LIU TIEH CHING BRANDON (also known as LAU TIT SHING) v. LIU JU CHING AND OTHERS

CACV 198/2021

[2022] HKCA 512

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 198 OF 2021

(ON APPEAL FROM HCCW NO 109 OF 2019)

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J U D G M E N T

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Kwan VP:

1.  I agree with the judgment of Chow JA.

Cheung JA:

2.  I agree with the judgment of Chow JA.

Chow JA:

3.  This is the Petitioner’s appeal against the decision (“the Decision”) of Harris J (“the Judge”) dated 31 March 2021, whereby the Judge struck out, inter alia:

(1)  §§136 to 138 and Prayer 5 of the Petition in respect of the Petitioner’s alternative claim for the winding up of the 6^th Respondent (“OAL”) by the Court pursuant to s 177(1)(f) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32; and

(2)  the Petitioner’s claims against the 3^rd and 4^th Respondents and the inclusion of the 3^rd Respondent in his claim for injunctive relief against the 1^st and 2^nd Respondents as pleaded in §139 and Prayer (4) of the Petition.

4.  In view of the COVID-19 situation in Hong Kong, this appeal is dealt with by way of written submissions only without an oral hearing. For this purpose, this Court has received and considered (i) the Skeleton Argument of the Petitioner/Appellant dated 1 March 2022, (ii) the 1^st to 5^th Respondents’ Skeleton Argument dated 15 March 2022, (iii) the Reply Submissions of the Petitioner/Appellant dated 22 March 2022, and (iv) R1-R5’s Submissions in Reply on P’s New Authorities dated 28 March 2022.

BASIC FACTS

5.  This action arises out of a shareholders’ dispute amongst members of the LIU family in respect of OAL, which was established by Liu Hao Tsing, deceased (“Liu Sr”) in Hong Kong in 1965. Liu Sr was a distinguished entrepreneur known in the oil and petroleum industry in Hong Kong as 香港石油大王 (Hong Kong oil tycoon), and co-founded the FEOSO (東方石油) Group with the late Fok Ying Tung in around 1973.

6.  OAL is an asset/investment holding company, holding shares in various subsidiaries and associated companies (together the “OAL Group”), and other publicly traded securities. OAL has ceased carrying on any business in its own right since no later than 2011. The OAL Group is, or has, engaged in the business of shipping investments and operations, industrial machinery trading, chemical and oil-based manufacturing and trading, and real estate.

7.  Liu Sr had 6 children, including:

(1)  the Petitioner, his eldest son (2^nd child);

(2)  the 4^th Respondent, his 2^nd daughter (3^rd child);

(3)  the 1^st Respondent, his 2^nd son (4^th child); and

(4)  the 2^nd Respondent, his 3^rd son (5^th child).

8.  The 3^rd Respondent (Ling Siu Kwong) is not a LIU family member, but an employee who had worked for Liu Sr/OAL for more than 50 years retiring not long before Liu Sr’s death in 2016.

9.  The 5^th Respondent (Liu Hao Tsing Education Foundation Limited) is an educational charitable company formed by Liu Sr in 1986.

10.  Until 21 November 2003, OAL’s entire 5,000 issued shares were held by Liu Sr. On 21 November 2003, Liu Sr transferred 1,500 shares in OAL to the 5^th Respondent, and continued to hold the balance (3,500) of the shares in OAL.

11.  On or about 2 February 2014, Liu Sr transferred his remaining 3,500 shares in OAL to the Petitioner and 1^st and 2^nd Respondents, and the shareholding of OAL became:

	Shareholder	No of shares	Percentage
1	5th Respondent	1,500	30%
2	Petitioner	1,400	28%
3	1st Respondent	1,050	21%
4	2nd Respondent	1,050	21%
		5,000	100%

12.  It is the 1^st to 5^th Respondents’ case that the transfer of 1,400 shares in OAL by Liu Sr to the Petitioner was subject to an agreement contained in or evidenced by a statement (“the Statement”) signed by Liu Sr on 16 December 2009 and by (inter alia) the Petitioner on 4 December 2013 that the Petitioner would not bring any legal actions against OAL, the 5^th Respondent or any of their subsidiaries or any of his siblings, and if the Petitioner should act in breach of this agreement, he would be required to “return” those shares to the 5^th Respondent.

13.  On 18 August 2016, Liu Sr passed away.

14.  On 11 April 2019, the Petitioner issued the Petition herein. Two main complaints are raised in the Petition:

(1)  The 1^st, 2^nd and 3^rd Respondents caused OAL or its subsidiaries to unjustifiably make substantial payments to (inter alia) themselves and the 4^th Respondent, including -

(a)  unauthorized and unjustified payments of interest of more than HK$58 million by Far East Oil Tanker SA (“FEOT”), a subsidiary of OAL, to the 1^st, 2^nd, 3^rd and 4^th Respondents on credit balances allegedly owed to them;

(b)  unauthorized and unjustified payments of interest of more than HK$4.8 million by OAL to various companies;

(c)  questionable payments of more than HK$21 million by FEOSO Energy (Hong Kong) Ltd (“FEHK”), an associated company of OAL, recorded as “Amount Due from Director”, that being a reference to the 1^st Respondent (“FEHK Temporary Payments”);

(d)  misappropriation or misapplication of dividends declared by FEHK and OAL (including amounts of more than HK$4.5 million payable to the Petitioner) to purportedly set off against the FEHK Temporary Payments, and failure to distribute dividends notwithstanding that OAL had generated very substantial profits from its businesses and investments;

(e)  misappropriation of OAL and FEOT’s funds of more than HK$335 million for the personal purposes of the 1^st, 2^nd, 3^rd and 4^th Respondents;

(f)  misappropriation of OAL’s funds of more than HK$5.4 million which was paid to or for the personal purposes of the 3^rd Respondent.

