LEI ZI SHEN v. TAI-AO ALUMINIUM GROUP LTD AND OTHERS

cacv 391/2005

in the high court of the

hong kong special administrative region

court of appeal

civil appeal no. 391 of 2005

(on appeal from HCCW NO. 1116 of 2004)

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J U D G M E N T

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Hon Rogers VP:

1.  This was an appeal from a judgment of Barma J given on 11 November 2005.  The matter before the judge was an application to strike out the petition and alternatively that the claims for winding-up relief and delivery up of the books and records and the injunction against the fourth respondent should be struck out.  The judge acceded to the application to strike out the prayer for relief in respect of winding-up, delivery up of books and records of the company and restraining the fourth respondent from continuing to act as chief executive officer of the first respondent (“the Company”).  At the conclusion of the hearing of this appeal, judgment was reserved which we now give.

Background

2.  Since this is an application to strike out pleadings on the basis that the claim is unsustainable, it is necessary at this stage, to consider the matter on the basis of the pleading itself.  The basic allegation is that the petitioner founded the Tai-Ao Aluminium (Taishan) Company Ltd (“Taishan”) in October 2000.  He held 46% of the shares and it is said that Taishan was established on the basis of mutual trust and confidence between the original shareholders.  Taishan soon built up a substantial business in aluminium products.  It had a total investment of US$18 million in 2001 and it employed some 2000 workers.  It is said in the petition that the petitioner had contributed a total of RMB 34,846,947.64 by way of capital injection and loans.

3.  In 2002 the petitioner was introduced to Ho Seong Peng (“Ho”).  Ho claimed that he was a developer of two commercial towers in Guangzhou and a deputy supervisor in the National Security Bureau of the PRC central government.  As often seems to be the case when there are ventures in the Mainland, he claimed to have very good relationships with officials in the PRC central and municipal governments.  Ho introduced the petitioner to Chen Yixin (“Chen”) who was the husband of the Mayor of the city of Jianmen.

4.  As set out in the judgment below, there was a series of manoeuvres which ultimately resulted in the making of an agreement between the petitioner and the original shareholders in Taishan the effect of which was that a Hong Kong holding company would be established to hold Taishan and various overseas sales offices or branches.  That Hong Kong holding company is the first respondent (also referred to herein as “the Company”).

5.  Under the arrangement, Ho and Chen would be entitled to a 26% shareholding in the first respondent.  They would guarantee that all future working capital requirements of the Hong Kong holding company would be met and they undertook responsibility for liaising with PRC government departments to ensure the smooth business of Taishan.  They also agreed to be responsible for the repayment of a bank loan of RMB 40 million to be obtained by Taishan, this being treated as their capital contribution for the 26% interest that they were to obtain in the first respondent, it being agreed that they would repay such loan out of future dividends which it was envisaged that the first respondent make.

6.  The original agreement was varied by supplemental agreements.  The effect of the agreement made on 20 February 2003 was that the capital injection of Ho and Chen would be reduced from RMB 40 million to RMB 11 million but Ho and Chen would remain entitled to a 26% shareholding of the first respondent.  For their part Ho and Chen confirmed that as at 31 December 2002 they were indebted to the Company for RMB 11 million, which they were to repay using future dividends expected to be declared and payable to them by the Company.

7.  It is then alleged that the Company and Taishan are currently under Ho’s management and control.  This was partly achieved by Ho manoeuvring himself into the control of the second respondent and through that company having control of first respondent.  It is said that the relationship between the petitioner and the other directors led by Ho deteriorated in about May 2004 as a result of concern about bank loans which Ho, with the concurrence of the other directors, caused Taishan to obtain from its bankers.  As a result the petitioner resigned as chairman of Taishan and chairman of the Company.  Just over two months later the petitioner discovered that Ho was an undischarged bankrupt.

8.  In paragraph 32A and 32B it is said that the Company was established on the basis that there would be a quasi-partnership and that the original shareholders and Ho and Chen reposed mutual trust and confidence in each other.  It is said that the petitioner had proceeded upon the fundamental premise that Ho and Chen were competent and that it was lawful for each of them to take part and participate in the management of the Company.  It is then said that Ho’s failure to disclose his status as an undischarged bankrupt at the time of the agreements, his control of the Company and its subsidiaries as chief executive officer and as the de facto director of the Company when he knew or ought to have known it was unlawful for him, as an undischarged bankrupt, to take part in or be concerned with the management of the Company without leave of the court and his continued position as a director of Taishan had caused the petitioner to lose all trust and confidence in the original shareholders, Ho and Chen.

