YU LAI PING WANDY v. CHAN KUEN AND OTHERS

bjbj HCCW1147/1999 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES WINDING UP PROCEEDINGS NO.1147 OF 1999 ------------------- IN THE MATTER of Section 168A or alternatively 177(1)(f) of the Companies Ordinance, Cap.32 and IN THE MATTER of Perfect Trade Limited ------------------- BETWEEN YU LAI PING WANDY Petitioner and CHAN KUEN 1st Respondent PUN KING TIM 2nd Respondent PERFECT TRADE LIMITED 3rd Respondent ------------------- Before : Hon Chu J in Court Dates of Hearing : 3, 4, 6, 9, 10, 12 and 17 April 2001 Date of Judgment : 1 June 2001 ---------------------- J U D G M E N T ----------------------- This is a petition to wind up the company called Perfect Trade Limited ( the Company ) on just and equitable ground. Alternatively, the petitioner seeks relief under section 168A of the Companies Ordinance. Background The Company was incorporated on 14 May 1999. The nominal capital of the Company is $10,000 divided into 10,000 shares of $1 each. Until September 1998, the petitioner and a BVI company called Freeside Investments Limited, which was beneficially owned by the petitioner and her husband, Chan Ping Kwong ( P.K. Chan ), were the only shareholders. P.K. Chan is the supporting creditor in these proceedings. The 1st respondent is the wife of the 2nd respondent. On 28 September 1998, the 1st respondent became a 51% shareholder of the Company with the remaining 49% being held by the petitioner. Subsequently, the 2nd respondent also became a 2% shareholder upon the petitioner and the 1st respondent each transferring 100 shares to him. Throughout, the petitioner is a director of the Company. The 1st respondent became a director on 28 September 1998. In the latter part of 1998, the 2nd respondent also became a director of the Company, although there is some uncertainty as to when exactly in 1998 that he became a director. The Company was incorporated to hold a property situate at Flat C, 13/F, Tien Sing Mansion, Taikoo Shing, Hong Kong ( Property ), which was occupied by the petitioner and P.K. Chan as their matrimonial home. In February 1998, the TKS Property was sold and the net proceeds in the sum of $491,413.12 was paid out to the petitioner. The petitioner and P.K. Chan came to know the 1st and 2nd respondents and Mr Chan Fan ( Y.F. Chan ), the 1st respondent s father, in about the latter half of 1996. P.K. Chan has a keen interest for Chinese herbal medicine. In October 1997, a company called Lucky State Enterprise Limited ( Lucky State ) was formed with P.K. Chan and the 1st respondent as shareholders and directors, and the 2nd respondent was appointed as the general manager. Lucky State was formed for the purpose of trading in a Chinese herbal medicine invented and manufactured in Mainland China for curing heart problem. According to the 2nd respondent, the medicine is patented in Beijing and he has been granted the right to deal in it. Sometime in 1998, the petitioner, P.K. Chan and the 1st and 2nd respondents agreed to a plan of setting up a medicine refining factory in Hong Kong. In order to finance the establishment of the factory, the parties agreed to embark upon property investment and to use the Company as a corporate vehicle for the investment. It is against such background that the 1st and 2nd respondents joined the Company as shareholders. On 2 November 1998, the Company purchased the property known as Flat B, 3/F, Block 3 Regency Park, No.3 Wah King Hill Road, Kwai Chung, New Territories ( the 1st Property ) at the price of $6,380,000. Completion took place on 30 November 1998. It was mortgaged to Hang Seng Bank Limited for $4,466,000. A second mortgage was created on 17 March 1997 for $1,070,000. Then on 29 March 1999, the Company purchased a second property known as Flat B, 12/F, Block 5, Wonderland Villas, No.l9 Wah King Hill Road, Kwai Chung, New Territories ( the 2nd Property ) at the price of $3,250,000. Completion took place on 26 May 1999. It was mortgaged to Wing Hang Bank Limited for $2,275,000. A decoration loan of $400,000 secured by the 2nd Property was made on 3 June 1999. On 11 November 1999, the Company sold the 2nd Property for $3,128,000 and the sale was completed on 3 December 1999. The 1st Property was sold on 8 December 1999 at $6,728,000 and completion occurred on 23 December 1999. The petition herein was presented on 23 December 1999. The petitioner alleges in the petition that there is a loss of substratum, a breakdown in the mutual trust and confidence among the shareholders and improper conduct on the part of the 1st and 2nd respondents as constituting just and equitable ground for a winding up order. Alternatively, the petitioner says that the affairs of the Company have been managed in an unfair and prejudicial manner in that she has been excluded from the management, deprived of access to the books, records and information and has also been subject to undue pressure and duress and also there were improper dealings in the assets and funds of the Company. The 1st and 2nd respondents oppose the winding up of the Company on the basis that the Company is an active trading entity with promising commercial prospect. While they do not dispute that the mutual trust and confidence among the shareholders have broken down, they deny all the allegations of impropriety as well as allegations of improper dealings