(2)  The Petitioner has been excluded from the management and financial affairs of the OAL Group since November 2014 by the 1^st, 2^nd and 3^rd Respondents, and denied or delayed access to documents and records of the OAL Group.

15.  In the Petition, the Petitioner seeks the following relief:

(1)  an order for the distribution in specie of the assets of the OAL Group to the shareholders of OAL in accordance with their respective interest in OAL;

(2)  alternatively, an order that the 1^st and 2^nd Respondents and each of them do sell their 1,050 shares in OAL to him;

(3)  further or alternatively, an order that the 1^st and 2^nd Respondents do purchase the Petitioner’s 1,400 shares and the 5^th Respondent’s 1,500 shares in OAL;

(4)  further or in the alternative, an injunction to restrain the 1^st, 2^nd and 3^rd Respondents from dealing with the assets of OAL/OAL Group other than in the ordinary course of its business in order to preserve the assets of OAL/OAL Group from further dissipation and misapplication;

(5)  alternatively to (1) to (4) above, an order that OAL be wound up by the Court.

16.  By 2 summonses issued on 29 May 2019 by (i) the 1^st to 4^th Respondents, and (ii) the 5^th Respondent, they applied to strike out the Petition or various parts of the Petition on, inter alia, the following grounds:

(1)  the Petition was in breach of the Statement, in consequence whereof the Petitioner’s shares in OAL were forfeited and thus he had no locus to present the Petition;

(2)  the Petition was advertised early and in breach of Rule 24 (“Rule 24”) of the Companies (Winding Up) Rules, Cap 32H, and the circumstances in which Rule 24 was breached constituted an abuse of process on the part of the Petitioner such that the Petition ought to be struck out;

(3)  the winding up relief was liable to be struck-out because the alternative relief of a buy-out was available;

(4)  the relief for distribution in specie of the assets of the OAL Group should be struck out because there was no real prospect of such relief being granted; and

(5)  the Petition against the 3^rd and 4^th Respondents should be struck-out as no relief was sought against them.

There were also some other grounds relied on by the 1^st to 5^th Respondents to strike out the Petition and/or various parts of the Petition which are not necessary to set out in this judgment.

THE DECISION

17.  The Judge heard the strike out applications on 28-29 May 2020. In the Decision, the Judge rejected the principal ground upon which the 1^st to 5^th Respondents applied to strike out the Petition based on the Petitioner’s breach of the Statement (§16(1) above) and the subsidiary ground based on the Petitioner’s breach of Rule 24 (§16(2) above), but upheld the applications to strike out (i) the winding up relief (§16(3) above), (ii) the relief for distribution in specie of the assets of the OAL Group (§16(4) above), and (iii) the Petition against the 3^rd and 4^th Respondents (§16(5) above).

18.  The Judge’s reasoning for striking out the winding up relief can be seen from §§36-38 of the Decision:

“[36] … The ground for including winding up as an alternative to the first four forms of relief sought is pleaded in [137] - [138] of the Petition which read:

‘137. OAL and OAL Group are solvent. In a winding up of OAL, there would be a substantial surplus for the shareholders:

138. [The Petitioner] has a genuine interest and basis in seeking this alternative winding-up relief in that:

138.1. the various unauthorised or unjustified payments from OAL Group and other wrongdoings of [the 1^st, 2^nd and 3^rd Respondents] should be properly and fully investigated by an independent liquidator;

138.2. it would put a stop to the misapplication of OAL Group’s funds by [the 1^st, 2^nd and 3^rd Respondents];

138.3. OAL is an asset/investment holding company and does not carry on business operations in its own right. A winding-up of OAL would not have any adverse impact on any ongoing business or operations of the companies within OAL Group or affect their value.’

[37] Winding up is commonly included as an alternative to a buy-out order. The justification is normally said to be the possibility that a respondent may not be able to pay the acquisition price or that it may become clear that valuation is not practical. That is not suggested in the Petition and the explanation pleaded in [138] is difficult to reconcile with the Petitioner’s preferred remedies.[1] It may be that reasons of the sort contained in [138] might have justified seeking primarily a winding up on the grounds that it was be far [sic] and away the most practical relief. However, that is not the way the Petitioner has put his case. My impression from the order in which the relief has been pleaded is that there has been a failure to think through in an informed way what would be the most realistic relief to seek. This is unfortunately far too common a problem.

[38] As the Company is solvent and carrying on an active business and no reason is given for thinking that the 2^nd or 3^rd preferred forms of relief (orders for [the 1^st and 2^nd Respondents] to sell their shares to [the Petitioner] and vice versa) might prove impractical, in my view there is no basis set out in the Petition for concluding that the Company should be wound up and it is obvious that such relief will not be granted on the basis of the facts and matters pleaded in the Petition - largely because they do not suggest any reason why the 2^nd or 3^rd preferred forms of relief would not be ordered if Brandon is successful on liability.”

