WONG TIN CHEE TINLY AND OTHERS v. WONG TO YICK AND ANOTHER

CACV 867/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 867 OF 2001

(ON APPEAL FROM HCCW NO. 668 OF 2000)

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REASONS FOR JUDGMENT

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Hon Le Pichon JA:

1. This is an appeal from the order of Madam Justice Yuen made on 24 April 2001 striking out the winding up prayer and associated paragraph of the Amended Petition with costs to the 1st respondent. At the hearing the appeal was dismissed with costs to the 1st respondent to be taxed and paid forthwith. The reasons for the dismissal were to be reduced into writing later. This we now do.

Background facts

2. The background facts appearing in the Petition dated 27 July 2000 as amended on 14 August 2000 are summarised below. Wong To Yick Wood Lock Ointment Limited ("the company"), the subject matter of the Amended Petition is a family company incorporated in 1988 to promote and engage in the production, marketing and distribution of a medicated product which the 1st respondent and his wife ("Madam Law") had first started manufacturing in the 1960's. The 1st respondent is the head of the family and the largest single shareholder, holding 45% of the issued capital of the company. The three petitioners who together hold 20% of the issued capital are three of the 1st respondent's eight children. The 1st petitioner holds 12% of the shares and each of the 2nd and 3rd petitioners holds 4% each. The balance of the shares i.e. 35% of the issued capital is held by other family members including the remaining five children and the 1st respondent's wife. They are not respondents to the Amended Petition.

3. The 1st respondent and Madam Law were Chinese medical practitioners and established themselves as bone setters. They first manufactured the medicated balm in 1965. In due course, all eight children went abroad. By 1983, the 1st respondent and Madam Law ran two businesses: China Medical Laboratory and Wong To Yick Clinic. In 1985, the 1st petitioner returned to Hong Kong to help run the family business at the request of the 1st respondent and Madam Law. It was at his suggestion that the company was formed and incorporated in 1988, taking over the business of formerly carried on under the name of China Medical Laboratory. In that same year, the Wong To Yick Clinic ceased business and at the 1st respondent's request, the 1st petitioner carried on the same practice of bone setting at the address of Wong To Yick Clinic but renaming the business China Medical Center which the 1st petitioner's wife then looked after.

4. The 3rd petitioner returned in 1991 to take care of the accounts of the business and the 2nd petitioner returned in 1992 to deal with administrative matters. The 1st and 2nd petitioners were directors of the company from inception. The 3rd petitioner became a director on 12 January 1998. All three petitioners were removed as directors on 17 December 1999.

The Amended Petition

5. The petitioners seek relief by way of a winding up order on the just and equitable ground and, in the alternative, for section 168A relief based upon the following allegations. First, the petitioners allege that the company was a quasi-partnership with an agreement and understanding that all of the directors should participate in the conduct of the business. Second, the petitioners allege that they were unlawfully ousted from the management of the company in the following circumstances. Following a family dispute in mid-1999, the 1st respondent asked three other children to return to Hong Kong and disclosed to them and to the spouse of one of them the production line and formula for the medicated balm, contrary to the longstanding policy and agreement of the company that these matters should not be disclosed to members who were not members of the family. The three children who had newly returned to Hong Kong were asked by the 1st respondent to look into the accounts of the company. The 1st respondent also authorised them without the consent or authority of the board, to take away the books and accounting records of the company. On 29 July 1999, the 1st petitioner was informed by the 1st respondent that the Chinese Medical Center had been closed and thereafter the 1st petitioner was excluded from the premises at which that business had been conducted. Then without the knowledge, consent or permission of the board, a general meeting of shareholders was held on 17 December 1999 at which the petitioners were replaced as directors by the three newly returned children.

6. The petitioners further complain that thereafter, despite repeated requests, the company not only refused to supply audited accounts to the petitioners but withheld all financial and other relevant information pertaining to the company. In addition, they allege that the respondents have failed to provide information to the petitioners without which they cannot assess the value of the company, that the respondents have prevented the petitioners from ascertaining how the 1st respondent and the new directors have been conducting the affairs of the company, that the 1st respondent and the new directors have shown lack of probity in the conduct of the company's affairs and that it is unjust and inequitable to require the petitioners either to continue as members or to leave on unjust terms. One of the allegations is that the 1st respondent had the habit of drawing cheques on the company's account as he pleased, i.e. helping himself to company funds. The unfairly prejudicial acts are said to be the exclusion of the petitioners from participation and management of the company, oppression through the passing invalid board resolutions or acting without passing any board resolution and the obstruction in the delivery of accounting papers and balance sheets to the petitioners.

The judgment below

7. The judge approached the application on the basis that all the allegations made in the Amended Petition were true. She considered that the question before her was whether, assuming the allegations were true, there was any real possibility or prospect of a winding up order being made. That approach was prescribed by section 180(1A) which reads:

"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"

As the judge rightly observed, the principle behind that section is that since winding up by a contributory is a remedy of last resort, it would not be granted on a contributory's petition if the petitioner was acting unreasonably in insisting upon it where there was an alternative remedy.

8. In considering the exercise of her discretion, the judge took the following factors into account:

(1) The company was solvent, financially sound and profitable. It followed that it was not in the interest of any of its members to wind up a solvent company.

(2) There are innocent shareholders (holding 35% of the issued capital) who would be adversely affected by a winding up order. Even if the shareholding of the new director (12%) were ignored, that would still leave 5 neutral members holding between them 23% of the shares.

(3) There was no prejudice to the petitioners by striking out the claim for winding up relief. Nor was there any substantive benefit to be gained from a winding up order which the petitioners would not receive from a buy-out order.

