HUI WAH CHUEN v. SIU KWOK SUN AND ANOTHER

HCCW 318/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 318 of 2014

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D E C I S I O N

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1.  I have before me a summons issued on 18 December 2014 to strike out most of the relief in the prayer to the Petition. The summons on its face seeks to strike out both the prayers for an order that one or other of the shareholders in the Company purchase the others’ shares in it and winding up relief. It was clear by the time the application came on before me that the 1^st Respondent only seeks to strike out the prayer for a winding up order.

2.  The Petition was issued on 27 October 2014. The Petitioner sought orders that the 1^st Respondent to sell his shares in the Company to the Petitioner, alternatively that the 1^st Respondent purchase the Petitioner’s shares in the Company and, in the alternative to those two orders, a winding up of the Company on the just and equitable ground.

3.  On 15 January 2015 the petition was very substantially amended. The entire petition from paragraphs 7 onwards was deleted and replaced with 51 new paragraphs.

4.  Although the relief in the petition was struck through it was repeated in identical terms in the Amended Petition. I assume that the reason why this was done had to do with making the amended petition easier to read.

5.  As is common in these kinds of applications the application is made on the basis that the 1^st Respondent says there is no realistic prospect of a winding up order being made, the inclusion of the winding up relief in the petition prejudices the ability of the company to conduct its affairs in the normal manner and, accordingly, the relief should be struck out.

6.  There is no dispute between the parties about the principles by reference to which applications of this sort are assessed.  These are explained in paragraphs 4 to 10 of decision in Re Sun Light Elastic Limited [1]:

“4. The principles by reference to which such applications are assessed is not in issue and are as follows:

(1) 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 [2];

(2) The application should be approached with the greatest circumspection and it is only in a plain and obvious case that the court should exercise its discretion to strike out the petition for winding up or the parts complained of [3];

(3) The burden is on the applicant to show that it is plain and obvious that the petition for winding up would fail on the ground there is an alternative remedy available to the petitioner and that the petitioner is acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy[4];

(4) Where proposed amendments are put forward in an application to strike out, the court should have regard not only to the allegations in the existing petition but also to matters in the proposed amendments[5].

5. Madam Justice Yuen (as she then was) explained in Wong To Yick Wood Lock Ointment Limited the court’s task as follows:

“The question in the application before me is whether even at the present stage, assuming that the petitioners prove all the facts in the amended petition, there is no real possibility or prospect of a winding-up order being made such that the court should exercise its discretion to strike-out the claim for a winding-up order.”

6. I am, therefore, to consider the application on the basis that the Petitioner’s factual allegations will be established at trial. Before striking out the prayer for a winding up order, I need to be satisfied that it has no realistic prospect of success.

7. In the present case the factual background is not of itself material, as for present purposes I will proceed on the basis that the complaints of unfair prejudice are made out, and that the Petitioner will be found to be entitled to some relief if the matter proceeds to trial.

8. However, the authorities in Hong Kong have shown some difference of approach in practice with some decisions placing more weight on the undesirability of having an unnecessary winding-up petition hanging over a company on the one hand, and on the other on the difficulty of concluding with sufficient certainty at the early stage of proceedings that a winding‑up order would never be the appropriate remedy for the court to grant. In Re Mahr China Ltd [6]I explained how this divergence of approach should be resolved:

“14. It seems to me that there is a difference between the decisions in Re Ranson Motor Manufacturing Co Ltd and Re Wong To Yick Wood Lock Ointment Ltd on the one hand and Re Prudential Enterprise Ltd, Kinong Group Ltd and Re Company on the other. The former places more emphasis on the generally recognised undesirability of having a winding-up petition hanging over the head of an ongoing business and the court’s reluctance to wind up companies if some other remedy is available. The latter recognises the possibility that although at the time an application to strike out is made it may appear that a purchase of shares is the inevitable result of the proceedings, unforeseen events may intervene and lead the court ultimately to be persuaded that a winding-up order is the appropriate remedy. For this reason the correct approach is to stay rather than strike out the claim for a winding-up.