19.  In respect of the striking out of the Petition against the 3^rd and 4^th Respondents, the Judge’s reasoning appears at §§44-45 of the Decision:

“[44] Finally, the Respondents challenge the inclusion of Siu Kwong (3^rd Respondent) and Shen Po (4^th Respondent). They do so on the basis that no relief is sought against Shen Po and that the injunction sought against Siu Kwong is misconceived as the injunction that is sought, which is pleaded in [139], is in the following terms:

‘If and insofar as it is necessary to preserve the assets of OAL Group from further dissipation and misapplication by [the 1^st, 2^nd and 3^rd Respondents], [the Petitioner] will seek an injunction against [the 1^st, 2^nd and 3^rd Respondents] to restrain them from dealing with the assets of OAL and OAL Group other than in the ordinary course of business.’

It is, submit the Respondents, clear that any injunction to preserve the Company’s assets would be made against the Company and there is no reason to join [the 3^rd Respondent] simply because he is allegedly a de facto director, [the 3^rd Respondent] having ceased to be a de iure director at the end of 2015. I cannot see any sensible reason for thinking that if after trial the court were to conclude that it was necessary to grant an injunction to prevent the Company makes payments to the individual Respondents it will be necessary to grant an injunction against [the 3^rd Respondent]. Certainly no facts or matters that suggest why it is necessary have been pleaded in the Petition and the inclusion on this basis smacks of maliciousness or at least consciously aiming to cause trouble for tactical reasons.

[45] The other ground advanced by [the Petitioner] for joining [the 3^rd and 4^th Respondents] is that as it is alleged that they have been recipients of what [the Petitioner] says are improper payments they are necessary parties because if the court directs a valuation of the Company’s shares it will be necessary to take an account of the payments of which [the Petitioner] complains some of which were to [the 3^rd and 4^th Respondents]. That maybe, although I note that the Petition fails to plead the basis upon which a valuation should take place, for example, the date of valuation or whether a discount should be given to reflect a minority interest, which as I have repeatedly told lawyers acting for petitioners seeking such relief needs to be thought through before issuing a petition and set out clearly in it. The 6^th Prayer is a catch all referring to ‘Such further or other orders, accounts, directions and other relief as may be necessary’. However, the Petition clearly does not seek any relief relating to valuation of shares or taking of an account against either [the 3^rd or 4^th Respondents] and neither does it contain an allegation, which suggests they are necessary parties for the purposes of such exercises. To the extent that at some time in the future it may be necessary for an account to be taken of how much they have received from the Company no reason is set out in the Petition for thinking that such information will not be available, as one would expect, from the Company’s books and records and self-evidently there is no derivative claim against either of them for return of any money. In my view they are not proper parties and the Petition against them should be struck-out.”

THE APPEAL

20.  By a Notice of Appeal dated 28 April 2021, the Petitioner appeals the decision of the Judge to strike out (i) the winding up relief, and (ii) the Petition against the 3^rd and 4^th Respondents. There is no appeal against the Judge’s decision to strike out the relief for distribution in specie of the assets of the OAL Group.

21.  By a Respondent’s Notice for the 1^st to 4^th Respondents and a Respondent’s Notice of the 5^th Respondent both dated 18 May 2021, the 1^st to 4^th Respondents and the 5^th Respondent contend that the Judge’s aforesaid decision should be affirmed on various additional grounds which will be considered below.

DISCUSSION

(i) The striking out of the winding up relief

22.  The applicable principles for striking out an alternative relief for the winding up of a company are well settled.

23.  Section 180(1A) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance states as follows:

“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.”

24.  To justify the striking out of the winding up relief, an applicant is required to show that it is plain and obvious that the petition for winding up would fail on the ground that there is an alternative remedy available to the petitioner and the petitioner is acting unreasonably in seeking to have the company wound up instead of pursuing the alternative remedy (see Wong Tin Chee v Wong To Yick [2001] 2 HKLRD 685, at 687E-688D per Yuen J (as she then was); Re Wong To Yick Wood Lock Ointment Ltd [2003] 1 HKC 484, at 7-8 per Le Pichon JA; Re Four Twenty Company Limited, HCCW 278/2004 (6 January 2005), at §5(3) per Kwan J (as she then was)). For this purpose, 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, save that the court is not bound to accept allegations which are plainly unsustainable or of no substance, or can demonstrably be shown to be false or incorrect.

25.  Generally speaking, where the winding up relief is sought, particularly in cases where it is put forward as an alternative to some other remedy, the petitioner ought to explain why it is the relief that he prefers or why it is, or may be, the only relief to which he is entitled (see Wong Tin Chee, ante, at 687G-I; Re Sun Light Elastic Ltd [2013] 5 HKLRD 1, at §§9-10 per Harris J). Such explanation should be given in the Petition, or in an affidavit.

26.  In respect of the striking out of the winding up relief, the Petitioner contends as follows in the Notice of Appeal:

“[1] The Judge erred, at Decision §§35-38, in holding that the winding up relief in the Petition should be struck out because of the availability of the other relief.

…

[3] In the hearing before the Judge, the Petitioner contended, inter alia, that:-

[3.1] Where the company has claims of substantial amounts which might materially affect the value of the company on a valuation, the procedure in winding up (whereby such claims would be determined) is preferable to an estimate of their worth by an accountant in the scenario of buy-out: Re Copeland & Craddock Ltd [1977] BCC 294, 298E-G. In the instant case, given that the Petitioner has been denied full access of the documents of OAL Group, the full extent of the wrongdoings of [the 1^st, 2^nd and 3^rd Respondents] (apart from those raised in the Petition) would have to be properly and fully investigated upon the winding up of OAL. Accordingly, it is reasonable for the Petitioner to pursue the winding up relief in the Petition.

