfer Receipt, and the Retained Products remained in the possession of NHEL pending delivery instructions from Yibao. In the enforcement proceedings brought by NHEL against Yibao in (2020) 粵0105執恢1042 號, a valuer had conducted a stock take and concluded that only part of the Retained Products remained at the Factory. Taking into account the fact that Yibao had since July 2015 not taken delivery of any products, the difference between the Retained Products and the products remained at the Factory must have been lost due to the fault of NHEL.

(3) Based on the parties’ established mode of dealings, NHEL had assumed the obligation to preserve the Retained Products until Yibao took delivery. As part of the Retained Products were lost while they were in NHEL’s possession, NHEL bore the primary responsibility for their loss. However, Yibao was also at fault in failing to take delivery within a reasonable period, particularly after NHEL had informed Yibao’s lawyer that it could take the Retained Products. The court held that NHEL should be liable for 60% of the Retained Products lost, while Yibao should be liable for 40%.

(4) Taking into account the prices at which the Retained Products were sold and the remaining products, the value of the Retained Products lost was RMB1,672,862. NHEL was liable to compensate Yibao for RMB983,877, being 60% of the Retained Products lost, which had to be paid within 10 days of the judgment.

47.  Both Yibao and NHEL appealed against the 2021 Judgment to Foshan City Intermediate People’s Court (“Foshan court”) in (2021) 粵06民終10345號and adduced new evidence during the appeal:

(1) Yibao adduced evidence to show that during 2014, Yibao had purchased products in excess of RMB10 million from NHEL, which far exceeded the products purchased in 2015.

(2) NHEL produced records of proceedings before Haizhu court, during which Yibao confirmed that the cross-claim for the Retained Products (RMB1,847,477) already included all the products purchased from NHEL in 2015. This shows that Yibao lied to the Foshan court when it said that its claim for RMB1,672,862 was not the same as the cross-claim rejected by Haizhu court.

(3) Wong in his capacity as legal representative of NHEL attended the hearing and admitted that NHEL had sold the Retained Products to another customer.

48.  On 28 October 2021, Foshan court gave judgment in (2021)粵06民終10345號民事裁決 (“2021 Appeal Judgment”) holding that:

(1) Although the Retained Products claimed by Yibao in the cross-claim before Haizhu court overlapped with the claim made by Yibao in Nanhai court, the factual bases of the claims were different. Therefore, Yibao’s claim did not constitute a re-litigation of the same issue decided by the court;

(2) The parties had conducted their business following the established mode pursuant to which Yibao left the Retained Products which it had purchased for RMB1,672,862 at the Factory. Yibao had already given instructions to NHEL to deliver most of the Retained Products to the customers but NHEL did not comply with the instructions;

(3) There was a mis-calculation of the value of the Retained Products which had been lost, and the correct amount should be RMB1,617,095;

(4) NHEL should be wholly liable for the loss of the Retained Products given that (a) it had assumed responsibility to preserve the Retained Products; (b) NHEL was unable to show that the Retained Products was lost owing to a reason beyond its control; and (c) Wong admitted that NHEL had unilaterally sold the Retained Products; and

(5) NHEL was ordered to pay RMB1,617,095 to Yibao (“2021 Judgment Debt”) within 10 days of the judgment.

49.  NHEL (under the control of Lo/Pan) did not pay the 2021 Judgment Debt to Yibao, and applied for a re-trial of Yibao’s claim.

50.  On 24 October 2022, Guangdong Provincial Higher People’s Court in its judgment (廣東省高級人民法院民事裁定 (2022) 粵民申547號) dismissed NHEL’s application for re-trial appeal and upheld the 2021 Appeal Judgment.

B3. NHEL’s claim against Wong

51.  In 2018, NHEL commenced a claim at Nanhai court in (2017) 粵0605 民初14732號 and obtained an order requiring Wong to attend the Tax Bureau and SAIC for the purposes of verifying his identity as legal representative of NHEL and assisting NHEL to apply for the Combined Licence[20]. However:

(1) Wong did not comply with the order and lodged an appeal against the order.

(2) On 26 April 2019, Foshan court handed down judgment in (2018) 粵06 民終9508號民事判決書, upholding the order.

(3) NHEL applied for enforcement of the order against Wong but subsequently withdrew it on the ground that the directors had been trying to resolve the dispute. On the other hand, Wong claimed that he did not have possession of the Chops and therefore could not make the application required by the order, and NHEL’s representative did not go to the relevant Bureau.

52.  On 19 May 2020, NHEL commenced another proceeding in Nanhai court in (2020) 粵0605民初11985號against Wong claiming compensation for the loss suffered as a result of Wong’s acts in (1) refusing to sign document for extension of a RMB2 million revolving loan which had been granted by a bank to NHEL (“Loan”); (2) refusing to assist NHEL to apply for the Combined Licence; (3) causing Yibao not to pay the debt owed to NHEL; and (4) transferring the trademarks registered at CTMO to Harsen China[21].

53.  In the judgment dated 14 May 2021 in (2020) 粵0605民初11985號 (“2^nd 2021 Judgment”), Nanhai court held that:

(1) Under PRC law, a director and senior management personnel owe a duty of fidelity to the company. If the director acts in breach of his duty and the company suffers a loss as a result, he may be liable to compensate the company.

(2) Loan: In April 2015, NHEL informed Wong that the Loan would expire on 17 June 2015 and requested Wong to arrange a time to sign the documents for extension of the Loan. Wong did not comply with the request on the ground that NHEL had been under the control of Pan/Lo and he was not able to decide whether NHEL required the Loan. However, despite its importance, no board meeting had been convened to discuss the matter and no resolution was passed. The ground put forward by Wong that NHEL had sufficient liquid assets appears to be reasonable.

(3) Combined Licence: Wong had an obligation to assist NHEL in applying for the Combined Licence. Although NHEL had applied for enforcement of the order against Wong, the application was withdrawn. This shows that NHEL had been able to continue to operate without the Combined Licence, and no loss was suffered as a result.

(4) Yibao: Yibao had been using the emails system of harsenindustries.com and jnharsen.com both owned by HIL. All internal emails of Yibao were copied to Wong/Cheng and Cheng directed and handled the affairs of Yibao. This shows that Yibao had been under the control of Wong/Cheng.

(5) Yibao is a related company of “Harsen” companies. However, the many legal proceedings between Yibao and NHEL show that the interest of Yibao was not aligned with the interest of other “Harsen” companies.

(6) Yibao’s failure to pay: Wong owed duty of fidelity to NHEL and should ensure that the dealings between Yibao and NHEL were conducted fairly and in the interest of NHEL. However:

(a) Yibao did not pay the 2018 Judgment Debt (RMB1,016,184.75). This led to the liquidation of NHEL. No enforcement action could be taken against Yibao as it had no assets and NHEL suffered a loss as a result.

(b) Shortly after NHEL had commenced proceedings against Yibao on 10 August 2017, on 18 September 2017, Cheng instructed the employees of Yibao to transfer all the customers (and hence all its business) to Yangfan. As a result of the transfer, Yibao did not have any income and could not pay the 2018 Judgment Debt. Although the instruction was given by Cheng, Wong must knew and agreed with the instruction as he had been in actual control of Yibao. In so acting, Wong acted in breach of his duty of fidelity and should be liable to compensate the loss suffered by NHEL.

(c) As there was no evidence on the financial position of Yibao before the transfer of customers to Yangfan, taking into account the scale of the transaction, the amount owed, the timing and the chance of causing loss to NHEL, Wong was adjudged liable to compensate NHEL for RMB500,000.

(7) Transfer of trademark: Although the trademarks were transferred to Harsen China, no evidence was adduced by NHEL to prove the loss suffered and the claim for compensation failed for that reason.

(8) Wong was ordered to pay RMB500,000 to NHEL within 10 days of the judgment.

54.  Wong and NHEL both appealed against the 2^nd 2021 Judgment to Foshan court in (2021) 粵06民終11800號. In the appeal, Wong contended that Yibao and Yangfan are companies belonging to the Harsen Group[22].

55.  In the judgment dated 27 December 2021 in (2021) 粵06民終11800號民事裁決 (“2^nd 2021 Appeal Judgment”), Foshan court set aside the order requiring Wong to pay RMB500,000 primarily on the ground that the new evidence adduced by Wong showed that NHEL had since July 2015 been in possession of the Retained Products. If the Retained Products were lost by the time Yibao became indebted to NHEL, the loss suffered by Yibao could be set-off against the amount owed by Yibao to NHEL. Conversely, if the Retained Products remained in NHEL’s position, NHEL could sell the Retained Products and apply the proceeds to pay the 2018 Judgment Debt. Accordingly, NHEL did not suffer any loss as a result of Yibao’s failure to pay the debt owed to NHEL.

B4. Liquidation of NHEL

56.  Meanwhile, on 2 December 2021, Yibao applied to Nanhai court in (2021) 粵0605執30115號 for enforcement of the 2021 Judgment which led to foreclosure of the Land and the Factory. On 31 May 2022, Yibao withdrew the enforcement proceedings, which came to an end on 2 June 2022. Thereafter, Yibao applied to Nanhai court in (2022) 粵06清初1號to put NHEL into liquidation. The application was refused primarily on the grounds that (1) the value of NHEL’s assets far exceeded the 2021 Judgment Debt, (2) Yibao could have continued with the enforcement proceedings, and (3) there was no necessity for putting NHEL into liquidation.

57.  Yibao appealed against the aforesaid judgment to Foshan court and sought an order to put NHEL into liquidation. As recorded in the judgment dated 30 August 2022 in (2022) 粵06清終1號 (“2022 Judgment”):

(1) Yibao relied on the grounds that (a) the 2021 Judgment Debt had not been paid; (b) NHEL’s operating business had expired on 6 January 2022 and no valid resolution had been passed or provided to SAIC for extension of the operating period of NHEL; (c) the management of NHEL had not been functioning and its manufacturing activities had ceased a few years; and (d) no liquidation committee had been appointed within 15 days of the expiry of the operating period.

(2) NHEL agreed that liquidation was the only way to protect the interests of the shareholder and creditors, in view of the fact that (a) its operating period had expired; (b) the ongoing dispute between the directors; (c) from 2016 NHEL did not have any operating business; (d) some of the assets had been wrongfully transferred away from NHEL; (e) HCL was subject to the WU Petition; and (f) NHEL had since 2016 ceased to have any business operation, the board had been in deadlock and only 3 employees including one director remained.

(3) HCL (under the control of Lo/Pan) also agreed with liquidation for the same reasons given by NHEL. It cited the additional reasons that no resolution could have been passed by the directors for extending the operating period of NHEL, and the assets of NHEL had been depleted substantially since cessation of its operation in 2016. This could be seen from NHEL’s AFS for the years from 2017 to 2019.

(4) Foshan court set aside the order of Nanhai court and ordered NHEL to be put into liquidation.

58.  On 12 October 2022, Nanhai court appointed Yuan Hao Law Firm (廣東源浩律師事務) as liquidation committee of NHEL (“Committee”).

59.  The Committee took the following steps to deal with the assets of NHEL:

(1) On 23 March 2023, the Committee submitted a proposal which stated, inter alia, that as at 5 May 2022, NHEL had bank balance of RMB5,239.08. The proposal was approved by Nanhai court on 17 April 2023.

(2) On 27 April 2023, the Committee informed NHEL’s creditors, legal representative, directors, and shareholder (i.e. HCL) that in accordance with the proposal, the Factory and other infrastructural assets on the Land would be sold by way of auction at the initial asking price of RMB30,873,730.

(3) At the auction held on 29 May 2023, the Factory and infrastructural assets were sold for RMB43,170,000.

(4) On 12 June 2023, the remaining assets were sold to an independent third party, Luo Jian Cheng (羅建成), at RMB500,000.

(5) On 2 August 2023, the Committee informed the parties that it would submit a supplemental liquidation proposal No. 2 of the same date to the court.

C. ISSUES

60.  In these proceedings, Wong/Cheng adopt the same stance on all issues. Although Lo and Pan are separately represented, their stance on all issues are essentially aligned.

61.  In respect of the Petitions:

(1) Wong/Cheng complain that the affairs of the Companies have been conducted by Lo/Pan in an unfairly prejudicial manner and seek an order to (a) purchase Lo/Pan’s shares in HIL and HEL, and (b) sell his shares in HCL to Lo/Pan. The main plank of their case is that the shareholders had agreed to conduct the business in accordance with the “Common Understanding” (as defined in §87 below) and the “Agreed Mode” (as defined in §87(1) below), which must be adhered to unless Wong agreed to the changes. The acts of Pan/Lo in seeking to change the manner in which HCL and NHEL had been conducting its business without the consent of Wong are unfairly prejudicial to the interests of Wong/Cheng.

(2) Lo and Pan deny that the shareholders had reached the Common Understanding or the Agreed Mode, and contend that they conducted the affairs of the Companies and of NHEL in accordance with their constitutions. Further, by reason of their misconduct, Wong and/or Cheng have not come to the court with clean hands and no relief should be granted in their favour.

62.  As agreed by the parties, the following issues require determination by this Court:

(1) Whether there existed a group of companies including HIL, HEL, HCL and NHEL which cooperated in the pursuit of common business object (Issue 1).

(2) Whether the relationship between Wong, Cheng, Lo and Pan was one which was built upon trust and confidence (Issue 2).

(3) Whether there was any “Common Understanding” among Wong, Cheng, Lo and Pan as to the manner in which the affairs of the members in the Group were run and how its electrical products business were operated (Issue 3).

(4) Whether Lo and/or Pan committed the alleged unfairly prejudicial acts asserted at §§37 to 71 of PoC (Issue 4).

(5) Whether Wong and/or Cheng committed wrongful acts set out at §§31 to 38 and 48 of Pan’s PoD (Issue 5).

(6) Whether Wong/Cheng have come to the court with clean hands and whether they are entitled to any relief (Issue 6).

63.  As for the Action, the parties agreed that the following issues on liability require determination by the court[23]:

(1) Whether Wong acted in breach of his fiduciary duties in transferring the trademarks from HIL to Harsen China and procuring Harsen China to register other “Harsen” trademarks at the CTMO (Issue 7).

(2) Whether Wong engaged in business in competition with that of HIL and, if so, whether Wong acted in breach of his fiduciary duties (Issue 8).

(3) Whether HIL suffered any loss as a result of the breaches of duties on the part of Wong (Issue 9).

