LU JUN v. YU QI AND OTHERS

HCCW 377/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 377 OF 2014

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D E C I S I O N
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1.  There is before me an urgent application for the appointment of provisional liquidators in respect of Astrotec Company Limited, the 4^th respondent in these proceedings. I shall give my reasons briefly.

2.  The company is a company incorporated in Hong Kong.  The petitioner, the applicant on this application, is a shareholder in respect of 15% of the issued shareholding of the company.  The 1^st respondent is the beneficial owner of the remaining 85% of the shareholding of the company through the 2^nd and 3^rd respondents which are corporate vehicles under her control.

3.  The background of the matter has been fully rehearsed in a previous set of proceedings in HCCW 282/2010, in particular in the judgment of Recorder Patrick Fung SC dated 31 January 2013, which I shall not repeat.  Suffice it to say that in those proceedings the company was found to be a quasi-partnership, and the 1^st defendant was found to have conducted the affairs of the company in a way that was unfairly prejudicial to the applicant herein.

4.  In the result, the learned Recorder made an order for the buyout of the petitioner’s shares against the 1^st and/or 3^rd respondent.  This decision was upheld by the Court of Appeal in CACV 37/2013 in a judgment handed down on 7 February 2014. 

5.  The buyout order made by the Recorder, which was affirmed by the Court of Appeal, is in these terms.

“The 1^st Respondent is to pay to the petitioner the value of the shares with interest thereon within 35 days from the publication of the valuation by the Valuer and upon full payment of the purchase price, the Petitioner is forthwith to transfer the Shares to the 1^st Respondent free of all incumbrances or claims of whatsoever nature.”

6.  The valuer duly conducted a valuation of the company and published their report on 23 May 2014.  The value of the company, as a whole, was found to be RMB456 million, and the value of the 15% stake of the petitioner was therefore RMB68.4 million.

7.  The buyout order, accordingly, required the 1^st respondent to pay the petitioner the sum of RMB68.4 million by 27 June 2014.  On 8 July 2014 the petitioner obtained a charging order nisi over the shares held by the 2^nd respondent in the company to secure the payment of the price under the buyout order.

8.  There were then steps taken in the latter part of 2014 by the 1^st respondent for an order for the valuation to be “retracted”, but those applications had since fallen away.  The 1^st respondent has exhausted her recourse against the valuation.  There is, as things stand, no appeal outstanding that may affect the valuation.

9.  Yet despite the amount to be paid has been ascertained and the buyout order has therefore crystallised, it has not been complied with by the 1^st respondent. 

10.  Instead, the 1^st respondent has apparently caused the company to enter into some transaction with another company called Heathcliff Trading SA.  It is said in the 1^st respondent’s affirmation in HCMP 3125/2014, dated 4 January 2015, that the company entered into an agreement in early 2014 with a Swiss company for the acquisition of certain isotope for the sum of US$140 million with a view to the company re-selling it at a higher price.  It is said also that at:

“Sometime after completion of the transaction in about mid-2014, due to unexpected twist of events, the original financing plan fell through. Negotiation with the vendor ensued in order to persuade them to postpone enforcing the notes and securities in relation to the price of the goods.”

11.  It is said, as appears from the Statement of Affairs prepared by the 1^st respondent, that as a result of this transaction the company’s balance sheet went from a surplus of HK$500 million to a deficit of HK$495 million.  It is also said that all the assets of the company have been charged to Heathcliff under a debenture that creates both a fixed charge and a floating charge. 

12.  Despite that this transaction raises serious concerns for the interest of the company and has apparently driven the company into insolvency, very little further information has been disclosed by the 1^st respondent about the company Heathcliff, or the transaction.

13.  Furthermore, on 3 November 2014, the 1^st respondent caused the company to be put into liquidation under section 228A of the Companies (Winding-Up and Miscellaneous Provisions) Ordinance (Cap 32).

14.  On 28 November 2014, the petitioner issued an originating summons in HCMP 3125/2014 to seek a permanent stay of the voluntary winding up.  On 12 January 2015, Anthony Chan J granted a permanent stay of the voluntary winding up. 

15.  Meanwhile on 18 December 2014, the petitioner applied by summons for the appointment of provisional liquidators in respect of the company. 

