PINE ENTERPRISES LTD v. LECTURE KIT CO LTD AND ANOTHER

HCCW 593/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING UP PROCEEDINGS NO. 593 OF 2005

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REASONS FOR DECISION

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Introduction

1.  This is the Petitioner’s application for the discharge of Mr Kennic Lui and Mrs Lauren Lau from their appointment as provisional liquidators of the 2^nd Respondent (“Provisional Liquidators”). 

2.  On 13 May 2003, the 1^st Respondent acquired from the Petitioner 510,002 shares in the 2^nd Respondent representing 51% of its issued share capital with the Petitioner retaining the remaining 49% interest.  The sole asset of the 2^nd Respondent is a piece of land in Yanjiao (“Yanjiao Property”) in the People’s Republic of China (“the PRC”) held by its wholly-owned subsidiary, Union Resources Educational Development (Yanjiao) Company Limited (“UREDY”).  As a result of a shareholders dispute, the Petitioner petitioned for the winding up of the 2^nd Respondent on just and equitable ground under HCCW 593/2005 on 1 August 2005 (“Petition”).  The Provisional Liquidators were appointed pursuant to the order of Reyes J dated 25 April 2006.  On 7 June 2006, the Petitioner commenced action under High Court Action No 1221 of 2006 (“HCA 1221/2006”) against the 1^st Respondent and its associated companies for breaches of various agreements.  On 25 September 2007, I adjourned the Petition pending the outcome of the trial of HCA 1221/2006.  On 14 March 2008, I entered judgment in favour of the Petitioner, which eventually led to the repurchase by the Petitioner of the 510,002 shares it had previously sold to the 1^st Respondent under an order for sale dated 1 September 2008 under HCMP 705/2008.  Hence, since 16 September 2008, the Petitioner became the sole beneficial owner of all the issued share capital in the 2^nd Respondent.  The 1^st Respondent appealed against my judgment and applied for stay of execution of the various orders I had made pursuant to that judgment pending the outcome of the appeal.  I refused the application for stay of execution upon the Petitioner’s undertaking not to deal with the Yanjiao Property without leave of the Court.  On 20 October 2008, the Petitioner applied for the Provisional Liquidators to be discharged pursuant to section 196 of the Companies Ordinance.

3.  The Petitioner’s ground for the application is that now that the Petitioner has acquired all the shares in the 2^nd Respondent and become its sole beneficial owner, the need for the Provisional Liquidators to protect the assets of the 2^nd Respondent ceased to exist.  The only outstanding matter between the 2^nd Respondent and the Provisional Liquidators is the Provisional Liquidators’ costs of between $14 and $16 million.  The Petitioner intends to cause UREDY to sell the Yanjiao Property as soon as possible to pay the Provisional Liquidators.  It also offered an undertaking to the Provisional Liquidators not to remove or otherwise dispose of any proceeds realized from the sale of the Yanjiao Property unless and until the Provisional Liquidators’ costs have been fully paid.  The Provisional Liquidators rejected the Petitioner’s offer and insisted the Petitioner to make payment into Court in the amount of $16 million as security for their costs as a condition for their discharge.

4.  The Provisional Liquidators do not object to the application as such.  But they take the view that section 196 of the Companies Ordinance applies only to removal of a liquidator or provisional liquidator on due cause shown and that the Court has no power to discharge their appointment where, as in the present case, there is no allegation of personal misconduct or unfitness on their part.  However, their greatest concern or objection is that their costs must be secured prior to their discharge.  Otherwise, they insist to remain in office so that they may have control of the assets of the 2^nd Respondent for the purpose of selling them to pay their own costs before resigning or agreeing to their discharge.  Thus, the Provisional Liquidators’ objections are whether the Court has jurisdiction to discharge them otherwise than on cause shown and whether such discharge is prejudicial to the interest of the Provisional Liquidators as unpaid creditors.

5.  The 1^st Respondent also objects to the discharge of the Provisional Liquidators on the ground that its appeal against my judgment in HCA 1221/2006 which led to the order for sale of its shares in the 2^nd Respondent to the Petitioner is now pending appeal and the Petitioner’s intended sale of the Yanjiao Property to pay the Provisional Liquidators’ costs is a threatened breach of its undertaking not to dispose of the Yanjiao Property.  Miss Gwilt, counsel for the 1^st Respondent, also asks for adjournment to take instruction and for leave to file affidavit in opposition to the application.