64.  I consider these issues in turn.

C1. Issue 1: Whether the Companies operated as a Group

65.  Wong/Cheng’s pleaded case is that HIL, HEL and HCL (including NHEL) carried on business of manufacturing and sale of electrical products as “Harsen Group” (“Group”).[24]

66.  Mr Albert Yau[25], counsel for Wong/Cheng, submits that:

(1) The record of meeting prepared by Cheng is “the most important document”. The record shows that at the meeting held on 14 March 2015, (a) Lo/Pan asked for “division of family” (分家) and that NHEL be financially independent from others (各自獨立). Wong disagreed. (b) Pan asked Wong to authorise him to sell the Factory but Wong disagreed saying that he would only consider the question of sale when a potential purchaser was found. (c) The issue of sorting out the shareholding of HIL was raised. (d) Wong asked “what was the reason for not releasing the products” and Lo/Pan’s answer was that they wanted the customers and sales to be transferred to NHEL.

(2) Wong’s account of the meeting in §§34-35 of his WS is not challenged during cross-examination.

(3) Although under cross-examination, Lo and Pan both say that they cannot recall the meeting or the contents of the meeting (if held), and they cannot confirm the truthfulness of Cheng’s record, the court should find that the record was “a true record kept by Cheng” as her evidence in §7 of WS is not challenged.

67.  Other evidence relied on by Mr Yau in support of the existence of the Group are:

(1) The minutes of the meeting held on 12 October 2002 in Guangzhou attended by Wong, Lo and Pan show that Wong had the right to decide who should be NHEL’s customers.

(2) The email of 26 December 2006 from Pan requesting Wong and Lo to provide the sales plan and sales forecast so that he could decide the production plan and budget for the Factory for the next year.

(3) In HIL’s brochure dated “Jan. 2013” published after the 2^nd phase of expansion of NHEL, HIL was described as “a Hong Kong based company” “founded in 1997” and “established 11 branch offices and one manufacturer in China”. Photographs of NHEL before and after the expansion were shown. It is Cheng’s unchallenged evidence in §11 of her WS that this brochure was prepared by Lo. Although under cross-examination, Lo does not accept that he prepared the brochure, he admits that the photographs were taken by him.

(4) In various brochures disclosed by Lo, HIL was described as either having a wholly-owned factory in Foshan (i.e. NHEL) or that NHEL was a wholly-owned subsidiary of HIL. When these documents are shown to Lo, he says that it was part of the sales gimmick (手法) and insists that there was no Group, his explanation is contrived.

(5) In another brochure disclosed by Lo entitled “Harsen Industries Limited”, the back page described HIL as having its head office in Hong Kong and NHEL located in Nanhai’s Songxia Industrial Park. This supports Wong/Cheng’ contention that HIL was the flagship company of the Group.

(6) In the group photograph entitled “凱訊實業有限公司二〇〇五年年終銷售會議合影留念” taken during the 2005 annual sales meeting outside the Factory, apart from Wong, Lo and Pan, the staff of the Mainland Sales Companies and the key personnel of NHEL were present. This shows that HIL is the flagship company of the Group. Cheng’s evidence relating to these annual meetings is not challenged[26]. Lo’s evidence that there were separate sales meeting for NHEL and the Mainland Sales Companies does not sit well with the fact that Pan together with NHEL personnel attended the meeting of HIL/Mainland Sales Companies.

(7) In Lo’s email dated 12 January 2013, he said “我們現時有3間公司: 1) 實業 (負責銷售及策劃公司整體方向): 2) 機電(負責生產): 3) 國際(負責國外銷售), 而每個公司都有他的職位架構, 我覺得應該先弄好公司的職位架構再把它套用到各個公司及辦事處”. Although Lo did not mention all the companies within the Group, it shows that the companies mentioned operated as a whole in pursuing their business objectives.

68.  Mr Yau also points to bits and pieces of other evidence (such as the invoices issued by HEL, use of the name “Harsen” and parts of Wong’s WS where he deals with the Agreed Mode[27]), and submits that they show the existence of the Group. The significance of the existence of the Group is that the dispute between the shareholders “should not be compartmentalised as domestic dispute affecting a particular company or only the members of that company”. For instance, the cessation of production by NHEL affected the interest of NHEL and HCL, the interest of HEL and those involved in the sales of its products including HIL and the Mainland Sales Companies.

69.  Pan’s pleaded case is that each of HIL, HEL and HCL was incorporated for its separate and independent purposes. At no time did HIL, HEL and HCL operated as a group[28]. Even if the Group existed, he was not a member or quasi-partner of such Group as he never undertook any management role in HIL[29]. In his Closing, Mr Kaiser Leung[30], counsel for Pan, submits that:

(1) The evidence of Wong and Cheng at most goes to show that the companies were related or affiliated and there was an established course of dealings between them. It does not show that the interests of the individual companies were all “bound up” for a “common object”[31].

(2) Wong’s own evidence is inconsistent with there being a group structure. For example, Wong accepts during cross-examination that Yibao had to pay NHEL for the products sold by NHEL[32]. He accepts that Yibao (acted on his instructions) never raised any defence that the amount owed to NHEL could be set-off as mutual debts between companies within a group in the proceedings leading to the 2018 Judgment[33] (despite his assertion to the contrary in his WS[34]). The objective evidence is that although various entities had frequent business transactions with one another, they remained independent commercial entities dealing at arms’ length. Plainly, the debt owed by NHEL to HIL cannot be used to set off the debt owed by Yibao to NHEL.

(3) In any event, unless the other aspects of Wong and Cheng’s case are made out, the existence of the Group alone does not entitle Wong and Cheng any relief.

70.  As for Lo, he denies that the Companies operated as a group. In his Opening, Mr Bernard Lam, counsel for Lo, submits that the Group is only a shorthand label used by Wong/Cheng to describe the manufacturing and sales business of the Companies. It does not have any standalone significance as to whether the Common Understanding or Agreed Mode existed, which is a separate issue.

71.  In my judgment, the objective evidence shows that until early 2015 when the dispute arose, the shareholders had been conducting the business and affairs of the Companies and of NHEL as a group, rather than as separate and independent entities. This is evidenced by the undisputed facts set out in Sections A1 – A3 and A7 above and the unchallenged evidence identified by Mr Yau as summarised in §§66-68 above).

72.  Lo’s suggestion that each of the Companies operated independently, and Pan’s suggestion that the Companies remained “independent commercial entities” and dealt with the other “at arms’ length” is inconsistent with and contradicted by the following facts:

(1) all the domestic sales of the products manufactured by NHEL had been carried out by the Mainland Sales Companies which, in turn, accounted to HIL (see §9 above);

(2) the various forms of “Harsen” trademarks were registered in the name of HIL even though all the “Harsen” products were manufactured by NHEL, and no licence fee whatsoever was ever paid by NHEL to HIL (see §11 above);

(3) HEL was used as the vehicle to record all the revenues and expenses incurred by the manufacturing operations including NHEL so that a substantial part of the profits made by NHEL were transferred to HEL. It was for this reason that HEL, despite not having any operation, was able to declare and pay dividends to the shareholders (see §§12, 19-21 above); and

(4) HEL would provide interest-free loans to HCL for the purpose of acquiring the Land and building the Factory (see §18 above).

73.  The fact that Yibao had to pay the products sold by NHEL and did not seek any set-off against HIL is neither here nor there. Indeed, it has not been explained by Pan (or Lo) as to why or how the debt owed by Yibao could be set off against HIL.

74.  For the above reasons, I find that until the dispute between the shareholders arose in early 2015, the Companies and NHEL had been operated as a group for the common purpose of carrying on business in manufacturing and sales of electrical products in and outside of the Mainland. However, such finding is not and cannot be equated with the existence of the Common Understanding or Agreed Mode, which is a separate issue.

C2. Issue 2: whether relationship built on trust and confidence

75.  Mr Yau submits that it is not necessary for Wong/Cheng to show that the Companies were formed as quasi partnership. It is sufficient if the Companies became quasi partnership by the time the conduct complained of took place, relying on Croly v Good [2011] BCC 105, §H7.2 & 91. The proposition is not in dispute.

76.  Mr Yau submits that the shareholders reposed trust and confidence upon each other and “there existed a quasi-partnership among Wong, Cheng, Lo and Pan before their relationship turned sour in 2015” evidenced by the following facts and matters:

(1) The parties had from 1999 to 2015 been doing business together and invested much time and funds into the Companies.

(2) It is Lo’s evidence that before 2015, he trusted Wong. In his PoD, Lo described himself and Wong as business partners since 1997.

(3) Under cross-examination, Pan says that he respected and treated Wong as partner (夥伴) although he immediately qualifies his answer by saying that he means “colleague” not the partner.

77.  Mr Leung (on behalf of Pan) submits that on Wong/Cheng’s pleaded case, there are the following indicia which are inconsistent with the suggestion that there was any quasi partnership amongst Wong, Cheng, Lo and Pan in the Companies, whether as alleged or at all:

(1) Pan never served as director of HIL or held any management role in HIL[35];

(2) Cheng never held any management role in none of HIL, HEL and HCL[36];

(3) Cheng was not a shareholder of HEL or HCL[37]; and

(4) There was no restriction on the allotment of shares by the companies or restriction on the transfer of the members’ shares in the Companies. It is pleaded at §21 of PoC that the shareholdings in HIL went through numerous changes over years: (a) HIL allotted 100 shares of which 20 shares were allotted to Pan in January 2000, and (b) Smooth Investment Company Ltd (a former shareholder of HIL) transferred its 10% shares in HIL to Cheng.

78.  Mr Lam (on behalf of Lo) submits that:

(1) The mere fact that Wong and Lo were former colleagues at Yardway before 1999 does not give rise to a relationship of trust and confidence.

(2) Wong/Cheng do not plead, and produce no evidence, that there has been any restriction on the transfer of the members’ interests in the Companies, relying on the same matters identified by Pan.

79.  Pan/Lo’s contention that there was no restriction on allotment or transfer of shares is misconceived. As with all private companies incorporated in Hong Kong, the Companies’ articles of association contain restrictions on transfer of shares. The fact that all shareholders agreed to the allotment and transfer of shares in the past is not and cannot be equated with no restriction on transfer of shares. In any event, whether or not there was restriction on the issue or transfer of shares is irrelevant to the issue as to whether the relationship of Wong, Cheng, Lo and Pan was founded upon trust and confidence between them.

80.  In my view, the following evidence, which is not in dispute, is sufficient to show that until early 2015, the Companies and NHEL had been operated on the basis of the personal relationship between Wong/ Cheng, Lo and Pan, and they reposed trust and confidence upon each other when dealing with their business and affairs:

(1) The shareholders trusted each other in dealing with their respective areas of responsibility, and did not enquire about the matters falling within the other’s responsibility.

(2) It is Lo/Pan’s consistent evidence that (a) they did not know much about the affairs of HIL and HCL, which had always been managed by Wong; (b) it was Wong who handled and managed the sales of the products manufactured by NHEL including directing the Mainland Sales Companies to carry on the domestic sales; (c) it was Wong who decided on how much dividends should be declared and paid by HEL; and (d) it was Cheng who used HEL to record the revenues, expenses and profits of NHEL, and she did not need to report to Lo or Pan on how such accounts were prepared.

(3) Lo/Pan respected Wong as he is the most senior person amongst the 3 of them. They let Wong assumed the position as legal representative of NHEL and made most of the decisions for the Companies, and they rarely, if at all, raised any objection to his decisions.

(4) It is Pan/Lo’s case that they did not have any knowledge of how the accounts of HIL and HEL were prepared and their financial state, all of which were handled by Cheng under the direction or supervision of Wong.

81.  However, the fact that the shareholders had managed the Companies and NHEL on the basis of mutual trust and confidence (as I so find) only goes to show that the Group had been managed and operated as a quasi partnership, rather than as commercial entities. It does not per se support Wong/Cheng’s case that the Common Understanding (including the Agreed Mode) existed, which is a different issue.

C3. Issue 3: whether “Common Understanding” existed

82.  Before deciding the parties’ contentions, it is useful to set out the relevant principles.

83.  Generally, shareholders are entitled to exercise their legal rights in accordance with the articles of association and the agreement reached between them unless the exercise of legal rights are subject to equitable constraints. The principle has been explained by Lord Wilberforce in In re Westbourne Galleries Ltd [1973] AC 360 at 379B–G in the context of a “just and equitable” winding up petition:

“… The words [just and equitable] are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. ‌… The ‘just and equitable’ provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.

… The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence—this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be ‘sleeping’ members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members’ interest in the company—so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere.” (underlined added)

84.  The same principle applies in the context of an “unfair prejudice” petition under s.724 of the CO (O’Neill v Phillips [1999] 1 WLR 1092, 1101D – 1102B).

85.  The concept of fairness must be applied judicially and the content which it is to be given by the court must be based upon rational principles. The context and background are very important (O’Neill v Phillips, at 1098D – 1099F; Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501 at §§43 – 45, per Ma CJ and Lord Millett NPJ). As to what may constitute considerations of a personal character involving mutual confidence, “this may come in the form of mutual understandings between members of a company or what may have been ‘an accepted course of conduct between the parties whether or not cast into the mould of a contract.’” (Kam Leung Sui Kwan v Kam Kwan Lai at §46).

86.  In the context of an “unfair prejudice” petition, the petitioner needs to show that the respondents have acted in breach of (a) what the parties agreed in contract (including the articles of association) such that there was a breach of his legal rights; or (b) what the parties have accepted to be the practice or the manner in which the affairs of the company should be conducted, even though such practice or manner is inconsistent with the terms of the contract or articles. For this purpose:

(1) The court expects a petitioner to demonstrate that there has been a relatively long period of acceptance of the practice in question by the shareholders concerned such that they cannot insist on their strict legal rights.

(2) Even if there was no breach of legal rights on the part of the respondents, if the conduct complained of involved the respondents having exercised their legal rights in breach of the equitable constraint on such rights, it may warrant the court exercising its equitable jurisdiction and grant the relief sought by the petitioner. A typical case is where the petitioner has the right to participate in, but has been excluded from, the management by the respondents exercising their voting rights to remove him as a director.

87.  It is Wong/Cheng’s case that since 1999, there had been the “common agreement, terms and/or understanding” of Wong, Cheng, Lo and Pan that the affairs of the Group would be conducted in the following manner (collectively “Common Understanding”)[38]:

(1) Each member is entitled to (a) have access to all the books and records of the Companies and NHEL including their audited and management accounts; (b) expect the business and operation of the Companies and NHEL to be conducted in accordance with the “Agreed Modus Operandi” (“Agreed Mode”) unless approved by a majority of members; (c) be involved in any decision which constituted a major change of the Agreed Mode and be provided with all information about such decision; and (d) be involved in the decision concerning the use of the profits generated by the Group and to share in the profits in proportion to their shareholding[39].

