MAN PO LO PAUL v. CHEUNG KANG WAH AND OTHERS

HCCW 478/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 478 OF 2006

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J U D G M E N T

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1.  This is an application, by an amended summons dated 21 November 2006, on the part of the 1^st to 4^th Respondents to strike out the Petition, alternatively the prayer for winding up relief in the Petition, in respect of the 5^th Respondent (“the Company”).

2.  There is also an application by the Petitioner to re-amend the Petition.  The re-amendment in question is simply to add a prayer seeking relief under s.168A of the Companies Ordinance, Cap.32, specifically an order that the shares of the Company be valued at such date and in such manner as the Court shall deem just and equitable and that the 1^st, 2^nd, 3^rd and/or 4^th Respondents purchase his shares in accordance with that valuation or otherwise as assessed by the Court.

The Company and its shareholding structure

3.  The Company was incorporated on 22 March 2000 and was formed by the 1^st and 2^nd Respondents and a Mr Lam Ying Chun (“Mr Lam”).

4.  The Company was established to carry on the business of manufacturing and trading electrical motors.

5.  The Petitioner is the registered holder of 1,530 or 17% of the shares in the Company by reason of a transfer of shares to him on 28 February 2005.  Prior to that transfer, he was not registered as a shareholder of the Company although, as noted below, the Petitioner claims that it was the mutual understanding of the parties he was a 12% shareholder in the Company as from March 2002.

6.  Each of the 1^st and 2^nd Respondents respectively holds 2,160 or 24% of the shares in the Company.  Each of the 3^rd and 4^th Respondents respectively holds 1,575 or 17.5% of the shares in the Company.

7.  Prior to the transfer of shares referred to above, the shareholders of the Company were the 1^st and 2^nd Respondents and Mr Lam.  They were also the directors of the Company until Mr Lam resigned as a director.  On 3 March 2005, the Petitioner, the 3^rd and 4^th Respondents became directors in addition to the 1^st and 2^nd Respondents.

The applicable principles

8.  The principles on which the Court acts on an application to strike out a winding up petition are well established and have not been in dispute in this application.  They are clearly summarised in the judgment of Kwan J in Doneur HK Limited v. Four Twenty Company Limited & Anor., unrep., HCCW 278/2004, 6.1.05 at §5 as follows:-

“		There is no dispute as to the approach and principles to be adopted in the strike out application and they may be summarised as follows:
	(1)	It is assumed that the particulars and allegations in the petition and the supporting affidavits of the petitioner would be established and the conflicts resolved in favour of the petitioner (Re Forecast Nominee Limited [1996] 4 HKC 12 at 18C; Re Prudential Enterprise Limited [2001] 2 HKC 687 at 692D-E).
	(2)	The application should be approached with the greatest circumspection and it is only in a plain and obvious case that the court should exercise its discretion to strike out the petition for winding up or the parts complained of (Re Wong To Yick Wood Lock Ointment Limited [2001] 2 HKC 618 at 623I).
	(3)	The burden is on the applicant to show that it is plain and obvious that the petition for winding up would fail on the ground there is an alternative remedy available to the petitioner and that the petitioner is acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy (section 180 (1A) of Cap. 32; Re Wong To Yick Wood Lock Ointment Limited, supra. at 622I to 623F and 623H and on appeal at [2003] 1 HKC 484 at 487H to 488B).
	(4)	Where proposed amendments are put forward in an application to strike out, the court should have regard not only to the allegations in the existing petition but also to matters in the proposed amendments (Re Prudential Enterprise Limited, supra. at 692D).”

The Re-Amended Petition

9.  Applying the above principles, I shall proceed to consider the proposed Re-Amended Petition, the contents of which I have assumed to be true for the purposes of this application.

10.  It is alleged in the Petition that the Petitioner became acquainted with the 1^st Respondent in about 1998 and that at the latter’s invitation, the Petitioner joined the Company in about March 2002 as a marketing manager and as a shareholder holding about 1,080 or 12% of the shares.  It is common ground that the Petitioner was not in fact registered as a shareholder in the Company at that time but the Petitioner alleges that this was the mutual understanding between him and the 1^st and 2^nd Respondents and Mr Lam.