in the Company assets and funds. They further allege that the petitioner had misappropriated the proceeds of sale of the TKS Property and a property known as Flat B, 18/F, Block 5 Wonderland Villas, No.9 Wah King Hill Road, Kwai Chung, New Territories ( the 3rd Property ), which is an asset of the Company. It is the 1st and 2nd respondents case that the 3rd Property was held by the petitioner on trust for the Company. The Issues The disputes between the parties are primarily factual matters. Broadly speaking, the issues that fall to be determined can be summarized as follows : (1) Whether the Company, apart from holding properties, has any trading activity. (2) Whether the petitioner has been excluded from the management of the Company and whether she has access to the books, documents and information of the Company. In particular, whether the petitioner has prior knowledge of the sale of the 1st and 2nd Properties and the financial affairs of the Company. (3) Whether the 2nd respondent had exerted force and pressure on the petitioner so as to subdue her into signing various documents relating to the Company and its assets. (4) Whether there is impropriety in the conduct of the 1st and 2nd respondents in managing the affairs of the Company. In particular, whether the 1st and 2nd respondents had misappropriated or made improper use of the funds and assets of the Company. (5) Whether the 3rd Property is an asset of the Company. (6) Whether any sum is owed by the Company to P.K. Chan. The Witnesses The petitioner and the 2nd respondent are the only witnesses. Given that there are substantial disputes on the facts, they were asked to give their evidence orally instead of adopting their affirmations as evidence chief. The petitioner is a housewife. She received education up to Form 4 and has ceased working since 1981. She is a simple, plain and unsophisticated woman. She is not a firm or persistent person, as demonstrated by her reactions to the repetitive, at times aggressive questioning by the 2nd respondent. It is also apparent from her answers in cross examination that she is not particularly intelligent and articulated. The 2nd respondent, by contrast, is a clever and sophisticated man. He too did not receive much education. He came to Hong Kong from Macau after finishing his primary education. After leaving school at Form 2, he had been engaged in various trades ranging from being an apprentice in mechanics to dealing in watch business and property investment. He is therefore an experienced businessman and a man of worldly wisdom. He is also very eloquent and extremely cautious and meticulous, to the extent of being unduly petty. The 2nd respondent s response and demeanour during cross examination reveal him to have a strong and forceful personality. He will not readily give in and will strive to have the last word on almost every matter, however trivial. He strikes me as a witness who is giving evidence from a script well learnt and memorized. Not only is he repetitive, but he is also proned to repeat in identical terms statements which he perceives as advantageous to his case, irrespective of what was being asked of him. One of the typical examples is his repeated assertions that he and the 1st respondent are ignorant in matters of accounts and bookkeeping whereas the petitioner and P.K. Chan are well conversant with these matters and that he could produce the earlier books and accounts of the Company to make good the point. He repeated this assertion almost every time when he was referred to or asked about the documents of the Company, even though they were disclosed by him and admittedly prepared by him and/or the 1st respondent. Despite his eloquence and sophistry, the 2nd respondent is clearly a poor and unreliable witness. He is evasive and has no hesitation in shifting his evidence to suit his convenience. There were a number of occasions when he prevaricated and changed his evidence within minutes in order to suit his case. I have no doubt that the evidence of the petitioner is to be preferred to that of the 2nd respondent. The object and activities of the petitioner The petitioner s evidence is that after the TKS Property was sold in February 1998, the Company had no asset nor activity. Later on when the parties agreed to carry out property investment so as to generate funds for the medicine refining factory, it was agreed that the property investments be carried out through the Company. Other than holding the 1st and 2nd Properties, the Company had no trading activities. The 2nd respondent on the other hand says that the Company has since 1998 been actively trading, dealing with the development of ory, but because of insufficient capital the Company engaged in property investment in the meantime to generate funds. According to the 2nd respondent, the understanding between the parties was that Lucky State was to deal with the marketing and sales of the Chinese medicine whereas the Company was to deal with the manufacturing of the medicine. Hence, as early as April 1997, Y.F. Chan had been making contacts and carrying out works in the Mainland on behalf of the Company for the purpose of developing the g machine. The Company was said to be in joint venture with certain Mainland entities to undertake research and development work in the facilities for the production of Chinese herbal