The 1^st Respondent’s objection

6.  The 1^st Respondent’s objection can be dealt with very briefly.  In relation to its appeal against my judgment in HCA 1221/2006, the Petitioner applied for security for costs against the 1^st Respondent.  On 18 July 2008, Rogers VP ordered the 1^st Respondent to pay security for costs in the amount of $1.2 million on or before 15 August 2008, failing which its appeal against my judgment shall stand dismissed.  The 1^st Respondent failed to pay within the time specified.  Accordingly, its appeal against my judgment was dismissed under the self-executing order of Rogers VP.  The 1^st Respondent appealed against the order of Rogers VP.  That appeal will be heard on 11 December 2008.

7.  Be that as it may, the appeal against the order of Rogers VP is not an obstacle to the Petitioner’s application for discharge.  The Provisional Liquidators’ costs will take quite some time to be ascertained and taxed.  The sale of the Yanjiao Property will take much longer to be finalized as there is still an outstanding litigation over the property in the PRC.  By then, the appeal against the order of Rogers VP will have been decided one way or other.  If the appeal is dismissed, the 1^st Respondent will have no cause to object to the disposal of the Yanjiao Property.  If the appeal is successful and the orders I made under HCA 1221/2006 are called in question, the Petitioner will have to apply for leave to sell the Yanjiao Property when an intending purchaser has been identified.  The Petitioner’s undertaking is not to dispose of the Yanjiao Property simpliciter, but not to do so without leave of the Court.  Should it become necessary, I shall then consider, upon the Petitioner’s application, whether to relieve the Petitioner from its undertaking.  The objection raised by the 1^st Respondent at this stage is premature and misconceived.  The adjournment and filing of affidavit in opposition requested would serve no useful purpose.  Therefore, I dismiss the 1^st Respondent’s ground of objection.

The Provisional Liquidators’ objection - “on cause shown”

8.  The Petitioner’s application is made pursuant to section 196 of the Companies Ordinance which provides that a provisional liquidator or liquidator appointed under section 193 or 194 may resign or, on cause shown, be removed by the court.  There is no allegation of misconduct or personal unfitness against the Provisional Liquidators.  The Petitioner’s only ground for discharging the Provisional Liquidators is that the reason for which they were appointed has ceased to exist because the Petitioner has become the sole shareholder of the 2^nd Respondent and does not now desire to have the 2^nd Respondent liquidated.  The Provisional Liquidators’ costs for continuing the management of the 2^nd Respondent are very expensive.  On the other hand, the Petitioner and its director Mr Woo are prepared to manage the 2^nd Respondent and attend to its litigation without charge to the 2^nd Respondent. 

9.  In In re Adam Eyton, Limited ex parte Charlesworth 36 Ch D 299, the English Court of Appeal dealt with the question of interpretation of the phrase “on due cause shown” under the equivalent provision of section 196 of the Companies Ordinance.  In that case, an order was made to wind up the company and Mr Banner was appointed official liquidator.  On the application of the majority creditors to substitute another accountant of their choice in place of Mr Banner as the official liquidator, North J allowed the application on their undertaking to pay the official liquidator in full the claims of all other creditors and all costs incurred by the official liquidator.  Mr Banner’s appeal to the Court of Appeal was dismissed.  The Court of Appeal held that the phrase “on due cause shown” is to be given a wide interpretation and it is not confined to personal unfitness or anything against the individual.  Cotton LJ said at 303:

“Now, in my opinion, it is not necessary, in order to justify the Court under this section in removing the liquidator, that there should be anything against the individual.  In my opinion, although of course unfitness discovered in a particular person would be a ground for removing him, yet the power of removal is not confined to that, and I do not think that the late Master of the Rolls in the case of In re Sir John Moore Gold Mining Company, 12 Ch D 331, which has been cited, intended to give an exhaustive definition.  In fact he points out that, and what he says is this: “I should say that, as a general rule they point to some unfitness of the person – it may be from personal character, or from his connection with other parties, or from circumstances in which he is mixed up – some unfitness in a wide sense of the term.”  He does not intend to exhaust all the grounds, but, in my opinion, and I believe the rest of the Court agree with me, if the Court is satisfied on the evidence before them that it is against the interest of the liquidation, by which I mean all those who are interested in the company being liquidated, that a particular person should be made liquidator, then the Court has power to remove the present liquidator, and of course then to appoint some other person in his place.”