[3.2] As it is not contended that it is unreasonable for the Petitioner to obtain an order that [the 1^st and 2^nd Respondents] be ordered to sell their OAL shares to [the Petitioner], it is not unreasonable for [the Petitioner] to ask in the alternative that OAL be wound up: Re Copeland, 299H-300B.

[3.3] The Petitioner has pleaded that [the 1^st and 2^nd Respondents] do not have the requisite financial resources to buy out his shares (Petition §134.4). [The 1^st and 2^nd Respondents] have adduced no evidence as to their financial means. An order requiring [the 1^st and 2^nd Respondents] to buy out the Petitioner’s shares is therefore not viable on the evidence before this Court.

[4] In holding (at Decision §38) that ‘no reason is given for thinking that the 2^nd or 3^rd preferred forms of relief (order for [the 1^st Respondent] and [the 2^nd Respondent] to sell their shares to [the Petitioner] or vice versa) might prove impractical’, the Judge failed to deal with the Petitioner’s submissions (summarized in §3 above) whether adequately or at all. The failure is particularly remarkable when the Judge accepted … at Decision §37 that ‘the possibility that a respondent may not be able to pay the acquisition price or that it may become clear that that valuation is not practical’ are justifications to seek winding up as an alternative to buy out order. These are matters squarely argued by the Petitioner before the Judge and he has not addressed or rejected them all but simply proceeded in the judgment as if no such contention had been made to him.

[5] The Judge ought to have accepted the Petitioner’s submissions in §3 above.

[6] Insofar as it is suggested (at Decision §38) that the Petitioner has not adequately pleaded his case in the Petition:-

[6.1] At Petition §134.4, the Petitioner has pleaded that [the 1^st and 2^nd Respondents] do not have the requisite financial resources to buy out his shares. At Petitioner §138.1, the Petitioner has pleaded that the wrongdoings of [the 1^st, 2^nd and 3^rd Respondents] should be properly and fully investigated by an independent liquidator.

[6.2] Further, at Decision §37, the Judge did not find the reasons pleaded in Petition §137 were not sufficient to justify seeking a winding up relief. In fact he found that ‘reasons of the sort contained in [Petition §138] might have justified seeking primarily a winding up on the grounds that it would be far and away the most practical relief’.

[6.3] In any event, if the Petitioner’s submissions (summarized in §3 above) are valid reasons to justify the seeking of the winding-up relief, even if the Petitioner’s case has not been adequately or explicitly pleaded, the proper remedy is to order the Petitioner to amend the Petition as striking-out is a remedy of last resort.”

27.  In the Decision, at §37, the Judge stated that the justification normally given for including the winding up relief as an alternative to a buy-out order is that a respondent may not be able to pay the acquisition price or that it may become clear that valuation is not practical. He seemed to have thought that such justification was not put forward by the Petitioner (“That is not suggested in the Petition”), and held that it was obvious that the winding up relief would not be granted on the basis of the facts and matters pleaded in the Petition:

“As the Company is solvent and carrying on an active business and no reason is given for thinking that the 2^nd or 3^rd preferred forms of relief (orders for [the 1^st and 2^nd Respondents] to sell their shares to [the Petitioner] and vice versa) might prove impractical, in my view there is no basis set out in the Petition for concluding that the Company should be wound up and it is obvious that such relief will not be granted on the basis of the facts and matters pleaded in the Petition - largely because they do not suggest any reason why the 2^nd or 3^rd preferred forms of relief would not be ordered if Brandon is successful on liability.” (§38 of the Decision)

28.  In saying that the Petitioner did not put forward the justification that the 1^st and 2^nd Respondents might not be able to pay the acquisition price or valuation was not practical, and gave no reason for thinking that the preferred forms of relief (ie a buy-out order) might prove impractical or would not be ordered if the Petitioner was successful on liability, the Judge appeared to have overlooked the fact that in the Petition, it was expressly pleaded that:

(1)  the 1^st and 2^nd Respondents do not have the requisite financial resources to purchase the Petitioner’s shares in OAL (§134.4 of the Petition);

(2)  the Petitioner has a genuine interest and basis in seeking the alternative winding-up relief because, amongst other matters, (a) the various unauthorized or unjustified payments from the OAL Group and other wrongdoings of the 1^st, 2^nd and 3^rd Respondents should be properly and fully investigated by an independent liquidator; and (b) OAL is an asset holding company and does not carry on business operations in its own right, and thus a winding-up order would not have any adverse impact on any ongoing business or operations of the companies within the OAL Group or affect their value (§138.1 and 138.3 of the Petition).

29.  In respect of the first matter, the 1^st to 5^th Respondents have not filed any evidence to counter the allegation that they do not have the requisite financial resources to purchase the Petitioner’s shares in OAL. On behalf of the 1^st to 5^th Respondents, Mr Victor Joffe submits that, on the Petitioner’s case, as at December 2018, OAL’s net current assets were HK$235.8 million and its cash was HK$244.2 million, and OAL held available-for-sale financial assets of HK$428.6 million[2], and “[g]iven the value of the assets involved in the OAL Group, [the 1^st and 2^nd Respondents] can raise finance to buy out [the Petitioner]”[3]. In support of this argument, Mr Joffe relies upon the judgment of Le Pichon JA in Re Wong To Yick, ante, at §§15-16, and the judgment of Harris J in Re Chun Yip Plastics Ltd, HCCW 463-470/2012 (26 March 2015), at §§59-60. It should be noted, however, that:

