Breakdown in mutual trust and confidence: when is the point of no return? Harbour Front v Leung Yuet Keung [2024] HKCFI 1

In Harbour Front v Leung Yuet Keung [2024] HKCFI 1599, the Court examined the question as to whether it was possible to “mend” a broken relationship in the context of unfair prejudice petitions.

This is the third in a long-running series of unfair prejudice petitions issued by Harbour Front (a company controlled by YT) against his elder brother (YK) in respect of two companies (Money Facts and Fonfair) which have been used by the Brothers to hold a piece of land in Yau Tong.  YK issued a cross-petition seeking an order that Harbour Front buy out his shares in Money Facts.

The Companies were originally managed by the Brothers, who made a written shareholders’ agreement.  However, after differences between them arose, YK took steps to remove YT from the boards.  In the two previous rounds of petitions Harbour Front sought orders that would have resulted in it being able to participate in management of the Companies.  These petitions were dismissed.

1. After a trial by Kwan J in 2004, it was held that, due to the misconduct of Harbour Front, there was a breakdown of the relationship of mutual trust and confidence between the parties.  As a result, Harbour Front could not assert its right of equal participation in the management of the Companies and failed to make out a case of wrongful exclusion from management.
2. In 2015, Harbour Front issued petitions founded on the assertion that Harbour Front had remedied the matters which Kwan J had found justified their exclusion from management and, thus, Harbour Front had become entitled to participate in management as envisaged by the shareholders’ agreement.  Harris J found that the past misconduct had not been remedied and dismissed the 2015 petitions.

In this round of the petitions (the latest in the series of petitions), Harbour Front argued that its continued exclusion from the management of the Companies was unfairly prejudicial to it.  In addition, Harbour Front contended that since the 2015 petitions, it had made amends to cure the past breaches, and so it is now entitled to participate in management.

The trial involved a number of interesting points of law.  In particular:

1. Can past breaches of the shareholders’ agreement be “purged” or “cured”?
2. When can a quasi-partnership be considered to have ended?

In the end, the Court found that the past misconduct had irretrievably broken down the mutual trust and confidence between the parties, and such relationship could not be “cured” in the same way as curing an isolated wrong.

1. The fact that a wrongdoer had committed past breaches does not mean that he is permanently excluded from participating in the management of the companies.
2. It may be possible for the wrongdoer to remedy its past misconduct if substantial and genuine steps are taken.  What steps are adequate to remedy misconduct will depend on the nature of the misconduct and the circumstances.  The greater the seriousness of the misconduct, the number of instances, the period of time over which it had taken place, and the general behaviour of the recalcitrant shareholder will all be material.
3. Having surveyed authorities from Hong Kong, Singapore, Australia and the United Kingdom, the Judge held that a quasi-partnership (or the expectation of equal participation) is not indefinite and is likely to be limited to a point in time at which for some reason the change in management and control became necessary.
4. In other words, there will be circumstances in which the emergence of irreconcilable differences will cause the court to conclude that an understanding or expectation as to the participation in management should be taken to have ceased, in a manner not entitling the person excluded from management to seek relief.  This is most usually the case where the court decides that it is the person excluded who is responsible for the breakdown in the relationship.

In the result, the Court held that Harbour Front had not displayed genuine recognition that the past wrongdoings should be remedied, and therefore dismissed their petition. The Court also made an order in YK’s cross-petition that Harbour Front buy out YK’s shares in Money Facts.

The full judgment is available at https://legalref.judiciary.hk/lrs/common/ju/ju_frame.jsp?DIS=160641&currpage=T 

Frances Lok SC leading Kwan Ping Kan acted for one of the Respondents in HCMP 1987 & 1988/2018 and the Cross Petitioner in HCMP 1471/2019