WONG YUN KEUNG AND OTHERS v. SAI KUNG P.L.B. (MAXICAB) (NO.1 & 2) CO LTD AND OTHERS

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D E C I S I O N

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The application

1.  This is an application to strike out the prayer for winding-up relief in a petition and two relevant paragraphs in the petition concerned with such relief.  The subject company is Sai Kung P.L.B. (Maxicab) (No. 1&2) Company Limited (“the Company”), which carries on the business of operating scheduled public light bus services in Hong Kong.

2.  There are nine petitioners in the petition. Together, they hold 14 of the 58 issued shares.

3.  There are 23respondents.  The Company is the 1^st respondent, the other 22 respondents are shareholders.  The 2^nd to 10^th respondents are the current directors.

4.  The application to strike out was brought by all the respondentswith the exception of the 11^th and 14^th respondents.  I will refer to the applicants as “the Majority Respondents”.  Leaving out the Company, the 20 individuals in the Majority Respondents hold 24 of the issued shares.

5.  16 shares in the Company are held by an independent accountant as trustee for the existing shareholders of the Company, as part of the settlement reached in a consent order made in HCMP No. 852 of 2005 (“the 852 Petition”).

6.  The striking out application was made on the basis there is no real prospect the court would make a winding-up order and the petitioners are acting unreasonably in insisting upon winding up as an alternative relief, instead of pursuing only the remedies sought under section 168A of the Companies Ordinance, Cap. 32, namely, an order that the respondents should purchase the petitioners’ shares, or that the petitioners should purchase the respondents’ shares.

7.  I will first relate the relevant background matters.

The Company

8.  The Company was incorporatedin 1981 for the purpose of holding a Passenger Service Licence Certificate (Scheduled)(“Service Licence”) that had been issued by the Hong Kong government to an individual, who was one of the two permanent directors of the Company. The Service Licence was transferred by this individual to the Company in 1988.There is no fixed term for the Service Licence, although it is revocable by the government in theory.

9.  The business of the Company had grown considerably since its early days. In 2006, the Company operated seven routes and employed 200 staff with a fleet of 61 green public light buses (“PLBs”).The fleet was made up of the PLBs owned by the shareholders individually and 18 PLBs purchased by the Company as of 2006.  The Company has become one of the key players in the business of operating PLB scheduled services in Hong Kong, with an annual turnover of about HK$60 million in 2008.

10.  According to the latest audited financial statements as at 31 March 2008, the Company had fixed assets of over HK$66.7 million, current assets of over HK$5.8 million and retained profit carried forward of over HK$9.4 million.

11.  It was stated in the petitionthat the Company has “substantial maintainable earnings” and “substantial assets of its own” and its business is “based on the Service Licence that does not expire”.  It was further averred in the event of a winding up, the petitioners believe “there would be substantial and/or more than negligible surplus for the contributories”.

12.  In an offer made by the petitioners in July 2008 for the sale of their shares, the petitioners have valued their shares at HK$3 million each. 

13.  It is not in dispute that the Company is solvent, financially sound withgood business prospects.

The 852 Petition

14.  In 2005, seven shareholders, being the 2^nd, 5^th, 6^th, 8^th, 12^th 18^th and 19^th respondents herein, brought a petition pursuant to section 168A against all the then directors of the Company, including the 1^st, 3^rd and 6^th petitioners herein and the 3^rd, 4^th, 11^th and 14^th respondents herein.  This is the 852 Petition.

15.  The 852 Petition was compromised by a consent order in June 2006.  Pursuant to the consent order, the 6^th petitioner resigned as a director and/or permanent director of the Companywithinseven days thereof.  Furthermore, the 3^rdand 6^th petitioners and the 11^th and 14^th respondents transferred a total of 16 shares which they had obtained from former shareholders to an independentaccountant to hold as trustee for the existing shareholders of the Company, as mentioned earlier.

16.  In the course of the 852 Petition, a new board of directors comprising the 2^ndto 9^th respondents and the 6^th petitioner as the permanent director was formed in February 2006. The 6^th petitionerlater resigned from the new board on 23 June 2006 pursuant to the consent order.

