A A
HCMP 305/2016
IN THE HIGH COURT OF THE
B B
HONG KONG SPECIAL ADMINISTRATIVE REGION
C COURT OF FIRST INSTANCE C
MISCELLANEOUS PROCEEDINGS NO 305 OF 2016
D D
____________________
E E
IN THE MATTER OF Up Profit
Limited (利升有限公司)
F F
and
G G
IN THE MATTER OF sections 732(1)
and 733 of the Companies Ordinance
H (Cap 622) H
_________________
I I
BETWEEN
J CHU KONG (朱江) Applicant J
K K
and
L L
UP PROFIT LIMITED (利升有限公司) Respondent
M ____________________ M
Before: Hon Harris J in Chambers
N N
Date of Hearing: 14 September 2016
O Date of Decision: 23 December 2016 O
P P
DECISION
Q Q
Application
R R
1. This is an application by the Applicant, Chu Kong
S S
(“Mr Chu”) for leave to commence a statutory derivative action
T (“Intended Derivative Action”) against Wat Fung Ying (“Ms Wat”), the T
U U
V V
-2-
A A
sole director of Up Profit Limited (“Company”) pursuant to sections 732
B and 733 of the Companies Ordinance, Cap 622 (“Ordinance”). B
C C
Background
D D
2. The immediate factual background can be quickly
E summarised:- E
F (1) The Company is wholly owned by Sun Harvest Holdings F
Limited, a BVI company (“Sun Harvest”). Sun Harvest is
G G
in turn owned by Mr Chu and a Mr Lau (“Mr Lau”) equally.
H Mr Chu and Mr Lau were business partners before they later H
fell out.
I I
(2) It appears undisputed that the Company’s sole purpose is to
J hold a property in Hong Kong (“Property”). When Mr Chu J
and Mr Lau were still on good terms, the Property was used
K K
to provide shared office space for them.
L (3) Ms Wat is said to be a “nominee” director. L
(4) Mr Chu alleges that after he and Mr Lau fell out the
M M
Property should have been leased or sold. Instead, Ms Wat
N (Mr Chu says) allowed the Property to be occupied by N
Mr Lau to the exclusion of Mr Chu. Accordingly, Mr Chu
O O
alleges that Ms Wat is in breach of her director’s duties
P
towards the Company. P
Q Relevant Legal Principles Q
R 3. The applicable legal principles are well established: R
S (1) Mr Chu has to demonstrate that (a) on the face of the S
application, it appears to be in the company’s interests that
T leave be granted: section 733(1)(a) of the Ordinance; and T
U U
V V
-3-
A A
(b) there is a serious issue to be tried: section 733(1)(b)(i) of
B B
the Ordinance.
C (2) The threshold in respect of both of these requirements is low. C
An applicant is not required to establish a prima facie case,
D D
and the prospects of success of the intended claim are to be
E
investigated only to a limited extend. The court is slow to E
find against an applicant unless his prospects are so slim he
F cannot be said to have any prospect of success.1 F
G (3) As to whether the Intended Derivative Action is in the G
interests of the Company, again the threshold is low. A claim
H is prima facie in the interest of the company if there is a H
serious issue to be tried. 2 The court will also consider
I I
whether any practical benefit is likely to result.3
J J
4. Separately, written notice has to be served under section 733,
K K
unless leave to dispense with service is granted under section 733(5). As
L I have explained in paragraph 9(d) of Yu Yuchuan v China Shanshui L
Investment Company Limited 4 , the purpose of the written notice is to
M M
allow the company to consider whether to contest or acquiesce to the
N application. In the present case Mr Chu sought leave to dispense with N
service, on the ground that the Company was well aware of this
O O
application. Mr Alder for the Company did not object. I granted leave
P pursuant to section 733(5) of the Ordinance. P
Q 1
See Yu Yuchuan v China Shanshui Investment Company Limited (HCMP 360/2015, 17 March Q
2015), paragraph 8
2
Ibid, paragraph 8
R R
3
See Hao Xiaoying v Green Valley Investment Ltd (HCMP 1394/2015, 10 August 2016),
paragraph 11(c)
4
S supra S
T T
U U
V V
-4-
A A
Serious Issue to be tried
B B
5. Mr Chu’s case is simple: he alleges that Ms Wat should have
C rent out or sold the Property. Instead, Ms Wat has preferred Mr Lau by C
allowing him to have exclusive possession of the Property after Mr Chu
D D
and Mr Lau fell out.
