XU LIU CHUN v. CHANG JIANG AND OTHERS

HCMP 3166/2014

[2019] HKCFI 1024

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 3166 OF 2014

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JUDGMENT

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1.  This is an application by the petitioner (“P”) by summons (“the Summons”) for interim payment by the 1^strespondent (“R”) of 40% ofthe sum of US$4,400,000 or such other sum as the Court may deem fit to be made either to him or into court arising out of the Judgment by DHCJ Alex Lee (as he then was) herein handed down on 13 July 2018 (“the Judgment”) and his Order of the same date (“the Order”).

Background

2.  P and R are respectively the registered holders of a 40% and a 60% shareholding in the 2^ndrespondent (“the Company”), a company incorporated in Hong Kong.  Disputes had arisen between P and R regardingthe management of the Company.  By the petition herein presented by P on 4 December 2014, P made allegations against R for mismanagement of the Company and oppression and unfair prejudice against him.  He prayed for relief under section 724 of the Companies Ordinance, Cap 622 (“Cap 622”), including the following:

(i)   an account of losses and damages suffered by the Company as a result of R’s misconduct as set out in the petition;

(ii)   an order for valuation of the shares of the Company and

(iii)   an order that R should purchase the shares of P in the Company at such value as assessed.

3.  After a trial over many days, DHCJ Lee handed down the Judgment on 13 July 2018.  He found two out of the five complaints made by P against R proved.  They are:

(i)   misappropriation of the sum of US$4,400,000 from the Company; and

(ii)   denying P access to the financial information of the Company in relation to, inter alia, its business in the Republic of Angola.

4.  During the trial, R denied the charges of misconduct against him.  He further alleged that the 40% shareholding under the name of P was actually held by P as his nominee and that he owned the beneficial interest therein.  The learned Judge found that R had failed to discharge his burden of proving that the 40% shareholding actually belonged to him.  Hence, he found that P was the beneficial owner of the 40% shareholding.

5.  In the result, the learned Judge found that the affairs of the Company had been conducted by R in a manner unfairly prejudicial to the interests of P and that there had been a complete breakdown of mutual trust between the parties and he ordered that the shares of the Company should be valued and that R should purchase the shares of P at the assessed value.

6.  Consequently, the learned Judge made the Order in the following terms:

“ 1. The 1^stRespondent do purchase the 12,000 shares (i.e. 40% of shareholding) of US$100 each in the capital of the Company presently registered in the name of the Petitioner at a price to be determined by the Court if not agreed.

2. The Court shall value the Petitioner’s shares on the following basis:-

a. by reference to the assets, profitability and future prospects of the Company as at 4^th December 2014 (i.e. the date of the Petition);

b. the valuation should take into account the unilateral withdrawal of US$4.4 million by the 1^stRespondent when assessing the value of the Petitioner’s shares; and

c. without any discount for the fact that the Petitioner’s shareholding is a minority holding.

3.   There be an order nisi that costs of this trial be reserved pending the decision on quantum.”

7.  P thereafter filed a Notice of Appeal in which he sought to argue that another sum of US$9.2 million alleged by him to have been misappropriated by R should also be taken into account in the valuation of the shares of the Company.

8.  R also cross-appealed on the ground that the issued capital of the Company in the sum of US$3 million should have been held to belong toR entirely on the various grounds set out in the amended respondent’s notice. There was no appeal against the finding that the said sum of US$4.4 million belonged to the Company or the finding that there had been a complete breakdown of mutual trust between the parties or the order that R should purchase the shareholding of P in the Company at the assessed value.  I suppose that what was in the mind of R was that once the Court of Appeal reversed the Judgment by holding that the share capital of US$3 million belonged to him entirely, it would follow that all the issued shares would belong to him and the order for the purchase of the shares would automatically fall away.  It is to be noted that there was no application for a stay of the Order pending appeal.

9.  I was informed by counsel for the parties that the appeal and cross-appeal had been heard by the Court of Appeal in February 2019 and that its judgment had been reserved.

