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Cheng Wai Tao And Others v Poon Ka Man Jason (Suing On Behalf Of Himself And All Other Shareholders In Smart Wave Limited Except The 1St Appellant) And Another

Judgment Cited authorities 23 Cited in Precedent Map Related
Vincent
Judgment Date01 April 2016
Year2016
Citation(2016) 19 HKCFAR 144
Judgement NumberFACV17/2015
Subject MatterFinal Appeal (Civil)
CourtCourt of Final Appeal (Hong Kong)
FACV17/2015 CHENG WAI TAO AND OTHERS v. POON KA MAN JASON (Suing on behalf of himself and all other shareholders in Smart Wave Limited except the 1st Appellant) AND ANOTHER

FACV No.17 of 2015

IN THE COURT OF FINAL APPEAL OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

FINAL APPEAL NO. 17 OF 2015 (CIVIL)

(ON APPEAL FROM CACV NO 135 OF 2013)

____________________

BETWEEN

POON KA MAN JASON
(Suing on behalf of himself and all other shareholders in Smart Wave Limited except the 1st Appellant)
 Plaintiff
(1st Respondent)
- and -
CHENG WAI TAO 1st Defendant
(1st Appellant)
SMART WAVE LIMITED 2nd Defendant
(2nd Respondent)
JOYFUL GAIN LIMITED 3rd Defendant
(2nd Appellant)
PERFECT PLAN LIMITED 4th Defendant
(3rd Appellant)
REGAL WELL LIMITED 5th Defendant
(4th Appellant)
WELL KEEN INTERNATIONAL LIMITED 6th Defendant
(5th Appellant)
WISE MASTER DEVELOPMENT LIMITED 7th Defendant
(6th Appellant)
CHARM GOLD LIMITED 8th Defendant
(7th Appellant)
PACIFIC GIANT LIMITED 9th Defendant
(8th Appellant)
FAITHFUL GAIN LIMITED 10th Defendant
(9th Appellant)
OCEAN PROFIT ENTERPRISES LIMITED 11th Defendant
(10th Appellant)
BONWAY LIMITED 12th Defendant
(11th Appellant)
STAR WAVE TRADING LIMITED 13th Defendant
(12th Appellant)
SANDER LIMITED 14th Defendant
(13th Appellant)
WISE FAITH INVESTMENTS LTD 15th Defendant
(14th Appellant)
GOLD WISDOM TRADING LIMITED 16th Defendant
(15th Appellant)
WISE HERO INTERNATIONAL LIMITED 17th Defendant
(16th Appellant)
PROFIT STAR ENTERPRISES LIMITED 18th Defendant
(17th Appellant)
LAMWAY LIMITED 19th Defendant
(18th Appellant)
OCEAN PIONEER DEVELOPMENT LIMITED 20th Defendant
(19th Appellant)
RICHTOP LIMITED 21st Defendant
(20th Appellant)
FOREVER WINNER LIMITED 22nd Defendant
(21st Appellant)
WAY TIME LIMITED 23rd Defendant
(22nd Appellant)
SILVER WAVE INVESTMENTS LIMITED 24th Defendant
(23rd Appellant)
WELL FORCE INTERNATIONAL LIMITED 25th Defendant
(24th Appellant)
WIN NOBLE LIMITED 26th Defendant
(25th Appellant)
DRAGON PERFECT LIMITED 27th Defendant
(26th Appellant)
WISE PROGRESS HOLDINGS LIMITED 28th Defendant
(27th Appellant)
WIN ELITE INTERNATIONAL LIMITED 29th Defendant
(28th Appellant)
WISE GENIUS INVESTMENTS LIMITED 30th Defendant
(29th Appellant)
WISE TEAM LIMITED 31st Defendant
(30th Appellant)

____________________
Before : Mr Justice Ribeiro PJ, Mr Justice Tang PJ, Mr Justice Fok PJ, Mr Justice Bokhary NPJ and Mr Justice Spigelman NPJ
Date of Hearing: 1 March 2016
Date of Judgment: 1 April 2016

__________________

JUDGMENT

__________________

Mr Justice Ribeiro and Mr Justice Fok PJJ:

1. We have had the advantage of reading in draft the judgment of Mr Justice Spigelman NPJ and respectfully agree with his analysis and reasoning and would likewise dismiss the appeal.

2. The starting-point in this appeal is that Ricky Cheng (“Ricky”) owed the usual fiduciary duties of a director as Smart Wave Limited’s (“Smart Wave”) sole director. The central question was whether, in the events that occurred, those duties were limited or cut down so as to enable Ricky to open further restaurants without breaching those fiduciary duties. The argument advanced in favour of such limitation of those duties rests on an agreement of the shareholders having the effect of authorizing or acquiescing in Ricky’s conduct and so preventing enforcement on behalf of Smart Wave of such duties by way of derivative action.