(2) Each director of HIL, HEL and HCL would comply with and perform his duties according to law[40]; and

(3) Wong is entitled to participate in the day-to-day management of the Group and NHEL, and be involved “in a leading role” in all major and long term plans and decisions of the Companies and NHEL, and be supplied with all relevant books and records of the Companies[41].

88.  The Agreed Mode, as pleaded in §§22, 26, 27 and 29 of PoC, spans across different periods of time and covers the following matters:

(1) Since 1998, HIL has conducted its domestic sales through the Mainland Sales Companies, which have “all along been appointed and considered as agents of HIL” and have been treated as “related companies of HIL for accounting purposes, with their sales and revenues reflected in the accounts of HIL”[42].

(2) Since 2022, Wong, Lo and Pan have agreed orally and/or by conduct on division of duties in that[43]:

(a) Pan would focus on manufacturing and be responsible for the management and daily operation of NHEL;

(b) Wong would take a leading role in NHEL, and Pan would report to Wong on all major or material matters and would not make any change to the business or operation without Wong’s consent (“Consent Requirement”);

(c) Wong and Lo would focus on marketing and sales of the Group, with Lo being responsible for Shantou, Fujian and Sichuan, and Wong responsible for all other regions in the Mainland;

(d) Wong would be responsible for the management of the daily operation of the Companies with the assistance of Cheng; and

(e) Lo would attend HIL’s office to sign cheques and other documents concerning the Group and would visit NHEL on a weekly basis to attend to financial matters including signing purchase orders in excess of RMB10,000.

(3) The Companies and NHEL would hold at least 3 meetings in a year viz., a sales meeting in the middle of the year; an annual general meeting on marketing and sales at the end of the year; and a meeting with Pan to discuss the development of the Factory[44].

(4) It was agreed between Wong, Pan and Lo orally and/or by conduct and/or as evidenced by the particulars pleaded in §29(1)-(4) of PoC that the business of the Group would be conducted in the following manner:

(a) NHEL would manufacture products for the Group, which would be supplied to HIL for overseas sales and to the Mainland Sales Companies for domestic sales;

(b) HIL would handle sales and marketing of the Group’s products either directly for overseas sales or through the Mainland Sales Companies for domestic sales;

(c) HIL would act as sales agent of several overseas brands; and

(d) HEL would handle all accounting and invoicing matters of NHEL “for the internal reference of Wong, Lo and Pan to understand the actual performance of the Manufacturing Business. HEL would not operate any manufacturing or business activities of its own” (“Accounting Practice”).

89.  So far as the Accounting Practice is concerned, Wong/Cheng rely on the following matters pleaded in §29(4) of PoC:

(1) By a letter of authority dated 1 December 2009, HIL was appointed as exclusive agent (獨家總代理商) of NHEL’s products within or outside the Mainland for 10 years from 1 January 2010.

(2) By a certificate of appointment, Gaotian was appointed as general agent (總代理商) of, inter alia, Harsen controller and charging devices manufactured by NHEL in the Mainland from 24 July 2000.

(3) By a certificate of appointment, Yibao was appointed as general agent (總代理商) of, inter alia, Harsen controller and charging devices manufactured by NHEL in the Mainland from 12 June 2006.

(4) Since January 1999, the modus operandi of the sale of NHEL’s products has been as follows[45]:

(a) The Mainland Sales Companies would place orders with NHEL and sold the products to customers of HIL in Mainland;

(b) HEL would issue invoices to HIL at 11% of the price at which NHEL sold the products, which represented the profit margin of NHEL in that sale; and

(c) The Mainland Sales Companies would transfer the sales proceeds to HIL less their operating expenses. The profits of the domestic sales were reflected in the accounts of HEL and HIL, and an “internal balance sheet of HIL” would be prepared by Cheng to update Wong and Lo on the sales of the products manufactured by NHEL.

90.  Pan takes issue with all the allegations made by Wong/Cheng and contends that the Companies were not quasi partnership between Wong, Lo and Pan. There was no Common Understanding or Agreed Mode[46]. If there existed any quasi partnership or “Group”, Pan was not involved[47]. Pan was never involved in the management of HIL.

91.  Lo denies that the Company was a quasi partnership or that the parties had come to the alleged Common Understanding or Agreed Mode. He contends that:

(1) The shareholders’ rights are governed by the articles of association (“AA”) of the Companies or according to law[48];

(2) NHEL was not required to sell all its products to HIL or the Mainland Sales Companies and could sell any products to its customers, with or without Wong’s consent[49];

(3) HIL and the Mainland Sales Companies were required to make payments for the products purchased from NHEL[50]; and

(4) Wong had no overriding right or power over Lo or Pan in business, management or operation of the Companies beyond the AA[51].

92.  Although in their PoDs, Lo/Pan deny the existence of the Common Understanding and the Agreed Mode, during the trial, it becomes clear that except the Consent Requirement, the other aspects of the Common Understanding and the Agreed Mode are either not in dispute or are indisputable:

(1) The existence of the Common Understanding, as summarised in §87(1)-(3) above, is not in dispute. Indeed, both Lo and Pan contend that any material decisions or changes concerning the Companies and NHEL could be made with the approval by a majority of shareholders.

(2) The Agreed Mode on the conduct of the domestic sales, as summarised in §88(1) above, is not challenged. Contrary to Mr Lam’s submissions[52], it is not Wong/Cheng’s case that the Mainland Sales Companies did not have to pay for the products sold by NHEL to them.

(3) Except the averment that the consent of Wong was required for any change to the business or operation, the Agreed Mode on the division of duties between Wong, Cheng, Lo and Pan, as stated in §88(2)(a), (c)-(e) above, is not disputed.

(4) The fact that the Companies and NHEL would hold at least 3 meetings in a year to discuss sales and development of the Factory (§88(3) above) is not challenged. Although Lo and Pan both assert that there were separate meetings of the Companies and of NHEL, the assertion is not supported by any document and is contradicted by the photos taken after the annual sales meetings which showed that the personnel of the Companies, NHEL and the Mainland Sales Companies all participated in the meetings.

(5) The business of the Group was conducted in the manner stated in §88(4)(a)-(d) above, with NHEL being the manufacturing arm, HIL the sales arm and HEL the accounting arm.

(6) The contemporaneous documents identified in §89(1)-(3) above amply support the existence of the Agreed Mode on the conduct of the business of the Group including the Accounting Practice.

(7) As for the modus operandi of the sale of NHEL’s products including the transfer of the profit margin of NHEL (11% of the price) to HEL (§89(4) above), the objective evidence shows that both Pan and Lo must knew about the arrangement and agreed with it:

(a) Pan signed all the invoices issued by HEL to HIL for payment of the so-called “assembly testing fees” at 11% of the price of the products sold by NHEL to HIL/Mainland Sales Companies. The invoices were prepared at NHEL’s office and signed by Pan. I do not accept Pan’s assertion that he only signed the invoices presented to him and did not know understand why NHEL had to pay the assembly fees to HEL.

(b) Lo was one of the 2 authorised signatories of HIL’s bank accounts, and he signed cheques payable to HEL for payment of the “assembly testing fees”; and his signature was required for all purchase orders and payments in excess of RMB10,000. I do not accept Lo’s evidence insofar as he denies having any knowledge of the modus operandi of the sale of NHEL’s products or the existence of the Accounting Practice.

93.  In their Closing, Pan/Lo only take issue with (1) the Consent Requirement and (2) Wong’s assertion that NHEL was required to sell its products to HIL and the Mainland Sales Companies exclusively[53] (“Exclusivity Requirement”).

94.  The Exclusivity Requirement can be disposed of briefly:

(1) It does not form part of Wong’s pleaded case on the Common Understanding or the Agreed Mode.

(2) NHEL’s AFS show that NHEL did sell its products directly to customers before the parties’ dispute in 2015. In NHEL’s AFS for 2013 Notes 2 and 12, there were 2 major account receivables and 2 major advance payments from and to end customers. The same applies to NHEL’s AFS for 2014.

(3) In Cheng’s WS[54], she produces documents showing NHEL’s sales for the period between October and December 2014. She describes the third category of customers listed therein as “other customers which NHEL dealt with and invoiced directly rather than to Mainland Sales Companies”. For these third category customers, 12% was invoiced by HEL to HIL.

(4) The list of NHEL’s customers in section II of exhibit 1 to Lo’s WS shows that NHEL had 218 direct or end customers. This is not challenged by Wong/Cheng.

95.  As regards the Consent Requirement, it is wholly devoid of merit. As submitted by Mr Lam:

(1) Wong has not pleaded any “oral agreement” or adduced any evidence in support of the existence of such agreement. Nor has Wong adduced any evidence to show that Lo and Pan had in fact sought Wong’s consent in relation to all material aspects of NHEL’s business;

(2) Wong’s case on the Consent Requirement (which forms part of the Agreed Mode) is contradictory to his own case that the Common Understanding could be changed by a majority of the shareholders. As Cheng has never been a shareholder or director of HCL or NHEL, the so-called Consent Requirement would not have any practical effect.

(3) The decision making process of NHEL’s board was exclusively governed by its AA which was adopted by NHEL on 19 September 2007. Had Wong, Lo and Pan agreed on the Consent Requirement back in 2002, it would have been reflected in the AA. Not only was there no provision for the Consent Requirement, article 18 provided that board decisions only required approval of a 2/3 majority, and the AA could only be changed with the unanimous consent of all directors (article 59).

(4) Even when NHEL adopted its supplemental AA dated 27 June 2012, the requirement of 2/3 majority remained. This shows that the Consent Requirement did not exist.

96.  For the above reasons, I find that:

(1) the shareholders had agreed to conduct the business of the Group in accordance with the Common Understanding and the Agreed Mode save and except the Consent Requirement; and

(2) Wong, Pan and Lo never agreed to the Consent Requirement, and the same did not exist.

C4. Issue 4: whether Lo/Pan committed the unfairly prejudicial conduct complained of by Wong/Cheng

97.  In the Petitions, Wong/Cheng complain that the following conduct constituted a breach of the Common Understanding and/or the Agreed Mode and/or fiduciary duties and have “seriously prejudiced” their interests as shareholders of the Companies:

(1) Exclusion of Wong from management of NHEL: Since March 2015, Pan (together with Lo or with his knowledge) has “unlawfully” and without the knowledge or consent of the legal representative (i.e. Wong) or Cheng used Wong’s personal chop and NHEL’s chop (together “Chops”) which had always been in Pan’s possession to (a) issue cheques and invoices on behalf of NHEL, (b) take effective control of NHEL, and (c) remove some equipment and machinery from NHEL. Despite Wong’s requests for return of the Chops, Pan and Lo continued to use the Chops unlawfully and in breach of the Common Understanding[55].

(2) Material changes to Agreed Mode without Wong’s consent: Pursuant to a resolution of HCL passed by Pan and Lo on 14 March 2015, the Agreed Mode was changed without the consent of Wong/Cheng. The changes involved NHEL: (a) stopped supplying its products to HIL or its agents; (b) sold its products to end customers directly; and (c) retained and withheld products which had already been sold by Yibao to HIL’s customers (“March 2015 Resolution”). As a result, HIL was unable to fulfil orders from its customers and suffered (i) a bad debt of HK$2.5 million in respect of the products retained by NHEL; and (ii) a reduction in HIL’s sales of over HK$25 million in 2015. HEL also suffered loss of profit margin which it would otherwise be able to receive from HIL from sale of NHEL’s products[56].

(3) Diversion of business and closure of NHEL: In April or May 2015, Lo/Pan set up Ruikang, Zhuohui and Zhuorui to engage in the same business as the Group and in competition with HIL. The shareholders/directors of these companies have been accustomed to act in accordance with the instructions of Pan/Lo, and are their trustees or nominees. In late 2015 or early 2016, Lo/Pan closed down NHEL’s production lines and moved its machinery to Zhuohui’s premises and solicited NHEL’s employees to work for Zhuohui.[57]

(4) Refusal to sign cheques: Since August 2015, Lo has refused to sign cheques payable to HIL’s suppliers, which led to HIL losing some agency agreements with overseas suppliers[58].

(5) Exclusion from management of HCL/HEL: On 24 July 2015 and 17 August 2015, Lo/Pan passed resolutions of HCL and HEL approving (a) the appointment of Lo as their managing director, (b) the adoption of additional company chop and legal representative’s chop, and (c) the changes in signing arrangement for documents to any 2 directors signing jointly (collectively “July/Aug 2015 Resolutions”). The July/Aug 2015 Resolutions have the effect of excluding Wong from the management of HCL and HEL and preventing him from participating in the development and future plans of the Group[59].

(6) Denial of access of NHEL’s records: Since August 2015, Wong has not been provided with relevant financial information, books and records necessary for him to apprise of the business and affairs of NHEL and hence the Group other than NHEL’s monthly financial statements for the period from January 2015 to April 2017. This has rendered it impossible for HIL and HEL to prepare audited accounts and has affected the operation of the Group[60].

98.  Pan takes issue with all the allegations made by Wong/Cheng and contends that:

(1) He was never involved in the management of HIL.

(2) In 2015, HIL and the companies under Wong’s control ceased to make any payment to NHEL for the products sold. As a result, NHEL had cash flow problem and was not able to continue with its operation[61].

(3) Pan did not have any involvement or interest in the competing business carried on by Ruikang, Zhuohui or Zhuorui[62].

99.  Lo also denies all the allegations made by Wong/Cheng. His case is that:

(1) As the General Manager of NHEL, Pan was entitled to use the Chops without Wong’s consent. Lo was not involved in the use of the Chops[63];

(2) NHEL could always sell its products directly to any customers. NHEL did not exclude sales to HIL or the Mainland Sales Companies provided that they pay for the products. NHEL stopped selling products to Yibao due to its failure to pay[64];

(3) NHEL did not stop production in late 2015 or early 2016, but could not continue to operate from 2018 due to Wong’s refusal to apply for the Combined Licence as required by the regulations in the Mainland. Lo had no involvement in removing any machinery or soliciting any employees to work for Zhuohui[65];

(4) Lo is not the beneficial owner or controller of Zhuohui, Zhuorui or Ruikang and had no involvement in their business[66];

(5) The July/Aug 2015 Resolutions were passed in accordance with the AA. Wong was entitled but chose not to participate in NHEL’s business[67];

(6) Lo refused to sign cheques requested by Wong/Cheng as he did not have access to the accounting documents of HIL and the Mainland Sales Companies. Even after Lo had obtained the Inspection Order, Wong still failed to provide the accounting documents to Lo[68]; and

(7) Lo was not in charge of keeping NHEL’s books and records, and they were available for inspection at NHEL’s office. Lo never obstructed Wong from having access to NHEL’s records[69].