11.  The Petition alleges that it was the mutual understanding and intention of the Petitioner and the 1^st and 2^nd Respondents that the business of the Company was to be conducted by the equal participation of all the directors and that the business of the Company was to be run by the Petitioner, the 1^st, 2^nd, 3^rd and 4^th Respondents as directors.

12.  The Petitioner alleges he was in charge of the marketing side of the Company’s business while the 1^st to 4^th Respondents were responsible for its operations, with the 1^st Respondent also being in charge of accounting and financial aspects of the Company.

13.  The Petition contains a series of complaints, which can be briefly summarised:-

(1)	It is alleged that, since 2005, despite an increase in turnover, the Petitioner has been denied a bonus based on monthly total turnover, allowances for waste materials sold by the Company, and the payment of his vehicle expenses.
(2)	The Petitioner claims that, although the original agreement was that he should have 12% of the shares and be a director of the Company when he joined in 2002, the Company’s books and records have not correctly reflected this position and so, it is alleged, the Company records are in a state of confusion.
(3)	It is alleged that since 2005, when Mr Lam left the Company, the Petitioner has been unable to participate in the Company’s business fully and effectively.
(4)	The Petitioner complains he was asked to provide a guarantee to HSBC on the basis of a misrepresentation as to the proportion of his liability thereunder.
(5)	The Petitioner alleges he was wrongly accused by the 1st Respondent of exposing the Company to liabilities in giving undertakings to customers that the Company’s products would comply with certain EU Directives.
(6)	It is alleged that, as a result of a new practice put in place by the 4th Respondent, the Petitioner was hindered in dealing with his customers and unable to work effectively.

14.  The Petition proceeds to describe that on 27 March 2006, the 1^st Respondent handed to the Petitioner a memo signed by the 1^st to 4^th Respondents informing the Petitioner that his position as a sales director was suspended with immediate effect.  Accordingly, the Petitioner says, he has been excluded from participating in the management of the Company and he had no alternative but to give a month’s notice to resign from the Company on 27 April 2006.  The Petitioner subsequently made a claim in the Labour Tribunal for the arrears of salary he claims were owed to him, which claim was settled by the Company.

15.  In June 2006, the Petitioner’s solicitors wrote to the Company and then its solicitors to request the supply of documents relating to the Company but this request was only complied with in respect of documents as from the time the Petitioner became a shareholder and director of the Company in 2005 and not as from March 2002 as the Petitioner claims.

16.  Based on the allegations in the Petition, the Petitioner claims it is just and equitable that the Company be wound up, alternatively that the Petitioner’s shares be purchased by the Respondents at a fair price.

The Respondents’ case

17.  The 1^st to 4^th Respondents submit that the Petition should be struck out because the Petitioner should have accepted an open offer made to him by the 1^st to 4^th Respondents to acquire his 17% shareholding in the Company.

18.  The 1^st to 4^th Respondents further submit that the allegations in the Petition are unsubstantiated and have been fully answered in the 1^st Respondent’s affirmations filed in support of its application to strike out the Petition.

19.  In the alternative, the 1^st to 4^th Respondent say that the Petitioner should not be permitted to maintain the prayer for a winding up order.

The offer to purchase the Petitioner’s shares

20.  By an open letter from their solicitors dated 13 November 2006, the 1^st to 4^th Respondents made an offer to the Petitioner to purchase the Petitioner’s shares in the Company on the following terms:-

(1)	The Petitioner’s shareholding of 17% in the Company would be valued at a fair value as between a willing buyer and willing seller on a pro-rata basis with no discount and on the basis that the Company is a going concern;
(2)	The valuation would take account of assets and liabilities and profitability of the Company;
(3)	The date of valuation would be 31 March 2006;
(4)	The valuation would be conducted by an independent accountant, not the current auditors of the Company, to be jointly agreed.  If the parties could not reach an agreement on the appointment of the valuer, the President of the Hong Kong Institute of Certified Public Accountants would make the appointment instead;
(5)	The costs of the valuation would be borne by both parties equally.