3. For the reasons given by Mr Justice Spigelman NPJ, we are not persuaded that any such agreement has been established. In particular, we do not consider that the 2004 Agreement was of continuing validity after it was discharged by mutual consent in the parties arriving at a settlement agreement reflected in the Hero Elegant Agreement. Even if the 2004 Agreement continued to operate, its content involved an agreement for the establishment of chain restaurants in which its parties would be able to participate as shareholders, rather than an agreement simply allowing Ricky to open further restaurants on his own. Furthermore, the parties to the 2004 Agreement and the Hero Elegant Agreement did not comprise all the shareholders in Smart Wave so that no informal authorization along the lines envisaged in Re Duomatic Ltd,[1] arose.

Mr Justice Tang PJ:

4. Itamae sushi is a service mark. Smart Wave Limited, the 2nd defendant, owned and operated the first Itamae sushi restaurant. Ricky was the only director of Smart Wave. This is a derivative action (HCA 304/2011) brought by Jason Poon (“Jason”) on behalf of himself and all the other shareholders in Smart Wave except Ricky, the 1st defendant. The complaint is that Ricky was in breach of fiduciary duties as a director of Smart Wave in that he had opened and operated other Itamae sushi restaurants.[2] The derivative action was heard together before Madam Justice Mimmie Chan with what I will call the Hero Elegant Action[3] (HCA 1269/2008).

5. The events which led to Smart Wave operating the first Itamae sushi restaurant are important for a proper understanding of the complaint. Jason and Ricky told largely the same story.

6. Briefly stated, it was Jason’s case[4] that, he, his sister Daisy Poon (“Daisy”),[5] Ricky and Shigemitsu Katsuaki (“Katsuaki”) were shareholders in a group of companies which were engaged in operating and managing a chain of Japanese style noodle restaurants under the trade name of Ajisen Ramen. They held shares in the Ajisen companies in these proportions: Daisy 48%, Jason 15%, Ricky 23% and Shigemitsu Katsuaki 14% (“the Ajisen shareholders”). The Ajisen shareholders agreed to develop a chain of sushi restaurants using the same model so:

“10. … that separate corporate vehicles would be formed to hold the interest of the said chain sushi restaurant business to be established by us. We … would then be allotted shares of and in the said corporate vehicles (‘the 2004 Agreement’).”[6]

“11. … Ricky Cheng was tasked to coordinate the establishment and operation of the chain sushi restaurant … [Jason] was tasked to coordinate and supervise the decoration works of the new sushi restaurants.”

“23. … Under the 2004 Agreement, [the Ajisen shareholders] agreed that they would each be allotted shares in the corporate vehicles formed to hold the interest of the chain sushi restaurant business. This was never confined to the 1st Itamae Sushi Restaurant, and would equally apply to the subsequent Itamae Sushi Restaurants established as a chain.”

7. The first Itamae restaurant was held in the name of Smart Wave. In due course, Daisy and Jason were allotted 24%[7] and 10% of the shares in Smart Wave respectively, Ricky 23% and Katsuaki[8] 15%, totalling 72%. The remaining 28% were allotted to 5 other shareholders (the minority shareholders).[9] I will deal with the significance of the minority shareholders later. Jason said Ricky’s explanation for the allotment to the minority shareholders was that:

“… these people were either suppliers or key staff who would be working in the Itamae Sushi Restaurant and he needed them to ensure a smooth and successful operation for the new business.”[10]

8. Jason also said:

“20. … The first Itamae Sushi Restaurant in Tsimshatsui proved to be a huge success. We therefore proceeded to open more Itamae Sushi Restaurants and Ricky Cheng was again tasked to coordinate their establishment.”

9. The second and third were opened in March 2005 and February 2006. Jason was responsible for the supervision of their decoration and he said, as was the practice with the Ajisen restaurants, he only charged a nominal fee for supervising such work. Jason said he asked Ricky from time to time when he would be allotted shares in these two restaurants but Ricky kept saying he was working on it. Later, in May/June 2006, he received a fax from Ricky proposing that in respect of these two Itamae sushi restaurants, Daisy would be allotted 23% and Jason allotted only 7% of the shares in them. When Jason complained to Ricky about the substantial reduction in his shareholdings from 10% to 7%, Ricky again said that he would need to allot some shares to other parties to facilitate the operation of the Itamae sushi business.

10. Cutting a long story short, the dispute over the allotment of shares in the subsequent Itamae restaurants led to the Hero Elegant Agreement. Another background detail which should be mentioned is that around the end of 2005, in order to go public, the Ajisen shareholders were advised to bring the Ajisen companies under one umbrella company,[11] and to facilitate the floatation, it was decided to segregate the management of the Ajisen Ramen business from the Itamae sushi business. At that time, Ricky was the managing director of the Ajisen Ramen companies in Hong Kong[12] group and the sole director of the companies operating Itamae sushi restaurants. The Ajisen shareholders were advised that this might not be acceptable to the listing Committee.[13] So Ricky resigned from Ajisen companies to “focus on the Itamae Sushi business”[14] and Daisy and Jason decided to focus on the Ajisen Raman business.[15] Fine Elite Group Limited (“Fine Elite”) was chosen to be the corporate vehicle to hold Jason and Daisy’s “shares in the Itamae Sushi business.”[16] Fine Elite entered into the Hero Elegant Agreement. Jason added:

“36. As I mentioned earlier, Ricky...

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