CHAN YUET MING v. TANG SAU KING AND ANOTHER

HCCW872/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING UP PROCEEDINGS NO.872 OF 1999

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J U D G M E N T

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1. This is a petition to wind up the company called Tourmaline Limited ("the Company") on just and equitable ground under section 177(1)(f) of the Companies Ordinance, Cap.4. The petition is brought by two of the five contributories and opposed by the remaining three contributories.

BACKGROUND

2. Before 31 March 1999, Mr Chan Park Chi ("Mr Chan"), and his wife ("Mrs Chan") were the shareholders of the Company. The Company was acquired by Mr and Mrs Chan in 1982 together with a property in Estoril Court, Garden Road, Hong Kong. The directors of the Company were and are Mr and Mrs Chan and their daughter-in-law, Madam Yung Shing Pik. The Company was for all intent and purposes a family company for Mr and Mrs Chan. The uncontroverted evidence is that the Company had been used by Mr and Mrs Chan for investing in and holding landed properties.

3. The 1st petitioner is a company owned and controlled by Mr Lo Wing Yuk ("Mr Lo") and his wife. The 2nd petitioner is the wife of one Mr Chan Wing Kay. In 1992, Mr Chan, Mr Lo and Mr Chan Wing Kay were desirous of purchasing a property known as Shop No.G46 Allied Plaza, Cosmopolitan Centre, 760 Nathan Road, Kowloon ("the G46 Property") through a company known as Dabo Development Limited ("Dabo"). As Dabo was unable to secure a HK$20 million mortgage from the bank to complete the purchase, the G46 Property was eventually assigned to the Company with Dabo acting as the confirmor. Through Mr Chan, the Company secured a $20 million mortgage from the Kwangtung Provincial Bank, secured by a personal guarantee given by Mr Chan. With this mortgage, the purchase of the G46 Property was completed. The arrangement was recorded in a Chinese agreement dated 28 November 1992 signed by Dabo and the Company.

4. Subsequently on 1 May 1995, Mr and Mrs Chan, as directors of the Company, signed two Declarations of Trust in favour of Mr and Mrs Lo and the 2nd petitioner respectively. Under the Declarations of Trust, the Company acknowledged that it held 45% of the interest in the G46 Property on trust for Mr and Mrs Lo and 10% of the interest on trust for the 2nd petitioner. Other than the G46 Property, the Company had held a number of other properties. After May 1998, however, the Company only held the G46 Property.

5. In 1999, the share capital of the Company was increased from 10,000 shares of $10 each to 30,000 shares of $10 each. On 31 March 1999, out of the newly issued shares, 13,500 shares were allotted to the 1st petitioner, 3,000 shares to the 2nd petitioner, 250 shares each to Mr and Mrs Chan and the remaining 3,000 shares to Mr Yau Kwok Wai, the son-in-law of Mr and Mrs Chan. As a result of the allotment, Mr and Mrs Chan and Mr Yau together held 45% of the shares in the Company, the 1st petitioner held another 45% while the 2nd petitioner held the remaining 10% of the shares. It is not disputed that the allotment of the newly issued shares was at the request of Mr Lo with the stated purpose of securing protection of his interest in the G46 Property.

6. Notwithstanding the admission of the new shareholders, the members on the board of directors remain unchanged. The bank accounts of the Company continue to be operated by Mr and Mrs Chan alone. The Company did not acquire or invest in any property since then. On 30 September 1999, the Company sold the G46 Property at $29 million and the net proceeds of sale has been kept by the Company in the bank.

7. Such are the background and the undisputed facts of this case.

THE PETITION AND THE EVIDENCE

8. On 2 October 1999, the petitioners issued the present petition. Paragraphs 1 to 11 and 13 recite the background of the Company and the sale of the G46 Property. Paragraphs 12, 14 and 15, which are the salient parts of the petition, read as follows :

"12. It was further agreed among all the shareholders that the Company would only be used as a vehicle for holding the Property but not carrying out any other activities, trading or otherwise save and except with the consent of all shareholders.

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14. There has been ongoing disputes between your two petitioners and Chan and there is no realistic possibility that they could ever agree to use the Company to engage in any other activities.

15. In the premises, it is just and equitable that the Company be wound up."

9. The petition is therefore, as one can see, extremely brief as to the basis justifying a winding-up order on the just and equitable ground. It is also vague as to the matters or fact relied upon by the petitioners. The position remains unclear even taking into account the statutory or verifying affirmation.