E E
6. I am inclined to agree with Mr Wong, SC (appearing with
F F
Mr Michael Lok for the applicant) that Mr Chu’s Intended Derivative
G Action raises a serious issue to be tried. It is seriously arguable that a G
company director such as Ms Wat is under a duty properly to realise the
H H
economic value of the Property, whether by renting it out or by sale.
I I
7. Mr Alder for the Company did not seriously dispute this
J J
proposition. Nonetheless, he raised two major objections relating to the
K merits of the case, and two other points relating to Mr Chu’s entitlement K
L
to commence the Intended Derivative Action. L
M 8. Firstly, on the merits, Mr Alder suggests that: M
N (1) The Company may be holding the Property and the rental N
income on resulting trust for Sea Premier Ltd and
O O
Topride Ltd (two companies owned by Mr Chu and Mr Lau
P equally). This is because they financed the purchase of the P
Property in the first place.
Q Q
(2) Ms Wat is a “nominee” director. Accordingly, she can only
R act with the joint consent of Mr Chu and Mr Lau. Relatedly, R
it is also suggested that the present condition of the Property
S S
is caused by the uncooperative attitude of Mr Chu: in
T
particular, it is alleged that Mr Chu had previously insisted T
that the Property must not be sold without the consent of the
U U
V V
-5-
A A
board of directors of Sun Harvest, and that Mr Chu had
B B
refused to discuss the rental arrangements with Mr Lau in a
C
constructive manner. C
D 9. I am not persuaded that these two points are sufficient to D
defeat Mr Chu’s application for leave:
E E
(1) As 1 have said, the threshold of “serious issue to be tried” at
F F
this stage is low. Unless it can be shown that the applicant
G has no realistic prospect of success, the court will not rule G
against him at the leave stage.
H H
(2) In any event, the resulting trust point cannot be a complete
I answer to Mr Chu’s Intended Derivative Action. It is trite I
law that the presumption of resulting trust is not irrebuttable.
J J
It is perfectly possible for the Company to rebut this
K
presumption in the Intended Derivative Action. This issue is K
inherently fact-sensitive and I am not prepared to dismiss
L Mr Chu’s application on this point summarily solely on L
affidavit evidence.
M M
(3) In the same vein, the “nominee director” argument is not a
N complete answer to Mr Chu’s claim. A director, “nominee” N
or not, owes duties (including fiduciary duties) to the
O O
company. In particular, a director (including a “nominee”
P director) is obliged to exercise his or her own independent P
judgment. The “nominee” nature of Ms Wat’s directorship
Q Q
may not be a complete defence to the Intended Derivative
Action.
R R
(4) Likewise, Ms Wat was not bound by the (allegedly unhelpful
S S
and uncooperative) view of Mr Chu. She was obliged to
T
exercise her own judgment. T
U U
V V
-6-
A A
(5) I note that Ms Wat in her affirmation seems to suggest that
B B
she was seeking to maintain the status quo in light of the
C
disputes between Mr Chu and Mr Lau. Nonetheless, C
whether, if this were to be established, it constituted an
D appropriate exercise of her independent judgment is a matter D
for trial.
E E
F 10. In addition, Mr Alder raised two points which go to F
Mr Chu’s entitlement to bring the Intended Derivative Action:
G G
(1) First, Mr Alder suggested that Mr Chu does not make the
H H
present application in good faith. He argued that the
Intended Derivative Action is no more than a tactic by
I I
Mr Chu to put pressure on Mr Lau, and there is no genuine
J desire to pursue Ms Wat. One factor relied upon by the J
respondent is Mr Chu’s alleged previous threats of legal
K K
action made against other employees of Mr Lau.
L (2) Secondly, he argued that Mr Chu should have resorted to L
unfair prejudice or just and equitable winding up
M M
proceedings, rather than commencing a derivative action
N against Ms Wat. He suggests that the root of the problem is N
the breakdown of the cooperation between Mr Lau and
O O
Mr Chu.