(4) The absence of an offer from the 1st respondent was immaterial since under section 168A, the court has power to order the purchase of shares at a fair value.

Having regard to all those matters, the judge came to the conclusion that there was no real prospect of the court making a winding up order in the particular circumstances of this case. At page 12 J-N of the judgment, the judge stated this:

"... it is clear in my view that there is only a real detriment to the Company and its neutral shareholders, and no proper benefit to the Petitioners, from the continued maintenance in the Amended Petition of a claim for a winding-up order. There is no reason why a successful and profitable company should be subject to a claim for a winding-up order when there is an available alternative remedy being sought by the Petitioners and when there is no real prospect that a winding-up order would be made at the hearing."

This appeal

9. Counsel for the petitioners based the appeal on a number of grounds, almost all of which appeared to relate to the judge's exercise of her discretion. There was no real challenge to the legal principles applied by the judge although at one point Ms Lai appeared to suggest that whether or not the petitioners are acting unreasonably in not pursuing any alternative remedy is a triable issue and cannot be determined summarily. If that be right, then a court would never be able to exercise its discretion to strike out a claim to winding up relief where alternative section 168A relief is also sought. That the court has jurisdiction to strike out such a claim is clear and Ms Lai eventually so conceded. In Re a company (No. 004415 of 1996) [1977] 1 BCLC 479, Sir Richard Scott V-C struck out the winding up relief which was expressed as an alternative to a buy-out order in a case where the petitioners had alleged unfairly prejudicial conduct such as rendered it just and equitable for the company to be wound up. In that case, the complaints made were that the companies had been run for the benefit of the family by means of paying unduly high directors' fees and declaring low dividends which combination constituted conduct of the companies' affairs which was unfairly prejudicial to the interest of the non-director shareholders.

10. I now turn to consider the points made by Ms Lai which, as noted above, related to the exercise of the judge's discretion.

The parties' wishes

11. Ms Lai submitted that in exercising her discretion, the judge failed to consider the wishes of the parties, i.e. whether the petitioners wished to sell their shares and whether the 1st respondent wished to buy the petitioners' shares.

12. But the 1st respondent had made his position clear by making the application to strike out the winding up prayer. Should the petitioners ultimately prevail in their claim, the appropriate relief would be a buy-out. So far as the petitioners' wishes are concerned, it is to be noted that the alternative relief sought was a buy-out order. Then at page 11 O-P of the judgment, the judge stated:

"There is no evidence that a winding-up order is the preferred remedy for any of the petitioners and no reasons given for any preference."

Given the nature of the application, it was incumbent upon the petitioners to file evidence to state why a winding up order is the preferred remedy and the reasons therefor. In the absence of any such evidence, the judge was perfectly entitled to conclude that they were not opposed to a buy-out order.

Inability to appoint provisional liquidators

13. It was submitted that a consequence of the striking out of the winding up relief is that from the date of the judge's order, the petitioners have not been in a position to apply for the appointment of provisional liquidators to look into the company's affairs which was prejudicial to the interests of the petitioners.

14. However, Ms Lai frankly acknowledged that at the hearing before the judge, when asked in what respects the petitioners might be prejudiced by the prayer for winding up relief being struck out, she never took that point on behalf of the petitioners. It has also to be borne in mind that when the matter came before the judge, the petition had already been in existence for some nine months. The alleged misconduct about which complaint is made in the petition had occurred by the time the petition was filed. Had these alleged improprieties and disputes been sufficiently urgent to warrant an application for the appointment of provisional liquidators, one would have expected the application to have followed hot on the heels of the filing of the petition. But no application was made during the several months that elapsed between the filing of the petition and the hearing of the striking out application. That being so, the petitioners cannot now be heard to complain that the judge had overlooked the fact that they would be prejudiced by not being able to appoint provisional liquidators. In my view, there is no merit in this submission.

No evidence of the 1st respondent's ability to pay

15. Ms Lai submitted that since the onus is upon the applicant (i.e. 1st respondent) to show that an alternative remedy was available, it was incumbent upon the 1st respondent to show that he had the ability to pay the petitioners in the event of a buy-out and because there was no evidence to that effect, the judge was wrong in making the order that she did.

16. The 1st respondent owns 45% of the total shareholding of the company. There was uncontradicted evidence that the company is a going concern, solvent and in a sound financial position. For the year ended 31 March 1999, the audited accounts show net assets of over $51 million with a net profit after tax of $20.9 million. The audited accounts for the year ended 31 March 2000 show net assets of over $69 million with a net profit after tax of $22 million. The petitioners together hold only 20% of the company. In the circumstances, any suggestion that the 1st respondent would not be able to fund a purchase of the petitioners' shares would appear to be lacking in merit.

Trademarks

17. Shortly after the filing of the petition, the company instituted a trademark action against, inter alia, the petitioners. Ms Lai submitted that the company's financial position as disclosed in the audited accounts would be adversely affected by the trademark dispute.

18. This submission was dealt with by the judge at page 10 H-J of the judgment:

"However the value of the trademarks had not been included in the companies audited accounts in any event, and there was no evidence as to how, and by how much, the company solvent position would be affected by the trademarks dispute."

I agree with those observations.

Conclusion

19. Where a party seeks to overturn the judge's exercise of a discretion, it has to be shown that the judge had seriously erred or has reached a manifestly unjust conclusion. As the points relied on by the petitioners are entirely devoid of merit, the question whether the high threshold required had been met does not even arise.

Hon Rogers VP:

20. I agree. This appeal was an attempt to reargue the points which had already been considered by the judge. In the circumstances it was unnecessary to call upon the respondents. Parties who are faced with such an appeal may well wish to avail themselves of the benefit of the provisions of Ord. 62 r. 9 and such an order for the immediate payment of costs.