100.  I deal with each of the complaint in turn.

C4.1 Issue 4(1): Exclusion of Wong from management of NHEL

101.  It is not in dispute that:

(1) Pan was the General Manager of NHEL, responsible for its day-to-day management;

(2) Pan was the only director based in Dongguan, and the Chops had always been in his possession; and

(3) Lo had always been based in Hong Kong, and he was not involved in the day-to-day management of NHEL. Nor was he involved in using the Chops.

102.  Although described as exclusion from management of NHEL, the only complaint made by Wong is in relation to the use of the Chops. To make good his complaint, Wong/Cheng need to discharge the burden of proving that:

(1) Wong, Pan and Lo had agreed that the Chops could only be used with the knowledge and consent of Wong or Cheng;

(2) the use of the Chops for NHEL’s purposes was prejudicial to the interests of NHEL and hence HCL; and

(3) both Pan and Lo were involved in using the Chops “unlawfully”.

103.  The complaint does not even get off the ground as there is no evidence in support of the allegation that Pan, Lo and Wong had ever agreed that the Chops could only be used with the knowledge or consent of Wong or Cheng:

(1) There was nothing in NHEL’s AA (or the supplemental AA) which provided that the Chops could only be used with the knowledge or consent of Wong or Cheng.

(2) Had there been any requirement that the Chops could only be used with the knowledge or consent of Wong/Cheng, the same would have been recorded in NHEL’s records, such as minutes of meetings or internal memo and made known to Lo, Pan and Wong and the employees of NHEL involved in issuing invoices.

(3) The very fact that Wong was contented to leave the Chops in the possession of Pan all the times militates against any allegation that the Chops could only be used with the knowledge or consent of Wong or Cheng.

(4) The assertion that Cheng’s knowledge or consent was required makes no sense as Cheng did not hold any position or have any interest in HCL or NHEL. It has not been explained why Pan and Lo would agree to confer such an important power on Cheng.

(5) The Common Understanding does not include any agreement or understanding about the use of the Chops.

(6) In Wong’s WS, he does not say that Pan, Lo and he have ever agreed that the Chops could only be used with his or Cheng’s knowledge or consent. Indeed, Wong does not even deal with the complaint in his WS.

(7) During cross-examination, Wong accepts that Pan did not need to consult him before issuing any invoices, contrary to his complaint that it was “unlawful” for Pan to use the Chops to issue invoices on behalf of NHEL.

(8) Pan and Lo both say that the Chops were entrusted to Pan for commercial convenience and efficiency, and he was entitled to use them as he was the general manager of NHEL.

104.  In his Closing[70], Mr Yau points to a notice issued by HIL dated 14 November 2012 which, he says, “provided that documents bearing official and contracts chops of NHEL will only be valid if Wong approved by his signature or Cheng, on his behalf”. The submission must be rejected:

(1) The notice was an internal document of HIL, rather than a notice issued by NHEL.

(2) The notice was only signed by Wong. No explanation has been provided as to why a notice signed by one director would be valid and binding upon HIL, still less NHEL, which was a subsidiary of HCL.

(3) Even if (which is not established) the notice was binding upon NHEL, Pan or Lo, it only stated that the document should first be submitted to Wong for signing, and if Wong could not sign in good time, he agreed that it would take effect upon signing by Cheng.

105.  In any event, there is simply no evidence to show that the use of the Chops for NHEL’s purposes was in any way prejudicial to the interests of NHEL. In particular, there is no evidence to show that any equipment or machinery was removed from NHEL. This is reinforced by the fact that during the liquidation of NHEL, the Committee had been able to take control over the equipment and machinery and managed to sell them to a third party.

106.  The complaint on exclusion from management must be rejected.

C4.2 Issue 4(2): Material changes to Agreed Mode without Wong’s consent

107.  The complaint is wholly devoid of merit.

108.  First, it transpires that the March 2015 Resolution was no more than Cheng’s record of the meeting held on 14 March 2015 attended by Wong, Cheng, Lo and Pan.

(1) As stated above, Lo and Pan do not recall that they attended the meeting or that the parties discussed the matters stated.

(2) The record only shows that the parties discussed about sale of NHEL and the parting of way. It did not record any resolution having been passed, let alone by Pan and Lo. This was made clear at the beginning of the record, which states that the directors were to consider how to handle matters, rather than to make any decision.

109.  Second, even if the record could somehow be construed as a resolution of HCL:

(1) in view of my finding that the Consent Requirement did not exist, there is no basis to suggest that Pan and Lo, as directors of HCL and NHEL, could not change the manner in which NHEL carried on its business in response to the situation then faced by NHEL; and

(2) there is no suggestion or evidence that in passing the March 2015 Resolution, Pan and Lo did not act bona fides in what they considered to be in the best interests of HCL and NHEL or that they acted for any collateral purpose.

110.  Third, Pan/Lo’s decision that NHEL should not supply any further products to HIL or its agents (i.e. Mainland Sales Companies) was justified, having regard to Wong’s conduct in causing Yibao not to pay NEHL for the products sold:

(1) At trial, it becomes clear that the main complaint is directed to NHEL stopped selling any products to Yibao[71].

(2) Yibao was under the actual control of Wong/Cheng, and they directed the affairs of Yibao (see 2^nd 2021 Judgment, §53(4) above).

(3) On 23 March 2015, Yibao confirmed that it owed NHEL the amount of RMB2,242,205.33. After taking into account the subsequent purchases and payments, Yibao still owed NHEL the sum of RMB1,295,637.51, and Yibao was ordered to pay the 2018 Judgment Debt to NHEL (see 2018 Judgment, §§40-41 above).

(4) Wong owed a duty of fidelity to NHEL and should ensure that the dealings between Yibao and NHEL were conducted fairly and in the interests of NHEL. However, in breach of his duty, Wong caused Yibao not to pay the amount owed to NHEL in March 2015 and continued to refuse to pay even after being ordered by the court to pay the 2018 Judgment Debt (see 2^nd 2021 Judgment, §53(6) above).

(5) Although in the 2^nd 2021 Appeal Judgment, the compensation order made against Wong was set aside, the findings that Wong acted in breach of his duty of fidelity remained undisturbed (see §55 above).

111.  Fourth, the complaint about NHEL’s conduct in withholding the Retained Products sold to Yibao is equally without merit:

(1) Yibao confirmed that as at 23 March 2015, it owed NHEL the sum of RMB1,295,637.51 (see 2018 Judgment, §§40-41 above).

(2) It was only 3-4 months later that in July 2015, NHEL was in possession of the Retained Products (see 2^nd 2021 Appeal Judgment, §55 above).

(3) Indeed, in setting aside the compensation order which had been made against Wong, Foshan court held that NHEL could sell the Retained Products and applied the proceeds to pay the debt owed by Yibao (see 2^nd 2021 Appeal Judgment, §55 above).

112.  In view of the aforesaid findings of the Mainland courts, I do not see how Wong can complain about the decision of Pan/Lo in causing NHEL to withhold the Retained Products from Yibao.

113.  Lastly, there is no evidence in support of Wong/Cheng’s assertion that HIL has suffered a bad debt of HK$2.5 million or a reduction in sale of over HK$25 million. If there were such loss, it was caused by the act of Wong in causing Yibao not to pay the amount owed to NHEL in March 2015.

C4.3 Issue 4(3): Diversion of business and closure of NHEL

114.  As regards the complaint about the 3 companies (Ruikang, Zhuohui and Zhuorui) said to have engaged in competing business as the Group:

(1) There is no evidence to show that they have anything to do with Lo.

(2) At the highest, the documents show that the companies are owned or controlled by the former employees of NHEL or Pan’s wife (i.e. Lei) and the registered offices of Zhuohui and Ruikang are the same. They do not show that the companies are owned or controlled by Pan.

(3) More importantly, even on Wong’s evidence[72], these 3 companies were either distributor or supplier of NHEL appointed in April or May 2015. There was nothing improper for NHEL to appoint new distributor or supplier in the course of its business. This was particularly so when Wong had caused Yibao to stop paying the amount admittedly due to NHEL in March 2015.

(4) There are contemporaneous documents to show that from January 2016, Yibao began to sell products to Zhuohui, and Wong/Cheng also sourced products from Zhuohui in March 2016.

115.  As for the complaint about the closure of NHEL, which is said to be “the most flagrant unfairly prejudicial act”[73], it is premised on Wong’s assertion that the Factory stopped production completely by time he and Cheng visited the Factory on 8 January 2016 and the WeChat message from a worker at the Factory (Ms Chum) who said that the workers had left the Factory and she was the last or amongst the few workers remained at the Factory. However, the assertion is contradicted by the following evidence:

(1) Pan was the only director based in Dongguan and managed the day-to-day business and operation of NHEL and the Factory and has personal knowledge of their state. His evidence, which remains unshaken during cross-examination, is that since 2015, NHEL had encountered cashflow problems due to (a) Yibao’s failure to pay the amount owed to NEHL and (b) Wong’s refusal to sign documents required by the bank for extending the Loan granted to NHEL which expired on 17 June 2015. The Factory only stopped production completely in early 2018 owing to cashflow problems, the loss suffered in the past few years and the inability of NHEL in applying for the Combined Licence.

(2) Both reasons identified by Pan as the cause of NHEL’s cashflow problem were part of the facts found by Nanhai court in the 2^nd 2021 Judgment and remained undisturbed in the 2^nd 2021 Appeal Judgment (see §53(2) & (6) above).

(3) Pan’s evidence is also corroborated by NHEL’s AFS for 2015 and 2016, the accuracy of which are not challenged by Wong. These AFS show that NHEL continued to generate revenue and incurred expenses including buying raw materials for manufacturing purpose.

(4) When it is put to Pan that he sent an email dated 7 February 2018 to Wong/Cheng where he admitted that the production of NHEL had stopped since 2015, he explains that the reference to “basic commercial activities” were the accounting activities of HEL. As HEL had since 2015 stopped providing accounting services, HIL should stop paying management fees for the service rendered by Cheng to HEL.

(5) I accept the evidence of Pan, which is consistent with the undisputed fact that HEL had since 2015 stopped providing any accounting services to HIL or NHEL and NHEL’s AFS.

116.  Mr Yau submits that the closure of the Factory in early 2016 is supported by (1) the notice of board meeting dated 4 February 2016, (2) the letter sent by his lawyer to Lo/Pan dated 16 March 2016 and the email sent by Wong to Lo/Pan dated 13 April 2016, to which there was no response from Lo/Pan[74]. However, these correspondence were sent at the time when Lo/Pan and Wong/Cheng were not in speaking term, and neither camp responded to the request made by the other. It does not support Wong’s assertion that the Factory had been closed by January 2016.

117.  There is no credible evidence in support of Wong’s allegation that the production lines and machinery had been removed from the Factory, still less moved to Zhuohui:

(1) The only evidence relied upon by Wong is the recorded message of a worker of the Factory (Ms Chum) who does not come forward to give evidence. Her evidence is contradicted by the evidence of Pan, which I accept to be true.

(2) As submitted by Mr Leung, the fact that the production line and the machinery remained in the Factory is corroborated by NHEL’s AFS for 2015 and 2016, which showed that the value of the machinery and equipment remained unchanged for the period from 1 January 2015 to 31 December 2016.

(3) As stated in Section B4 above, during the liquidation of NHEL, the Committee had taken stock of NHEL’s remaining assets and subsequently sold them to a third party.

118.  Lastly, even if, contrary to my findings, the Factory was closed in January 2016, I do not think it is open to Wong to complain about the closure of the Factory, given that:

(1) It was Wong who failed to act in the interests of NHEL by causing Yibao not to pay the amount owed to NHEL in March 2015, followed by refusing to sign document required by NHEL to extend the Loan upon its maturity in June 2015.

(2) Wong knew that given his position as the legal representative of NHEL, he had to attend the Tax Bureau and SAIC to apply for the Combined Licence after October 2016, and he refused to do so even after being ordered by Nanhai court to do so in 2018 (see §51 above).

(3) It was Wong who decided to put the business of NHEL to an end by causing Yibao to apply for liquidation of NHEL in 2022 (see Section B4 above).

119.  The complaint about diversion of business and closure of NHEL must be rejected.

C4.4 Issue 4(4): Refusal to sign cheques

120.  The complaint about Lo’s refusal to sign cheques payable to HIL’s suppliers since August 2015 is demurrable. Wong/Cheng have not even identified which suppliers had not been paid and which agency agreements with overseas suppliers were lost.

121.  In his Closing[75], Mr Yau states that Wong/Cheng “decided not to make any submission” on the complaint.

122.  The objective facts set out in Section A8 show that Lo has not been provided with access to the books and records of HIL and of the Mainland Sales Companies. I agree with Mr Lam that there can be no unreasonable refusal to sign cheques if Lo has not been provided with access to the documents and records of HIL and the Mainland Sales Companies.

C4.5 Issue 4(5): Exclusion from management of HCL/HEL

123.  In his Closing[76], other than referring to the fact that the July/Aug 2015 Resolutions were passed, Mr Yau does not advance any submission on the complaint.

124.  The complaint is wholly unfounded.

125.  First, on Wong’s own case, the Common Understanding did not have any effect of restraining Lo/Pan in passing the July/Aug 2015 Resolutions.

126.  Second, it was perfectly legitimate for Lo/Pan to pass the July/Aug 2015 Resolutions in view of the state of HCL and HEL at the time and Wong’s refusal to act in the best interest of NHEL.

127.  Third, as submitted by Mr Leung[77], the July/Aug 2015 Resolutions did not have the effect of excluding Wong from the management of HCL or HEL. Wong remained a director of HCL and HEL and was entitled to attend and vote at their board meeting.

128.  Lastly, as submitted by Mr Lam, at the time the July/Aug 2015 Resolutions were passed, HCL remained a holding company and did not have any business, while HEL no longer served the purpose of recording the profits of NHEL. Wong has not identified what affairs which he had allegedly been excluded from management.

C4.6 Issue 4(6): Denial of access of NHEL’s records

129.  The complaint as pleaded in the PoC, is demurrable:

(1) It is said that since August 2015, Wong has not been provided with relevant financial information, books and records necessary for him to apprise the business and affairs of NHEL.

(2) The assertion cannot be true as Wong was provided with NHEL’s monthly financial statements for the period from January 2015 to April 2017. He has not explained why he was not able to apprise the business and affairs of NHEL by reading the monthly financial statements.

(3) There is no suggestion that Wong was responsible for preparing the audited accounts of HIL and HEL. It is difficult to see why the non-provision of NHEL’s financial information, books and records to Wong would have rendered it impossible for HIL and HEL to prepare their audited accounts.