16.  In my view, there are circumstances in this case that justify and call for the appointment of provisional liquidators.  With the voluntary winding up having been stayed, the position is that the voluntary liquidation is for all practical purposes at an end.   The control of the company reverts to the directors, and the company resumes its business: see Re Outboard Marine Corporation (Asia) Limited [2003] 1 HKLRD 585 at paragraph 5.  The fact that the 1^st respondent caused the company to enter into the Heathcliff transaction with such purported devastating effect on the assets of the company seems to me to indicate that there will be jeopardy to the assets if the company continues to be left to the sole control of the 1^st respondent. The Heathcliff transaction smacks of an attempt to denude the company, and the 1^st respondent’s own shareholding in the company, of any value so as to render nugatory the buyout order which has been secured by a charging order on the 1^st respondent’s own shares in the company. 

17.  The 1^st respondent has not filed any evidence that condescends to the detailed facts.  Instead, she has made an affirmation in these proceedings on 22 January 2015 to say this:

“I have no objection to the claim in the petition herein for an order of compulsory winding up of the company and will procure both the 2nd and 3rd respondents herein not to object to it. I am willing to give an undertaking to the same effect to this honourable court in so far as is necessary.”

18.  I should add that she also denies all the allegations levelled against her in the affidavits filed on behalf of the petitioner in support of the present summons, although as I have already stated she has not gone into any detail in respect of the underlying facts.

19.  Nor has her counsel, Mr Fung, attempted to defend the Heathcliff transaction on its merits.  Remarkably, he submits instead that the charge in favour of Heathcliff was registrable but not registered and would therefore be void as against a liquidator of the company and that, therefore, Heathcliff has only a personal claim against the company which will be subject to scrutiny in a winding up.  That, with respect, seems to me to throw further doubt on the genuineness and propriety of the Heathcliff transaction. 

20.  We are therefore in an exceptional situation in that the 1^st respondent does not oppose and in fact herself seeks a winding up of the company.  Upon a winding up order being made, a provisional liquidator will of course be appointed.  The only difference in acceding to the applicant’s application now is that provisional liquidators are appointed slightly earlier, and that instead of the Official Receiver the insolvency practitioners nominated by the applicant are to be appointed.  Nevertheless, at the first meetings of creditors and contributories, the stakeholders will still have the opportunity of deciding who the liquidators should be, subject to the view of the court.

21.  Mr Fung has made a further point that had the petitioner not applied for a permanent stay of the winding up, the voluntary liquidators would still have been in office and there would arguably have been no need for the appointment of provisional liquidators.  However, as Harris J held in Re Pedagogic Innovations Limited [2014] 1 HKLRD 613, unless a genuine reason existed for using the procedure under section 228A, that procedure should not be used, and the resulting liquidation would have been wrongly commenced.

22.  The only thing that has given me pause, and which I have raised with Mr Wong and Mr Fung this morning, is that the applicant still has the benefit of the buyout order.  He has prima facie available to him all the remedies open to a judgment creditor: see Leung Chi Tung v Au Yeung Fan HCCW 504/2005, 14 May 2013.  He has a personal judgment against the 1^st respondent for RMB68.4 million in respect of which he has obtained a charging order nisi on the 1^st respondent’s beneficial shareholding in the company.  The buyout and winding up seem to me to be prima facie inconsistent remedies.

23.  If the petitioner wishes to be bought out, his interest is in obtaining the price for his shares from the 1^st respondent and he has no interest to receive any distribution as a contributory in the winding up of the company. 

24.  In contrast, a contributory’s petition is a class remedy invoking the statutory machinery for the winding up of a company.  While the petitioner is no doubt still a registered shareholder and as such satisfies the statutory requirement for the presentation of a petition: see Mai Gou v Mak Chik Lun [2001] 3 HKLRD 248, as a general rule a petitioner has further to show a tangible interest in the winding up (though the position is less clear in Hong Kong than in England: see Mak Sik Bun v Mak Lei Wun [2005] 4 HKLRD 328 at paragraphs 66 to 70) which is usually represented by the prospect of receivinga dividendin the liquidation, hence requirement in practice for a contributory’s petition to allege a surplus. 

25.  Plainly it seems to me the petitioner’s interest in preserving the value of the 1^st respondent’s shareholding as security for payment under the buyout order alone cannot suffice to entitle him to petition for the winding up of the company, or to apply for the appointment of provisional liquidators, anymore than a simple monetary judgment creditor who has obtained a charging order over certain shares owned by the judgment debtor in a company can seek the appointment of provisional liquidators in respect of that company. 