medicine in Western way. The 2nd respondent said that the machine has since June 2000 been ready for delivery but it was held up because of these proceedings. For this reason, the 2nd respondent had on behalf of the Company applied for a section 182 validation order which was heard and dismissed by Deputy Judge Kwan (as she then was) on 19 June 2000. The appeal to the Court of Appeal and for leave to appeal to the Court of Final Appeal were also dismissed. It is of significance to note that the 2nd respondent made no reference to any trading activity of the Company, let alone the joint venture activities, until his 3rd affirmation filed on 24 May 2000. This is so notwithstanding that the petition had averred that the Company did not trade and the 2nd respondent was legally represented in the preparation of his previous affirmation. It is also singularly odd that there is, other than the two contracts mentioned above, no documentary evidence to support the joint venture between the Company and the Mainland entities. There is, for instance, no memorandum of intention nor joint venture agreement. The two contracts merely show the purchase by the Company of a set of refining machinery and make no reference to any joint venture or co operation as alleged by the 2nd respondent. The explanation given for this is that it was sufficient proof of participation and co operation for the drawing to be stamped by the superior authority of the Mainland entity, so that the 22 October 1998 contract is in fact the joint venture contract. The absurdity of such proposition needs no elaboration. Equally absurd is the suggestion that the solicitors had considered it not necessary to dispute the averment in the petition that the Company did not trade on the basis that there was no need to reply to trivial matters. The fact that the Company is or is not actively trading cannot be a trivial matter, at least from the 2nd respondent s point of view. Indeed, the main reason for his resisting the winding up order is that the Company is actively trading, has contractual and commercial commitments and stands to have a bright future. Even if the solicitors did consider it unnecessary to deal with this in the first affirmation in opposition, it will be very surprising that the 2nd respondent would not disagree and insisted on an objection. The 2nd respondent does not strike me as a weak and submissive person. He had, for instance at the trial, insisted on saying what he regarded as important notwithstanding that it had been made plain to him by the petitioner s counsel and by the court that those were irrelevant to the questions put or the issues to be determined. While the 2nd respondent states that he had paid the deposit for the machine (US$6,280 = HK$48,845.12), this amount was not included in the accounts of the Company prepared by the 1st and 2nd respondents for the purpose of these proceedings. They have seen fit to include other payments in the miscellaneous expenses account and the director s current account but not this deposit. The 2nd respondent explains that the omission is because neither he nor the 1st respondent is familiar with accounting matters. But it does not require any knowledge of accounting matters to include an expenditure in the amounts incurred on behalf of the Company if indeed money had been paid and paid for the purpose of the Company. The 2nd respondent has also sought to explain the singularly lack of records and documentary evidence of the Company s trading activities on the basis that he is not aware of the need to put in documents and that given time opportunity he can produce the documents. The reality is that many of the respondents documents were only adduced in May 2000 in connection with the validation order application. Similarly, the allegation that the Company had for years been engaged in research and development work in Chinese medicine was only raised in May 2000 for the first time. As a result of Deputy Judge Kwan s reservations on the evidence as to the trading activities of the Company, the 2nd respondent had since introduced more documents, most of which were dated before the validation order hearing. As late as 27 February 2001, the 2nd respondent had obtained leave to adduce an additional 33 documents. The 2nd respondent therefore has all the opportunity he needs to adduce documents. The absence of working documents and records on the activities of the Company can only point to one conclusion, namely, the Company, as the petitioner says, has always been an investment company. Any business activity conducted in the name of the Company is only the personal activities of the 1st and 2nd respondents and/or Y.F. Chan. It is convenient at this point to deal with the 2nd respondent s assertion that the Company has engaged four employees, namely, the 1st respondent, Y.F. Chan, Chao Chun ( Chao ) and him. Chao is the 2nd respondent s nephew. The 2nd respondent claims that he was initially employed by Lucky State, but since 1 April 1998 has been employed by the Company and was appointed its general manager as from 1 September 1998. The other three employees, he says, were employed by the Company from as early as April 1997. They also worked for Lucky State after it was formed in October 1997. The 1st respondent, Y.F. Chan and him are entitled to $15,000 and Chao to $8,000 as monthly