Family company disputes are becoming more common and high profile. Whilst the Fook Lam Moon case recently attracted a lot of publicity, the matter settled before the court had to make a final decision. The Yung Kee case, however, did go to full trial and the decision of the Honourable Mr Justice Harris was handed down at the end of October 2012. Gavin Lewis, head of Herbert Smith Freehills' Asia disputes group, and Richard Norridge, a specialist at Herbert Smith Freehills Hong Kong in contentious trusts and estates matters, recently gave a breakfast briefing on this judgment. This bulletin explains some of the key themes and messages covered in that briefing.

This bulletin also briefly summarises our recent e-bulletin on an important decision of the Hong Kong Court of Appeal concerning Beddoe applications, which are rarely considered by the higher courts.

Family company dispute: Yung Kee Holdings Limited

The facts

Yung Kee is a well-known restaurant in Hong Kong which is particularly famed for its goose dishes. Its business became incredibly valuable over time, in part due to the success of the restaurant, but its real estate holdings also made a significant contribution. Following their father's death, the relationship between two of the brothers who owned the business, Kam Kwan Sing and Kam Kwan Lai, broke down. Kam Kwan Sing brought a petition in the Hong Kong court against Yung Kee Holdings Limited, seeking a share buyout, or alternatively the winding up of Yung Kee Holdings Limited. Yung Kee Holdings Limited is a BVI company which sits at the top of the group which owns and operates the Yung Kee restaurant. Yung Kee Holdings Limited's only asset is its shareholding in another BVI group company, an intermediate holding company.

The law

The Court had to grapple with two sections of the Companies Ordinance: Section 168A and Section 327(3)(c).

Section 168A

Section 168A was the basis for the buyout order which Kam Kwan Sing sought. In order to obtain relief under this section, Kam Kwan Sing had to show that the company's affairs "are being or have been conducted in a manner unfairly prejudicial" to his interests.

Harris J approached this issue by considering whether a quasi-partnership existed between the company's shareholders. If a quasi-partnership did exist, then in addition to complying with their respective legal rights and obligations regarding the company, the family members must comply with equitable considerations which had arisen as a result of their previous conduct.

In finding that a quasi-partnership existed, Harris J was influenced by the division of roles in the running of the business, and the fact that Kam Kwan Sing had traditionally been afforded an equal say regarding the company's affairs. These long established practices meant that a mutual understanding existed between the parties at the time that they had become shareholders in the business, which in turn gave rise to equitable constraints on the parties' conduct. Kam Kwan Lai had acted in breach of these equitable principles by using his majority shareholding to make changes to the business which he knew Kam Kwan Sing would have resisted. Kam Kwan Kai's conduct had therefore unfairly prejudiced Kam Kwan Sing's interests, and Kam Kwan Sing was in principle entitled to a share buyout.

Section 327(3)(c)

Under section 327(3)(c) the Hong Kong court has the power to order that a company be wound up if it considers it "just and equitable" to do so.

Harris J held that the court should demonstrate a parallel approach when considering both "unfairness" under section 168A and an application under the "just and equitable" grounds under section 327(3)(c). Here, although Kam Kwan Lai's conduct amounted to a breach of the quasi-partnership, the appropriate remedy in this case was a share buyout under section 168A, as opposed to winding up the company under section 327. This decision reflects the court's reluctance to order the winding up of a profitable business except in the most extreme circumstances.

The sting in the tail

Despite finding that Kam Kwan Lai's conduct prima facie entitled Kam Kwan Sing to relief, Harris J held that the Hong Kong court lacked jurisdiction to grant such relief.

As Yung Kee Holdings Limited was a BVI company, it must have established a "place of business" in Hong Kong for section 168A to apply. Harris J held that this requirement was not satisfied, and gave a list of 20 factors which had contributed to his decision. Harris J was heavily influenced by the group's corporate structure, which had been initially put in place for estate planning purposes.

In addition, it was not possible to establish jurisdiction under section 327(3)(c), because Yung Kee Holdings Limited did not have a "sufficient connection" to Hong Kong.

The decision is currently being appealed.

Recent Beddoe decision: Mong Man Wai William [2012]

What is a Beddoe order?

When administering a trust or estate, a trustee or executor may have to engage in litigation, and will be concerned to know whether the associated costs are recoverable via an indemnity out of the trust or estate fund. This is usually the case regarding associated costs which are properly incurred during the course of the litigation, but there is always a risk that a beneficiary may argue that it was not proper or reasonable for the trustee or executor to pursue that litigation. If the trustee or executor applies to the court for a Beddoe order, he is protected against a beneficiary's complaint, and permitted to claim an indemnity out of the fund, provided that he proceeds with the litigation in the way specified by the court.

The Court of Appeal's decision

The Court of Appeal took this opportunity to issue some important general guidance on the use of Beddoe applications. Some of the key points from the judgment include:

  • There are two well established rules to be followed in relation to a Beddoe application. The "First Rule" requires that any beneficiary bringing or defending the main action involving the trust or estate is not entitled to be heard when the merits of the main action are discussed before the court hearing the Beddoe application. The "Second Rule" states that the Opponent Beneficiary is normally not entitled to access the evidence adduced by the trustee or executor in support of the Beddoe application. The Beddoe court may adapt the Second Rule in order to do justice to the particular case, but it is unable to alter the First Rule.
  • The Beddoe hearing should be conducted in an inexpensive and expeditious manner and not be turned into a mini-trial of the main action.
  • In order to obtain a Beddoe order, the trustee need only convince the court that there is a reasonably arguable case on the merits.

For further details on the Court of Appeal's judgment in Mong Man Wai William, please see our e-bulletin entitled "Hong Kong Court of Appeal gives important guidance on Beddoe applications" which was circulated on 15 January 2013. A link to this e-bulletin can be found at here.