(1)  In the former case, at first instance: (a) it was accepted by counsel for the petitioners that on their case as disclosed in the petition, there was no ground or basis which would entitle them to a winding-up order only, but not an order under s 168A, and (b) it was found by the judge that there was no substantive benefit that the petitioners would gain from a winding-up order which they would not get from a buy-out order, there was no evidence that a winding-up order was the preferred remedy for the petitioners, and there were no reasons given for any preference ([2001] 2 HKLRD 683, 689B-E). In the Court of Appeal, the petitioners sought to argue that the onus was upon the 1^st respondent to show that he had the ability to pay the petitioners in the event of a buy-out and there was no evidence to that effect. It was in relation to this argument that Le Pichon JA referred to the uncontradicted evidence regarding the financial strength, profitability and net assets of the company, and expressed the view that, given the 1^st respondent owned 45% of the company and the petitioners only 20%, any suggestion that the 1^st respondent would not be able to fund a purchase of the petitioners’ shares would appear to be lacking in merit ([2003] 1 HKC 484, at §16).

(2)  In respect of the latter case, the respondents asserted that they had the means to pay, but provided no evidence of how they anticipated raising finance to pay the petitioner in the event of a buy-out. As pointed out by Harris J at §52(2) of his judgment, such an unsubstantiated assertion in response to a party calling into question the ability to pay should be treated with caution.

30.  Whether a respondent (shareholder) to a petition for the winding up of a company can rely upon his shares in the subject company to show that he has sufficient financial resources to satisfy a potential buy-out order depends on the facts of the case. If a respondent wishes to rely on such argument, it is incumbent on him to lay a proper evidential foundation, because the value of a block of shares in a private company (particularly a minority shareholding) may not be reflected by the net-asset value of the company, it is not necessarily self-evident that his shares in the company can be utilised to raise funds (eg the shares may have been pledged to a third party or may be subject to some other incumbrances), and shares in a private company may not be readily realizable, or accepted as security for raising funds. It does not seem to me that the 1^st and 2^nd Respondents have laid a sufficient factual foundation for the argument that their 42% of OAL could be utilized to fund the purchase of the Petitioner’s shares.

31.  It is, however, unnecessary to reach a final view on this issue because it would appear from the way in which the Petition is framed that the Petitioner’s preferred form of buy-out is that the 1^st and 2^nd Respondents be ordered to sell their shares to him, instead of him selling his shares to the 1^st and 2^nd Respondents[4]. Thus, it may be argued that even if (as alleged by the Petitioner) the 1^st and 2^nd Respondents do not have the requisite financial resources to purchase the Petitioner’s shares in OAL, that would not be an impediment to his buying out the shares of the 1^st and 2^nd Respondents. However, regardless of the form of the buy-out (whether by the Petitioner of the 1^st and 2^nd Respondents’ shares, or vice versa), there is still the question of whether or not valuation of the shares is practical, having regard to the substantial allegations of misappropriation or misapplication of funds belonging to the OAL Group by the 1^st to 3^rd Respondents.

32.  Mr Joffe argues that the allegations of misconduct (if established) can be taken into account in the process of valuation of the shares, and thus valuation of the shares by an accountant would not be rendered impractical in the event of a buy-out order being made by the court[5]. In support of this argument, he relies upon the judgment of Barma J (as he then was) in Re M Kirpalani (HK) Ltd, HCCW 618/2009 (23 June 2010), and the judgment of Harris J in Re Chun Yip Plastics Ltd, ante. Whether the concern about the impracticality of valuation by an accountant can be sufficiently addressed in this manner depends on the facts and circumstances of the case. Where the number of items involved are small or they involve only fairly small amounts, it may not be justifiable to make a winding-up order, and such items may more appropriately be resolved at the trial and taken into account in the valuation exercise by the accountant (see Re M Kirpalani (HK) Ltd, at §§29-30; Re Chun Yip Plastics Ltd, at §§57-58). On the other hand, where substantial claims of impropriety are raised, it may be more straightforward to wind up the company and leave the matters to be thoroughly investigated by the liquidators. The following observations by Dillon LJ in Re Copeland & Craddock Ltd [1997] BCC 294, at 298, are apposite:

“If there were a winding-up order a liquidator would be able to investigate these matters in the course of the winding up of the company. In the Abbey Leisure case one of the factors which led this court to differ from the judge at first instance’s view that the petition should be struck out was, as put by Balcombe LJ ([1990] BCC 60) at p. 68C of his judgment, that the procedure

‘in … winding up … for the proper determination of … claims [by and against the company] … must be preferable to an estimate of their worth by an accountant.’

In that case there were outstanding claims each way of substantial amount which might have materially affected the value of the shares of the company on a valuation. Conversely it is pointed out by Mr Snowden, for the opposing shareholders, that in a case of Re a Company No. 003843 of 1986 (1987) 3 BCC 624, which was of course decided before the Abbey Leisure case, Millett J seems to have thought that any minor matters of claims of impropriety by the directors could be taken into account by a valuer in valuing shares in the company.”

33.  In the present case, there are many items of alleged misappropriation or misapplication of funds, and they involve very substantial amounts which would have a material bearing upon the value of the shares of OAL. Depending on the evidence which may be adduced and the course that the trial may take, it is not inconceivable that after trial, the Judge may come to the conclusion that relief ought to be granted to the Petitioner but valuation of the disputed items by an accountant would not be practical, and it would be more appropriate and straightforward to make an order for the winding up of OAL.

34.  The fact that OAL is a solvent and profitable company and there would be a substantial surplus for its shareholders is a relevant consideration to the question of whether a winding up order should be made, but is by no means conclusive on this question. In this regard, it is also relevant that OAL is an asset/investment holding company and does not carry on any active business of its own.