130.  In his Closing[78], Mr Yau devotes 3 pages in expanding the complaint:

(1) He refers to a judgment in (2019) 粵0605執10030號 where Nanhai court ordered NHEL to provide its books of accounts for the period from 1 January 2015 to 31 August 2017 for Wong’s inspection, which led to Nanhai court enforcement proceedings commenced on 19 June 2019. This shows that contrary to Lo’s evidence, the accounting records of NHEL were not available for Wong’s inspection. However, the judgment shows that it was subsequently agreed between NHEL and Wong that the inspection of NHEL’s books and records could be carried out during the period from 11 September 2019 to 14 October 2019, and Wong did inspect the records albeit that some of the records had been lost and could not be made available.

(2) Mr Yau makes submissions on the “secrecy of NHEL’s true financial position” by referring to the withdrawals of cash in late 2018 and early 2018; the auditors of NHEL were unable to confirm that the AFS reflected the true and fair view of NHEL’s financial state; and the refusal on the part of Pan in providing information about the leasing of the Factory and account for the rent. However, none of these matters form part of Wong’s complaint in the PoC. It is not open to Mr Yau to expand the complaint by referring to these unpleaded matters.

C4.7 Conclusion on unfairly prejudicial conduct

131.  For the reasons set out in Section C4.1 – C4.6 above, I hold that Wong/Cheng fail to discharge the burden of proving that the conduct complained of constituted a breach of the Common Understanding (insofar as I find it existed) on the part of Pan/Lo, or that Lo/Pan acted in breach of their fiduciary duties owed to the Companies and NHEL.

132.  It follows that the Petitions must be dismissed.

C5. Issue 5: whether Wong/Cheng committed wrongful acts

133.  Pan contends that no relief should be granted in favour of Wong/Cheng in light of the following misconduct on their part:

(1) Wong caused HIL’s trademarks to be transferred to Harsen China without the approval of HIL and without any consideration, and the transfers benefitted Harsen China at the expense of HIL[79].

(2) Wong caused Harsen China to register other trademarks similar to those owned by HIL at CTMO so as to benefit Harsen China to the detriment of HIL[80].

(3) Wong through FEL, Harsen China and Harsen Mechanics engaged in the business of sale of electrical products in competition with HIL. Amongst them, Harsen Mechanics began to conduct business with HIL’s customers (including Caterpillar TianJian Ltd and 北京华非瑞克科技有限公司) shortly after its establishment in August 2015[81].

(4) In 2015, Wong caused HIL and the Mainland Sales Companies to stop making any payment to NHEL for the products supplied. This led to NHEL having cashflow problem and was not able to continue with its operations[82].

(5) Wong caused Yibao not to pay for the products sold by NHEL. In September 2017, Cheng directed Yibao to transfer all its business to Yangfan as a result of which Yibao did not have the funds to pay the amount due to NHEL. Nanhai court found in the 2^nd 2021 Judgment that such conduct of Wong constituted a breach of his duties owed to NHEL[83].

134.  Lo also contends that Wong and/or Cheng engaged in the following conduct in breach of their fiduciary duties owed to the Companies and without the knowledge or approval of Pan or him:

(1) Wong/Cheng engaged in competing business and diverted HIL’s business to Wong’s Companies (listed in §114 above)[84];

(2) Wong transferred HIL’s trademarks to Harsen China and caused Harsen China to register other “Harsen” trademarks which are confusingly similar to those owned by HIL[85];

(3) Wong/Cheng procured HIL and the Mainland Sales Companies not to pay the prices for the products purchased from NHEL and the cost of the products sold[86]; and

(4) Wong refused to apply for the Combined Licence which led to NHEL unable to carry on any business from 2018[87].

135.  Wong/Cheng’s responses to the conduct complained of by Pan/Lo may be summarised as follows:

(1) The transfer of the trademarks to Harsen China was prepared by an employee who asked Wong to sign the application forms without explaining the contents to him[88]. Under cross-examination, Wong accepts that the transfer was made with his knowledge and consent and he signed the relevant documents.

(2) The registration of the other trademarks in the name of Harsen China was carried out by his employee without Wong’s knowledge or approval[89]. Under cross-examination, Wong accepts that the registration of the other trademarks in the name of Harsen China was made with his knowledge and consent.

(3) On 25 January 2017, Wong caused Harsen China to transfer all the trademarks to HIL, and no loss or unfair prejudice has been suffered by HIL[90].

(4) FEL only engaged in the business of trading in wine and did not compete with HIL[91].

(5) Harsen China has never carried on any business or operation[92].

(6) Any business conducted by Harsen Mechanics was necessitated by the unfairly prejudicial acts of Pan and Lo[93].

(7) Wong’s breaches of duties, even if established, had no relationship with the unfairly prejudicial acts of Lo/Pan. In particular, Harsen Mechanics only carried out the business after Pan/Lo’s unfairly prejudicial conduct in March 2015[94].

136.  Except the allegations concerning the competing business carried out by Wong’s Companies (i.e. §§133(3) & 134(1) above, which will be dealt with in Section C8 below), the conduct complained of by Pan/Lo are either not in dispute or are supported by the findings of the Mainland court and this Court.

137.  I find that Wong and/or Cheng committed the following acts:

(1) In March 2015, Wong caused Yibao to withhold payment of RMB1,016,184.75 admittedly owed to NHEL (see §41 above). Even after the 2018 Judgment, Wong continued to cause Yibao not to pay the 2018 Judgment Debt (see §42 above). This was exacerbated by his act in causing Yibao to transfer all its business and assets to Yangfang so as to frustrate the enforcement action taken by NHEL against Yibao, followed by causing Yibao to apply for compulsory liquidation of NHEL (see §§43, 53(4)-(6), 56-57 above). In so acting, Wong failed to act in the best interests of NHEL and acted to its detriment. This constituted a breach of his duty of fidelity owed to NHEL.

(2) In December 2015, Wong caused HIL’s trademarks to be transferred to Harsen China without any consideration and without the approval of HIL (see §27 above). In causing the transfer to be made, Wong acted in breach of fiduciary duties owed to HIL in that he acted in breach of the constitution of AA, acted in a position of conflict and failed to act in the best interests of HIL.

(3) In February 2016, Wong caused Harsen China to register other “Harsen” trademarks at CTMO (see §28 above). In so acting, Wong acted in a position of conflict and failed to act in the best interests of HIL.

(4) Since 2016, Wong had refused to assist NHEL to apply for the Combined Licence notwithstanding his positions as legal representative, director and Chairman of NHEL. Even after being ordered by Nanhai court to assist NHEL in applying for the Combined Licence in 2018, Wong did not comply with the order (see §§51, 53(3) above). In so acting, Wong failed to act in the best interests of NHEL.

C6. Issue 6: whether Wong/Cheng come to court with clean hands

138.  In an unfair prejudice petition, the court is asked to consider whether the conduct complained of is unfairly prejudicial to the interests of the company or some of the members, having regard to the legal rights of the parties and the equitable constraints on the exercise of those rights. Since the essence of the jurisdiction is equitable, the petitioner must come to the court with clean hands. However, “clean hands” is not an overriding requirement and the doctrine only applies where the misconduct in question was causative of the breakdown in confidence (Yeung Bun v Brio Technology International Ltd [2000] 2 HKLRD 218, §§21-25).

139.  Further, the conduct of the petitioner may be material in a number of ways. It may render the conduct on the other side, even if prejudicial, is not unfair. Even if the conduct on the other side is both prejudicial and unfair, the petitioner’s conduct may nevertheless affect the relief which the court thinks fit to grant (Re London School of Electronics Ltd [1986] Ch 211, 222B-C).

140.  As Wong/Cheng fail to establish that the conduct complained of is prejudicial, still less unfair, it is not necessary to consider whether they come to the court with clean hands.

141.  Even if, contrary to my view, the conduct complained of by Wong/Cheng or any of them were prejudicial to their interests as shareholders of the Companies, I do not think that such conduct was unfair as it was Wong who first departed from the way the parties had operated the business of the Group by causing Yibao to withhold payment to NHEL. It was Yibao’s failure to make payment which caused the breakdown in confidence between the 2 camps of shareholders, and the conduct complained of by Wong/Cheng took place afterwards.

142.  Further, having regard to the wrongful acts of Wong/Cheng as I so find in §137 above, even if they succeed in establishing that the conduct complained against Lo/Pan were unfair prejudicial, I do not think that equity should come in aid of Wong/Cheng by granting any of the relief sought in the Petitions.

C7. Issue 7: whether transfer and registration of trademarks constituted breach of fiduciary duties

143.  For the reasons stated in §137(2)-(3) above, Wong acted in breach of his fiduciary duties owed to HIL by causing the trademarks registered in HIL’s name to be transferred to Harsen China and causing Harsen China to register other “Harsen” trademarks at CTMO.

C8. Issue 8: whether Wong engaged in competing business

144.  In the statement of claim (“SOC”)[95], it is alleged that:

(1) Wong through FEL[96], Harsen China[97], Harsen Mechanics[98] engaged in the business of manufacturing and sale of electrical products in competition with HIL. These were done without the approval of HIL and were against the interests of HIL;

(2) HIL has suffered loss and damage as a result of Wong engaging in these competing business[99]; and

(3) Further or alternatively, Wong is liable to account to HIL for the profits made in the competing business[100].

145.  At trial, the evidence shows that:

(1) Harsen China has not carried on any business in its own right. A declaration was made by Wong as part of its application for deregistration in 2017. It is the unchallenged evidence of Wong that Harsen China has only been used as (a) a vehicle to hold the registration of the trademarks at CTMO and (b) an investment holding company, holding the equity in Harsen Mechanics.

(2) Neither FEL nor Harsen Mechanics has ever engaged in the business of manufacturing electrical products.

(3) FEL has only engaged in wine trading business and has used HIL’s office for storing the wine purchased. It is the unchallenged evidence of Lo that over 18,000 bottles of wines were stored at HIL’s office without his or Pan’s consent[101]. During cross-examination, Wong confirms that he is willing to pay rent for the space occupied by FEL.

(4) Mr Leung (on behalf of HIL) submits that Wong’s assertion is inherently incredible as FEL has registered at least 5 trademarks, all of which listed electricity generators as its scope of products, and one of the promotion materials of “Harsen products” shows that HIL also engaged in the business of generators. However, the mere fact that FEL holds the 5 trademarks is not and cannot be equated with FEL having engaged in the business of sale of generators. There is simply no evidence before the court to show that FEL has carried on any business in sale of electrical products, let alone in competition with HIL.

146.  There is no dispute that Wong had misused HIL’s office for FEL’s purposes, which constituted a breach of fiduciary duties owed by Wong to HIL.

147.  The only remaining issue is whether Harsen Mechanics engaged in the business of sale of electrical products in competition with HIL[102].

148.  Mr Leung (on behalf of HIL) submits that:

(1) Wong does not dispute that Harsen Mechanics engaged in the business of sales of electrical products;

(2) Pan’s evidence that the competing business of Harsen Mechanics has generated substantial revenue during the period from 2015 to 2018[103] remains unchallenged;

(3) The only explanation offered by Wong is that Harsen Mechanics acted as sales agent of HIL and has accounted all the proceeds of sales to HIL;

(4) However, during cross-examination, Wong admits that the appointment of Harsen Mechanics as sales agent was never approved by the board or general meeting of HIL. Nor has Wong adduced any evidence to show that Harsen Mechanics has accounted any sale proceeds to HIL; and

(5) Although Wong claims that he has since 15 August 2016 ceased to have any interest in Harsen Mechanics, the assertion must be rejected. In the email dated 13 September 2017 from 吳翅文 (one of the transferees of shares in Harsen China, see §22 above) to Wong, she referred to the request made by Wong in 2016 requiring her to be a shareholder of Harsen Mechanics for a year; and she asked Wong to arrange for the shares to be transferred as she was only an employee and did not want to hold the shares. In response, Wong assured her that he would find a replacement.

149.  Mr Yau does not advance any submissions to contradict the points made by Mr Leung other than referring to some transaction documents which he says, show that the proceeds generated from certain sales to Caterpillar had been accounted by Harsen Mechanics to HIL[104]. However, the submission cannot be accepted as Wong does not in his evidence refer to any of the transaction documents relied on by Mr Yau. Nor has Mr Yau puts any of the documents to Pan or Lo during cross-examination.

150.  In my judgment, Wong acted in breach of his fiduciary duties owed to HIL in allowing Harsen Mechanics, a company owned and controlled by him, to carry on the same business as that of HIL but without the approval of the board of HIL.

C9. Issue 9: whether HIL suffered any loss

151.  As regards the claim relating to the trademarks, Mr Yau contends that no loss has been suffered by HIL as the evidence shows that Harsen China has not carried on any business and all the trademarks were transferred from Harsen China to HIL in January 2017 following the applications for transfer made in May 2016. On the other hand, Mr Leung submits that the question of damages should be left to the assessment stage[105].

152.  Neither counsel has made any submission on the form of relief, specifically whether HIL is entitled to seek damages or account for profits.

153.  In my judgment, Wong is liable to compensate HIL for the loss suffered or to account for the profits generated from the use of HIL’s trademarks and the other “Harsen” trademarks during the period when the trademarks were registered in Harsen China’s name. The question whether HIL has suffered any loss or that Wong has made any profits from the use of HIL’s trademarks and the other trademarks similar to Harsen is an issue which should be dealt with at the assessment stage.

154.  As for the claim relating to the competing business, Wong is liable to compensate HIL for the loss suffered or to account for the profits made by Harsen Mechanics from the date it began to carry on the same business in competition with HIL up to the date of this Judgment, to be assessed.

155.  In respect of both claims, HIL is entitled to elect whether to require Wong to pay damages or to account for the profits made by Harsen China and Harsen Mechanics after Wong has made discovery for the purpose of assessment or account. This accords with the following principles:

(1) The general rule of equity that no one who has duties of a fiduciary nature to perform is allowed to enter into engagements in which he has or can have a personal interest conflicting with the interests of whom he is bound to protect. A fiduciary’s liability to account for profits would not be defeated even if the principal to whom he owed duty were unable to make the profit. He must refund with interest all profits which he has made by means of his position unless he made them with the full knowledge and approval of the persons to whom he owes a fiduciary duty (Snell’s Equity, 34^th ed., §7-041; Regal (Hastings) Ltd v Gulliver, 137G-138G, 144G-145A, 154B-C; Swain v Law Society [1981] 3 All ER 797 at 807e-808j).

(2) The principal of the fiduciary is entitled to an account as of right (Libertarian Investments Ltd v Hall (2013) 16 HKCFAR 681, §167).

156.  As for the claim relating to FEL, on the basis of Wong’s admission, I hold that Wong is liable to pay rent for the use of HIL’s office space for FEL’s purposes for the entire period of occupation. The amount payable by Wong is to be assessed, if the amount cannot be agreed by the parties.