The present petition

17.  The present petition was filed in August 2008 and amended in December 2008. The same allegations are made to found a petition for winding up on the just and equitable ground and for relief under section 168A. It was alleged that the Company was a quasi partnership.

18.  The conduct complained of in the amended petition may be summarized as follows:

(1)  the conduct of the 2^nd, 5^th, 6^th, 8^th, 12^th, 18^thand 19^th respondents in presenting the 852 Petition led to deterioration of relations in the quasi partnership;

(2)  in November 2006, acting contrary to the consent order in the 852 Petition, the board of directors caused the Companyto bring an action against the former directors being the 6^thpetitioner, the 3^rd petitioner and others claiming damages for breach of fiduciary duty. This is High Court Action No. 2554 of 2006 (“the 2554 Action”);

(3)  the board of directors attempted to change the profit sharing ratio, which led to a demonstration of the drivers in December 2006. This caused the Company to suffer a drastic blow to its reputation and goodwill and tension between the petitioners, other shareholders and the management;

(4)  the board of directors without giving reason failed to renew the contract of one driver Hiew Nyuk Ying, who is the younger sister of the 3^rd, 4^th and 6^th petitioners, when they re-hired all the drivers;

(5)  the board of directors failed to provide financial statements to members of the Company in sufficient time pursuant to section 129G of Cap. 32;

(6)  the board of directors refused or ignored the 1^st petitioner’s applications to transfer his share to his wife;

(7)  the board of directors extended their term of office unilaterally without any resolution of shareholders;

(8)  the board of directors fraudulently altered the minutes of the annual general meeting of 2008;

(9)  the 1^st petitioner was unfairly subjected to liability incurred for and on behalf of the Company by the conduct of the board of directors in that they persistently ignored his request for information on the status of the personal guarantees he had provided for the Company;

(10)  the board of directors had exerted undue influence on some of the shareholders in casting votes in favour of resolutions proposed by them.

19.  Additional complaints were made in the 1^st petitioner’s 4^th affirmation filed inJanuary 2009. These allegations do not appear in the amended petition. No application has been made to further amend the petition to incorporatethese complaints. The court will not travel beyond the allegations contained in the petition in adjudicating the matter.The petitioners are confined to what was stated in the amended petition.Defects or omissions in the amended petition cannot be cured by a subsequent affirmation (In re Fildes Brothers Limited [1970] 1 WLR 592 at 597G-598C; Re Tourmaline Limited [2000] 4 HKC 348 at 354C-D). 

20.  The petition stated that the petitioners consider it a “viable option” to sell their shares back to the Company at an appropriate price.  Alternatively, they are willing to purchase shares from the board of directors and/or other shareholders at a “reasonably discounted price … as a last resort to avoid winding up of the Company”.

21.  The basis of valuation for the sale of the petitioners’ shares was pleaded in the petition and this basis of valuation is generally acceptable to the Majority Respondents. 

22.  The negotiations between the parties for the purchase of the petitioners’ shares prior to the presentation of the petition are also mentioned in the petition, and the relevant correspondence had been placed before the court.In summary, the Majority Respondents are willing to purchase the shares of the 1^st, 2^nd, 4^th and 5^th petitioners, but decline to purchase the shares of the other petitioners before the 2554 Action has been resolved, as the Company is suing the 3^rd and 6^th petitioners in that action for misfeasance.  It is alleged by the Majority Respondents that the 7^th to 9^th petitioners hold their shares on trust for the 6^th petitioner.

23.  In the prayer for relief, the petitioners seek an order that the respondentsare to purchase the petitioners’ shares at a fair value, alternatively, the respondents are to sell their shares to the petitioners, and in the further alternative, the Company be wound up.

The applicable legal principles

24.  There is no dispute on the relevant legal principles to be applied in this strike out application.I bear in mind it is assumed that the allegations in the petition and the petitioners’ evidence are established and that conflicts are resolved in the petitioners’ favour. I would approach the application with great circumspection and would only strike out the relief for winding up if I am satisfied it is plain and obvious the petition for winding up would fail.