15. In my view the way to resolve this difference is to return to the accepted test by which a strike‑out application is determined. This was explained as follows by Bingham LJ in Re Copeland & Craddock Ltd [1997] BCC 294 at p.300:

‘It has been often and rightly said that the court’s jurisdiction to strike out a claim advanced by a plaintiff or a claimant or a petitioner is to be exercised very sparingly and only where the clearest grounds are shown for doing so. The reason for this practice is clear. Although a court may at a preliminary stage regard a claim as tenuous and having a negligible chance of success, the claimant is nonetheless entitled to the court’s adjudication on it on the merits unless it is a claim which the court is satisfied cannot succeed. In this case the judge clearly regarded the plaintiff’s claim to wind up this company as one which was unlikely to succeed, but he did not feel that the claim was so manifestly unarguable as to justify him in striking it out … I share the judge’s view that this claim is unlikely to succeed. I am indeed persuaded that the case is very close to the borderline where striking out would be appropriate. But I am not quite persuaded that the claim is unarguable whatever comes out relevant to the petition on discovery and in the course of oral evidence.’

16. I, therefore, ask this question: am I satisfied at this stage of the proceedings and on the evidence before me that the claim for a winding-up cannot succeed? I am not. I cannot rule out the possibility that it will prove impossible to require the first respondent to purchase the petitioner’s shares at a price and on terms that the Court considers reasonable.”

9. In my view what is clear from the authorities is that the court will only grant a winding-up order rather than relief under section 168A if there is good reason to do so.  In my view if a winding‑up order is to be sought, particularly in the alternative it should only be because the Petitioner has a particular reason for doing so.  It is not enough simply to say “well one never knows what will transpire”.  This would be no criteria at all.  The Petitioner must be able to point to particular matters he is concerned might make a winding-up order the appropriate or only practical relief.  It is for this reason that in Sin Chung Yin Ronald and others v Sinodental Investments Ltd and Anor [7] I said:

“21. I think it is appropriate to end with the salutary reminder of Madam Justice Yuen in Re Wong To Yick Wood Lock Ointment Limited [2001] 2 HKC 618 at 623F. There is a Practice Direction in England, (No. 1 of 1990) [1990] 1 WLR 490 reminding practitioners of the undesirability of including as a matter of course a prayer for winding up as an alternative to an order under section 459 of the Companies Act (1985) (equivalent to section 168A of the Companies Ordinance) that:

‘It should be included only if that is the relief that the petitioner prefers or if it is considered that it may be the only relief to which he is entitled.’

22. It is clear that the prayer for a winding-up order has been included in this case without sufficient thought as to whether or not it is necessary. Practitioners should not automatically include as an alternative relief in a petition presented primarily for relief under section 168A of a prayer for winding up. They should only do so if there is reason to believe that this may be the relief that will be sought at trial, and the facts relied on in forming this view should be set out in the petition and amplified as necessary in the petitioner’s evidence filed in support of that petition.”

10. It seems to me that to require a petitioner to state in his Petition why he has sought in the alternative a winding-up order is not only sensible but consistent with the requirement that a petition must adequately set out the grounds on which relief is sought: Re Fildes Bros Limited [1970] All ER 923.”