The present application

10.  The Summons bears a marginal note which refers to Order 29, rules 10 – 13 of the Rules of the High Court.  Mr Wong, counsel for R, takes the point that the court has no power to grant the relief sought under Order 29, rules 10 – 13.  He says that the application should have been made under sections 724 – 725 of Cap 622.  Mr Suen, counsel for P, replies by pointing out that reference has already been made to section 724 of Cap 622in the title of the action.  I agree with Mr Suen.  In any event, the marginal note in a summons in no way has the kind of restrictive effect as contended by Mr Wong.  I have no doubt that I can consider the application both under Order 29 and Cap 622.

11.  The relevant parts of sections 724 – 725 of Cap 622 read as follows:

“ 724. When Court may order remedies

(1) The Court may exercise the power under section 725(1)(a) and (2) if, on a petition by a member of a company, it considers that—

(a) the company’s affairs are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of one or more members (including the member); or

(b)   an actual or proposed act or omission of the company (including one done or made on behalf of the company) is or would be so prejudicial.”

“ 725. Remedies that Court may order

(1) The Court may—

(a) for the purposes of section 724(1), make any order that it thinks fit for giving relief in respect of the matter mentioned in section 724(1)(a) or (b); and

…

(2) Without limiting subsection (1), the Court—

(a) may make any or all of the following orders—

(i) an order—

…

(iv) any other order that the Court thinks fit, whether—

…

(B) for the purchase of the shares of any member of the company by another member of the company;

…

(D) for any other purpose; and

(b)   may order the company or any other person to pay any damages, and any interest on those damages, that the Court thinks fit to a member of the company whose interests have been unfairly prejudiced by the conduct of the company’s affairs or by the act or omission.”

12.  The relevant parts of Order 29, rules 9, 10, 12 and 13 of the Rules of the High Court read as follows:

“ II. Interim Payments

9. Interpretation of Part II (O. 29, r. 9)

In this Part of this Order—

interim payment(中期付款), in relation to a defendant, means apayment on account of any damages, debt or other sum (excluding costs) which he may be held liable to pay to or for the benefit of the plaintiff; …

   10.   Application for interim payment (O. 29, r. 10)

(1)   The plaintiff may, at any time after the writ has been served on a defendant and the time limited for him to acknowledge service has expired, apply to the Court for an order requiring that defendant to make an interim payment.

…

   12.   Order for interim payment in respect of sums

other than damages (O. 29, r. 12)

If, on the hearing of an application under rule 10, the Court is satisfied—

(a)   that the plaintiff has obtained an order for an account to be taken as between himself and the defendant and for any amount certified due on taking the account to be paid; or

(b)   that the plaintiff’s action includes a claim for possessionof land and, if the action proceeded to trial, the defendant would be held liable to pay to the plaintiff a sum of money in respect of the defendant’s use and occupation of the land during the pendency of the action, even if a final judgment or order were given or made in favour of the defendant; or

(c)   that, if the action proceeded to trial, the plaintiff would obtain judgment against the defendant for a substantial sum of money apart from any damages or costs,

the Court may, if it thinks fit, and without prejudice to any contentions of the parties as to the nature or character of the sum to be paid by the defendant, order the defendant to make an interim payment of such amount as it thinks just, after taking into account any set-off, cross-claim or counterclaim on which the defendant may be entitled to rely.

13.  Manner of payment (O. 29, r. 13)

(1)   Subject to Order 80, rule 12, the amount of any interim payment ordered to be made shall be paid to the plaintiff unless the order provides for it to be paid into court, and wherethe amount is paid into court, the Court may, on the applicationof the plaintiff, order the whole or any part of it to be paid out to him at such time or times as the Court thinks fit.

(2)   An application under paragraph (1) for money in court to be paid out may be made ex parte, but the Court hearing the application may direct a summons to be issued.

(3)   An interim payment may be ordered to be made in one sum or by such instalments as the Court thinks fit.