10.  Bowen LJ also said at 306:

“In order to define “due cause shewn” you must look wider afield, and see what is the purpose for which the liquidator is appointed.  To my mind the Lord Justice has correctly intimated that the due cause is to be measured by reference to the real, substantial, honest interests of the liquidation, and to the purpose for which the liquidator is appointed.  Of course, fair play to the liquidator himself is not to be left out of sight, but the measure of due cause is the substantial and real interest of the liquidation.  That should be thoroughly understood, I think, as of great importance; …”

11.  Thus, the court’s jurisdiction to remove a liquidator under section 196 is not limited to cases of personal unfitness or misconduct on the part of the liquidator or provisional liquidator.  The phrase “on due cause shown” must be given a wide interpretation appropriate to the circumstances of the case, in particular, the purpose for which the liquidator is appointed.  The due cause is to be measured by reference to the real, substantial and honest interests of the liquidation.  In re Adam Eyton, Limited ex parte Charlesworth 36 Ch D 299 was concerned with substituting a liquidator by another.  But in my view, the same approach to interpretation of that phrase applies to removal without a substitution and where there will be no liquidation.

12.  In the present case, the Provisional Liquidators were appointed to protect the assets of the 2^nd Respondent pending its shareholders dispute.  The Provisional Liquidators have effectively performed that function and protected the assets of the 2^nd Respondent from dissipation by the 1^st Respondent.  Now that the shareholders dispute was resolved and the Petitioner has become the sole shareholder of the 2^nd Respondent, the Petitioner does not desire to have the 2^nd Respondent liquidated.  It is in the position to put the 2^nd Respondent’s house in order.  The Petitioner intends to sell the Yanjiao Property, its only asset, to pay the Provisional Liquidators’ costs.  It is prepared to manage the 2^nd Respondent without charge.  The Petitioner’s interest is unanimous with the interest of the 2^nd Respondent.  There is no other interest for the Provisional Liquidators to protect, save for their own costs.  It is no longer the real, substantial and honest interest to have the 2^nd Respondent liquidated.  To allow the 2^nd Respondent to be identified as a company in liquidation would be to the disinterest of the 2^nd Respondent as well as its only unpaid creditor, i.e. the Provisional Liquidators.  It may hinder the smooth sale of the Yanjiao Property and affect the price in which the property may be sold.  It may be prejudicial to the shareholder in that additional costs would have to be incurred to maintain the appointment of the Provisional Liquidators whose presence would serve no purpose except to sell its assets which could be done at no or minimal costs by the Petitioner or Mr Woo.  I am of the opinion the fact that the reason for their appointment no longer exists is a sufficient cause for the Provisional Liquidators’ removal, subject to their interest to have their costs recovered not being affected.  This brings me to the second ground of objection raised by the Provisional Liquidators.

The Provisional Liquidators’ interest to their costs

13.  Mr Tollan, solicitor for the Provisional Liquidators, accepts that under paragraph 3 of the order of Reyes J dated 25 April 2006 appointing the Provisional Liquidators, the Provisional Liquidators’ costs are to be paid out of the assets of the 2^nd Respondent which include UREDY and the Yanjiao Property.  He also accepts that the Provisional Liquidators’ costs have to be taxed before payment is due.  He reiterates that the Provisional Liquidators are not asking for payment of their costs into Court as security before taxation, but the question is raised by the Petitioner who seeks to have the Provisional Liquidators discharged.

14.  Mr Tollan argues that the Petition is not an ordinary petition for two reasons.  Firstly, he points out that the 2^nd Respondent’s only asset is its shares in UREDY.  The shares may have a value but its value is difficult to realize as it is a private company incorporated in the PRC.  Secondly, he argues that this is not an ordinary creditors petition where the provisional liquidator acts in the interest of the creditors, but a shareholder’s application under the just and equitable ground arising out of a shareholders dispute.  The Provisional Liquidators were appointed to protect the interest of the shareholders pending the resolution of their dispute.  Now that the litigation with the 1^st Respondent was concluded and the Petitioner was successful, the Provisional Liquidators should not be left in the cold as regards their costs.  Against this background, Mr Tollan argues that the Provisional Liquidators are in the same position as unpaid creditors of the 2^nd Respondent and have an interest in the assets of the 2^nd Respondent.  He argues that if the Provisional Liquidators are not discharged, they would have control over the Yanjiao Property and would be able to sell the propety to pay their own costs before vacating their office.  But if they are discharged, they would lose that advantageous position.  He submits that the Petitioner bears the burden of showing that the interest of all parties who had an interest in the 2^nd Respondent are satisfied before the Court can exercise its jurisdiction in discharging the Provisional Liquidators.  Mr Tollan submitsthat unless that burden is discharged, the Provisional Liquidators are entitled to remain in office for the purpose of selling sufficient asset to pay their costs.  The only outstanding interest in this case is the Provisional Liquidators’ costs of about $16 million. 