P P
11. As to the first objection, I am not prepared to make any
Q definitive finding on the motive of Mr Chu solely on the basis of affidavit Q
evidence. In particular, even if Mr Chu had previously threatened to
R R
bring legal action against the other employees of Mr Lau, it appears from
S the evidence that the alleged threat had not been carried out. S
T T
U U
V V
-7-
A A
12. As to the second objection, the alleged breach of director’s
B duties on the part of Ms Wat is no doubt “misconduct” referred to in B
C
section 732(1) of the Ordinance, which is defined in section 733 to mean C
“fraud, negligence, breach of duty, or default in compliance with any
D D
Ordinance or rule of law”. I, of course, appreciate that allegations of
E
misconduct are also sometimes raised in unfair prejudice proceedings: E
5
Yu Yuchuan v China Shanshui Investment Company Limited , at [44]-
F F
[45]. This does not mean, however, that Mr Chu should be compelled or
G confined to unfair prejudice proceedings when the essence of the G
complaints relate to Ms Wat’s alleged misconduct.
H H
I 13. It is perhaps relevant that the unfair prejudice (or just and I
equitable winding-up) claim can only be brought by Mr Chu at the level
J J
of Sun Harvest, which is incorporated in the British Virgin Islands.
K Mr Alder has not explained the jurisdictional basis for section 725 of the K
Ordinance or section 327 of Companies (Winding Up and Miscellaneous
L L
Provisions) Ordinance, Cap 32 applying to just and equitable winding-up
M petitions issued under either Ordinances against a foreign incorporated M
company.
N N
O 14. I am therefore satisfied that the Intended Derivative Action O
gives rise to a serious issue to be tried.
P P
Q Interests of the Company Q
R 15. Normally, when it is established that the intended claim R
discloses a serious issue to be tried, then it follows that it would be in the
S S
company’s interests for leave to be granted.
T T
5
supra
U U
V V
-8-
A A
16. In the present case, Mr Wong highlights two further factors,
B namely, the declining property market, and the fact that the Property is B
C
subject to an outstanding mortgage in the excess of HK$10 million. The C
point being that Ms Wat should have been considering whether a sale was
D D
prudent.
E E
17. Mr Alder, on the other hand, emphasises two technical
F F
points:-
G (1) First, he pointed out that Ms Wat has entered into a nominee G
director agreement. The agreement provides that Ms Wat is
H H
to be indemnified in respect of “all actions ... which may be
I made against [Ms Wat] directly or indirectly by reason of I
[her] acting as Director of the Company or by reason of any
J J
act, deed, matter or thing done or omitted ”. Mr Alder
K
therefore argues that the Intended Derivative Action is K
“ultimately pointless”, as Ms Wat would be entitled to
L recover the judgment sum from, among others, Mr Chu. L
M (2) Secondly, he argues that there is no evidence to suggest that M
Ms Wat would be able to satisfy the potential judgment
N made against her. N
O O
18. The short answer to the first objection (assuming that the
P indemnity would be engaged) is that the true test is whether the Intended P
Derivative Action is in the interests of the Company, rather than Mr Chu.
Q Q
That Mr Chu may have nothing to gain is of itself beside the point.
R R
19. Further, the argument ignores the fact that the indemnity in
S S
the nominee director agreement does not cover “any act, deed, matter or
T thing done or omitted in contravention of the laws of Hong Kong ... or in T
U U
V V
-9-
A A
contravention of any lawful directions or instructions given by me to the
B Nominee”. It, therefore, seems at least highly arguable that any finding B
C
of breach of duty would exclude the application of the indemnity. C
D 20. As to the second objection, there is also no evidence to D
suggest that Ms Wat would not be able to satisfy the judgment or any part
E E
thereof.
F F
21. In these circumstances I am of the view that on balance the
G G
Intended Derivative Action is in the interests of the Company.
H H
Conclusion and Costs
I I
22. Accordingly, I am satisfied that leave to commence the
J J
Intended Derivative Action should be granted.
K K
23. As to the costs of this application, I made an order nisi that
L L
the costs be costs in the cause in the Intended Derivative Action.