35.  In all the circumstances, I do not consider that it is plain and obvious that the petition for winding up would fail on the ground that there is an alternative remedy available to the Petitioner, or that the Petitioner is acting unreasonably in seeking to have OAL wound up instead of pursuing the alternative, buy-out remedy. Having reached this conclusion, it is not necessary to consider the Petitioner’s further arguments that:

(1)  there is a need to properly investigate other wrongdoings of the 1^st to 3^rd Respondents by an independent liquidator when the complaints raised in the Petition may not represent the full extent of their wrongdoings, given that the Petitioner has been excluded from the management and denied full access of documents of the OAL Group[6]; and

(2)  since it has not been contended that it is unreasonable for the Petitioner to seek an order that 1^st and 2^nd Respondents be required to sell their shares in OAL to the Petitioner, it would also not be unreasonable for the Petitioner to ask in the alternative that OAL be wound up so that he can bid for the shares in open market[7].

(ii) The striking out of the petition against the 3rd and 4th Respondents

36.  The Petitioner’s appeal against the Judge’s decision to strike out the Petition against 3^rd and 4^th Respondents can be dealt with more briefly. The Petitioner joined the 3^rd and 4^th Respondents as parties to the Petition for essentially 3 reasons: (i) the Petitioner was seeking an injunction against the 3^rd Respondent to restrain him from improperly dealing with OAL’s asset on the basis that he continued to be a de facto director of OAL after he ceased to be a de jure director from 1 January 2016 (see §§26.1 and 139 of the Petition), (ii) the 3^rd and 4^th Respondents were recipients of improper payments by OAL/OAL Group and were necessary parties, because if the court should eventually direct a valuation of OAL’s shares it would be necessary to take account of the improper payments to them, and (iii) it was important that the 3^rd and 4^th Respondents be joined as parties so that they would be bound by the judgment in the Petition.

37.  The Judge considered that if after trial the court were to conclude that it was necessary to grant an injunction to prevent OAL from making payments to the individual respondents, he could see no sensible reason why the court would find it necessary to grant an injunction against the 3^rd Respondent. The Judge also observed that (i) no facts or matters had been pleaded in the Petition to suggest why it was necessary to include the 3^rd Respondent in the injunction sought by the Petitioner, and (ii) the Petition did not seek any relief relating to valuation of shares or taking of account against either the 3^rd or 4^th Respondents, and neither did it contain any allegation that they were necessary parties for the purpose of such exercise. The Judge considered that, to the extent that at some time in the future it might become necessary for an account to be taken of how much they had received from OAL, there was no reason given in the Petition for thinking that such information would not be available from OAL’s books and records. The Judge therefore concluded that the 3^rd and 4^th Respondents were not proper parties and the Petition against them should be struck out.

38.  In the Notice of Appeal, the Petitioner contends that the Judge erred in striking out the Petition against the 3^rd and 4^th Respondents for the following reasons:

“[8] As a matter of principle, the Court has the discretion to join parties as respondents even if no final relief is sought against them, if it is important that they be bound by the outcome of the issues raised in the Petition: Caldero Trading Limited v Beppler & Jacobson Limited & Ors [2012] EWHC 1609 (Ch) §§29-42.

[9] Applying such principle, it is appropriate that the 3^rd and 4^th Respondents be joined to the Petition:-

[9.1] Substantial allegations are made against both the 3^rd and 4^th Respondent[s] in the Petition, including that the 3^rd Respondent was in breach of his fiduciary duties and that the 3^rd and 4^th Respondent[s] received substantial assets misappropriated from OAL Group.

[9.2] It is important for the 3^rd and 4^th Respondents be bound by the outcome of the Petition, such that in the event that the Petitioner obtains an order of buying out the 1^st and 2^nd Respondents’ shares or an order of being bought out, the OAL Group will be able to obtain repayment or compensation from the 3^rd and 4^th Respondents subsequently without the need to having the issues be tried twice. Time and costs could be saved, and risk of inconsistent judgments could be avoided.”

39.  As a matter of principle, a person may be a proper or necessary party to a petition even where he is not a shareholder of the company, or no relief is sought against him in the proceedings: see Little Olympian Each Ways Ltd (No 1) [1994] BCC 947, at 945H-955B per Lindsay J:

“… in an appropriate case relief can be sought against a non-member other than the company itself, or against a person not involved in the acts complained of (at least if that person would be affected by the relief sought) and that a person against whom no relief is in terms sought cannot necessarily escape being a respondent, whilst, on other facts, it can be right to strike out a petition, even as against those whose acts are complained of, so long as no relief is sought against such a person.

This summary suggests to me that in point of jurisdiction the wide language of s. 459 and s. 461 is not to be cut down. Nonetheless, cases may arise where, notwithstanding that the claim cannot be clearly said to be outside the wide jurisdiction, the likelihood of the court’s discretion being exercised so as to lead to relief against, or relief having any material impact effect upon, a given respondent can be seen to be so remote that the case can fairly be described as ‘perfectly hopeless’, to use Hoffmann J’s phrase, and hence that it would be abusive to require that respondent to remain as such or to be added as such.”