D. DISPOSITION & RELIEF

157.  For the reasons set out above, I make the following order:

(1) The Petitions be dismissed.

(2) Wong is liable to pay damages or account for the profits made by Harsen China and Harsen Mechanics as described in §§153-154 above, to be assessed.

(3) Wong is liable to pay rent for the use of HIL’s office space for FEL’s purposes for the entire period of occupation, to be assessed.

158.  As for interest, no submission has been made by counsel. In the SOC, HIL does not claim compound interest against Wong. I therefore order Wong to pay simple interest on the amount which he is adjudged liable to compensate or account to HIL from the date of the writ up to the date of this Judgment at HSBC prime lending rate plus 2% and, thereafter, at judgment rate until payment.

159.  As for costs, I make a cost order nisi that:

(1) Wong do pay to each of Lo and Pan 70% of the costs of and occasioned by the Petitions, to be taxed if not agreed on a party and party basis.

(2) Wong do pay to HIL the costs of and occasioned by the Action, to be taxed on a common fund basis.

(3) For the purpose of apportionment, 75% of the costs of the trial is to be apportioned to the Petitions and 25% to the Action.

(4) Pan is entitled to be indemnified by HIL of all the costs incurred in pursuing the Action, including the costs for seeking leave to bring the Action by way of statutory derivative action, to be taxed on an indemnity basis if not agreed.

160.  In making a 30% deduction in respect of the costs of the Petitions, I have taken into account the following matters:

(1) Lo and Pan are the successful parties in the Petitions. Some of the costs they incurred are general costs in opposing the Petitions.

(2) Lo/Pan fail in Issues 1-2 and part of Issue 3. In their WS, Lo/Pan seek to expand the complaint on competing business by making allegations in relation to the Wong’s Companies which go beyond their pleaded case in the Petitions. Substantial time and costs have been incurred by the parties in dealing with Issues 1-3 and the other unpleaded issues. These costs could have been saved had it not been for the stance taken by Lo/Pan on these issues. The deduction is to discourage the parties from leaving no stone unturned when there is no proper basis to dispute the issues or to make the allegations.

(3) Wong/Cheng fail to prove any of the conduct complained of in the Petitions, and are found to have committed the wrongful acts complained of by Lo/Pan.

(4) I do not think that the Petitions warrant the engagement of more than one counsel for each party.

161.  As for the costs of the Action, it is appropriate to order Wong to pay costs on a higher scale as he is found to have acted in breach of fiduciary duties and should be required to compensate HIL of all the costs incurred in pursuing the Action. Had it not been for the concessions he made during trial, costs would have been ordered against Wong on an indemnity basis.

162.  The parties are directed to submit their proposed directions on discovery and account within 21 days of this Judgment. Any disagreements on the proposed directions should be marked on the draft with brief explanatory statements. The directions will be given on paper unless any party wishes to be heard at an oral hearing.

163.  It is clear during the trial that the relationship of the 2 camps of shareholders has deteriorated to such a state that it is impossible for them to continue to cooperate in pursuing the business for which they spent a few decades to build. It is unfortunate that having spent 8 years in fighting these proceedings and the many proceedings in the Mainland, the parties are still not able to achieve a clean break. This is the result of Pan/Lo choosing not to present any cross-petitions to seek any relief from the court on the basis of the wrongful acts committed by Wong/Cheng, and the decision of the parties in not resorting to the various avenues discussed in Re Top ‘E’ Trading[2021] HKCFI 3572, §§27, 37 to resolve their dispute. There is no reason why the parties cannot continue to make use of those avenues to see if they can achieve an amicable parting of way, rather than continuing to incur costs in pursuing the assessment of damages or account in the Action.

Mr Albert Yau and Ms Man Yin Ting, instructed by Lau, Chan & Ko, for the 1^st – 2^nd Petitioners in HCMP 3363, 3365, 3366/2016, and the Defendant in HCA 193/2018

Mr Bernard Lam, instructed by Chan, Wong & Yip, for the 1^st Respondent in HCMP 3363, 3365, 3366/2016

Mr Joseph Wong and Mr Kaiser Leung, instructed by Fung Wong Ng & Lam LLP Solicitors, for the 2^nd Respondent in HCMP 3363, 3365, 3366/2016 and the Plaintiff in HCA 193/2018

The 3^rd – 5^th Respondents in HCMP 3363, 3365, 3366/2016 are not represented and absent

HCMP 3363/2016, HCMP 3365/2016, HCMP 3366/2016 and
HCA 193/2018 (HEARD TOGETHER)
[2020] HKCFI 600

HCMP 3363/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANOUS PROCEEDINGS NO 3363 OF 2016

____________________

____________________

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANOUS PROCEEDINGS NO 3365 OF 2016

____________________

____________________

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANOUS PROCEEDINGS NO 3366 OF 2016

____________________

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 193 OF 2018

____________________

_______________

D E C I S I O N

_______________

The application

1.  The 2^nd Respondent (“Pan”) has issued summonses in each of the above four proceedings seeking orders that the originating process and points of claim be struck out alternatively, the proceedings be stayed save for the purpose of giving effect to an agreement alleged to have been made to settle the proceedings on the following terms:

(i)  The Petitioner and Cheng Wai King Pat shall acquire the entire shares of Harsen Industries Limited and Harsen Engineering Limited for free in exchange for transferring the share under the name of the Petitioner in Harsen (China) Limited to the 1^st Respondent and 2^nd Respondent split in equal share free of any payment so that the same will be fully owned by the 1^st Respondent and 2^nd Respondent, pursuant to the settlement; and

(ii)  The Petitioner and Cheng Wai King Pat shall be fully responsible for all matters in Guangzhou Yibao Electric Equipment Co Ltd (廣州市宜保機電設備有限公司) and Dongguan Yanfan Electric Co (東莞市洋帆機電有限公司), Harsen International Ltd and Takada (China) Ltd, pursuant to the Settlement.

2.  The applications were originally to be heard before me on 4 March 2020, but I directed with the agreement of the parties that the applications be dealt with in writing and that an e-bundle be prepared.  The e-bundle was not in compliance with my directions and there were also problems with the bundle of authorities.  I comment further on this at [26] at the end of this decision.  As a result I directed that paper bundles be filed.

Background

3.  The three Petitions are all issued by Wong Yee Chuk and, in the case of HCMP 3365/2016 his Wife Cheng Wai King Pat, seeking orders pursuant to s725 of the Companies Ordinance, Cap 622, that his shares in the three relevant companies (with names all starting with “Harsen”) be bought by the other shareholders Lo Po Wai Harry and Pan Shi Liang.  The Harsen Group was established in mid-1997 by Mr Wong and Mr Lo when Harsen Industries Ltd was incorporated (the company in HCMP 3365/2016) to carry on business manufacturing and selling electrical products.

4.  Mr Wong and his Wife own 50% of Harsen Industries and Mr Wong owns 40% of the other two companies, Harsen Engineering and Harsen China, with Mr Lo owning 40% of each company and Mr Pan owning the 20% of Harsen Engineering and Harsen China and 10% of Harsen Industries.  The relationship between the two camps began to break down in 2015 leading to issue of the Petitions in 2016.

5.  The High Court Action is a derivative action brought by Hansen Industries at the instigation of Mr Lo and Mr Pan against Mr Wong seeking damages for establishing a competing business in breach of his fiduciary duties as a director and appropriating for his own use certain trademarks. The precise details of the claims in the respective proceedings do not matter.

6.  On 17 December 2018 the parties conducted a mediation.  It was unsuccessful.  On 18 December 2018 Ernest Li & Co (solicitors for the Petitioners in the Miscellaneous Proceedings and the Defendant in the High Court Action) wrote to TKC Lawyers (solicitors for the 1^st Respondent in the three Miscellaneous Proceedings) and Fung Wong Ng & Lam (“Fung Wong”) (solicitors for the 2^nd Respondent in the Miscellaneous Proceedings and the Plaintiff in the High Court Action) with an offer of settlement.  It is necessary to quote largely in full the contents of the letter and the subsequent correspondence, which was exchanged between the three firms of solicitors (each firm receiving each letter).

“We refer to the mediation meeting on 17 December 2018. With a view to further exploring the room of reaching a full and final settlement of the captioned cases, we are instructed to say that our clients are prepared to set out the terms of offer in lieu of litigation so that the matter can be fully settled, particulars please see below:-

a. Our clients shall acquire the entire shares of Harsen Industries Ltd and Harsen Engineering Ltd for free in exchange for transferring the shares under the name of Mr Wong to your respective clients in Harsen China Ltd free of any payment so that the same will be fully owned by your clients respectively;

b. Our clients shall fully responsible for all matters in Guangzhou Yibao Electric Equipment Co Ltd (廣州市宜保機電設備有限公司) and Dongguan Yanfan Electric Co (東莞市洋帆機電有限公司), Harsen International Ltd and Takada (China) Ltd; and

c. Each party shall bear his/her own legal costs and disbursement.

We would like to hear from you in respect the aforesaid on or before 21 December 2018.”

7.  On 21 December 2018 Fung Wong replied:

“We write further to our letter dated 19^th December 2018 and refer to your letter dated 18^th December 2018 marked ‘without prejudice’.

For the purpose to bring the above actions to an early end to save the Court’s time and parties’ costs, please be advised that your clients’ offer (i.e. terms a – c set out in your said letter dated 18^th December 2018) in lieu of litigation is accepted by our client.

In light of Harsen China Ltd (which holds the Mainland factory) will be transferred to our client and Mr. Lo after settlement, for avoidance of unnecessary doubt and for clarification purpose, kindly be advised that our client would look forward to take away only ‘Harsen’ trademark with other trademarks left with the other partners.

Please let us by return and at any event within the next 7 days the draft Summonses for the settlement for our consideration.

In the meantime, all rights of our client herein are expressly reserved.”

8.  Ms Ip of Ernest Li then phoned Mr Tang of Fung Wong and,   Mr Tang says in [17] of his affirmation that the call was very brief, and Ms Ip told him (and I quote from [24] of his affirmation) “her client’s offer could only be accepted in terms a-c set out in the letter dated 18^th December 2018, which could be nothing more”.  Ms Ip has not filed any evidence to dispute what Mr Tang says.  As a consequence of this conversation Mr Tang wrote the 2^nd letter Fung Wong sent on 21 December 2018:

“We refer to our letter of even date and the tele-conversation immediately thereafter between your Ms. Ip and our Mr. Tang.

Please be confirmed that:-

For the purpose to bring the above actions to an early end to save the Court’s time and parties’ costs, please be advised that your clients’ offer (i.e. terms a – c set out in your said letter dated 18^th December 2018) in lieu of litigation is accepted by our client.

We further agree and confirm that your clients’ offer (i.e. only terms a – c set out in your said letter dated 18^th December 2018) which are no less and no more are the only terms agreed by the parties for prompt settlement so to bring the above actions to the end without hiccups.

Kindly let us by return and at any event within the next 7 days the draft Summonses for the settlement for our consideration.

In the meantime, all rights of our client herein are expressly reserved.”

9.  A 3^rd letter from Fung Wong followed:

“We refer to the above matters AND our 2^nd letter of even date and the letter also of even date from Messrs. TKC Lawyers both unequivocally accepting your settlement offer exactly in the terms set out in your letter dated 18 December 2018, which will be no more and no less.

In light of consensual agreement from all parties in the terms proposed by your clients, for the purpose to save the court’s time and parties’ further unnecessary costs, please do let us have by return and at any event within the next 7 days the draft consent summons reflecting the said terms of settlement agreed by the parties for the parties’ perusal and agreement so to bring the above actions to the end and have the matters herein fully settled.

In the meantime, all rights of our client herein are expressly reserved.”

10.  TKC Lawyers also wrote to Ernest Li on 21 December 2018:

“We refer to your letter of 18^th December 2018 (the ‘Letter’)

We are instructed to inform you that your clients’ offer as said out the Letter is acceptable to our client.

Please let us have the draft consent summons reflecting the terms of the settlement for our perusal.

Meanwhile, all our client’s rights and remedies are hereby reserved.”

11.  Ernest Li did not immediately prepare summonses to bring the proceedings to a conclusion. Fung Wong wrote on 27 December 2018 enclosing a consent order for HCMP 3363/2016:

“We refer to the above matters, your letter dated 18^th December 2018, the letter dated 21^st December 2018 of TKC Lawyers and our three letters all dated 21^st December 2018.

Although the Mediation on 17^th December 2018 failed, the parties have thereafter reached settlement agreement that your client’s offer as set out in your letter dated 18^th December 2018 is accepted by our client by our three letters all dated 21^st December 2018 and Mr. Lo by the letter dated 21^st December of TKC Lawyers.

In the circumstances, we enclose our draft Consent Order for HCMP 3363/2016 for the parties’ consideration and comment. If this draft Consent Order is agreeable to the parties, we will adopt the terms thereof to the other actions with necessary amendments.

Please let us have your reply by return and at any event within the next 7 days for our further handling.”

“CONSENT ORDER

…

BY CONSENT, IT IS ORDERED that:-

1. All further proceedings herein be stayed upon the terms set out in the Schedule annexed hereto except for the purpose of carrying such terms into effect;

2. For the said purpose the Petitioner, the 1^st Respondent and the 2^nd Respondent have liberty to apply; and

3.   There be no order to costs of this action and costs of this application.”

“SCHEDULE

1. WONG YEE CHUK (黃宜祝) and CHENG WAI KING, PAT (鄭偉琼) or their nominee(s) shall acquire all the One Hundred (100) shares standing in the names of LO PO WAI, HARRY (羅保偉) and PAN SHI LIANG (潘世良) respectively in the Register of HARSEN INDUSTRIES LIMITED (凱訊實業有限公司) and all the Sixty Thousand (60,000) shares standing in the names of LO PO WAI, HARRY (羅保偉) and PAN SHI LIANG (潘世良) respectively in the Register of HARSEN ENGINEERING LIMITED (凱訊機電有限公司) for free in exchange for transferring the all the Eighty Thousand (80,000) shares standing in the name of WONG YEE CHUK (黃宜祝) in the Register of HARSEN (CHINA) LIMITED (凱訊(中國) 有限公司) to LO PO WAI, HARRY (羅保偉) or his nominee(s) and PAN SHI LIANG (潘世良) or his nominee(s) respectively free of any payment so that HARSEN (CHINA) LIMITED (凱訊(中國)有限公司) will be fully owned by LO PO WAI, HARRY (羅保偉) and PAN SHI LIANG (潘世良) respectively;

2.   WONG YEE CHUK (黃宜祝) and CHENG WAI KING, PAT (鄭偉琼) shall fully responsible for all matters in Guangzhou Yibao Electric Equipment Co. Ltd. (廣州市宜保機電設備有限公司)and Dongguan Yanfan Electric Co. (東莞市洋帆機電有限公司), Harsen International Ltd and Takada (China) Ltd.”

