Lau Man Sang James et Al v King Bun Ltd et Al
| Jurisdiction | British Virgin Islands |
| Judge | Farara JA |
| Judgment Date | 07 July 2023 |
| Judgment citation (vLex) | [2023] ECSC J0707-2 |
| Docket Number | BVIHCMAP2021/0034 |
| Court | Court of Appeal (British Virgin Islands) |
The Hon. Mr. Mario Michel Justice of Appeal
The Hon. Mr. Vicki Ann Ellis Justice of Appeal
The Hon. Mr. Gerard St. C. Farara Justice of Appeal [Ag.]
BVIHCMAP2021/0034
THE EASTERN CARIBBEAN SUPREME COURT
IN THE COURT OF APPEAL
Commercial Appeal — Alleged crisis affecting company — Sale of subsidiary companies to first appellant at liquidation price — Disposal of company's receivables amounting to more than 50% in value of assets without approval of shareholders — Section 175 of the BVI Business Companies Act 2004 (“the BCA”) — Whether directors breached their statutory duties owed to the company — Sections 120 to 122 of the BCA — Duty of directors to act honestly and in good faith — Duty of directors to exercise powers for proper purpose — Duty of directors to exercise reasonable care, diligence and skill — Whether judge erred in law and or fact in determining that respondents' claim against the appellants succeeded — Whether the crisis alleged to be affecting company warranting the sale of its subsidiaries in fact existed — Capitalisation of receivables — Whether judge incorrectly determined that the capitalisation of receivables was not carried out for a proper purpose — Whether judge erred in finding that the capitalisation of receivables was done in breach of section 175 of the BCA — Ratification of breaches of directors' duties — Full disclosure to be given to shareholders to enable them to ratify breaches by directors of their duties — No ratification of breaches involving fraud on minority — Appellate restraint on challenges to findings of fact — Delay
The first to sixth respondents are minority shareholders in Vanway International Group Limited (“the Company”), a company incorporated in the Territory of the Virgin Islands (“BVI”). The Company owns two subsidiary companies referred to as ‘the Target Group’ which comprise of Vanway Pharmaceutical Holdings Limited (“Vanway”) and Vanway Pharmaceutical Holdings (Hong Kong) Limited (“Vanworld”). The Company, through the Target Group, operated a business of manufacturing pharmaceutical products in the Peoples Republic of China (“the PRC”) through a PRC company, Vanworld Pharmaceutical (Rugao) Company Limited (“Vanworld Rugao” or “the PRC Company”), which is a wholly owned subsidiary of Vanworld.
The fundamental dispute concerns a derivative claim brought by the respondents as minority shareholders and on behalf of all shareholders of the Company except the first and second appellants. They alleged that the appellants took a series of steps in 2015 which led to the Company disposing of its valuable subsidiary companies by wrongful and/or unlawful means at a gross undervalue to the first appellant, Mr. Lau Man Sang, James (“Mr. Lau”). This was done to the detriment of the Company, and by extension, its minority shareholders, including the respondents. Mr. Lau, is and was at all material times the Chairman of the Company's Board of Directors, managing director, and the Company's majority shareholder.
The events which led up to the sale of the subsidiaries stem from the manufacture and sale of a biologically derived painkiller ‘Analgecine’. At most material times, Analgecine was manufactured and produced for sale by the Target Group at its factory in Rugao City in the PRC (“the Rugao Factory”). At a Board meeting held on 20 th August 2015, the Board presented the alleged ‘crisis’ that the Company was facing. The alleged crisis comprised of several elements. Firstly, that on 19 th May 2009 the China Food and Drug Administration (“CFDA”) issued a ‘Review Opinion Notice’ (“the CFDA Notice”) with respect to the drug Analgecine. The CFDA Notice stated that Analgecine did not meet the requirements of ‘the official approval of testing standard’ and that the ‘official approval of testing standard’ was rejected. This notice apparently did not come to the attention of the directors of the Company until 2015. The CFDA's decision to reject the official approval was appealed by the Target Group in 2015. Notwithstanding the rejection, the manufacture, production and sale of Analgecine continued uninterrupted at the Rugao Factory and no stop notice was issued to or received by Vanworld Rugao or the Company. In fact, there was a re-registration of the standard approval from 2009 to 2014 and on 17 th August 2015, the re-registration was approved for another 5 years. Another element of the ‘crisis’ involved a general notice dated 10 th August 2010 by the Office of the Safety Production Committee of Jiangsu Province (“the Removal Notice”). It is common ground that by the Removal Notice, the Target Group was required to relocate the Rugao Factory. It is also common ground that the effective date of the factory's relocation was, after consultations with the relevant authority, postponed until 31 st December 2016.