40.  In the present case, serious allegations have been raised in the Petition that (i) the 3^rd Respondent acted in breach of his fiduciary duties in procuring substantial payments from OAL/OAL Group for his personal benefit, and (ii) both the 3^rd and 4^th Respondents received substantial funds misappropriated from OAL/OAL Group. In the event that the court should ultimately make an order that the 1^st and 2^nd Respondents be required to sell their shares in OAL to the Petitioner, the valuation of the shares ought, in principle, to take into account the amounts improperly paid to or for the benefit of the 3^rd and 4^th Respondents by OAL/OAL Group. Obviously, in such scenario, OAL, after it comes under the control of the Petitioner, would seek to recover the improper payments from the 3^rd and 4^th Respondents. In order that the 3^rd and 4^th Respondents be bound by the court’s findings and to avoid the risk of inconsistent judgments, it is important that they be joined as parties to the present proceedings. It also seems to me clear that this is a case where the relief sought by the Petitioner may have a material impact on the 3^rd and 4^th Respondents.

41.  Mr Joffe argues that the Judge was right to strike out the Petition against the 3^rd and 4^th Respondents because:

(1)  The 4^th Respondent is not a shareholder of OAL. No relief of any sort is sought against her in the Petition. There is no reason why she has to be bound by the judgment.

(2)  The 3^rd Respondent has never been a shareholder of OAL. The only relief sought against him is an injunction, but that is plainly misconceived because the injunction (if granted) would be against OAL restraining it from dealing with its assets. It would not be granted against the 3^rd Respondent (who, according to the Petitioner, ceased to be a de jure director of OAL on 1 January 2016). There is no reason why the 3^rd Respondent has to be bound by the judgment.

(3)  To include the 3^rd and 4^th Respondents as parties to the Petition is an ill-conceived attempt on the part of the Petitioner to cause maximum trouble and disruption.[8]

42.  I have already explained why I consider it important that the 3^rd and 4^th Respondents be bound by the judgment in the Petition.

43.  In so far as injunctive relief is concerned, if the 3^rd Respondent has continued to act as a de facto director of OAL as alleged in the Petition (which, for the present purpose, is assumed to be true), I see no reason why an injunction can only be granted against OAL to restrain it from improperly dealing with its assets, but not against the wrongdoers, including the 3^rd Respondent. In any event, even if the claim for an injunction against the 3^rd Respondent cannot be justified, that does not affect the validity of the other reason for joining the 3^rd and 4^th Respondents as parties (namely, so that they would be bound by the judgment).

44.  In all, I do not consider the joinder of the 3^rd and 4^th Respondents to the Petition to be so plainly and obviously abusive, improper or without basis that the Petition against them ought to be struck out.

(iii)  Rule 24 of the Companies (Winding-up) Rules

45.  Rule 24 states as follows:

“Advertisement of petition

Every petition shall be advertised 7 clear days or such longer time as the court may direct before the hearing, as follows – (See Form 4)

(a) in the case of a company whose registered office or if there shall be no such office, then whose principal or last known principal place of business is or was situate within Hong Kong once in the Gazette, and once at least in 2 Hong Kong daily newspapers, or in such other newspaper as the court directs;

(b) in the case of any other company, once in the Gazette, and twice at least in one local newspaper circulating in the district where the local register is kept, or the principal or last known principal place of business, as the case may be, of such company is or was situate, or in such other newspaper as shall be directed by the court;

(c) the advertisement shall state the day on which the petition was presented, and the name and address of the petitioner, and of his solicitor and shall contain a note at the foot thereof, stating that any person who intends to appear on the hearing of the petition, either to oppose or support, must send notice of his intention to the petitioner, or to his solicitor within the time and in the manner prescribed by rule 30, and an advertisement of a petition for the winding up of a company by the court which does not contain such a note shall be deemed irregular.

And if the petitioner or his solicitor does not within the time hereby prescribed or within such extended time as the Registrar may allow duly advertise the petition in the manner prescribed by this rule the appointment of the time and place at which the petition is to be heard shall be cancelled by the Registrar and the petition shall be removed from the file unless a judge or the Registrar shall otherwise direct.”

46.  The statutory Form 4 referred to in Rule 24 envisages that the date of presentation of the petition and also the date of hearing of the petition would be given in the advertisement.

47.  In the present case, the Petition was presented on 11 April 2019, served on the Respondents on 16-17 April 2019, advertised on 18 April 2019 (Thursday), and listed for hearing on 12 June 2019 (Wednesday).

48.  Mr Joffe argues that the Petition was advertised prematurely in breach of Rule 24, which, upon its true construction, requires a winding-up petition to be advertised exactly 7 clear days before the hearing of the petition unless time is extended by the court. Pausing here, if this construction of Rule 24 is correct, it means that the Petition in this case must be advertised on precisely 3 June 2019 (excluding the date of advertisement and date of hearing as well as the intervening Sunday). Mr Joffe further argues that the premature advertisement in this case constituted an abuse of the process of the court because it (i) made it impossible for the Respondents to make any application to restrain advertisement of the Petition, and (ii) deprived the court of any opportunity to consider whether advertisement should be dispensed with.[9]

49.  Mr Joffe’s construction of Rule 24 is incorrect, as well as being impracticable or unworkable in light of the current practice in Hong Kong regarding advertisement in the Gazette and hearing of a petition.

50.  The true construction of Rule 24 should have regard to the purpose of advertisement, which is “for … informing the creditors and contributories of the company that one of their number has invoked the class remedy of winding up the company. Upon seeing the advertisement, creditors and contributories may appear at the hearing of the petition to support or oppose it. They could choose to support or oppose not the petitioner, but the petition” (Re Hon Seng Engineering Ltd [2001] 3 HKLRD 63, at §15 per Yuen J, as she then was). This purpose of giving notice of a petition by advertisement is served by construing Rule 24 (“7 clear days or such longer time as the court may direct before the hearing”) to mean that there must at least be a period of 7 days between the date of advertisement and the date of hearing. The words “or such longer time as the court may direct” permits a respondent to a winding up petition, who, for whatever reason, considers that there should be a longer period of time between the date of advertisement and the date of hearing, to apply to the court for an order to that effect.