salary. Several employment contracts, letters of appointment and wages receipts are produced to make good these allegations. The petitioner denies the allegations and explains that the documents were only made out on the 2nd respondent s requests for tax purposes. As a starting point, it is difficult to understand why a small company like the Company would require four permanent staff even at a time when the Company did not have an office. These people were employed in April 1997 but the Company did not have an office until October 1997. According to the 2nd respondent, Y.F. Chan works mainly in the Mainland overseeing the research and development work. His work is so onerous that Y.F. Chan has to undertake numerous and frequent trips to the Mainland. There is however no record in the accounts of the Company prepared by the respondents of any expenses incurred by Y.F. Chan in this regard. When this was put to him in cross examination, the 2nd respondent claimed that these expenses would be met or set off by the dividends to be paid to Y.F. Chan in future. This has never been mentioned by the 2nd respondent in the affirmations and is not evidenced by the employment contract, letter of appointment or any record of the Company. At the same time, it is the 2nd respondent s evidence that he has all along entrusted his son to the care of Y.F. Chan who lives in Macau. As for the 1st respondent, her duties are described as typing, answering telephone calls and miscellaneous office work ( W>\) previous working experience when she was allegedly employed in April 1997. The $15,000 monthly salary can hardly be justified. The 2nd respondent s justification is that because Y.F. Chan had been underpaid, the 1st respondent was given relatively better terms g of business trips to the Mainland, the purposes and details of which have not been spelt out. Similarly vague and unclear is the 2nd respondent s descriptions of his own duties and work. It would appear from his evidence that what he had been doing throughout the period for the Company was to inspect properties and discuss with estate agents for the purpose of identifying suitable investments and office premises for the Company. While he also claims to have researched into the products available and the demand of the market in relation to Chinese medicine, he never gives any particulars nor details of it. It is quite plain that there is no substantive work involved in these employments, despite a total salary of $53,000 is payable per month. Not only that, the 1st and 2nd respondents had resided in the 1st Property and Chao in the 3rd Property. The utility expenses, including telephone calls made to Y.F. Chan in Macau, were met by the Company. In my view, none of these employments is genuine. The incredibility of the situation is further illustrated by the fact that no employee s compensation insurance has been taken out for any of the alleged employees. The employment contracts and other related documents are, as the petitioner says, merely prepared for the purpose of achieving tax gains. In this regard, it is the 2nd respondent s own evidence that the letter dated 1 September 1998 appointing him as general manager was made out subsequently in 1999 for the purpose of showing to the Inland Revenue Department. What is especially astonishing is the 2nd respondent s evidence on the payment of salaries to the employees. He alleges that the employees had all along been owed salaries by the Company and they had to chase after P.K. Chan for salaries. His evidence at one point is that because P.K. Chan could not pay them the salaries, so he asked him and the 1st respondent to become the shareholders of the Company. The 2nd respondent also said that P.K. Chan had on three occasions in December 1998, May and June 1999 paid three lump sums to settle the salaries in arrears. Hence, their salaries were paid up to 30 April 1999. As from May 1999 until February 2000, Chao s salary was paid by the 2nd respondent. This is clearly in contradiction to the wages receipts produced by the respondents which suggest that all the four employees had received salaries up to December 1999. When confronted with this, the 2nd respondent stated that the wages receipts were incorrect and that they were only made out for accounting purposes. On the other hand, the 1st and 2nd respondents had recorded in the directors current account that the 2nd respondent had paid $424,000 on behalf of the Company as staff salaries for the period from May to December 1999. After much prevarications, the 2nd respondent s answer to this is that he had in fact paid the money. This part of the evidence, apart from revealing how unreliable the 2nd respondent is as a witness, also demonstrates the incredibility of the assertion that the Company has had the service of four employees for the furtherance of its trading activities. In my judgment, there is no truth in the allegation that these people were the Company s employees. They were stated as employees just for the purpose of enabling them to take advantage of the Company s funds and assets and also as a convenient way of explaining how the capital injected by the petitioner and P.K. Chan into the Company has been drained away by the 1st and 2nd respondents, a matter which I return to deal with in greater details later. The management and accounts of the Company