25.  In the written submission of the petitioners’ counsel, it was contended that the petitioners are entitled to winding-up relief on the basis of breaches alleged in the petition. If they meant to say that the petitioners are entitled to have the Company wound up as of right upon establishing the matters complained of, this is wrong in law.  The court has a discretion to refuse winding-up relief under section 180(1A) of Cap. 32. 

26.  The principle behind this provision was explained in Wong Tin Chee v. Wong To Yick [2001] 2 HKLRD 683 at 687F to G and Re Wong To Yick Wood Lock Ointment Limited [2003] 1 HKC 484 at 488B.  The remedy of winding up is a remedy of last resort, and would not be granted if the petitioners are acting unreasonably in insisting upon it instead of pursuing an available alternative remedy.  Here, the onus is on the Majority Respondents to show there is an available alternative remedy and the petitioners are acting unreasonably in not pursuing it.

If there is no real prospect of awinding-up order

27.  There is clearly an alternative remedy available to the petitioners.I have mentioned the financial position of the Company. I note that the petitioners have offered to sell their shares to the respondents before they presented the petition. The petition stated that buy-out is a viable option and it is a last resort to avoid winding up. The Majority Respondents have confirmed in their affirmation that the basis of valuation of the petitioners’ shares is generally acceptable to them.  There is no suggestion that the Majority Respondents are not financially capable of buying out the petitioners’ shares at a fair value.

28.  In the written submission ofthe petitioners’ counsel, it was submitted that the petitioners were not acting unreasonably in rejecting the counter-offer of the Majority Respondents to buy out the shares of only the 1^st, 2^nd, 4^th and 5^th petitioners and to defer the question of buying out the shares of the other petitioners until after the 2554 Action has been resolved.

29.  It is not the Majority Respondents’ contention that the petitioners were acting unreasonably in rejecting their counter-offer.  The point is that under section 168A(2)(a), the court has wide discretion to order the Majority Respondents to buy out the petitioners’ shares at an appropriate price, assuming that the petitioners’ case of unfairly prejudicial conduct is made out.  The Majority Respondents contended that given this relief available to the petitioners, this should provide sufficient remedy and the petitioners are acting unreasonably in seeking winding up in the alternative. 

30.  It was submitted by the petitioners there are doubts if the buy-out remedy would be effective and viable. It was said there may be a problem due to the PLBs owned by the shareholders and included as part of the fleet of vehicles operated by the Company. The proprietary interest of the PLBs lies with the shareholders individually and it was submitted that the court has no power to compel the shareholders to sell their PLBs with their shares in the Company.

31.  I reject this submission. As mentioned already, the court has wide discretion under section 168A(2)(a) to make such order as it thinks fit for the purchase of sharesof any member.  Further, it is the case of the petitioners in the petition they are willing to sell their shares in the Company with the PLBs. It is also common ground that any shareholder who wished to withdraw his PLB would give the Companya right of first refusal in acquiring the PLB. Mr Chan, SC informed the court on instructions today if the court should order the Majority Respondents to sell their shares in the Company to the petitioners, they are willing to sell their PLBs that were part of the Company’s fleet.

32.  Given that buy-out relief is a remedy available to the petitioners, it would be unlikely in the extreme for such a successful company to be wound up by the court, particularly bearing in mind that the Service Licence, upon which the successful and substantial business is operated, is held by the Company.

33.  It is incumbent on the petitioners to adduce evidence “to state why a winding-up order is the preferred remedy and the reasons therefor”,as stated by the Court of Appeal in Re Wong To Yick Wood Lock Ointment Limited, supra. at 489G.This is obviously relevant to the approach prescribed by section 180(1A), by which the court is to form a view if the petitioners are acting unreasonably in seeking winding up instead of pursuing some other remedy available to them.

34.  On 24 June 2009,the petitioners issued a summons for leave to adduce evidence of an affirmation of the 2^nd petitioner made on 23 June 2009, seeking to explain why they prefer a winding-up order.At the hearing today, the petitioners’ counsel informed the court he would not be pursuing this application to adduce evidence.  So the court was left in a position where no evidence is given for any preference for winding up and no reasons for such preference.