This was the situation as of the Board meeting of the Company on 20 th August 2015 and it continued throughout the August and September 2015 meetings of the Board and the Extraordinary General Meetings (“EGM”) of the Company. Other elements of the crisis discussed at the 20 th August 2015 Board meeting include that Vanway was short of capital, that there had been a delay in the payment of wages to Hong Kong and domestic employees during the past two months, and that there would have to be payment by the Company of severance fees and long service fees to employees in Hong Kong and Mainland China in the aggregate sum of HK$45,390,000 if the Rugao Factory is forced to close. At the said Board meeting, a proposal to sell the Rugao Factory was tabled as being one of the solutions to reduce the loss. Mr. Lau then stated that he would like to acquire the two wholly owned subsidiaries of the Company at the price of HK$ 1 million, and he would be liable for the debts of the Company. The Board also discussed the possibility of convening an EGM to pass the relevant shareholders' resolutions if the value of the Company's assets sold exceeds 50% of the total asset value in accordance with the relevant provisions of the BVI Business Companies Act, 2004 (“the BCA”).
Subsequent to the 20 th August 2015 Board meeting, Mr. Yeung Yiu Chong (“Mr. Yeung”), a director, sent all the shareholders an email enclosing the minutes of the Board meeting on 20 th August 2015 and a copy of the Alfred Sung & Co. Valuation Report (“the Alfred Sung Report”) dated 17 th August 2015. Although the Alfred Sung Report is dated 17 th August 2015, before the 20 th August 2015 Board meeting of the Company, it was not produced at the said meeting, and the minutes thereof seem to indicate that it had not yet been completed and produced to the directors of the Company. The valuation report opined that as at 30 th June 2015, the net asset value of Vanworld Rugao was about HK$113 million and the net profits after tax for the 6 months to that date were approximately HK$20 million. No mention had been made in the Alfred Sung Report re-registration documents in conducting and arriving at his valuation. Mr. Alfred Sung later in his evidence, accepted that this fact was highly relevant and pertinent to his valuation of the Company. The re-registration approval, whilst known to the directors, was not tabled or mentioned at the 20 th August 2015 Board meeting of the Company. Likewise, the Alfred Sung Report had not taken into account the very substantial receivables in the form of shareholder loans in excess of HK$150 million owed by the two wholly owned subsidiaries, the Target Group, to the Company. It was evident however, that Mr. Lau's offer of HK$1 million to purchase the Ta rget Group was less than 1% of the value of Vanworld Rugao stated in the Alfred Sung Report.
At an EGM held on 2 nd September 2015, Mr. Hui Pak Kong (“Mr Hui”) offered to purchase the Target Group for HK$1.1 million (slightly more than the offer of HK$1 million from Mr. Lau). This was met with no response. The fact that the Company also held assets of HK$156 million in receivables owed to it by the Target Group was also raised by Mr. Hui at the EGM. The EGM was adjourned. The following day, 3 rd September 2015, the Board of Directors of the Company passed a resolution dealing with the receivables. It was resolved that ‘in the best interest of the Company, the board shall capitalise the Loans owed by each of Va nway and Vanworld by issuing new shares’. It was noted that ‘the new combined value of the net worth of [the two subsidiaries] will be increased to HK$5,929,909 after the capitalization of the loans’. It was also noted that the Board had informed Mr. Lau of the new combined value net worth and after due negotiation, both the Board and Mr. Lau agreed to the new consideration of HK$6,000,000 to acquire a total of 128,947,630 ordinary shares in Vanway and a total of 33,076,392 ordinary shares in Vanworld. The Board then unanimously approved to sell the shareholdings in Vanway and Vanworld at a total consideration of HK$ 6million to Mr. Lau.
In passing this resolution, the Board did not obtain the approval of shareholders as was required by section 175 of the BCA. On 15 th September 2015, at an EGM of the Company, the majority of members entitled to vote at the meeting approved, confirmed and ratified the sale of the Target Group to Mr. Lau for HK$6 million. The consideration was expressly made payable by instalments...
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