12.  On 8 January 2019 Ernest Li wrote sending an alternative form of consent summonses:

“We refer to the letter from Messrs. Fung, Wong, Ng & Lam dated 21^st December 2018 and the letter from TCK Lawyers dated 21^st December 2018.

We enclose the draft consent orders with a view to reaching a full and final settlements of the captioned proceedings, we would like to say that the terms of the said drafts are also covering matters arising from the legal actions other than in Hong Kong i.e. the legal proceedings in the Mainland China, property in Guangzhou, the stocks remained in the warehouse of NHEL bearing the trademarks of Harsen etc. as instructed.

We are instructed that it is in the interest of all parties that a global settlement can be reached so that there will not be any conflict or dispute or further matter concerning or arising from HIL, HEL and HCL wither their Mainland Sales Companies (‘Harsen Group’), if no consensus being reached for 4 cases, any out of court settlement is meaningless, the captioned proceedings have to be continued.

We are instructed to reserve our client’s right hereunder and nothing herein shall bind and intended to be bounded our client unless and until all the 4 consent orders were signed by the relevant parties.

We would like to hear from you on or before 20^th January 2019.”

“CONSENT ORDER

…

BY CONSENT, IT IS ORDERED THAT:

1. All further proceedings be stayed upon the terms set out in the schedule to this Order, except for the purpose of carrying those terms into effect;

2. There be no Order to costs of this proceedings and the costs of this application;

3. The Hearing of Case Management Conference on 28^th March 2019 at 9:30am before Honourable Mr Justice Harris be vacated; and

4.   Liberties to apply to carry the term of this consent order by the parties.”

13.  The schedules to the Tomlin Orders varied for each proceeding:

(1)  HCMP 3363/2016:

“Following a mediation taking place, the Parties have agreed the following settlement terms upon the Consent Order in the HCMP 3365/2016 and HCMP 3366/2016 and HCA 193/2018 be signed simultaneously by the relevant parties:

1. The 1^st and 2^nd Respondents will respectively transfer the shareholding respectively registered under the name of the 1^st and 2^nd Respondents in the Harsen Engineering Ltd. (‘Company’) free of payment to the Petitioner solely upon signing of this Order and the solicitors for the Petitioner shall prepare the instrument of transfer and bought and sold note for the said transfer;

2. At the time of execution of the relevant instrument of transfer and bought and sold note as mentioned aforesaid, the 1^st Respondent shall at the same time execute the audited account of the Company for the year end on 31 December 2015 with the relevant papers for preparing the said audited account as provided by K. M. Lee and Co. (‘auditor’) so that the audited account for the year end on 31 December 2016, 2017 and 2018 can be done without further delay and to ensure the stamp duty of the said transfer can be done as soon as possible;

3. Any current account maintained in the books and ledgers of the Company owed to the 1^st and 2^nd Respondents shall be written off by the 1^st and 2^nd Respondents upon execution of the aforesaid documents;

4. The 1^st and 2^nd Respondents shall indemnify and keep indemnified the Company for the penalty imposed by the Inland Revenue Department (‘IRD’) in respect of the Company’s failure to file the audited account of the Company for the year end on 31 December 2015 and the years subsequently thereafter on time;

5. The 1^st Respondent shall pay the Company in the sum of HK$5,500.00 by the 1^st Respondent being the late charge imposed by the IRD and penalty under the summons of WKS 14537 of 2017;

6. The 1^st and 2^nd Respondents shall resign as the director of the Company upon signing this consent order;

7. Upon 14 days of signing this consent order, the 1^st Respondent shall accompany with the Petitioner to Bank of China Ltd. to amend the authorised signatories of the aforesaid account to the intent that these accounts shall be operated by the Petitioner only;

8. The 1^st and the 2^nd Respondents severally and jointly waive and abandon any claim, bonus demand, loss and damages or employee benefit in respect of any matter in relation to the Company in the past and in the future;

9. Parties agree not to disclose the fact or terms of this settlement to any third party other than their spouses, their professional legal advisors, auditors, insurers or accountants, or where the written consent of all the other Parties have been obtained (such consent not to be unreasonably withheld).  Nothing in this clause will apply where such disclosure is required by law, or is required to enforce this Tomlin Order.”

(2)  HCMP 3365/2016:

“Following a mediation taking place, the Parties have agreed the following settlement terms upon the Consent Order in the HCMP 3363/2016 and HCMP 3366/2016 and HCA 193/2018 be signed simultaneously by the relevant parties:

1. The 1^st and 2^nd Respondents will respectively transfer the shareholding respectively registered under the name of the 1^st and 2^nd Respondents in the Harsen Industries Ltd. (‘Company’) free of payment to the 1^st Petitioner and 2^nd Petitioner for 80 shares to the 1^st Petitioner and 20 shares to the 2^nd Petitioner upon signing of this Order and the solicitors for the Petitioners shall prepare the instrument of transfer and bought and sold note for the said transfer;

2. At the time of execution of the relevant instrument of transfer and bought and sold note, the 1^st Respondent shall at the same time execute the audited account of the Company for the year end 31^st December 2015 with the relevant papers for preparing the audited account as provided by K. M. Lee and Co. (‘auditor’);

3. Any current account maintained in the books and ledger of the Company as at the 31^st day of December 2015 owed to the 1^st Respondent by the Company shall be written off by the 1^st Respondent upon execution of the aforesaid documents;

4. The 1^st Respondent shall sign the papers for the purpose of preparing the audited accounts of the Company at the time of signing the audited accounts for the year end on 31^st of December 2015 and from 1^st January 2016 to 31^st December 2017 issued by the auditor of the Company so to ensure the stamp duty of the said transfer can be done as soon as possible;

5. The 1^st and 2^nd Respondents and their related parties as well as the Petitioners respectively shall withdraw the legal proceedings brought by the parties in the Mainland China namely (1) 广东省广州市中级人民法院民事判决书(2018)粵01民終17815号), (2) 广东省广州市海珠区人民法院民事判决书(2018)粵0105民初2641号, (3) 广东省广州市中级人民法院民事判决书(2018)粵01民終17816号), (4) 广东省广州市海珠区人民法院民事判决书(2018)粵0105民初2642号, (5) 广东省广州市海珠区人民法院 (2018)粵0105执9307号, (6) 广东省广州市中级人民法院民事判决书(2018)粵01民終17357号), (7) 广东省广州市海珠区人民法院民事判决书(2017)粵0105民初7225号, (8) 佛山市南海區人民法院(2017)粵0605民初14732号, (9) 佛山市中级人民法院(2018)粵06民終9508号, (10) 佛山市南海區人民法院(2017)粵0605民初17014号, (11) 佛山市中级人民法院(2018)粵06 民終9497号, (12) 佛山市南海區人民法院(2018)粵06 民終9493号 and (13) 佛山市中级人民法院(2018)粵06 民終9493号within 14 days from the date of signing the consent order herein and to provide the Petitioners documents evidencing such withdrawal forthwith upon receiving such documents;

6. The Respondents and the Petitioners shall procure the Company and Foshan Nanhai Harsen Electric Co. Ltd. (‘NHEL’) to write off the account receivables respectively due to NHEL by HIL and Mainland Sales Companies namely Dongguan Yangfan Electric Co. (東莞市洋帆機電有限公司)and Guangzhou Yibao Electrical Equipment Co. Ltd. (廣州市宜保機電設備有限公司)and Guangzhou Yibao Electrical Equipment Co. Ltd. — Shanghai Branch (廣州市宜保機電設備有限公司—上海分公司) upon signing of this consent order. The actual amount shall be the figure entered into the audited account of HIL as at the end on 31^st of December 2015 for the Company prepared by K. M. Lee and Co and for Guangzhou Yibao Electrical Equipment Co. Ltd. (廣州市宜保機電設備有限公司)and Guangzhou Yibao Electrical Equipment Co. Ltd. — Shanghai Branch (廣州市宜保機電設備有限公司—上海分公司) shall be audited account of Guangzhou Yibao Electrical Equipment Co. Ltd. as at the end of 31 December 2015 and the years subsequent thereafter.

7. The 1^st and 2^nd Respondents shall indemnify and keep the Company indemnified for the late charge and penalty imposed by the Inland Revenue Department (‘IRD’) in respect of the Company’s failure to file the audited account of the Company for the year end on 31 December 2015 and the years subsequently thereafter on time and pay the Company in the sum of HK$666,463.00 by the 1^st Respondent and 2^nd Respondent for the sum of HK$333,231.50 being penalty purposed by IRD and penalty under the summons of WKS 14537 of 2017 upon signing of this Consent Order;

8. The 1^st Respondent shall resign as the director of the Company upon signing this consent order;

9. Upon 14 days of signing this consent order, the 1^st Respondent shall accompany with the Petitioners to Citibank, China Citic, Bank of East Asia Ltd, Bank of Communications Ltd. and Bank of China Ltd. to amend the authorised signatories of the aforesaid account to the intent that these accounts shall be operated by the 1^st Petitioner only;

10. The 1^st Respondent shall waive the right of claiming the sum of HK$241,680.00 being the alleged sum owed to 1^st Respondent by the Company in the purchase of vehicle bearing registration no. A252B2 and any other claim, damages and right arising from the said vehicle;

11. The 1^st Respondent shall reimburse the sum of HK$313,900.00 to the Company being the consideration for the sale of 55 shares of Smooth Investment Co. Ltd. by the 1^st Respondent registered under the name of the 1^st Respondent on trust for the Company upon signing this consent order;

12. The 1^st and 2^nd Respondents shall pay to the 1^st Petitioner in the sum of HK$2.2 million representing the contribution by the 1^st and 2^nd Respondents for the purchase of property situate at 廣州市海珠區南華東路草芳圍2號B棟3層09, 10, 11 房 (‘Guangzhou Units’) i.e. 40% of the purchase price of the said Guangzhou Units forthwith at the same of signing this consent order and the 1^st Petitioner upon receiving aforesaid money shall fully abandon and waive his right, interest and benefit of and in the Guangzhou Units;

13. The 1^st and 2^nd Respondents severally and jointly waive and abandon any claim, bonus demand, loss and damages or employee benefit in respect of any matter in relation to the Company in the past and in the future;

14. The 1^st and 2^nd Respondents shall allow the Petitioners to take possession of the stock and products kept in the warehouse of NHEL as per the copy of the list herein free of payment within 14 days from the date of the signing this consent order;

15. Parties agree not to disclose the fact or terms of this settlement to any third party other than their spouses, their professional legal advisors, auditors, insurers or accountants, or where the written consent of all the other Parties have been obtained (such consent not to be unreasonably withheld).  Nothing in this clause will apply where such disclosure is required by law, or is required to enforce this Tomlin Order.”

(3)  HCMP 3366/2016:

“Following a mediation taking place, the Parties have agreed the following settlement terms upon the Consent Order in the HCMP 3363/2016 and HCMP 3365/2016 and HCA 193/2018 be signed simultaneously by the relevant parties:

1. Upon all legal proceedings in the Mainland China in respect of the Petitioner, Mainland Sales Companies NHEL and related parties of the 1^st and 2^nd Respondents have been completely withdrawn by the relevant parties, namely (1) 广东省广州市中级人民法院民事判决书(2018)粵01民終17815号), (2) 广东省广州市海珠区人民法院民事判决书(2018)粵0105民初2641号, (3) 广东省广州市中级人民法院民事判决书(2018)粵01民終17816号), (4) 广东省广州市海珠区人民法院民事判决书(2018)粵0105民初2642号, (5) 广东省广州市海珠区人民法院(2018)粵0105执9307号, (6) 广东省广州市中级人民法院民事判决书(2018)粵01民終17357号), (7) 广东省广州市海珠区人民法院民事判决书(2017)粵0105民初7225号, (8) 佛山市南海區人民法院(2017)粵0605民初14732号, (9) 佛山市中级人民法院(2018)粵06民終9508号, (10) 佛山市南海區人民法院(2017)粵0605民初17014号, (11) 佛山市中级人民法院(2018)粵06 民終9497号, (12) 佛山市南海區人民法院(2018)粵06 民終9493号 and (13) 佛山市中级人民法院(2018)粵06 民終9493号the Petitioner, will within 14 days from the date of the confirmation from the Respondents that the aforesaid legal proceedings have been completely withdrawn, transfer the shareholding registered under the name of the Petitioner in the Harsen (China) Ltd. (‘Company’) free of payment to the 1^st Respondent for 53,333 shares and the 2^nd Respondent for 26,667 shares by the Petitioner respectively upon signing this consent order and the solicitors for the Petitioner shall prepare the instrument of transfer and bought and sold note for the said transfer;

2. The 1^st and 2^nd Respondents shall indemnify and keep the Petitioner indemnified against the claim, demand, tax, levy, charges and penalty imposed by the tax authority in the Mainland China tax authority in respect of the taxation matter of the Company’s Mainland wholly owned subsidiary registered under the name of Foshan Nanhai Harsen Electric Co. Ltd. (‘NHEL’) since 1 January 2015;

3. The Petitioner shall resign as the director of HCL upon signing this consent order at the same time of signing the aforesaid instrument of transfer and bought and sold note;

4. The Petitioner shall resign as the legal representative and director of Foshan Nanhai Harsen Electric Co. Ltd. (‘NHEL’) at the same time of signing the aforesaid instrument of transfer and bought and sold note and the chop of the legal representative of NHEL will be cancelled forthwith;

5. The Petitioner and the 1^st and 2^nd Respondents shall respectively consent to procure NHEL to write off the outstanding amount owed to NEHL by HIL recorded in the audited account of HIL as at the year end on 31 December 2015 and the years subsequent thereafter;

6. The Petitioners shall resign as the authorised signatories of bank account of NHEL maintained with Agricultural Bank of China (‘ABC’) in the Mainland China within 14 days from the date of signing this consent order;

7. Apart from the taxation matter, the 1^st and 2^nd Respondents shall jointly and severally indemnify and keep the Petitioner indemnified against all losses and damages, liabilities and claim for all matters arising from NHEL since the 1 January 2015 including but not limited to the employee compensation, outgoings, business, operation, customs, insurance and books and records of NHEL;

8. Upon 14 days of signing aforesaid the instrument of transfer and bought and sold note, the 1^st Respondent shall accompany with the Petitioner to Bank of China Ltd. to amend the authorised signatories of the aforesaid account to the intent that these accounts shall be operated by 1^st Respondent only;

9. The 1^st and 2^nd Respondents shall be precluded or debarred from bring any action against any of the Mainland Sales Companies, namely Dongguan Yangfan Electric Co. (東莞市洋帆機電有限公司)and Guangzhou Yibao Electrical Equipment Co. Ltd. (廣州市宜保機電設備有限公司)and Guangzhou Yibao Electrical Equipment Co. Ltd. — Shanghai Branch (廣州市宜保機電設備有限公司—上海分公司) whatsoever in regard to their operation, business or transactions, record or books, tax issue and the dealing in the past and in the future;

10. The 1^st and 2^nd Respondents shall allow the Petitioner to take possession of the stock and products kept in the warehouse of NHEL as per the copy of the list herein free of payment within 14 days from the date of the signing this consent order;

11. Parties agree not to disclose the fact or terms of this settlement to any third party other than their spouses, their professional legal advisors, auditors, insurers or accountants, or where the written consent of all the other Parties have been obtained (such consent not to be unreasonably withheld).  Nothing in this clause will apply where such disclosure is required by law, or is required to enforce this Tomlin Order.”