M M
N N
O (Jonathan Harris) O
Judge of the Court of First Instance
P High Court P
Q Q
Mr William Wong SC and Mr Michael Lok, instructed by Sit, Fung,
Kwong & Shum, for the applicant
R R
Mr Edward Alder, instructed by Smyth & Co, for the respondent
S S
T T
U U
V V
A A
HCMP 305/2016
IN THE HIGH COURT OF THE
B B
HONG KONG SPECIAL ADMINISTRATIVE REGION
C COURT OF FIRST INSTANCE C
MISCELLANEOUS PROCEEDINGS NO 305 OF 2016
D D
____________________
E E
IN THE MATTER OF Up Profit
Limited (利升有限公司)
F F
and
G G
IN THE MATTER OF sections 732(1)
and 733 of the Companies Ordinance
H (Cap 622) H
_________________
I I
BETWEEN
J CHU KONG (朱江) Applicant J
K K
and
L L
UP PROFIT LIMITED (利升有限公司) Respondent
M ____________________ M
Before: Hon Harris J in Chambers
N N
Date of Hearing: 14 September 2016
O Date of Decision: 23 December 2016 O
P P
DECISION
Q Q
Application
R R
1. This is an application by the Applicant, Chu Kong
S S
(“Mr Chu”) for leave to commence a statutory derivative action
T (“Intended Derivative Action”) against Wat Fung Ying (“Ms Wat”), the T
U U
V V
-2-
A A
sole director of Up Profit Limited (“Company”) pursuant to sections 732
B and 733 of the Companies Ordinance, Cap 622 (“Ordinance”). B
C C
Background
D D
2. The immediate factual background can be quickly
E summarised:- E
F (1) The Company is wholly owned by Sun Harvest Holdings F
Limited, a BVI company (“Sun Harvest”). Sun Harvest is
G G
in turn owned by Mr Chu and a Mr Lau (“Mr Lau”) equally.
H Mr Chu and Mr Lau were business partners before they later H
fell out.
I I
(2) It appears undisputed that the Company’s sole purpose is to
J hold a property in Hong Kong (“Property”). When Mr Chu J
and Mr Lau were still on good terms, the Property was used
K K
to provide shared office space for them.
L (3) Ms Wat is said to be a “nominee” director. L
(4) Mr Chu alleges that after he and Mr Lau fell out the
M M
Property should have been leased or sold. Instead, Ms Wat
N (Mr Chu says) allowed the Property to be occupied by N
Mr Lau to the exclusion of Mr Chu. Accordingly, Mr Chu
O O
alleges that Ms Wat is in breach of her director’s duties
P
towards the Company. P
Q Relevant Legal Principles Q
R 3. The applicable legal principles are well established: R
S (1) Mr Chu has to demonstrate that (a) on the face of the S
application, it appears to be in the company’s interests that
T leave be granted: section 733(1)(a) of the Ordinance; and T
U U
V V
-3-
A A
(b) there is a serious issue to be tried: section 733(1)(b)(i) of
B B
the Ordinance.
C (2) The threshold in respect of both of these requirements is low. C
An applicant is not required to establish a prima facie case,
D D
and the prospects of success of the intended claim are to be
E
investigated only to a limited extend. The court is slow to E
find against an applicant unless his prospects are so slim he
F cannot be said to have any prospect of success.1 F
G (3) As to whether the Intended Derivative Action is in the G
interests of the Company, again the threshold is low. A claim
H is prima facie in the interest of the company if there is a H
serious issue to be tried. 2 The court will also consider
I I
whether any practical benefit is likely to result.3
J J
4. Separately, written notice has to be served under section 733,
K K
unless leave to dispense with service is granted under section 733(5). As
L I have explained in paragraph 9(d) of Yu Yuchuan v China Shanshui L
Investment Company Limited 4 , the purpose of the written notice is to
M M
allow the company to consider whether to contest or acquiesce to the
N application. In the present case Mr Chu sought leave to dispense with N
service, on the ground that the Company was well aware of this
O O
application. Mr Alder for the Company did not object. I granted leave
P pursuant to section 733(5) of the Ordinance. P
Q 1
See Yu Yuchuan v China Shanshui Investment Company Limited (HCMP 360/2015, 17 March Q
2015), paragraph 8
2
Ibid, paragraph 8
R R
3
See Hao Xiaoying v Green Valley Investment Ltd (HCMP 1394/2015, 10 August 2016),
paragraph 11(c)
4
S supra S
T T
U U
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-4-
A A
Serious Issue to be tried
B B
5. Mr Chu’s case is simple: he alleges that Ms Wat should have
C rent out or sold the Property. Instead, Ms Wat has preferred Mr Lau by C
allowing him to have exclusive possession of the Property after Mr Chu
D D
and Mr Lau fell out.