10. The opposing contributories deny that there was ever an agreement among the shareholders to the effect stated in paragraph 12 of the petition. In his affirmation in opposition to the petition, Mr Chan referred to a pending High Court action involving him and the petitioners over an alleged agreement for the transfer of the petitioners' shares in the Company to another company owned by Mr Chan. The opposing contributories initially relied on this part of the evidence to attack the locus standi of the petitioners to bring these proceedings. After the opposing contributories decided not to pursue the "locus standi" point, this part of the evidence was withdrawn with the permission of the court. Nevertheless, counsel for the petitioners in his opening submission stated that the "ongoing disputes" referred to in paragraph 14 of the petition is a reference to the dispute over the alleged agreement for the transfer of the Company shares. Counsel, however, submitted that this court needs only note that there is a genuine dispute between the parties in that there is this pending litigation. Indeed this court cannot, and there is no room for this court to, embark upon the surrounding circumstances or the merits of the dispute or litigation as the matter and the related evidence are not before this court.

11. The sum total of the undisputed evidence before this court is therefore as set out in the preceding section of this Judgment with the additional fact that there is an ongoing litigation involving the petitioners and Mr Chan over the transfer of the petitioners' shares in the Company to a company controlled by Mr Chan.

12. Other than this, there are two disputes of fact that this court has to resolve. The first is the petitioners' allegation in paragraph 12 of the petition that there was an agreement among the shareholders that the Company would not carry out any activities, other than holding the G46 Property, unless with the consent of all shareholders. The other dispute is the opposing contributories' allegation that notwithstanding the allotment of shares, the control and management of the Company are to remain vested in Mr and Mrs Chan.

13. On the first issue, it is hardly borne out by the evidence. Although Mr Lo confirmed this agreement in his affirmation, his oral evidence clearly shows that the alleged agreement was made between him and Mrs Chan. On his account, none of the other shareholders was present when the discussions between Mr Chan and him took place. Even accepting his evidence in its entirety, it does not support the allegation in paragraph 12 of the petition. The suggestion that there was such a shareholder agreement is simply not made out.

14. As to the other issue, it is common ground that the Company had since 1982 been treated as a family company of the Chan's. The management and control had always remained within the family. This state of affairs continues even after the allotment of shares to the petitioners for it is not disputed that the constitution of the board of directors and the authorized signatories of the Company remain as before. In my view, these are strong indications and go a long way to support Mr Chan's evidence that it was agreed between him and Mr Lo that the new shareholders were not to take part in the management of the Company nor to operate the Company's bank accounts. Had it not been the case, it will be difficult to understand why Mr Lo or the petitioners did not request to be represented on the board of directors or to become a co-signatory to the bank accounts when they had been so keen and eager to protect their interest in the G46 Property through the acquisition of the shares in the Company. It may be argued that Mr Lo or the petitioners did not make the request because the relationship among the parties were amicable and there was mutual trust until and after the sale of the G46 Property. However, if indeed Mr Lo and the 2nd petitioner had complete trust and confidence in Mr and Mrs Chan, Mr Lo would not have requested and urged Mr Chan to admit the petitioners as shareholders. Afterall, the two Declarations of Trust had clearly set out the parties' respective beneficial interest in the G46 Property and would have afforded Mr and Mrs Lo and the 2nd petitioner the necessary protection. As admitted by Mr Lo, the only reason for requesting to be a shareholder in the Company is because of the interest in the G46 Property. There is no conceivable reason why the petitioners would be interested in other aspects of the Company. In my judgment, an objective assessment of the evidence shows that it is more probable than not that the allotment of shares to the petitioners was on the understanding and agreement that the management of the Company is to remain solely within the Chan's family, and I so find.

JUST AND EQUITABLE TO WIND UP THE COMPANY?

15. There can be no doubt that the burden is on a petitioner to identify the factual and legal premises relied upon in contending that it is just and equitable for a company to be wound up. It is equally a petitioner's duty to adduce satisfactory evidence in support of the contentions relied upon.

(1) Sufficiency of the petition

16. Although a petition does not constitute a formal pleading, it serves to define the scope of the matters in issue and the disputes that the court has to resolve. Accordingly, a petition must set out with precision and sufficient particulars the matters complained of or relied on by a petitioner in justifying a winding-up order on just and equitable ground, and the court will not travel beyond the allegations contained in the petition in adjudicating the matter : In re Fildes Bros. Ltd [1970] 1 WLR 592 at pp.597G-598C. It follows that a sufficient case must be stated on the petition and defects or omissions in the petition cannot be cured by the supporting affidavit : see Derek French, Applications to Wind Up Companies, pp.86-88; Re Wear Engine Works Co. (1875) LR 10 Ch.App.188 at p.191.