(4)   Where a payment is ordered in respect of the defendant’s use and occupation of land the order may provide for periodical payments to be made during the pendency of the action.”

13.   Despite the argument by Mr Wong to the contrary, in my judgment, the court does have jurisdiction to make an order for interim payment of part of the purchase price for the shares the subject matter of an order for purchase of shares made in proceedings under section 724 of Cap 622.  More specifically, such jurisdiction is based on section 725(1) and (2)(a)(iv)(B) and (D) of Cap 622 and Order 29, rule 12(c) of the Rules of the High Court.  The last-mentioned provision refers to a situation where the trial has not taken place.  There is an even stronger basis where the trial has actually taken place and the court has made an order against thedefendant for the payment of a substantial sum, even if the exact amount has not yet been ascertained.

14.  There are decided cases both in Hong Kong and in England in support of such a jurisdiction on the part of the court.

15.  In the case of Re Hang Sang Engineering Factory LtdHCCW 456/2005 (unreported, 7 November 2007) which is similar in nature to the present case, Kwan J (as she then was) said as follows:

“ 1. On 20 March 2007, I gave judgment for the 1^st and 2^nd petitioners on their petition and ordered the 1^st respondent to 4^th respondents to purchase their shares in Hang Sang Engineering Factory Limited (‘the Company’). Leave was given to restore the hearing for consequential directions to be given to facilitate a purchase of the shares.

…

3. I have found in favour of the petitioners that unfairly prejudicial conduct was made out in that they were wrongfully removed from their management positions in the Company and theShenzhen Company and that the notices issued by the respondentsto certain suppliers in 2003 had adversely affected the interests of the Company.

…

7. I have indicated to parties at the outset that I am not prepared to order the petitioners to hand over the business and assets of the Shenzhen Company and the factory before the sale and purchase of the shares is to take place, unless the respondentsare prepared to make an interim payment on account of the purchaseprice. I have power to make such an interim order under the wide jurisdiction conferred in section 168A (Ferguson v MacLennon Salmon Company Limited [1990] BCC 702; Re Clearsprings (Management) Limited [2003] EWHC 2516 (Ch) at paragraph 43). Given that indication, the parties have reached an agreement on an interim payment of the purchase price to be made by the respondents to the petitioners.”

[emphasis added]

16.  In the case of Ferguson referred to by Kwan J above, the petitioners sought an order for the purchase by the majority shareholder respondents of their shares in a company on the basis of unfair prejudice bythe respondents against them.  The respondents accepted that the company’s affairs had been conducted in a manner which was unfairly prejudicial to the interests of the petitioners.  The parties agreed that the court should order the company or other respondents to purchase the shares of the petitioners.  The court valued the shares at GBP3.05 per share and ordered the respondents to purchase the shares of the petitioners at that price together with interest at 15% per annum from a certain date.  The respondents appealed.  The petitioners applied for interim payment on account at GBP1.10 per share withinterest on the basis that GBP1.10 was the lowest price per share contended for by the respondents’ witnesses.  The Court of Session (Inner House) consisting of three judges made an order for interim payment as requested on condition that the shares were transferred into the name of a nominee to beheld for such of the respondents or their nominees who ultimately purchased the shares.

17.  Hence, there is no question that the court does have jurisdiction to make an order for interim payment in a situation such as that in the present case.

18.  The next questions are whether the court should make such an order in the circumstances of this case and, if it should, then what should be the amount of the interim payment and on what terms.

The arguments of the parties

19.  Besides the jurisdictional point referred to above on which I have ruled against R, counsel for R also argue as follows:

(i)   There is the cross-appeal by R.  If that is successful, the entire basis of P’s claim would be destroyed and hence the Court should not make any order for interim payment before the decision by the Court of Appeal.  In this regard, they rely on the cases of Re a company (No 004175 of 1986) [1987] BCLC 574, a decision by Scott J (as he then was), and Re Minloy Limited HCMP 1526/2013 (unreported, 7 July 2017), a decision by DHCJ Ismail SC.