9.  All this was coupled with the fact that on 24 September 2004 the petitioner received a notice of an extraordinary general meeting of the Company where the proposed resolution was that he should be removed from the board of directors.  It is said that he was removed despite the fact that it was the common understanding of the original shareholders and Ho and Chen that he should be a director.

10.  It is unnecessary to dwell on the fact that, as pleaded in the petition, section 131 of the Bankruptcy Ordinance makes it an offence for an undischarged bankrupt to obtain credit of $100 or more and to engage in any trade or business under a name or names other than those under which he was adjudicated bankrupt.  In this respect it should be mentioned that Ho had used an alternate spelling of his name in an apparent attempt to avoid detection by those who might know of his bankruptcy.  In addition, section 156(1) of the Companies Ordinance prohibits an undischarged bankrupt from acting as a director directly or indirectly taking part in or being concerned in the management of any company without leave of the court.

11.  In the course of argument the petitioner relied upon the fact that he had rescinded the agreement with Ho precisely because Ho had entered it whilst an undischarged bankrupt.  The judge below took the view that it could not be said that Ho had obtained credit.  That seems to me to be a simple point.  At this stage I consider that it is arguable that the arrangement (of the agreement) whereby there was still RMB 11 million outstanding did constitute obtaining credit.  The judge also appears to have taken a very narrow view in respect of the petitioner’s case that he had lost confidence.  Nevertheless, he did consider that the point was arguable particularly if the pleading were amended.  The judge also considered that the fact that the petitioner had been removed from office as a director was a ground upon which the petitioner could rely if there were sufficient allegations in the petition.  The judge gave leave to re-amend the petition to make such allegations.

12.  The judge however, struck out the relief, primarily of the claim for winding-up, on the basis that he did not consider it reasonable for the petitioner to insist on a winding-up when there was an alternative relief under section 168A of the Companies Ordinance which would enable the court to make a buy out order.  In paragraphs 48 and 49 of the judgment, the judge gave his reasons for ordering the prayer for the relief to be struck out.  In my view, the judge took far too early a view of the matter.

13.  In making the order to strike out the prayer for winding-up relief the judge referred to the decision of this court in Re Wong To Yick Wood Lock Ointment Ltd [2001] 2 HKLRD 683.  The starting point of the consideration was section 180(1A) which reads:

“where the petition is presented by members of the company as contributories on the ground that it is just and equitable that the company should be wound up, the court shall not refuse to make a winding-up order on the ground only that some other remedy is available to the petitioners unless it is also of opinion that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy”

14.  In the Wong To Yick case the judge at first instance had said that there was no prejudice to the petitioners by striking out the claim for winding-up relief.  Nor was there any substantive benefit to be gained from a winding-up order which the petitioners would not receive from a buy-out order.  She then had said:

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

15.  In the present case although the judge had started the consideration on the basis that he followed the approach prescribed in section 180(1A) of the Companies Ordinance by considering (assuming the allegations made in the petition to be true) whether there was any real possibility or prospect of a winding-up order being made, he, in effect, tried to decide the matter then and there.  That should only be done when the prayer for a winding-up will clearly not succeed.  So long as it may succeed, as in any other type of claim, the petitioner is clearly entitled to pursue his claim.

16.  Whilst it might be said that the petitioner was not apparently opposed to a buyout, it is not possible, at the moment, to say that he would be acting unreasonably to insist instead on a winding-up of the Company.  Indeed, winding-up the Company might well be to his advantage.  The Company itself is a holding company.  Taishan is quite obviously a going concern and any liquidator of the Company would be in a position to dispose of Taishan .  Indeed the petitioner may well wish to buy Taishan from the liquidator.  That would be a different proposition than buying out the shareholders of the Company.  Again the judge took the view that there would be a significant risk that a sale by a liquidator would produce a less satisfactory price.  That may well be a legitimate consideration when it comes to the final order to be made on the hearing of a petition but, again, at least so far as this case is concerned it is far too early a stage on a strike out to take such a view.  It cannot be said that the petitioner’s claim for a winding-up order is clearly unsustainable or that he is unreasonable in making such a claim.

17.  In the circumstances I would set aside the order made by the judge below with an order nisi of costs in favour of the petitioner.  In view of the fact that the judge ordered that the petition should be re-amended and this court has considered the re-amended petition particularly in those respects where the re-amendments were made, I would leave the order for costs below undisturbed.

Hon Le Pichon JA:

18.  I agree.