51.  The above construction that Rule 24 imposes a minimum period of time between the date of advertisement and the date of hearing of a petition is reinforced by Order 3 r 2(4) of the Rules of the High Court, Cap 4A, which states: “Where the act is required to be done a specified number of clear days before or after a specified date, at least that number of days must intervene between the day on which the act is done and that date” [emphasis added].[10]

52.  Mr Joffe’s suggested construction that Rule 24 prohibits a petitioner from giving a more generous notice of the petition, and thus more time to the creditors and contributories to prepare for the hearing of the petition, is contrary to the aforesaid purpose of advertisement. The suggestion that Rule 24 requires a petition to be advertised exactly 7 clear days before the hearing is also impracticable or unworkable in light of the practice in Hong Kong regarding advertisement in the Gazette and hearing of a petition. As pointed out by the Judge, the Gazette is normally published on a Friday[11] while the first hearing of a winding up petition is normally fixed before a Master on a Wednesday. It is thus impossible in practice for Rule 24 to be complied with if it strictly requires an exact period of 7 clear days between the date of advertisement and the date of hearing. Mr Joffe’s construction of Rule 24 is also at odds with sub-paragraph (b) thereof, which, where applicable, requires a petition to be advertised once in the Gazette and “twice at least in one local newspaper”. It would not make sense to read that sub-paragraph to mean that a petitioner is required to place the same advertisement twice in one local newspaper on the same day.

53.  Mr Joffe argues that the purpose of Rule 24 referred to by Yuen J in Re Hon Seng Engineering Ltd is not the sole purpose of that rule, and that another purpose of the rule is to “avoid oppression: to enable an application to be made in the case of a creditor’s petition on the basis of disputed debt, in the case of a contributory’s petition, on the basis of damage to the company, either to restrain advertisement or for an order dispensing with advertisement until trial”. In support of this argument, he relies on a number of English authorities (Re Signland Ltd [1982] 2 All ER 609; Secretary of State for Trade and Industry v North West Holdings plc [1998] BCC 977; and Re Doreen Boards Ltd [1996] 1 BCLC 501), and submits that “premature advertisement” of a petition can give rise to abuse of process.[12] While it may be accepted there could be more than one purpose of Rule 24, it is important to appreciate that the discussion about “premature advertisement” in the aforesaid English cases was in the context of very different statutory rules concerning the time/period of advertisement.

(1)  Re Signland Ltd concerns r 28 of the Companies (Winding-up) Rules 1949 (SI 1949/330 as amended), which provides that, unless the court otherwise directs, every petition shall be advertised once in the London Gazette not less than seven clear days after it has been served on the company and not less than seven clear days before the day fixed for the hearing.

(2)  North West Holdings plc concerns r 4.11 of the Insolvency Rules 1986 (SI 1986/1925), which provides that the advertisement, to be in the Gazette, must be made to appear (a) if the petitioner is the company itself, not less than 7 business days before the day appointed for the hearing, and (b) otherwise, not less than 7 business days after service of the petition on the company, nor less than 7 business days before the day so appointed.

(3)  Re Doreen Boards Ltd concerns r 4.23(1) of Insolvency Rules 1986 (SI 1986/1925), which provides that, in the case of contributories’ petitions, “On the return day, or at any time after it, the court shall give such directions as it thinks appropriate with respect of … (c) whether, and if so by what means, the petition is to be advertised”. That rule was construed by Laddie J to mean that the petitioner must not advertise before the return date (504l-505b).

54.  Ultimately, the question of whether there was a breach of Rule 24 in the present case depends on the true construction of that rule. For the reasons mentioned above, I consider that the Judge is correct in his view that Rule 24 only requires a petition to be advertised at least 7 clear days, but not exactly 7 clear days, before the hearing.

55.  Even if I am wrong in the above construction of Rule 24, I am far from being satisfied that the “premature advertisement” of the Petition should be regarded as an abuse of process on the part of Petitioner, taking into account the fact that, as confirmed by the Masters, the practice in Hong Kong is that petitions are invariably advertised more than 7 days before the hearing (see §23 of the Decision), and the ambiguity of the rule itself. I would treat the breach of Rule 24 (if any) in the present case as an irregularity which ought to be waived. There is no sufficient ground to interfere with the Judge’s exercise of discretion in this regard (see §24 of the Decision).

DISPOSTION

56.  For the foregoing reasons, I would allow the Petitioner’s appeal and set aside paragraphs 2, 3 and 5 of the Judge’s order dated 31 March 2021, with costs of the appeal to the Petitioner, to be taxed if not agreed, with certificate for 2 counsel. In so far as the costs below are concerned, the Petitioner has, in consequence of this judgment, been largely successful in resisting the strike out applications save in relation to the claim for distribution in specie of OAL Group’s assets[13]. I would make an order that the 1^st to 5^th Respondents shall pay 80% of the Petitioner’s costs below, to be taxed if not agreed, with certificate for 2 counsel. The above orders as to costs are orders nisi, which shall become absolute unless there is an application to vary them within 14 days from the date of this judgment.

Kwan VP:

57.  The Petitioner’s appeal is allowed, and an order is made as mentioned in §56 above.