21.  The offer was stated to be open for acceptance before 5pm on 14 November 2006.  It was also proposed that, if the basis of valuation was accepted, the Petition should be immediately withdrawn with each party bearing its own costs.

Whether the Petition should be struck out

22.  I shall deal first with the 1^st to 4^th Respondent’s application to strike out on the basis that the allegations in the Petition are unsubstantiated or have been fully answered by the 1^st Respondent’s evidence.

23.  In my view, it would not be right for me to strike out the Petition on this ground for the following reasons:-

(1)	It is assumed that the particulars and allegations in the Petition and the supporting affirmations of the Petitioner will be established and the conflicts resolved in favour of the Petitioner.
(2)	On that footing, the Petition and the Petitioner’s evidence disclose that the Company was to have been operated on the basis of the equal participation of all the directors and that he has been excluded from the management of the Company.  This may or may not be established at trial but, on the assumption that this is established, it is a ground for relief on the basis of the just and equitable ground: see Ebrahimi v. Westbourne Galleries Ltd. [1973] AC 360; Shareholders’ Rights by Robin Hollington (4th Ed.) §7-95.
(3)	It is only in a plain and obvious case that the Court should exercise its discretion to strike out a winding up petition.  Despite my misgivings as to the strength of the Petitioner’s case (as to which see below), I am not prepared to say that the Petition should be struck out as being plainly and obviously unsustainable at this interlocutory stage.

24.  I have come to the conclusion that it is not appropriate to strike out this case not without some hesitation because, in my view, the Petitioner’s case that he has been subject to unfair prejudice appears to be weak.  Mr Richard Leung, counsel for the 1^st to 4^th Respondents made a number of valid points, in my opinion, to show that the underlying complaints in the Petition do not appear to be borne out by the contemporaneous documentation.  He pointed out that: the draft agreement whereby the Petitioner was to become a shareholder in March 2002 was never executed and that it was only in February 2005, after Mr Lam withdrew from the Company, that the Petitioner became a shareholder; the Petitioner was allowed to participate in weekly meetings of the directors; the reduction in allowances applied to all the directors; the incident concerning the giving of undertakings to customers to comply with EU directives was simply a disagreement properly resolved by majority against the Petitioner; and the Petitioner participated in meetings of the Company and its directors in December 2005 at which the audited accounts for the year ended 31 March 2005 were tabled for consideration.

25.  However, as Bingham LJ (as he then was) held in Re Copeland & Craddock Ltd. [1997] BCC 294 at 300:-

“It has been often and rightly said that the court’s jurisdiction to strike out a claim advanced by a plaintiff or a claimant or a petitioner is to be exercised very sparingly and only where the clearest grounds are shown for doing so.  The reason for this practice is clear.  Although a court may at a preliminary stage regard a claim as tenuous and having a negligible chance of success, the claimant is nonetheless entitled to the court’s adjudication on it on the merits unless it is a claim which the court is satisfied cannot succeed.  In this case the judge clearly regarded the plaintiff’s claim to wind up this company as one which was unlikely to succeed, but he did not feel that the claim was so manifestly unarguable as to justify him in striking it out.  Having heard Mr Snowden’s very clear and well presented argument, I share the judge’s view that this claim is unlikely to succeed.  I am indeed persuaded that the case is very close to the borderline where striking out would be appropriate.  But I am not persuaded that the claim is unarguable whatever comes out relevant to the petition on discovery and in the course of oral evidence.”

In my view, those observations are pertinent to the present case.  Despite my reservations as to its merits, I do not think the claim in the Petition is so manifestly unarguable as to justify striking it out.

26.  I turn to consider the 1^st to 4^th Respondent’s contention that the Petition should be struck out as an abuse because the Petitioner acted unreasonably in refusing to accept the offer made to purchase his shares.