35.  At the hearing today, Mr Chung submitted on behalf of the petitioners that the petitioners would suffer prejudice if a buy-out order is made, in an attempt to justify why winding up would be the preferred remedy.

36.  I would attach little weight to this.There is no affirmation from any of the petitioners.This submission would appear to be contrary to the case of the petitioners in the amended petition, in which it was stated that buy-out relief is a viable option and it would be pursued as a last resort to avoid winding up.As Mr Chan has pointed out, this stance in the petition was consistent with the letters of the petitioners’ solicitors to the Majority Respondents before the petition was presented.

37.  In any event, the submission made by Mr Chung does not bear scrutiny.He contended that special consideration should be given to the 6^th petitioner’s wishes as he and others were the founders of the Company.I see no basis why that should be so.He said if an order were made for the Majority Respondents to purchase the petitioners’ shares, the petitioners would be “driven to extinction”.In every situation where an order is made for the purchase of shares of one party by another party or by the company, the outgoing shareholder would leave the business, and would be paid an adequate compensation for giving up his stake in the company.There is nothing unfair about this.More tellingly, Mr Chung said if a winding-up order were made, the petitioners would be able to purchase assets of the Company from the liquidator at less expense, even though the petitioners would have to bid for the service lines of the PLBs again from the government.

38.  As already mentioned, the court has wide powers to grant relief under section 168A(2)(a). The court could order the respondents to sell their shares to the petitioners, if it is established by the petitioners it is appropriate in all the circumstances to grant such relief, instead of requiring the respondents to purchase the petitioners’ shares. There is no problem with regard to the sale of the PLBs by the outgoing shareholder, for the reasons given earlier.There is no reason for the petitioners to resort to winding up as a means to take over the business, except this may be cheaper to the petitioners as counsel had submitted.

39.  Reliance was placed by the petitioners’ counsel on Re Tai-Ao Aluminium Group Limited, CACV No. 391 of 2005, 22 June 2006 at para 16.  The facts there are very different. The company in that case was a holding company, the winding up of the company would not affect the disposition of its operating subsidiary as a going concern.  Likewise, the passage in Re Copeland & Craddock Limited[1997] BCC 294 at 297F cited by the petitioners’ counsel was concerned with the possibility of buying the business as a going concern if there was a winding up of the company. Here, the Company holds the Service Licence on which its business depends.  Once the Companyis wound up, the Service Licence would be terminated.  There is no justification for the court to take that course, merely because it is considered by the petitioners to be a cheaper though riskier way of taking over the business.

40.  Winding up would be to the detriment of a substantial portion of the shareholders who could rightly be regarded as innocent shareholders. I have set out earlier the complaints in the petition. I do not understand paragraph 91 of the petition to contain any allegation of misconduct, this paragraph merely alleged there has been a consistent split in the major decision making process of the shareholders. I think it is fair to say no specific allegations of misconduct were made against the 11^th, 13^th, 14^th, 15^th, 16^th, 17^th, 20^th, 21^st, 22^ndand 23^rd respondents. The 11^th and 14^th respondents have all along remained neutral, they did not even take part in this strike out application. These respondents together hold 10 out of the 58 issued shares. In addition, there are 16 shares held by an independent accountant for and on behalf of the shareholders of the Company. So a total of 26 out of 58 shares are not held by the petitioners or by those respondents against whom allegations of misconduct were made in the petition. That is over 44% of the issued shares.

41.  The position of a large number of innocent shareholders who would be adversely affected is clearly a material consideration why the court would not exercise its discretion in making a winding-up order.

42.  For the above reasons, it is plain and obvious there is no real prospect a winding-up order would be made on the amended petition.I am satisfied the petitioners are acting unreasonably in insisting on winding up as an alternative remedy, given the remedies available to them under section 168A.I therefore grant the relief sought by the Majority Respondents.I order the prayer for winding up and paragraphs 150 and 151 of the amended petitionto be struck out.

Costs

43.  Costs of the application should follow the event.I order the costs of the strike out summons and costs of the summons to adduce additional evidence to be paid by the petitioners to the Majority Respondents in any event with a certificate for two counsel.