E E
6. I am inclined to agree with Mr Wong, SC (appearing with
F F
Mr Michael Lok for the applicant) that Mr Chu’s Intended Derivative
G Action raises a serious issue to be tried. It is seriously arguable that a G
company director such as Ms Wat is under a duty properly to realise the
H H
economic value of the Property, whether by renting it out or by sale.
I I
7. Mr Alder for the Company did not seriously dispute this
J J
proposition. Nonetheless, he raised two major objections relating to the
K merits of the case, and two other points relating to Mr Chu’s entitlement K
L
to commence the Intended Derivative Action. L
M 8. Firstly, on the merits, Mr Alder suggests that: M
N (1) The Company may be holding the Property and the rental N
income on resulting trust for Sea Premier Ltd and
O O
Topride Ltd (two companies owned by Mr Chu and Mr Lau
P equally). This is because they financed the purchase of the P
Property in the first place.
Q Q
(2) Ms Wat is a “nominee” director. Accordingly, she can only
R act with the joint consent of Mr Chu and Mr Lau. Relatedly, R
it is also suggested that the present condition of the Property
S S
is caused by the uncooperative attitude of Mr Chu: in
T
particular, it is alleged that Mr Chu had previously insisted T
that the Property must not be sold without the consent of the
U U
V V
-5-
A A
board of directors of Sun Harvest, and that Mr Chu had
B B
refused to discuss the rental arrangements with Mr Lau in a
C
constructive manner. C
D 9. I am not persuaded that these two points are sufficient to D
defeat Mr Chu’s application for leave:
E E
(1) As 1 have said, the threshold of “serious issue to be tried” at
F F
this stage is low. Unless it can be shown that the applicant
G has no realistic prospect of success, the court will not rule G
against him at the leave stage.
H H
(2) In any event, the resulting trust point cannot be a complete
I answer to Mr Chu’s Intended Derivative Action. It is trite I
law that the presumption of resulting trust is not irrebuttable.
J J
It is perfectly possible for the Company to rebut this
K
presumption in the Intended Derivative Action. This issue is K
inherently fact-sensitive and I am not prepared to dismiss
L Mr Chu’s application on this point summarily solely on L
affidavit evidence.
M M
(3) In the same vein, the “nominee director” argument is not a
N complete answer to Mr Chu’s claim. A director, “nominee” N
or not, owes duties (including fiduciary duties) to the
O O
company. In particular, a director (including a “nominee”
P director) is obliged to exercise his or her own independent P
judgment. The “nominee” nature of Ms Wat’s directorship
Q Q
may not be a complete defence to the Intended Derivative
Action.
R R
(4) Likewise, Ms Wat was not bound by the (allegedly unhelpful
S S
and uncooperative) view of Mr Chu. She was obliged to
T
exercise her own judgment. T
U U
V V
-6-
A A
(5) I note that Ms Wat in her affirmation seems to suggest that
B B
she was seeking to maintain the status quo in light of the
C
disputes between Mr Chu and Mr Lau. Nonetheless, C
whether, if this were to be established, it constituted an
D appropriate exercise of her independent judgment is a matter D
for trial.
E E
F 10. In addition, Mr Alder raised two points which go to F
Mr Chu’s entitlement to bring the Intended Derivative Action:
G G
(1) First, Mr Alder suggested that Mr Chu does not make the
H H
present application in good faith. He argued that the
Intended Derivative Action is no more than a tactic by
I I
Mr Chu to put pressure on Mr Lau, and there is no genuine
J desire to pursue Ms Wat. One factor relied upon by the J
respondent is Mr Chu’s alleged previous threats of legal
K K
action made against other employees of Mr Lau.
L (2) Secondly, he argued that Mr Chu should have resorted to L
unfair prejudice or just and equitable winding up
M M
proceedings, rather than commencing a derivative action
N against Ms Wat. He suggests that the root of the problem is N
the breakdown of the cooperation between Mr Lau and
O O
Mr Chu.