26.  Ordinarily, the applicable principle of law is,as stated by Lord Atkin in United Australia Ltd v Barclays Bank Ltd [1941] AC 1 at 30 that:

“if a man is entitled to one of two inconsistent rights it is fitting that when with full knowledge he has done an unequivocal act showing that he has chosen the one he cannot afterwards pursue the other, which after the first choice is by reason of the inconsistency no longer his to choose. Instances are the right of a principal dealing with an agent for an undisclosed principal to choose the liability of the agent or the principal: the right of a landlord where forfeiture of a lease has been committed to exact the forfeiture or to treat the former tenant as still tenant and the like. To those cases the statement of Lord Blackburn in Scarf v Jardine (1882) 7 App Cas 345, 360 applies: ‘where a man has an option to choose one or other of two inconsistent things when once he has made his election it cannot be retracted.’ ”

27.  This gives rise to the question whether in light of the purchase order the applicant still has sufficient standing or a tangible interest in the winding up of the company to apply for the appointment of provisional liquidators and possibly a second question whether, if he has a tangible interest only insofar as he forgoes the purchase order, he should be put to election between prima facie inconsistent remedies and, if so, when he should be required to elect.

28.  On the first point, I am satisfied that it is at least reasonably arguable that despite the buyout order, in the light of the 1^st respondent’s obdurate refusal to comply with it, the applicant may nevertheless elect to pursue his right as a member or contributory of the company in respect of new complaints arising after the conclusion of the previous set of proceedings.  It has been said that a buyout order is similar in nature to a decree for specific performance: Leung Chi Tung (supra) at paragraph 14.  While the analogy may not be exact, I note that in the case of an order for specific performance, if it is not complied with, the plaintiff has an option: he may either apply for further orders for the purpose of enforcing the order for the performance of the contract, or he may apply to the court to dissolve the order for specific performance, put an end to the contract, and award damages for the loss suffered in consequence of the defendant’s breach: Johnson v Agnew [1980] AC 367 at 393 to 394, 398 to 399. 

29.  The underlying principle has been explained by the Privy Council in The Personal Representatives of Tan Man Sit (Deceased) v Capacious Investments Ltd [1996] 1 HKLR 16 at page 20:

“In the ordinary course the decision made when judgment is entered is made once and for all. That is the normal rule. The order is a final order, and the interests of the parties and the public interest alike dictate that there should be finality. The principle, however, is not rigid and unbending. Like all procedural principles the established principles regarding election between alternative remedies are not fixed and unyielding rules. These principles are the means to an end, not the end in themselves. They are no more than practical applications of a general and overriding principle governing the conduct of legal proceedings, namely, that proceedings should be conducted in a manner which strikes a fair and reasonable balance between the interests of the parties, having proper regard also to the wider public interest in the conduct of court proceedings. Thus in Johnson v Agnew [1980] AC 367, the House of Lords held that when specific performance fails to be realised, an order for specific performance may subsequently be discharged and an enquiry as to damages ordered. Lord Wilberforce observed, at page 398:

‘Election, though the subject of much learning and refinement, is in the end a doctrine based on simple considerations of common sense and equity.’ ”

30.  Here it is the 1^st respondent who has defaulted in complying with the buyout order. All that the petitioner has done by way of enforcing it is to apply for and obtain a charging order nisi over the 1^st respondent’s shares in the company.  I do not think this precludes the possibility for the petitioner to apply for the buyout order to be rescinded and to opt instead to remain as a shareholder in the company.

31.  As to the second question, it is in my view unnecessary for me to deal with it in this application.  I do not think that the appointment of provisional liquidators is such an irreversible step as to be regarded as requiring an election of remedy on the part of the applicant, and I ought not to express any further view, especially since the point was only raised this morning, and there has only been limited argument before me.

32.  In the result, therefore, I am satisfied that I ought to make an order appointing provisional liquidators. 

(Discussion re terms of the order)

33.  I will make an order in terms of the draft order as amended.

(Discussion as to costs)

34.  I am minded to treat this as a discrete application and to order costs to follow the event and, therefore, I am inclined to order that the costs be paid by the 1^st respondent to the petitioner.  There are some costs, however, that the petitioner would have had to incur in any event, even in an uncontested application.  So what I will do is to reduce the proportion of costs payable to the petitioner.  I order that the 1^st respondent do pay 75% of the petitioner’s costs of the application on a party and party basis to be taxed if not agreed, forthwith.