7.  If a Petitioner thinks that he may want, or need, to seek a winding‑up order at trial it should be possible for him to identify the facts and matters that lead to this conclusion and, accordingly, it should be possible to include them in the Petition in a section which clearly is directed to satisfying the requirements that I have explained in paragraphs  9 and 10 of Re Sun Light Elastic Limited.  The petition does not do so.  Paragraphs 56 to 58 of the petition contain a conclusion and explain the relief that is sought in the following terms:

“56. By reason of the matters pleaded above:

(1) Siu had acted in breach of the Common Agreement and the Cessation Agreement;

(2) as a result of the wrongful acts of Siu, the Company has been managed in manner that is unfairly prejudicial to the interests of Hui;

(3) Hui has completely lost faith in Siu, the relationship of trust and confidence between Siu and Hui has irretrievably broken down;

(4) the Company was in a position of deadlock;

(5) in breach of the fiduciary duty as a director of the Company, Siu had acted in conflict of interests of the Company as a whole, and had wrongfully and unfairly obtained personal gains and benefit to the detriments of the Company and its shareholders as a whole;

(6) by reason of the wrongful acts of Siu, Hui suffered loss and damages.

57. Hui is prepared to purchase Siu’s shares in the Company, or sell his shares in the Company to Siu, at a fair value to be determined by an independent valuer appointed by the Court pursuant to s.725 of the Companies Ordinance (Cap. 622).

58. Alternatively, it is just and equitable that the Company be wound up by the Court pursuant to s.177(1)(f) of the Companies (Winding-up and Miscellaneous Provisions) Ordinance.”

8.  Reading the amended petition as a whole it contains a series of complaints, the precise nature of which are not at this stage relevant, which appear framed, as one would expect, to justify a complaint of unfair prejudice which justifies the preferred relief sought in the Amended Petition, namely, a buyout order. The 1^st Respondent has offered to buy the Petitioners’ shares and has no objection to that relief. If the matter ended they are I would make an order striking out the winding up relief.  However, it does not.

9.  Two days before the 1^st Respondents’ summons was due to be  heard, and 5 days after service of the 1^st Respondent’s skeleton argument, the petitioner issued a summons to make Re-Amendments to the Petition.  Although the draft re-amendments are not lengthy they do constitute a significant change in the case that the Petitioner wishes to pursue.  The draft re-amendments are made to paragraphs 56 to 58 and the prayer. They are as follows:

“56. Siu’s actions have caused loss and damage to Hui.

57. Hui is prepared to purchase Siu’s shares in the Company, or sell his shares in the Company to Siu, at a fair value to be determined by an independent valuer appointed by the Court pursuant to s.725 of the Companies Ordinance (Cap. 622)

58. Alternatively, it is just and equitable that the Company be wound up by the Court pursuant to s.177(1)(f) of the Companies (Winding-up and Miscellaneous Provisions) Ordinance.”

10.  As can be seen the principal relief that is sought in the draft re‑amendments is a winding-up order. As can be seen from draft paragraph 56(2) the Petitioner is contending that because of the Cessation Agreement, which is explained earlier in the petition, he is entitled to a winding up order. The loss of substratum referred to in sub‑paragraph (6) supports this case, because as is explained earlier in the petition, the Petitioner contends (subject to what I say in paragraph 13) that the company no longer carries on any business other than completing outstanding works required during the defect periods of otherwise concluded contracts.  The company's business which commenced in about 1996 involved designing, supplying, installing and maintaining heating ventilation and air‑conditioning systems.

11.  At this stage it is helpful to set out in more detail the Petitioner's complaints in the Amended Petition. The company currently has 2 shareholders. The Petitioner holds 47% of its issued shares and the 1^st Respondent holds the balance of 53%. Originally the Company had 4 shareholders.  The Petitioner contends that the original understanding between the 4 shareholders at the time the business was established was that all shareholders would have the right to be involved in the management and control of the company and that all decisions, presumably other than very minor ones, had to be made unanimously.  By  the middle of 2000 the other shareholders had withdrawn from the Company.  There were subsequently small transfers of shares from the 1^st Respondent to the Petitioner which results in the current shareholdings.