The petitioner s case here is that she had been denied access to the books and records of the Company. In particular, she was kept in the dark as to the financial matters of the Company, including the sales of the 1st and 2nd Properties. The petitioner also says that she has been subdued into signing various documents. The respondents do not dispute that the petitioner is entitled to participate in the management of the Company and to have access to information, books and accounts of the Company. What they say is that the petitioner has all along handled the accounts of the Company and has unrestricted access to the company books. It is also said that the petitioner had been made aware of the sales of the two properties. The 2nd respondent denies having in any way subdued the petitioner into signing various documents. It is a fact that the petitioner had signed a number of the company documents, but it does not necessarily follow that she was in command or was well informed of the company affairs including its accounts. For one thing, a lot of these documents were for submitting to the Inland Revenue Department or tax related purposes. These include the employment contracts and some letters to the Inland Revenue Department. Secondly, I accept the petitioner s evidence that these documents were prepared at the instigation of the 2nd respondent, and that she was pressurized into signing them, although I do not consider the evidence as sufficient to give rise to a case of duress in law. Thirdly, it is important to note that the 2nd respondent had since September 1998 been the sole signatory to the Company s bank accounts. The operation of the bank accounts and the finance of the Company is therefore under the control the 2nd respondent instead of the petitioner. In this connection, it is extremely odd that the 2nd respondent was made the sole signatory on 26 September 1998, before he and the 1st respondent became the shareholders and directors of the Company. The petitioner s explanation is that she was acting under the impression that the 2nd respondent was to be added as a co signatory and not as a sole signatory when she signed the letter to the bank giving instructions to change the mandate for the accounts. The 2nd respondent denies this, but was unable to offer any reason for this. He, however, accepts that this was very strange and he said interestingly under cross examination that if he were to do it again, he would >Yju \bO) e to sign the letter to the bank. Fourthly, it is not to be forgotten that the 1st and 2nd respondents together would form the necessary quorum and also the majority either at the directors meeting or at the member s meeting. As for the sale of the 1st and 2nd Properties, if one analyses the 2nd respondent s evidence carefully, one can see that the petitioner was indeed not informed of the sales. What the 2nd respondent says is that it had been agreed between the parties that they were to acquire properties for investment purpose, hence the petitioner was fully aware that the 1st and 2nd Properties would eventually sold. When the property market improved in 1999, the respondents had repeatedly impressed upon the petitioner and P.K. Chan that the 1st and 2nd Properties as well as the 3rd Property, which I shall deal with separately, should be sold. The 2nd respondent, however, agrees that no directors meeting had been hold to discuss or approve the actual sales. His evidence is that they had been advised by their solicitors that, under the Company s Articles, the agreement of the 1st and 2nd respondents would be sufficient to effect the sales. Therefore taking the 2nd respondent s evidence at its highest, it only shows that the petitioner knew that the 1st and 2nd Properties would be sold. But there is no evidence that she was specifically informed of the execution of the Sale and Purchase Agreements relating to the two properties or their actual sales. In an attempt to justify the sales of the two properties without seeking the petitioner s approval, the 2nd respondent points out that the property market had declined rather substantially after the sales. It was, he said, a wise move. However that misses the point altogether. The petitioner, being a shareholder and director, is entitled to participate in the management and decision making process of the Company. By not informing and consulting her as to the two Sale and Purchase Agreements, the 1st and 2nd respondents had excluded the petitioner from the management of the Company and had acted unfairly. The petitioner also complains that the sales were at an under value. Although the respondents dispute the allegation, there is no expert or independent evidence adduced to contradict the valuations of the petitioner s valuers. There is only the bare assertion of the 2nd respondent that the purchase prices were the best prices obtainable in the market. As to the proceeds of sale of the properties, it is plain from the 2nd respondent s evidence that the bulk of the proceeds had been paid to the 2nd respondent, under the disguise of discharging debts due to him. On the company books and records, the 2nd respondent said they were kept initially at the 1st Property and subsequently at his residence in Sea Crest Villa, and the petitioner could have unrestricted access to them. This clearly is not the case. When the 1st Property