15.  The Petitioner is not prepared to give a personal undertaking to pay the Provisional Liquidators’ costs as did the majority creditors in In re Adam Eyton, Limited ex parte Charlesworth 36 Ch D 299.  The Petitioner is only prepared to undertake not to remove or otherwise dispose of any proceeds realized from the sale of the Yanjiao Property unless and until the Provisional Liquidators’ costs have been paid in full.  Mr Tollan submits that the undertaking offered by the Petitioner is unsatisfactory and illusory in two respects.  Firstly, he argues that the undertaking is from a party whose the financial position is unclear.  Secondly, he points out that there is no evidence that the Petitioner will sell the Yanjiao Property and as long as there is no sale the Provisional Liquidators will never be paid.  In addition, he is concerned that the Petitioner had indeed undertaken to the Court not to dispose of the Yanjiao Property pending the 1^st Respondent’s appeal.  Even if the Petitioner does undertake to pay, the undertaking would still be illusory in that it is from a party whose financial position is unclear to the Provisional Liquidators.

16.  In considering whether to discharge the Provisional Liquidators, I do not find it necessary to balance the interest of the Provisional Liquidators against that of the Petitioner.  The Provisional Liquidators have an absolute right to their costs as they were brought in for the benefit of the 2^nd Respondent and its shareholders.  However, I find Mr Tollan’s argument that the Provisional Liquidators are entitled to remain in office when they have no function to perform solely for the purpose of selling the 2^nd Respondent’s assets so as to recover their own costs unattractive.  Having decided that there is no longer any function for the Provisional Liquidators to perform, the question is whether the Provisional Liquidators’ interest to their costs will be at risk if they should be discharged.  Absence of a winding up of the company, a provisional liquidator can only recover his costs after due process, i.e. after the costs have been quantified and taxed, if necessary, and when sufficient assets have been realized.  His interest to his costs is not at risk, so long as his position is no worse off than it would otherwise be were he not removed from his position as liquidator. 

17.  Mr Tollan’s argument that UREDY is a private company incorporated in the PRC and that the Yanjiao Property is situated in the PRC does not help the Provisional Liquidators.  That was the position when the Provisional Liquidators accepted their appointment.  The terms of their appointment are that they are to be paid out of such assets.  That is not a position which would be created by their removal. 

18.  As for sale of the Yanjiao Property, for more than two and half years since their appointment, the Provisional Liquidators were unable to secure the sale of the Yanjiao Property.  It is not disputed that one of the reasons for the difficulties facing the Provisional Liquidators in marketing the property is that it is occupied by China Institute of Defence & Science Technology (“CIDST”) or its School of Foreign Commerce.  The 1^st Respondent has difficulties in evicting CIDST from the Yanjiao Property, despite that an order for possession had been obtained from the PRC arbitration tribunal.  The Provisional Liquidators were not prepared to put in funds to secure the vacant possession of the Yanjiao Property from CIDST so as to improve the marketability or the price of the Yanjiao Property.  That was their position before the application for their discharge.  Now, the Petitioner or Mr Woo as the sole beneficial owner of the 2^nd Respondent and hence of UREDY is prepared to do everything necessary to manage the 2^nd Respondent and cause UREDY to sell the Yanjiao Property, including to evict CIDST from the Yanjiao Property.  The Petitioner is prepared to provide funding for that purpose.  UREDY under the control of the Provisional Liquidators might not be able to secure as good a price for the Yanjiao Property as it would under the hands of the Petitioner or Mr Woo due to want of funding to properly market the Yanjiao Property.  Thus, UREDY would be in better hands if placed under the Petitioner than under the Provisional Liquidators.  The Provisional Liquidators’ chance of recovering their costs will be no worse off should the 2^nd Respondent and hence UREDY be put in the hands of the Petitioner.

19.  The Yanjiao Property is a very valuable piece of land.  According to a valuation report prepared by the Provisional Liquidators, in October 2007 the Yanjiao Property had an open market value of RMB 90 million on vacant possession basis or RMB 59 million on non-vacant possession basis or a forced sale value of RMB 61 million and RMB 38 million respectively.  The Provisional Liquidators’ costs are only $16 million at the highest.  The risk that the Provisional Liquidators will not be able to recover their costs from the sale of the Yanjiao Property is very remote.