12.  By January 2014 the Petitioner and the 1^st Respondent had sufficient differences over the running of the Company that in that month they agreed in principle to the cessation of the Company’s business and that each of them pursue their business interests separately.  In broad terms they agreed to complete existing contracts and then wind up the Company.  The Petitioner says that the Parties began to implement the Cessation Agreement.  In August 2014 the 1^st Respondent seems to have had a change of mind.  He attempted to convene an annual general meeting of the Company to remove the Petitioner from the board and replace him with an associate.  He has excluded the 1^st Respondent from the management of the Company, refused to distribute dividends, in breach of the Cessation Agreement submitted quotations for new projects, utilised the Company’s resources for the benefit of his own projects and misused the Company’s funds.  The Amended Petition goes on to say the Company is in deadlock and then comes the conclusion in paragraphs 56 to 58.

13.  So far as the application to Re-Amend the Petition is concerned I will grant leave to make the proposed amendments accept paragraph 55(6), which introduces an allegation of loss of substratum. There is nothing in the body of the Petition to explain this allegation which is inconsistent with paragraph 45 of the Amended Petition.  I proceed to consider the strike out application on the basis of the Re-Amendments.

14.  I accept that the Cessation Agreement is a factor that the Court would properly take into account in considering what relief to grant, but it does not seem to me that it alone is capable of justifying a winding‑up order in circumstances in which it would not otherwise be granted.

15.  As the argument before me developed, and with some assistance from the Court, a more complete reason for seeking, as the primary relief, a winding-up order than appears in the Re‑Amended Petition began to emerge.  That reason seems to be something along these lines.  The Cessation Agreement was initially implemented.  As a result the business of the Company was for a period run down.  The Petitioner unilaterally decided to pursue new business in the Company’s name in August 2014.  The 1^st Respondent has been excluded from any role in the business since that time.  In these circumstances it would be difficult to value the business.  It would be difficult, for example, to decide on a valuation date.  Valuation tends to be fraught with difficulties and in these circumstances those difficulties would be amplified.  In these circumstances it is reasonable for the Petitioner to take the view that the more straightforward was of proceeding is to have the Company wound up.  At present the Petitioner cannot point to any particular financial benefit that would accrue to the Petitioner by opting for a winding up rather than selling his shares.  His principle concern, as I have said, is that the valuation process will be drawn out and complicated. 

16.  Mr. Lee fairly says that even accepting that properly explained this is what the Petitioner seems to be saying, the fact is that this case is not set out in the Amendments or Re-Amendments.  The Petitioner has had the opportunity to reformulate its case.  It did so by proposing Re‑Amendments after it had received his skeleton argument, which was served a week before the hearing, and had the opportunity to reconsider its case in the light of his submissions and the authorities he brought to the Petitioner’s attention.  The Court should determine the case by reference to the Re-Amendments, and if, as he submits, they are inadequate strike out the relief.

17.  I agree, for reasons that are apparent from what I have said earlier in this decision, that the Amendments and Re-Amendments to do not contain adequate reasons for seeking a winding-up order.

18.  The live issue now is whether from what has emerged during the hearing there is justification for giving the Petitioner one last chance to formulate a satisfactory case for seeking a winding up.  The Court requires a party to formulate its case properly, but it is clear that it is the practice of the Court to allow a petitioner to amend a petition it if the Court thinks a case can be saved.  This reflects the overriding concern of the Court to do justice between the parties.

19.  Although the case that has emerged during argument is more complete than that contained in the Re-Amended Petition in my view it is too vague and incomplete to justify a departure from the practice of the Companies Court, namely, to proceed on the basis that a winding-up order is relief of last resort and will not normally be granted in the face of an offer to buy out the Petitioner unless good reason is established.  I also can see no reason for staying the winding-up relief rather than striking it out, which I order.

20.  I would end with this observation.  Part of the purpose of the Court producing judgments such as Re Sun Light Elastic and Re Health & Care Group Ltd is to make clear how a case for a winding up order should be formulated.  It is incumbent on practitioners to pay attention to them.  If that had been done in the present case at the outset it may be, although I have doubts, that the Petitioner would have been in a different position.