(ii)   There is no or no sufficient evidence of the irreducible minimum value of the shares ordered to be purchased.  In this regard, R relies on the Ferguson case (supra) and also on the judgment of Barma J (as he then was) in Lam Yuk Hon v Kook Tai Wai HCCW 1138/1999 (unreported, 4 September 2007).

(iii)   In any event, if an order for interim payment is made, it must be conditional upon the transfer of the shares in question.

20.  Mr Suen has put forward arguments in answer to the arguments of R.  I shall refer to some of those in my discussion below.

Discussion

21.  First, I do not think that the Re a Company case (supra) decidedby Scott J would assist R.  In that case, the petition had not been heard whenthe application for interim payment was made.  In those circumstances, it is no wonder that the court held that it was not in a position to grant the order sought.  At page 578a–b, Scott J said:

“ Under these statutory provisions the court has no jurisdiction to make an order on the petition until the statutory criterion set out in s 461(1) has been satisfied. That criterion will not be satisfied until the hearing of the petition.”

In the present case, the court had actually given judgment on the petition and made an order for the purchase of the shares in question.

22.  Furthermore, the fact that there is a judgment pending in the Court of Appeal also does not assist R.  Order 59, rule 13(1) of the Rules of the High Court provides expressly that an appeal does not operate as a stay of execution of the proceedings under the decision of the court below.  There has also not been any application for a stay of execution of the order for the purchase of the shares in question.

23.  Reliance has been placed by R on paragraph 15 of the Judgment of DHCJ Ismail SC in Minloy (supra) which reads as follows:

“ 15. By way of jurisdiction in the unfair prejudice petition context:

(a) P refers to Ferguson v Maclennan Salmon [1990] BCC 702;Re Hang Sang Engineering Factory [2007] HKEC 2073,Lam v Kook, (unreported) HCCW 1138/1999, 4 September2007. These authorities demonstrate a jurisdiction to makean order for an interim payment where the court is satisfied that an amount would ultimately be payable in respect of a buy-out order.

(b) I note that in Ferguson, there was no dispute as to liabilityfor unfair prejudice, only a dispute over value of the shares. Accordingly, the court could be satisfied that there would ultimately be a pay-out.

(c) Without deciding the point, it is not clear to me whether or not the Court has jurisdiction to make an interim payment order where the unfair prejudice finding is subject to appeal.

(d)   If this application is restored, then this jurisdictional issue should be addressed so far as possible.”

24.  A number of features should be noted about the Minloy case.  First, in the said paragraph 15, the learned Deputy Judge expressly said that she was not deciding the point of the effect of an appeal on the application for interim payment.  Secondly, the petitioner applicant was acting in personwhilst some of the respondents were represented by three counsel, includingsenior counsel.  Thus, one would expect that the arguments of the petitioner applicant would not have been presented in such a full fashion.  Thirdly, it would appear from paragraph 19 of the Judgment that there was actually on foot an application to the Court of Appeal for a stay of execution.  Finally, the learned Deputy Judge was not deciding on the application but was adjourning it with liberty to restore.

25.  In all the circumstances set out above, I do not think that the Minloy case really assists R.

26.  In the Ferguson case, the following passages appear at pages 704A–B and 706A–D of the Opinion of the Court:

“ In moving the court to grant the motion. Mr Drummond Young for the petitioners reminded us that sec.461(1) of the Companies Act 1985 is expressed in very wide terms. Section 461(1) provides:

‘If the court is satisfied that a petition under this Part is well founded, it may make such order as it thinks fit for giving relief in respect of the matters complained of.’”