was used as the office of the Company, it was also occupied by the 1st and 2nd respondents as their residence. After the 1st Property was sold, the respondents moved to Sea Crest Villa. This being the case, there is no question of the petitioner enjoying unrestricted access to the company books and records. She would have to obtain the agreement of the respondents before attending these premises. When the petitioner s solicitors wrote in March 2000 complaining of denial of access to company documents and requesting for inspection of the same, the respondents former solicitors did not deny such allegation. The 2nd respondent s explanation on this is that his solicitors considered the allegation too trivial to merit argument. That cannot be right since denial of access to company documents is one of the matters relied upon by the petitioner in seeking to wind up the Company on just and equitable grounds. It is most unlikely that the solicitors would consider dealing with the complaint in such a way if in fact the petitioner had unrestricted access to company books and records. It is also of significance to note that in these proceedings, the petitioner had sought and obtained order for specific discovery on the company documents, and that the bulk of the company documents in these proceedings was disclosed by the respondents and not by the petitioner. Evidently, the petitioner had no access to the company documents and had been kept in the dark about the Company s affairs and accounts. Improper conduct in managing the affairs of the Company I have, in discussing whether the Company has any trading activities and employees, pointed out that it is probable that the 1st and 2nd respondents and Y.F. Chan have made use of the Company to conduct their business activities. I have also observed that they as well as Chao had derived personal benefits from the assets and funds of the Company by living in the 1st and 2nd Properties and using the Company s funds to settle their own utility expenses. The improper conduct of the 1st and 2nd respondents can further be seen from the capital injected into the Company by the petitioner. The petitioner s case is that she had throughout advanced more than $4 million for the use of the Company. The respondents do not dispute that the petitioner and P.K. Chan had made capital contributions but disagree with the amount. The petitioner has adduced documentary exhibits showing that between 10 November 1998 and 21 June 1999, $4,041,139 had been paid to the 2nd respondent. The 2nd respondent s explanation is that the majority of these sums were to repay loans advanced by him to P.K. Chan between January 1998 to June 1999. According to the 2nd respondent, he had in total lent approximately $2.2 million to P.K. Chan. The amount lent on each occasion varied between $50,000 to $200,000. Surprisingly, there is no document to evidence any of these lendings. The 2nd respondent claims that P.K. Chan had given him a number of IOUs but they had been discarded after the repayments and also after the account between them had been finalized and settled in September 1999. The 2nd respondent produced a Chinese declaration dated 17 September signed by the petitioner and him to the effect that all the previous transactions between them had been settled in cash and that no further sum was due from either of them to the other. It is obvious that this declaration only touches upon the dealings between the petitioner and the 2nd respondent and makes no reference at all to any dealing with P.K. Chan. One wonders why the 2nd respondent would nevertheless feel contented to discard all the IOUs given by P.K. Chan. There is also no explanation as to why the declaration is silent as to the loans made to P.K. Chan. Even accepting his evidence that the IOUs had been discarded, it remains disturbing that there is no attempt to adduce such documentary evidence as bank withdrawal slips or statements to show that money had been withdrawn for lending to P.K. Chan. The 2nd respondent s explanation is that all these loans were made in cash, which I find extraordinary. He goes so far as saying repeatedly that it was his habit to keep $100,000 to $200,000 cash in his safe at home and that the loans were paid out of the cash in his safe. Even if that was the case, he would still have to obtain the money from the bank first before he could have it in his safe at home. Not only that, there is hardly any evidence to demonstrate that the 2nd respondent was financially in a position to make the loans. Afterall, the amounts involved are not insubstantial. Although the 2nd respondent claims to have properties in Hong Kong and Macau and to have several tens of thousands in his bank accounts, he has adduced no documentary proof in support. On the other hand, there is also no credible evidence as to why P.K. Chan would have to incur such substantial loans from the 2nd respondent and why the 2nd respondent would be prepared to lend these loans readily. Admittedly, P.K. Chan was a senior executive of a public utility company and had a steady income. The 2nd respondent asserts that P.K. Chan had suffered heavy loss in his investments which gave rise to the loans. If this is so, it is difficult to understand how P.K. Chan, through the petitioner, was able to pay over $2.2 million to the 2nd respondent within the four months