27.  In Re a company (No.00836 of 1995) [1996] 2 BCLC 192 at 197f-g, it was held (by Judge Weeks QC):-

“There is a considerable number of reported cases as to the effect of an open offer on a petition under s.459 [equivalent to s.168A of the Companies Ordinance].  The basis on which the courts have exercised their jurisdiction to stay such petitions is the basis on which Julian’s case is put before me today.  That is that an offer has been made which gives the petitioner all the relief that he could realistically expect to obtain on his petition, and that it would therefore be an abuse of the process to continue to litigate matters just for the sake of having a day in court.”

28.  In Re Prudential Enterprise Ltd. [2002] 2 HKC 375, the Court of Appeal set out the requirements of a reasonable offer.  At §15 (on pp.382H-383B), Cheung JA said:-

“	In O’Neill v. Phillips [1999] 1 WLR 1092 Lord Hoffmann stated that a reasonable offer should have the following features:
	(1)	The offer must be to purchase the shares at a fair value.
	(2)	The offer should provide for the value, if not agreed, to be determined by a competent expert.
	(3)	The offer should be to have the value determined by the expert as an expert.  The objective should be economy and expedition, even if this carries the possibility of a rough edge for one side or the other compared with a more elaborate procedure.
	(4)	The offer should provide for the equality of arms between the parties.  Both sides should have the same right of access to information about the company which bears upon the value of the shares, and both sides should have the right to make submissions to the expert.
	(5)	The offer should make suitable provisions for the question of costs.”

29.  The question is therefore whether the offer made by the 1^st to 4^th Respondents to the Petitioner is a reasonable one and whether the Petitioner has acted unreasonably in refusing to accept it.

30.  For the following reasons, I do not think the Petitioner’s rejection of the offer made to him was unreasonable so that it warrants the striking out of the Petition.

(1)	It was only open for acceptance until 5pm on the following day.  In my view, that was an unreasonably short period of time for acceptance and so the Petitioner cannot be said to have been unreasonable in refusing to accept it.
(2)	Furthermore, the offer fixed the date of valuation at 31 March 2006, which may not be the appropriate date for this exercise.  Although the Petitioner withdrew as a director of the Company at that time, he remained and remains a shareholder.  The normal date for valuation is the date of the petition: see Tai Lap Investment Co. Ltd [1999] 1 HKLRD 384 per Le Pichon J (as she then was) at p.399F-G.  The Petitioner has advanced a number of submissions as to why 31 March 2006 is not the appropriate date.  It is not necessary on this application to resolve the issue of what is the appropriate date but the short point is that it cannot be said with certainty that the Court, on hearing the Petition, would order a valuation of the shares as at that date.  It cannot therefore be said that the acceptance of the offer would give the Petitioner “all the relief that he could realistically expect to obtain on his petition”.
(3)	In any event, the offer is no longer an offer capable of acceptance by the Petitioner as it has now lapsed.  In the circumstances, it seems to me that it is difficult to characterise the continued maintenance of the Petition is an abuse of the Court’s process.

Whether the prayer for a winding up order should be struck out

31.  The applicable law to be applied was clearly set out in the judgment of Yuen J (as she then was) in Re Wong To Yick Wood Lock Ointment Limited [2001] 2 HKC 618 at 622G-624B:-