“ The present case is unusual in respect that it is a matter of agreement between the parties that the affairs of the company have been conducted in a manner which is unfairly prejudicial to the interests of the petitioners and that the court should make an order in terms of sec. 461 of the Act of 1985 ordering the purchasefrom the petitioners of their whole shares in the company. In thesecircumstances we are satisfied that this petition is well founded, and accordingly we are entitled under sec. 461(1) to make such order as the court thinks fits for giving relief to the petitioners. We see no reason why the power conferred upon the court by this subsection should not include power to make an interim order. We accept that there is no express reference in sec. 461 to the making of an interim order, but Mr McNeill accepted that the court in the past had pronounced interim interdict under sec. 461, and under the corresponding provisions in the Companies Act 1980 the court felt able to pronounce interim orders restraining a company from holding a meeting or from passing specific resolutions (Whyte,Petitioner 1984 SLT 330; (1984) 1 BCC 99,044).

   In the circumstances of the present case, it is plain that at the end of the day the petitioners will be entitled to an order for the purchase of their shares at not less than £1.10 in respect of each share.  That being so, we do not see why the petitioners should have to wait any longer before obtaining a payment to account of that amount.  Parties were agreed that the entire evidence at the proof had been concerned with the valuation of the shares, and, in the special circumstances of this case, it appears to us reasonable that the petitioners now should receive what in effect is a payment to account.”

27.  In the Lam Yuk Hon case (supra), the petitioner had presented a winding-up petition under section 177(1)(f) of the Companies Ordinance and not a petition for relief, including an order for purchase of the petitioner’s shares in the company by the respondent, based on a plea of oppression of the minority.  The matter was then settled on terms requiring a valuation of the shares in the company.  The terms of settlement were embodied in an order in the Tomlin form.  As a result of the very long time taken in the valuation process, the petitioner applied for an order for interim payment under section 255 of the Companies Ordinance and the inherent jurisdiction of the court.

28.  The following passages appear in the judgment of Barma J:

“ 11. The basis on which the application is brought is, as I have said, section 255 of the Companies Ordinance. That section, which appears in the part of the Companies Ordinance that is headed ‘Provisions Applicable to Every Voluntary Winding-up’, provides that:

‘ The liquidator or any contributory or creditor may apply tothe court to determine any question arising in the winding-up of a company or to exercise as respects the enforcing of calls, or any other matter, all or any of the powers which the court might exercise if the company were being would up by the court.’

12. It seems to me that that section has no application at all in the circumstances of the present case. The section is clearly one that applies only to companies that are in liquidation and, moreover,to companies that are in voluntary liquidation. It is designed to give the court the power to give directions, in an appropriate case, as if the company were being wound up by the court.

…

19. In this case, however, although it does seem to me that there may well be an irreducible minimum beyond which the priceto be paid for the shares under the Tomlin order will not fall, it seems to me that given that there is now no longer outstanding any action or any proceedings in which the section 168A jurisdiction could be invoked, bearing in mind that the petition in the first place was based not on section 168A, under which the court has wide powers, but under section 177(1)(f) and sought only a winding-up of the company, and bearing in mind also that even if there had been conjoined with the section 177(1)(f) winding up application a claim under section 168A, the petition is in any event stayed, save for the purpose of carrying out the terms of the Tomlin order.

20. In those circumstances, it does not seem to me that there isany basis for the court to exercise any jurisdiction that it might have under section 168A to order an interim payment. That leaves the inherent jurisdiction but, with respect, I am unable to see that there is any basis in the inherent jurisdiction for ordering an interim payment simply on the basis that the court feels that it would be a reasonable or just thing to do in the circumstances of the case.

21.   I am therefore afraid that I have come to the conclusion — which I have reached with some reluctance in the circumstances of this case — that there is simply no jurisdiction enabling me to grant the relief that is sought by the summons in this application and I must therefore dismiss the application.”

Thus, Barma J decided the case on the basis of lack of jurisdiction.

29.  The above passages from the judgments in Ferguson and Lam Yuk Hon are clearly against R on the point of jurisdiction.

30.  That leads me to the second major point addressed by Mr Wong for R, which is on the question of whether there is evidence of the irreducible minimum of the value of the shares in question.  Mr Wong relies on Ferguson and Lam Yuk Hon for the proposition that the same must be ascertained before any interim payment can be ordered by the court.  I do not think that that is disputed by Mr Suen.  It therefore becomes a question of evidence.