between March and June 1999. If P.K. Chan had alternative resources, he would not need to borrow from the 2nd respondent. In addition, if P.K. Chan was in grave financial difficulties, as the 2nd respondent suggested, then it is hard to believe that the 2nd respondent was prepared to make repeated loans of considerable amount to him. Being a clever and calculating person, it is most unlikely that he would risk his money by making these unsecured loans. In my judgment, there is a whole ring of untruth in the assertion that the many sums paid by the petitioner to the 2nd respondent were not for the use of the Company, but were as payments of the loans owed by P.K. Chan to the 2nd respondent. Given that the Company has no trading activity, it is incredible that the money injected by the petitioner would have been absorbed by the operational expenses of the Company. It is also to be borne in mind that the 1st and 2nd respondents were obliged to make similar amount of contributions to the Company. The undisputed evidence is that the Company only has about $465,000 left in its accounts representing part of the proceeds of sale of the 1st and 2nd Properties. The irresistible inference is that the 1st and 2nd respondents had not been making any contributions to the Company. In addition, the 2nd respondent, being the sole signatory of the Company bank accounts and the recipient of the contributions from the petitioner, must have been intermeddling with the funds of the Company. There is overwhelming evidence that the 1st and 2nd respondents had acted improperly with respect to the affairs and accounts of the Company. The 3rd Property The 3rd Property was purchased in the petitioner s name on 7 April 1999 at $3,383,000. It has since completion on 3 June 1999 been used by the petitioner and P.K. Chan as their matrimonial home. It was mortgaged to United Chinese Bank for $2,935,550 and the loan was guaranteed by P.K. Chan. By April 2001, the petitioner had paid some 21 mortgage instalments. The respondents case is that the deposits for the purchase of the 3rd Property was provided by the Company and that the property was held on trust for the Company by the petitioner. The 3rd Property was registered in the petitioner s name in order to achieve savings in time and costs in the event that the petitioner decided to acquire it. The petitioner does not dispute that the deposits and the first two mortgage instalments for the 3rd Property were paid out of the Company s funds. Her explanation is that since she had injected so much capital into the Company, it would be appropriate to withdraw funds from the Company to pay for the deposits and mortgage payments. The petitioner is effectively saying that the deposits represent partial repayment of the advancements she made to the Company. In my view, the petitioner s belief that she was entitled to make the withdrawals is erroneous. The fact that she had injected large amount of capital into the Company does not necessarily mean that she could withdraw part of the Company funds for her own purpose. Proper authorization by the board of directors is required. There is however no board resolution authorizing the withdrawals. Notwithstanding this, the fact that the withdrawals had not been previously approved by the board does not necessarily mean that the 3rd Property was held by the petitioner on trust for the Company. In support of the contention that the 3rd Property is part of the Company s assets, the respondents had produced a declaration of trust dated 7 April 1999 signed by the petitioner in favour of the Company. As observed by Miss To for the petitioner, the declaration of trust had not been stamped and is therefore inadmissible as evidence on the ownership of the 3rd Property. Quite apart from this, the petitioner s explanation for signing the declaration is that P.K. Chan had agreed, at the 2nd respondent s request, to have the petitioner signed a document to the effect that the Company was the owner so as to enable the Company to secure banking facilities. However, she was given a document stating that the 3rd Property was held on trust for the 2nd respondent. As a result of pressure exerted by the 2nd respondent, she signed on it. It was later discovered that the English name of the petitioner was spelt wrongly, so a new copy with the correct spelling was printed and signed by the petitioner. When P.K. Chan came to learn of the contents of the document, he complained to the 2nd respondent. Eventually, the declaration of trust in favour of the Company was signed by the petitioner. The 2nd respondent denies all these. He alleges that the document on which the petitioner s name was spelt wrongly was a forgery by the petitioner. There are however a number of objective factors indicating that the petitioner s account is a credible one. In the first place, there is no convincing reason why the petitioner would forge a document which is against her own interest. It is also unlikely that she would get her own name wrong. Secondly, there is no need for the petitioner to come up with such a complicated and rather clumsy story in order to explain away the declaration of trust in favour of the Company. There is no additional mark to be scored by fabricating the document declaring that the 3rd Property was held on trust for the 2nd respondent. Thirdly, similar to other