“	I shall set out briefly the law to be applied.  First a contributory petitioner’s claim for a winding-up order is not doomed to fail by reason only that alternative relief has been sought in the petition.  However, the Court would at the hearing (a) take into account the fact that there is alternative relief, and (b) assess the reasonableness or otherwise of the petitioner’s action in seeking an order for winding-up instead of the alternative remedy.
	This approach is prescribed by statute.  In Hong Kong, s.180(1A) of the Companies Ordinance provides:-
	‘	where the petition is presented by members of the company as contributories on the ground that it is just and equitable that the company should be wound up, the court shall not refuse to make a winding-up order on the ground only that some other remedy is available to the petitioners unless it is also of opinion that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy’.
	The wording of that section (enacted in Hong Kong in 1978) is slightly different from s.125(2) of the 1986 Insolvency Act (formerly s.225(2) of the Companies Act 1948), which provides:-
	‘	If the petition is presented by members of the company as contributories on the ground that it is just and equitable that the company should be wound up, the court, if it is of opinion – (a) that the petitioners are entitled to relief either by winding-up the company or by some other means, and (b) that in the absence of any other remedy, it would be just and equitable that the company should be wound up, shall make a winding-up order but this does not apply if the court is also of the opinion both that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy’.
	Notwithstanding the difference in wording, the principle behind both sections is the same – i.e. that the remedy of winding-up on a contributory’s petition is a remedy of last resort (Re San Imperial Corp. Ltd. (No.2) [1980] HKC 463, 466; Re a Company (No.004415, 4416 and 4413 of 1996) [1997] 1 BCLC 479, 487) and would not be granted if the petitioner was acting unreasonably in insisting upon it instead of pursuing an available alternative remedy.
	The onus is however on the parties opposing the petition to show that there was an available alternative remedy and that the petitioner was acting unreasonably in not pursuing it.
	That is the position at the hearing of the petition.  However, there is a Practice Direction in England [No.1 of 1990] ([1990] 1 WLR 490) reminding practitioners of the undesirability of including as a matter of course a prayer for winding up as an alternative to an order under s.459 of the Companies Act 1985 (equivalent to s.168A of the Companies Ordinance) and that ‘it should be included only if that is the relief that the Petitioner prefers of if it is considered that it may be the only relief to which he is entitled’.
	The question in the application before me is whether even at the present stage, assuming that the Petitioners prove all the facts in the Amended Petition, there is no real possibility or prospect of a winding-up order being made such that the Court should exercise its discretion to strike out the claim for a winding-up order.
	As with all applications to strike out, this application must be approached with the greatest circumspection.  It is only in a plain and obvious case that the Court should exercise its discretion to strike out a claim before it has gone to a full hearing.  Further, in the present case, the same facts are relied upon by the Petitioners to justify the claim for a winding-up order and for the relief under s.168A, so there will be little saving in costs or time should the application succeed.
	Having said that, if it is clear that there is no real possibility or prospect of a winding-up order being made at the hearing by a court applying s.180(1A), it cannot be just for a company to have the threat of a winding-up order hanging over its head like a Sword of Damocles.”

32.  In that case, Yuen J struck out the prayer for relief in the form of a winding-up order.  The Court of Appeal dismissed an appeal against her decision (see [2003] 1 HKC 484).

33.  In my judgment, the following factors are relevant to a consideration of whether the claim for relief in the form of a winding-up order in the present case should be struck out:-

(1)	The remedy of a winding-up order is a remedy of last resort.
(2)	There is an alternative remedy available to the Petitioner in the form of an order that the 1st to 4th Respondents purchase his shares in the Company.
(3)	That alternative remedy is now one that the Petitioner is seeking to add to the Petition by re-amendment.
(4)	It is an alternative that the 1st to 4th Respondents appear to support, as reflected by the open offer that was made to the Petitioner.  Indeed, in his submissions, Mr Leung stressed the fact that his clients were willing and able to buy out the Petitioner.
(5)	It was common ground that the Company is solvent, financially sound and profitable, and this is also reflected by the fact that a general validation order was made in respect of it.  It would not be in the interests of any of its members to wind it up.
(6)	I am unable to see any prejudice to the Petitioner if the claim for relief in the form of a winding-up order were to be struck out.  The Petitioner pointed to the fact that absent this relief, it would not be able to apply for the appointment of a provisional liquidator.  That is true, but the fact is that the Petition has been on foot since 6 September 2006 and the Petitioner has not made any such application to date.

34.  In all the circumstances, there is, in my judgment, no prospect that the Petition will lead to a winding-up order being made.

35.  Accordingly, I grant an order striking out the prayer for winding-up relief in the Petition.

36.  I grant leave to the Petitioner to re-amend the Petition and make an order in terms of the Petitioner’s summons dated 5 February 2007. 

37.  As to the costs of the strike out application, although the 1^st to 4^th Respondents have not been wholly successful in their application, the application has been partly successful and the Petitioner resisted the entirety of the application.  I make an order nisi that the Petitioner pay the 1^st to 4^th Respondent’s costs of the strike out application, to be taxed if not agreed.