17. I had observed that the present petition is extremely brief and does not identify the facts and basis relied upon by the petitioners. The so-called "ongoing disputes between the petitioners and Mr Chan" had not been identified, let along particularized. It has to be noted that the mere existence of disputes between certain shareholders do not necessarily justify a winding-up order on the just and equitable ground. The dispute has to be adjudged against the circumstances leading to it and also the conduct of the shareholders involved. The mere averment of the existence of an ongoing dispute is therefore plainly insufficient. Likewise, the additional allegation that because of the ongoing disputes, there is no realistic possibility that the petitioners and Mr Chan can agree to use the Company to engage in any other activity does not take the petition any further. The fact that a company has no activity is not necessarily a reason for winding it up. Counsel for the petitioners had alluded to a deadlock in the course of his opening submission. That, however, is never part of the petition, whether expressly or impliedly.

18. In short, the petition is evidently inadequate. No case has been made out on it. Had an application been made at the very outset of these proceedings, the petition would have been liable to be struck out.

(2) Sufficiency of the evidence

19. Neither of the two affirmations of Mr Lo in support of the petition adds anything of significance to cure the shortcomings in the petition. The first affirmation merely verifies the petition. The second affirmation does not in any way enlarge on the ongoing disputes or the point about the impossibility of the Company engaging in any other activities. Even taking into account the totality of the oral evidence adduced in the course of the hearing, the petitioners' case boils down to no more than this. Within a few months after the petitioners became shareholders in the Company, the G46 Property was sold and the sale proceeds was kept in the Company's bank account. The Company presently has no other investment and holds no landed property. It only holds a vehicle and a licence plate for the Chan's family. Other than the sale of the G46 Property in September 1999, the Company has no other activity. The petitioners and Mr Chan are involved in a litigation over the transfer of the shares in the Company, which is pending. The question is : does this afford a sufficient basis for the court to exercise its discretion to wind up the Company on the just and equitable ground? The answer, in my judgment, is plainly "no".

20. I accept that the words "just and equitable" carry a wide meaning and do not limit the discretion of the court to any particular type of situation. Ultimately whether it is just and equitable to order a winding-up is a question of fact and each case depends on its own facts. This is the effect of the judgment of Lord Wilberforce in the often-cited case of Ebrahimi v. Westbourne Galleries Ltd [1973] AC 360 at pp.374F-380B. However, in the same passage, Lord Wilberforce also acknowledged that, because of the superimposition of equitable considerations, something more is required to bring into play the just and equitable ground, and he went on to indicate three of those typical elements : see p.379E-H. Counsel for the petitioners is therefore right in saying that there is no legal requirement that the petitioners must bring themselves within a specific category, such as deadlock in management, loss of company substratum and so on. Despite that, the petitioners are still bound to state and support by evidence the factors that enable the equitable considerations to apply.

21. In this connection, counsel for the petitioners submitted that the relationship between the contributories requires mutual trust and confidence, that the Company has no trading activity and no goodwill and given that the parties are now at loggerheads, there is plainly no purpose to be served by continuing with the Company. A winding-up order is therefore said to be justified on equitable considerations. In my judgment, the submission has taken an over-simplistic view of the position of the Company and the elements required to constitute the just and equitable ground.

22. Firstly, it is inapt to equate the pending litigation between the petitioners and Mr Chan as a deadlock in the management of the Company or a deadlock in the Company as a whole. In the first place, the petitioners are not members of the board of directors. The board of directors, comprising Mr and Mrs Chan and their daughter-in-law, can continue to operate and manage the affairs of the Company. In addition, the petitioners jointly hold 55% of the shares in the Company. They are the majority shareholders. There is therefore no reason, and there is no evidence suggesting, that decisions relating to the Company, including the distribution of the proceeds of sale of the G46 Property, cannot be resolved in the shareholders' general meeting. There is, as counsel for the opposing contributories observed, no true deadlock in the Company. There is also nothing inequitable for the board or the general meeting to exercise the powers respectively conferred on them by the constitution of the Company : see the judgment of Hoffmann J in Re Saul D. Harrison & Sons plc. [1955] 1 BCLC 14 at pp.19a-20b.