31.  Mr Wong has made the following points:

(i)   The learned Judge did not find that the Company owned the entirety of the US$4.4 million in question.

(ii)   In valuing the shares in question, the court would have to take into account not only the assets of the Company but also its liabilities.  In this regard, it is to be borne in mind that the Company has signed two contracts in its own name which means that there will be project costs and liabilities.  Furthermore, there is evidence that an associate company by the name of Fujian Jiang Yuan Investment Development Ltd on the Mainland co-owned by P and R share personnel on the Mainland.  That in fact would give rise to operational costs and liabilities.

(iii)   Regarding the paid-up capital of US$3 million, there is no evidence that the same has remained in the Company since its payment-up in December 2007 and that there is indeed a surplus of assets over liabilities in the Company.

32.  In reply, Mr Suen has made the following points:

(i)   It has never been suggested that the Company is insolvent.  Furthermore, R resisted the petition by engaging substantial legal representation, including three counsel.  The above, coupled with the fact that R had failed in his duty to provide the accounts of the Company to P, would entitle the court to draw the inference that the Company must have a substantial value.

(ii)   There has never been any suggestion that the share capital or any part of it has been reduced or returned to the shareholder.

(iii)   R has never suggested that the Company had incurred any material expenses or liabilities.  On the contrary, it has always been R’s case that the Company was used only as a payment platform with no staff and no business operation of its own.

(iv)   Regarding the two contracts signed by the Company, DHCJ Lee in paragraph 90 of the Judgment has alluded to the fact that that it was R’s belated evidence that the Company’s two contracts had never been performed and therefore there had been no payment under them.

(v)   It has not been suggested by R that when he withdrew the sum of US$4.4 million the Company had to meet claims or liabilities. The learned Judge simply found that such withdrawal by R was in breach of his fiduciary duties.

(vi)   Furthermore, since the withdrawal of the sum of US$4.4 millionby R in September 2014, there is no evidence that the Company has been subject to demands for debts by unpaid creditors.

(vii)   Finally, the Court should also take into account the fact that R is not ordinarily resident in Hong Kong, although admittedly P is likewise not ordinarily resident in Hong Kong.

Disposition

33.  Having considered all the circumstances as set out above, I agree with the substance of the submissions of Mr Suen. I have come to the conclusion that there is an ascertainable irreducible minimum value of the shares in the sum of US$100 per share.  I further conclude that this is a suitable case for me to make an order for interim payment in the exercise of my discretion.

Order

34.  I make an order in the following terms:

(1)   R do make payment into court in the sum of US$1.2 million within 21 days from the date hereof as an interim payment on account of the purchase money to be paid to P for the purchase of the shareholding of P in the Company pursuant to the Order of DHCJ Lee herein dated 13 July 2018 whereby the learned Judge ordered that R do purchase the 12,000 shares (ie 40% of shareholding) of US$100 each in the capital of the Company presently registered in the name of P at a price to be determined by the Court if not agreed, on the following terms:

(i)   the certificates of the said 12,000 shares registered in the name of P together with all the necessary transfer documents shall be lodged with a stakeholder to be agreed between the lawyers for the parties or, failing such agreement, to be appointed by the court;

(ii)   upon the lodging pursuant to (i) above being completed and upon the cross-appeal by R in CACV 380/2018 being dismissed by the Court of Appeal, the said sum of US$1.2 million shall be paid out of court to P on account of the purchase price to be paid by R to him for the purchase of the said 12,000 shares.

(2)   The parties have liberty to apply for further directions arising out of the carrying out and implementation of this order.

(3)   There be an order nisi that the costs of and incidental to this application be paid by R to P to be summarily assessed on paper. For this purpose, P should lodge in court his submission together with a detailed breakdown of the costs claimed within 14 days from the date of this order and R should lodge in court his reply submission within 14 days thereafter.

Conclusion

35.  Finally, it remains for me to thank counsel on both sides for their able assistance.