14.  On 8 January 2019 Fung Wong wrote to Ernest Li:

“We refer to our 2^nd letter dated 21^st December 2018 and your letter of even date purportedly marked ‘Without Prejudice save as to Costs’.

We will take instruction thereon from our client and revert soonest.

In the meantime, we observe that:-

(i) Our Mr. Tang was told in the tele-conversation initiated by your Madam Ip immediately after receiving our 1^st letter dated 21^st December 2018 that your client’s offer could ONLY be accepted in terms a – c set out in your said letter 18^th December 2018, which could be nothing more;

(ii) We immediately clarified and confirmed our stance by our said 2^nd letter dated 21^st December 2018 (which is an open letter) that:-

Please be confirmed that:-

For the purpose to bring the above actions to an early end to save the Court’s time and parties’ costs, please be advised that your clients’ 2018 in lieu of litigation is accepted by our client.

(iii) However, we notice some terms which are not necessary and ancillary to the implementation of terms a – c set out in your said letter 18^th December 2018 slipped into your Schedules to Tomlin Orders

In the meantime, all rights of our client herein are expressly reserved including but not limited to applying to court for necessary directions and/or hearings at the expenses of your clients.”

15.  TKC Lawyers wrote to similar effect on 11 January 2019.

The Disagreement

16.  Mr Wong in his affirmation in opposition describes Ernest Li’s letter of 18 December 2018 as preliminary terms and an invitation to explore further a settlement.  Mr Wong proceeds to argue that Ernest Li’s letter was brief, vague and plainly incomplete and it must have been obvious that various matters remained to be agreed.  He says in [38.1] to [38.6] of his affirmation:

“38.1 Further negotiation and agreement between Lo, Pan and I as to the precise proportions in which they would hold HCL post-Transfer, given that they hold different shareholdings in the three Harsen Group companies;

38.2 The signing of the audited accounts of the Harsen Group companies, which Lo had been hitherto unwilling to sign, so as to ensure that the instruments of the Transfer can be duly stamped, without which such instruments would remain inadmissible under section 15 of the Stamp Duty Ordinance (Cap. 117);

38.3 Resignation and/or change in directorship of the three Harsen Group companies;

38.4 Amendment of the bank signatories of the three Harsen Group companies;

38.5 Dealing with intra-group liabilities, including but not limited to the possibility of writing-off and/or waiving the account receivables due to NHEL by HIL and/or Mainland Sales Companies, and possession of the stock and products kept in NHEL’s warehouse, as well as liabilities as between the parties; and

38.6     Dealing with the late charges and penalties imposed by the Inland Revenue Department and/or foreign tax authorities, including but not limited to the possibility of indemnification by directors or former directors.”

17.  Self-evidently the offer set out in Ernest Li’s letter of 18 December 2018 did not suggest that Mr Wong proposed that the major component of the dispute be settled on the basis proposed in the letter and that if they were agreed the remaining items of the sort described by Mr Wong could then be addressed with a view to a full and final settlement of all four proceedings.  It necessarily follows from Mr Wong’s own evidence (and assuming that it accurately summarises what he assumed on 18 December 2018) that the letter should have been couched in the kind of terms I have used in the previous sentence.  It seems to me that the issue is whether or not Fung Wong and TKC Lawyers must have appreciated that there would be some other matters that would need to be agreed before the entirety of the dispute could be resolved.

18.  As I have already noted in [8] no evidence has been filed by Ms Ip.  The evidence filed by the Applicants tell me nothing material about the progress of the mediation (by which I intend no criticism) and other than for the evidence referred to in [8] & [17] of these reasons, does little more than exhibit correspondence and, indeed, it is the Applicant’s case that the correspondence contains a binding settlement agreement.  They do not rely on terms said to have been agreed orally.

19.  Mr Wong has filed a lengthy affirmation intended to demonstrate that the correspondence did not give rise to a concluded settlement agreement.  He explains the background to the Hong Kong proceedings and also that there is a series of associated proceedings in the Mainland.  He explains that on 17 December 2018 a mediation took place “with a view to settling the Actions amicably”[1].  “Actions” are defined in [3.2] of Mr Wong’s affirmation to include all proceedings including the HCMP actions and the High Court Action.  On a fair reading of [3] and [28]–[30] of his affirmation, Mr Wong does not suggest that the mediation was to discuss settlement of the Mainland proceedings and it is unclear from his evidence what discussions, if any, had taken place concerning them.  This is an illustration, albeit a minor one, of the unsatisfactory nature of his evidence as I assume, reading the affirmation as a whole, that it probably was discussed and Mr Wong probably intended to resolve that dispute as well; and as can be seen in [13(2)] above the schedule to the consent summons for HCMP 3365/2016 provides for this.

20.  Accepting, as I do, that Mr Wong probably did not understand Ernest Li’s letter to contain all the matters that would need to be agreed in order to settle his disputes with Mr Lo and Mr Pan, it is quite obvious that Ms Ip did not draft the letter of 18 December 2018 properly.  The letter should have made it clear that it was an attempt to agree the major terms and that if that were successful the Parties could then deal with the other matters, which are recorded in the schedule to the draft Consent Order Ernest Li sent to Fung Wong and TKC Lawyers on 8 January 2019, which are referred to in [13] above.  Mr Wong’s affirmation, which as it has Ms Ip’s reference on it.  I assume was drafted by her, reads like an attempt, a disingenuous one, on Ms Ip’s part to excuse her mistake.  It would have been better if Mr Wong has been advised, and the affirmation reflected the advice, that the letter of 18 December 2018 was unsatisfactory, but that it must have been clear to Fung Wong and TKC Lawyers given the extent of the disputes between the Parties that the terms of the letter were not comprehensive and that by simply replying “our client accepts your offer” they would not create a binding agreement that would bring the four sets of proceedings to an end.

21.  Reading between the lines of the correspondence between the Parties, it seems to me that Mr Tang at Fung Wong, probably guessing that Ms Ip had made a mistake, was keen to move things along quickly hoping to leverage the mistake to secure a settlement of the proceedings on terms that were more attractive than expected.  It seems to me that an experienced litigation lawyer would have appreciated that given the breadth of the disputes between the parties it was unlikely the contents of the 18 December was intended to be all that had to be agreed before the four proceedings could be concluded.

22.  In Raymond Bieber v Teathers Limited [2] HH Pelling QC sitting as an additional judge in the Chancery Division provides a convenient summary of the relevant principles in [14]:

“i) Whether the parties have reached a concluded agreement is to be determined objectively by considering the whole course of the parties’ negotiations. Once the parties have to all outward appearances agreed in the same terms concerning the same subject matter, a contract will have been formed and that is so even though it is understood that a formal agreement will be entered into that records or even adds to the terms agreed. However, where it is understood that a formal agreement will be entered into, whether the parties intended to be bound immediately or only when a formal agreement has been executed depends on an objective appraisal of their words and conduct—see Air Studios (Lyndhurst) Limited v. Lombard North Central Plc [2012] EWHC 3162 (QB) [2013] 1 Lloyds Rep. 63 per Males J at [5] following RTS Ltd v. Molkerei Alois Muller GmbH & Co AG [2010] UKSC 14 [2010] 1 WLR 753 per Lord Clarke at [45] and Pagnan SpA v. Feed Products Limited [1987] 2 Lloyds Rep 601per Lloyd LJ at 619;

ii) Generally the subjective state of mind of a party to negotiations and thus any subjective reservations that have not been communicated to the other party to an alleged agreement are irrelevant and evidence of their existence is inadmissible—see RTS Ltd v. Molkerei Alois Muller GmbH & Co AG (ante) per Lord Clarke at [45]. This is so because subjective reservations do not prevent the formation of a binding contract—see Air Studios (Lyndhurst) Limited v. Lombard North Central Plc (ante) per Males J at [5]. At most subjective belief may be relevant and thus is admissible to demonstrate that objectively a particular term has been agreed where the consensus depends on oral exchanges or conduct—see Carmichael v. National Power Plc [1999] 1 WLR 2041 cited by Lord Hoffmann in Chartbrook Limited v. Persimmon Homes limited [2009] UKHL 38 [2009] 1 AC 1101 at [64]–[65];

iii) If, on an objective appraisal of the parties’ words and conduct, the parties intended to conclude a legally binding agreement, the fact that certain terms of economic or other significance had not been agreed does not prevent it being concluded that the parties had concluded a binding agreement. The only requirement is that the parties shall have agreed all the terms necessary for there to be an enforceable contract—see Pagnan SpA v. Feed Products Limited (ante) per Lloyd LJ at 619 (proposition 6) and RTS Ltd v. Molkerei Alois Muller GmbH & Co AG (ante) per Lord Clarke at [45]. In the context of settlement agreements, this may mean that the failure to agree terms concerning confidentiality and other allied matters will not prevent a court from concluding that the parties have objectively entered into a binding settlement agreement—see by way of illustrative example AB v. CD Limited [2013] EWHC 1376 (TCC) per Edwards-Stuart J at [31];

iv) Where the parties wish to ensure that a contract otherwise capable of being made orally is only made in a formal document the parties may ensure that is so by expressly stipulating that their negotiations will take place ‘subject to contract’. Where there is such a stipulation then there is no binding agreement until a formal written agreement has been duly executed—see Winn v. Bull (1877) 7 Ch.D 29 per Sir George Jessel MR at 32;

v) It is not essential that there be an express stipulation that the negotiations are to be conducted ‘subject to contract’ if that was nevertheless the mutual understanding of the parties—see Winn v. Bull (ante) per Sir George Jessel MR at 32, Whitehead Mann Ltd v. Cheverny Consulting Ltd [2006] EWCA Civ 1303 [2007] 1 All E.R. (Comm.) 124 per Sir Andrew Morritt C at [42], RTS Ltd v. Molkerei Alois Muller GmbH & Co AG (ante) per Lord Clarke at [46] to [49] and Investec Bank (UK) Limited v.Zulman [2010] EWCA Civ 561 per Longmore LJ at [17];

vi) Whilst negotiations being conducted ‘subject to contract’ are most commonly encountered in transactions concerning land, the rule is capable of applying to any contractual negotiation—see RTS Ltd v. Molkerei Alois Muller GmbH & Co AG (ante) per Lord Clarke at [48];

vii) Whether there was a mutual understanding that negotiations would proceed on a ‘subject to contract’ basis is a question of fact in each case: ‘… where as here, solicitors are involved on both sides, formal written agreements are to be produced and arrangements made for their execution the normal inference will be that the parties are not bound unless and until both of them sign the agreement. In a sense this case is an a fortiori case in that on any view there are at least three agreements to be executed and the respective parties are not the same’

—see Whitehead Mann Ltd v. Cheverny Consulting Ltd (ante) per Sir Andrew Morritt C at 45; but

viii)     Even if the parties have initially agreed to proceed ‘subject to contract’ it is open to them subsequently to agree either expressly or by necessary implication to remove that qualification or waive that stipulation—see the authorities noted at footnote 582 in Chitty On Contracts, 31^st Ed., Vol.1     Para.2−121; however, whether the parties have so agreed is a question of fact that needs to be approached with care since the Court should ‘…not impose contracts on the parties which they have not reached…’—see RTS Ltd v. Molkerei Alois Muller GmbH & Co AG (ante) per Lord Clarke at [55].”

23.  In my view considering the whole course of the Parties’ negotiations they had not reached a concluded agreement to settle the four sets of proceedings when Fung Wong and TKC Lawyers replied to Ernest Li’s letter of 18 December 2018.  It seems to me clear that it would have been appreciated by an objective, fair minded solicitor advising both Mr Lo and Mr Pan that it was likely that Ernest Li and their client intended that having agreed the major terms set out in Ernest Li’s letter of 18 December 2018 that the Parties proceed to deal with the mechanics of transferring control of the Companies and ending mutual business dealings including ending the Mainland proceedings.

24.  I, therefore, will dismiss the summons in each Action and make a costs order nisi that the Applicants pay the costs of the applications with a certificate for counsel, save that the costs of Mr Wong’s affirmation be disallowed to reflect what I consider to be the disingenuous way it has been framed.  I would not expect Ernest Li to charge for its preparation.

25.  I would express the hope that having progressed a substantial way towards resolving their differences the Parties can conclude the process rather than waste money on further legal proceedings.

E-bundles

26.  The use of e-bundles has a number of potential advantages.  It reduces consumption of paper and the quantity of files the court has to store.  They are readily portable and if they are prepared properly they are easy to work with as bookmarks and hyperlinks allow documents to be located quickly.  If they are not properly prepared they become frustratingly difficult to work with very quickly.  In the present case either no effort to comply with the detailed directions for their preparation was made or those preparing the e-bundles were incompetent and incapable of doing so.  Elementary mistakes included the pdf files not having the same page numbering as the paper bundles, which contained the references used by counsel in their submissions.  Even the file numbers did not coincide accurately.  Nothing was bookmarked and unsurprisingly nothing was hyperlinked.  Counsel were not much better as the index to the bundles of authorities did not contain bookmarks making finding authorities difficult.  Not only must lawyers comply with the directions that are made they must use the bundles themselves to ensure that they understand how they work in order to ensure that they are user friendly.  Solicitors and counsel need to bear in mind that when directed to use e-bundles separate pdf files need to be prepared for various different types of documents.  As one is not preparing physical files it does not matter if some of the pdf files are short.  What is important is that they are easy to work with.  For example, preparing one pdf file containing all the pleadings, summons orders and affirmations without any regard to how the file is to be used is not helpful.  The reader may want to have open both the petition and the affirmations at the same time.

27.  One might have thought by now that most lawyers were capable of preparing e-bundles and would probably themselves find them convenient and have mastered the best way of compiling them, although given the standard of preparation of many paper bundles it is perhaps not surprising that this is not yet proving to be the case.