documents admittedly prepared by the 2nd defendant and printed from the printer of the Company, the document carries a band of blurred characters near the left hand side of the paper. It is too much of a coincidence that a document fabricated by the petitioner would bear printer defects in exactly the same way as the respondents documents. Fourthly, the 2nd respondent s evidence on the exact agreement between the parties on the beneficial ownership of the 3rd Property is extremely chaotic. He began by saying that the petitioner would have to pay the Company a market price if she eventually decided to acquire it. In the course of cross examination, he changed to say that as soon as the petitioner began to discharge the mortgage instalments, the 3rd Property was deemed to have been sold to her and she would have to pay the market price to the Company. Moments later, he changed yet again and said that as of today, the beneficial ownership remains with the Company because the petitioner has not paid the market price. Although the beneficial interest of the 3rd Property is vested in the Company, the 2nd respondent considers that it is the petitioner s responsibility to discharge the mortgage payments. The respondent s allegations that the 3rd Property is an asset of the Company and that the petitioner has misappropriated it are therefore ill founded. The 3rd Property is legally and beneficially owned by the petitioner, although she will have to account to the Company the withdrawals she made from the Company for paying the deposits and the first two mortgage instalments. Is P.K. Chan a creditor of the Company? P.K. Chan s case is that he had lent three sums totalling $399,400 to the Company. The respondents do not deny that the money had been received, but disagree that it is a loan to the Company. The respondents case is that by pocketing the sale proceeds of the TKS Property, the petitioner and P.K. Chan had misappropriated funds of the Company and the sum of $399,400 was to repay the Company. According to the evidence of the 2nd respondent, the petitioner had told him that the sum was to be regarded as repayment to the Company for the proceeds of sale of the TKS Property. But almost in the same breath, the 2nd respondent said that the money was to settle salaries owed to him, Y.F. Chan, Chao and the 1st respondent and that it was a loan to the Company. The TKS Property was sold at a time when the only shareholders of the Company were the petitioner and her nominee company. There is nothing irregular for the petitioner to withdraw the proceeds of sale from the Company. The 2nd respondent argues that the money should be used to pay off the creditors first, but there is no evidence of any creditor or liability on the Company s part. It is not a misappropriation of the company funds for the petitioner to pocket the proceeds of sale. It follows that there is no question of P.K. Chan making repayment to the Company. As to the suggestion that the money was to pay for the outstanding salaries of the Company s alleged employees, it only serves to support P.K. Chan s case that he had lent money to the Company. There can be no doubt that P.K. Chan is a creditor of the Company. Winding-up order Irrespective of the many contests on the evidence, it is common ground that the Company was an association based on mutual trust and confidence. It is also common ground that the mutual trust and confidence no longer exist among the parties. In addition, the petitioner has also been deprived of her legitimate expectation to participate in the management of the Company. It is also trite from the evidence that there is a loss of substratum in that the main object for which the Company was formed can no longer be achieved. On top of all these, given the improper conduct of the 1st and 2nd respondents in the management of the Company affairs and accounts, the case cries out for the need of an independent investigation : Re Comtowell Ltd [1998] HKLRD 463, 471 3. Although there is also evidence justifying reliefs under section 168A of the Companies Ordinance, there is no room for making a buy out order in view of the absence of evidence as to the 1st or 2nd respondent s financial ability. Despite invitations by counsel for the petitioner during cross examination, the 2nd respondent had categorically refused to state whether he is in a position to comply with a buy out order if one were to be made. In the circumstances and given the overwhelming evidence, it is just and equitable that the Company be wound up. Conclusion For the reasons stated above, I order that the Company be compulsorily wound up. There is no reason why the 1st and 2nd respondents should not bear the costs personally having regard to the fact that the dispute is in substance one between shareholders : Re L Investment Ltd and Wyatt Estates Ltd [1992] 78. I therefore also make an order that the 1st and 2nd respondents pay the petitioner the costs of these proceedings to be taxed if not agreed. (C. Chu) Judge of the Court of First Instance, High Court Miss Doris To, instructed by Messrs Liu, Chan & Lam, for the Petitioner and Supporting Creditor The 1st and 2nd Respondents, unrepresented, appeared in person - PAGE - r p# r p# "@AB "@AB P;3z P;3z & 6" Alice NS Chau Normal.dot Microsoft Word 8.0 Title _PID_GUID Microsoft Word Document MSWordDoc Word.Document.8