P P
11. As to the first objection, I am not prepared to make any
Q definitive finding on the motive of Mr Chu solely on the basis of affidavit Q
evidence. In particular, even if Mr Chu had previously threatened to
R R
bring legal action against the other employees of Mr Lau, it appears from
S the evidence that the alleged threat had not been carried out. S
T T
U U
V V
-7-
A A
12. As to the second objection, the alleged breach of director’s
B duties on the part of Ms Wat is no doubt “misconduct” referred to in B
C
section 732(1) of the Ordinance, which is defined in section 733 to mean C
“fraud, negligence, breach of duty, or default in compliance with any
D D
Ordinance or rule of law”. I, of course, appreciate that allegations of
E
misconduct are also sometimes raised in unfair prejudice proceedings: E
5
Yu Yuchuan v China Shanshui Investment Company Limited , at [44]-
F F
[45]. This does not mean, however, that Mr Chu should be compelled or
G confined to unfair prejudice proceedings when the essence of the G
complaints relate to Ms Wat’s alleged misconduct.
H H
I 13. It is perhaps relevant that the unfair prejudice (or just and I
equitable winding-up) claim can only be brought by Mr Chu at the level
J J
of Sun Harvest, which is incorporated in the British Virgin Islands.
K Mr Alder has not explained the jurisdictional basis for section 725 of the K
Ordinance or section 327 of Companies (Winding Up and Miscellaneous
L L
Provisions) Ordinance, Cap 32 applying to just and equitable winding-up
M petitions issued under either Ordinances against a foreign incorporated M
company.
N N
O 14. I am therefore satisfied that the Intended Derivative Action O
gives rise to a serious issue to be tried.
P P
Q Interests of the Company Q
R 15. Normally, when it is established that the intended claim R
discloses a serious issue to be tried, then it follows that it would be in the
S S
company’s interests for leave to be granted.
T T
5
supra
U U
V V
-8-
A A
16. In the present case, Mr Wong highlights two further factors,
B namely, the declining property market, and the fact that the Property is B
C
subject to an outstanding mortgage in the excess of HK$10 million. The C
point being that Ms Wat should have been considering whether a sale was
D D
prudent.
E E
17. Mr Alder, on the other hand, emphasises two technical
F F
points:-
G (1) First, he pointed out that Ms Wat has entered into a nominee G
director agreement. The agreement provides that Ms Wat is
H H
to be indemnified in respect of “all actions ... which may be
I made against [Ms Wat] directly or indirectly by reason of I
[her] acting as Director of the Company or by reason of any
J J
act, deed, matter or thing done or omitted ”. Mr Alder
K
therefore argues that the Intended Derivative Action is K
“ultimately pointless”, as Ms Wat would be entitled to
L recover the judgment sum from, among others, Mr Chu. L
M (2) Secondly, he argues that there is no evidence to suggest that M
Ms Wat would be able to satisfy the potential judgment
N made against her. N
O O
18. The short answer to the first objection (assuming that the
P indemnity would be engaged) is that the true test is whether the Intended P
Derivative Action is in the interests of the Company, rather than Mr Chu.
Q Q
That Mr Chu may have nothing to gain is of itself beside the point.
R R
19. Further, the argument ignores the fact that the indemnity in
S S
the nominee director agreement does not cover “any act, deed, matter or
T thing done or omitted in contravention of the laws of Hong Kong ... or in T
U U
V V
-9-
A A
contravention of any lawful directions or instructions given by me to the
B Nominee”. It, therefore, seems at least highly arguable that any finding B
C
of breach of duty would exclude the application of the indemnity. C
D 20. As to the second objection, there is also no evidence to D
suggest that Ms Wat would not be able to satisfy the judgment or any part
E E
thereof.
F F
21. In these circumstances I am of the view that on balance the
G G
Intended Derivative Action is in the interests of the Company.
H H
Conclusion and Costs
I I
22. Accordingly, I am satisfied that leave to commence the
J J
Intended Derivative Action should be granted.
K K
23. As to the costs of this application, I made an order nisi that
L L
the costs be costs in the cause in the Intended Derivative Action.
M M
N N
O (Jonathan Harris) O
Judge of the Court of First Instance
P High Court P
Q Q
Mr William Wong SC and Mr Michael Lok, instructed by Sit, Fung,
Kwong & Shum, for the applicant
R R
Mr Edward Alder, instructed by Smyth & Co, for the respondent
S S
T T
U U
V V