23. I pause here to say that I do not agree with the criticisms levelled at Mr Chan's evidence and his perception that even after the admission of the petitioners as shareholders in the Company, the petitioners have no real interest in the Company and that Mr Chan and his wife remain at liberty to run and manage the Company in such manner as they think fit. It is in fact also Mr Lo's evidence that his only reason for wanting to be a shareholder of the Company is because of the G46 Property. The fact that he is unable or unwilling to say whether he would still be interested in the shareholding in the Company after the pending litigation and the interest in the G46 Property had been resolved and dealt with is a strong indication that he personally has no keen interest in the Company. In my view, given the background leading to the allotment of shares in the Company to the petitioners, it is only natural and logical that the petitioners would only be concerned with the interest in the G46 Property and not generally in the Company. Further, it is not uncommon, even for private companies, to be formed or operated, on the understanding that only some of the shareholders shall take part in the management of the Company. Again, considering the background of the Company, especially the keen interest of and participation by the Chan's family in the affairs of the Company throughout the years, there is nothing incredible or unsustainable in Mr Chan's evidence and belief that he and his wife are at liberty to decide on the affairs and activities of the Company, so long as they are not injurious to the petitioners' interest in the G46 Property.

24. Secondly, the Company was not formed nor acquired for the specific purpose of holding and investing in the G46 Property. On the contrary, it has since 1982 been used in connection with property investments carried out by Mr and Mrs Chan. As late as 1998, it was holding property acquired by Mr and Mrs Chan. Hence, the fact that the G46 Property was sold in September 1999 does not mean that the Company's substratum has gone or the purpose for which the Company was acquired no longer exists. It is true that between May 1998 and October 1999, the Company had not embarked upon new investment venture and that at the time the petition was presented, the Company held no landed property at all. That does not necessarily lead to the conclusion that the Company has no future and no purpose to be served. The board of directors can resolve to carry out other property investments as and when the opportunity arises. There is nothing in the evidence to suggest that the board will refrain from so doing. Indeed, there is no evidence indicating that the board has given up on property investment or has abandoned the operation of the Company. It is therefore not open to the petitioners to say, on the evidence presented to the court, that the Company has lost its substratum or no longer has any useful purpose to serve : see Re Mediavision Ltd [1993] 2 HKC 629 at pp.633C-G, 634D-F.

25. Thirdly, insofar as the determination on the petition involves an exercise of the court's discretion is concerned, the court has to have regard to such circumstances as the conflicting interests and wishes of the contributories, the drastic character of the remedy and the availability of alternative remedies : Derek French, supra, para.7.7.2 at p.265.

26. I have observed that the interests and concerns of the petitioners in the Company are premised upon and very much confined to the G46 Property and its sale proceeds. Indeed, their association with the Company has been extremely brief. It was just six months after they became the shareholders and two days after the sale of the G46 Property was completed that they presented the petition herein. Contrasting this, Mr and Mrs Chan have been actively involved in the Company since 1982. They no doubt have a close interest in the Company and in preserving it. Mr Chan, in cross-examination, had also referred to the fact that the Company has a good credit record and standing, and therefore enjoys trust and support from banks. I do not agree that Mr Chan has been exaggerating, even though the fact is he and Mrs Chan have also put up personal guarantees for the advances from the banks. If the situation is, as counsel for the petitioners contended, that the credit record or reputation of the Company is immaterial, the G46 Property would not have to be acquired in the name of the Company. It could have been acquired by Dabo backed by personal guarantee(s) of Mr Chan and/or other members of Dabo. Balancing these factors, the wishes of the opposing contributories ought to be given due weight and consideration.

27. On the other hand, it is plain that the winding-up remedy is a strong and drastic one. It should be used as a remedy of last resort and the court is slow to grant it when another remedy is available : Re San Imperial Corp. Ltd [1980] HKLR 649 at pp.652, 655-6. In the present case, there are clearly other remedies open to the petitioners. The petitioners, being the majority shareholders, could have redressed their position or grievances in relation to the sale proceeds of the G46 Property through shareholders' general meeting. They could have restructured the board of directors. Their complaints and grievances arising from the G46 Property could and would also be fully ventilated and resolved in the pending litigation. There is no good justification for resorting to the drastic remedy of winding-up, when there are clearly other appropriate and full remedies.

28. Weighing these considerations, the balance clearly tilts in favour of refusing a winding-up order.

CONCLUSION

29. By reason of all the matters aforesaid, the petition is to be dismissed, and I so order. I also make an order nisi that the petitioners pay the costs of these proceedings, including the costs of the opposing contributories, to be taxed if not agreed.