20.  The Provisional Liquidators will only be paid their costs after they have been ascertained and agreed or taxed.  Thereafter, they can demand the 2^nd Respondent for payment.  If the 2^nd Respondent fails to pay within a reasonable time, the Provisional Liquidators can institute recovery action, including winding up the 2^nd Respondent or putting it under receivership.  In that event, they will regain control over the sale of the Yanjiao Property, if by then no progress will have been achieved after the Petitioner has regained control of the 2^nd Respondent and of UREDY.  However, given all that have happened while the 2^nd Respondent is under the control of the Provisional Liquidators and seeing the huge amount of costs that have been incurred, I am only too sure that Mr Woo will exercise all diligence to cause the Yanjiao Property to be sold or otherwise obtain resources to pay the Provisional Liquidators’ costs so as to avoid putting the 2^nd Respondent under another liquidation.  Except possibly for some loss of time which could be compensated for by interest, the Provisional Liquidators will not be at risk as regards their costs.  They will be no worse off, if they are discharged. 

21.  Recently, Cyber Strategy Limited, which is the holding company of the 1^st Respondent, has initiated legal proceedings in the Langfang Court in the PRC against the Petitioner and against Mr Woo and the 2^nd Respondent as third parties in respect of the same subject matter as that in HCA 1221/2006.  The impact of that litigation on the value of the shares in UREDY or the Yanjiao Property remains to be seen.  But it will be a waste of the 2^nd Respondent’s costs to rely on Mr Kennic Lui as the legal representative of UREDY to answer the proceedings or to continue to act on behalf of UREDY or the 2^nd Respondent for that purpose.  On the other hand, the Petitioner or Mr Woo are ready and willing to act on behalf of UREDY and to fund the litigation.  And it is in their interest to do so as well.  This is a minor consideration in favour of the discharge of the Provisional Liquidator.

Conclusion

22.  The Provisional Liquidators’ costs of $16 million is a huge sum of money to require the Petitioner as a shareholder of the 2^nd Respondent or Mr Woo as a shareholder of the Petitioner to forthwith deposit into Court to procure the discharge of the Provisional Liquidators even before such costs have been taxed.  It is accepted that the Provisional Liquidators are to be paid out of the assets of the 2^nd Respondent.  There is nothing to suggest that the 2^nd Respondent will not be good for that amount of money, especially in view of the very valuable Yanjiao Property.  The Provisional Liquidators will not be at risk as regards their costs, if they are discharged.  In the circumstances, it would be inappropriate to require either Mr Woo or the Petitioner to pay that amount into Court as security for the Provisional Liquidators’ costs before the Provisional Liquidators are discharged. 

23.  On the facts of the present case, the Provisional Liquidators have no longer any useful function to perform by remaining in office.  Their continued appointment will only add unnecessary costs to the 2^nd Respondent.  The Provisional Liquidators will not be any worst off as regards their costs even if they are discharged.  There is no evidence that the 2^nd Respondent will not pay the Provisional Liquidators’ costs within reasonable time of such costs becoming due after taxation.  The cause for their appointment has ceased to exist.  It lies ill in their mouths to argue that they should be allowed to continue in office for no purpose and no benefit but detriment to the 2^nd Respondent and solely for the purpose of disposing of its assets to satisfy their costs.  Upon due consideration, I consider it appropriate that the Provisional Liquidators should be discharged and be allowed to recover their costs against the 2^nd Respondent subject to the usual process of recovery. 

24.  As an added comfort to the Provisional Liquidators, I shall make an order to impose on the 2^nd Respondent’s shares in UREDY and the Yanjiao Property a charge for securing the payment of the taxed costs of the Provisional Liquidators.  I proposed such charge to be imposed if the taxed costs of the Provisional Liquidators remain unpaid after six months of taxation.  The taxed costs shall bear interest at judgment rate for as long as they remain unpaid from the date of taxation up to the said period of six months.  At the request of the parties, I left it to the parties to agree to the precise terms of the order.  I also ordered that the costs of the application be in the cause of the Petition save that the Provisional Liquidators’ costs be paid out of the assets of the 2^nd Respondent.  Such costs are to be taxed if not agreed.  This costs order is made without prejudice to the Petitioner’s right to apply to the Court for an order that such costs shall be paid or reimbursed by the 1^st Respondent to the 2^nd Respondent. 

25.  The parties having agreed to agree to the precise terms of the order subsequently failed to reach agreement because the Provisional Liquidators dispute the validity of such an order on jurisdictional ground.  If indeed I have no jurisdiction to make such an order, I would still discharge the Provisional Liquidators from their office as provisional liquidators of the 2^nd Respondent, because the balance weighs heavily in favour of their discharge.  Accordingly, as the order having been made, in default of agreement as to its precise terms, I make the order imposing the charge as I originally proposed in paragraph 24 above.  I grant a short stay of execution of my orders for 14 days from the date of this Reasons for Decision to enable the Provisional Liquidators to consider their position.