MARRAKESH INVESTMENTS LTD v. TANGIERS HOLDINGS LTD AND ANOTHER

HCCW 352/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 352 OF 2016

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D E C I S I O N

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1.  On 11 October 2016 the petitioner issued a summons seeking the appointment of an interim receiver over the property of the Company, alternatively an interim injunction restraining the 1^st respondent from transferring funds of the Company from its bank account until further order of the court.

2.  At the hearing before me today the petitioner was represented by Mr Richard Khaw SC and Mr Martin Ho and the 1^st respondent by Mr Jose Maurellet SC and Ms Sharon Yuen.

3.  The Company is owned equally by the petitioner and the 1^st respondent.  They in turn are owned or controlled by Mr Robert Ng and Mr James Jessop respectively.  Jessop & Baird was founded in the United Kingdom in 1923 by Mr Jessop’s grandfather.  It is apparently a leading specialist in hot-melt lamination and moulding manufacturing.  One of its customers is Marks & Spencer (“M&S”). M&S were interested in about 2003 in expanding its business in the mainland of China (“Mainland”) which Mr Jessop saw as an opportunity for Jessop & Baird to establish a factory in the Mainland.  It was during his investigations of the business opportunities that Mr Jessop came to meet Mr Ng.  As a consequence, they established the Company with a view to exploiting the business opportunities Mr Jessop thought existed in the Mainland.  Jessop & Baird would provide the technical know-how and the machinery and Mr Ng would be an investor and assist in setting up the factory and providing local know-how.

4.  The Company had one bank account in Hong Kong with HSBC.  Mr Jessop and Ms Neo Hwee Khim were appointed directors. Ms Khim represented Mr Ng’s interests. 

5.  The relationship between Mr Jessop and Mr Ng began to deteriorate in around April 2016.  There is a dispute between the parties concerning how certain monies were dealt with. 

6.  On 19 July 2016 Mr Jessop prevailed upon Ms Khim to resign her directorship leaving him as the sole director of the Company. The petitioner says Ms Khim was coerced.  Mr Jessop says she agreed to resign because he persuaded her that if she did not she would get drawn into the dispute between him and Mr Ng.

7.  On 20 July 2016 Mr Jessop changed the bank mandate so that the only signatories on the account were himself and his nominee Mr Hatim Allam.  On 4 August 2016 HSBC froze the Company’s bank account because Ms Khim had told them her resignation was invalid.  On 12 August 2016 the Company commenced HCA 2100/2016 against, inter alia, Mr Ng and Ms Khim seeking access to account records and return of US$950,000 Mr Jessop believed had been misappropriated.

8.  On 15 August 2016 Mr Jessop wrote on behalf of the Company to one of its customers, Eastside Holdings Limited (“Eastside”), asking it to make future payments to a company called Fully Plan Limited (“Fully Plan”) which is owned by Mr Jessop and his son.  This came to the attention of Mr Ng who, through his solicitors P C Woo & Co, demanded an explanation.  Mr Jessop’s then solicitors replied on 19 August 2016 saying:

“To avoid any over-reaction by your client, our client confirms that all payments received from the Company’s customers to Fully plan Limited are held on trust for the Company (the ‘Interim Payment Arrangement’). The reason for the Interim Payment Arrangement was due to the following reasons…”

9.  On 31 August 2016 the petitioner presented a petition number HCCW 307/2016 seeking as its principal relief a buy-out order.  Despite being presented as a winding-up petition, it did not seek a winding-up order.  Consequently this was converted into Miscellaneous Proceedings at the end of September, but on 3 October 2016 the petitioner issued a further petition seeking a winding-up order: HCCW 352/2016. 

10.  On 1 September 2016 the Company commenced HCMP 2296/2016 against HSBC for an order that the account that had been frozen be reactivated and operated in accordance with the most recent mandate. Mr Ng and Ms Khim applied to intervene.  On 23 September 2016 Deputy High Court Judge Ismail SC adjourned the Company’s application against Mr Ng and Ms Khim’s undertaking to apply for the appointment of a receiver within one week and also their agreement to the release of US$718,169.17 to order to allow the Company to make necessary payments.  The application was not made and on 30 September 2016 the DHCJ granted an order in similar form to a validation order and criticised Mr Ng and Ms Khim for failing to comply with their undertaking.

11.  On 30 September 2016 DHCJ Ismail SC granted an interim injunction in HCA 2572/2016 for delivery up of the Company’s property.  It was continued by Au-Yeung J on 14 October 2016.  On 9 November 2016 I granted a validation order as I was satisfied that the Company is solvent and has an ongoing business.

12.  Before turning to the petitioner’s grounds for seeking a receiver it is helpful if I address the principles by reference to which the court assesses applications such as the one before me.  In Re Zealot & Co Limited [1] Kwan J (as she then was) says this:

“The principles for the appointment of interim receivers are well established. I apply by analogy the principles for granting interlocutory injunctions in American Cyanamid Co v Ethicon Ltd [1975] AC 396. I need to consider if there is a serious case to be tried, if there is proper basis for appointing receivers such as a jeopardy to assets, and where does the balance of convenience lie.”

Kwan J was persuaded to appoint receivers because she was satisfied, to quote §40 of her Ladyship’s judgment, “that a case is made out that there may be a risk of dissipation of assets.  I am persuaded there is a need to preserve and protect the assets of the Company pending the resolution of the ownership dispute.”

13.  Mr Khaw SC argued that the rationale underlying these principles is as explained by Harman J in Re a Company (No 596 of 1986) [2]:

“ In a partnership dispute it is almost as of course for the court, where the partners have fallen out and there has to be a dissolution, to order the appointment of a receiver, on motion, at an early stage of the partnership action. That is done to hold the ring, to ensure that the partner or partners who happen to be in possession of the partnership trading assets do not obtain advantage, nor damage the partnership assets to the harm of the dissenting partner, nor siphon them away or otherwise maltreat the partnership affairs. It is done without any judgment of the rights or wrongs in the partnership action or any attempt to take a view as to why the partnership has broken up. It is simply designed to hold the ring and ensure that the status quo of the assets is preserved, that the value of the business is there, so that the whole thing may best be realised for the advantage of all partners in due course. That is particularly the case where there is a business with a going concern and a goodwill.

That analogy seems to me to have considerable, though by no means total, aptness to this case and indeed to almost all cases of private companies formed on a basis of quasi-partnership between two sides both having substantial shares in the equity and having come together with a view to all being involved in the trading of the company. The analogy cannot be perfect because a company is a separate legal creature for which statutory remedies of winding-up petitions, petitions under sec. 459–461 and so forth are provided; and the dissolution of the company does not automatically follow on a falling-out of the corporators as the dissolution of a partnership, certainly at will, would inevitably follow on the falling-out of partners. Thus the analogy is not perfect. Yet, in my view, it provides a correct and desirable base from which to approach the whole matter.

The reasons which apply to cause the court almost as of course to appoint a receiver in a partnership dispute have considerable similarities to, and are in my judgment properly applicable as guides to the court in a company of this sort. The decision which I myself made and which I cited in the motion by Mrs. Jeska to have a receiver appointed under her debenture, which was the decision, again in a case called In Re a Company, that the important thing was that while a sec. 75 of the old Act (sec. 459–461 of the 1985 Act) petition proceeded it was of great importance to preserve the status quo, to hold the ring, to ensure that the assets remained undiluted, undiverted and properly administered; so that, if the court came to the conclusion, as it frequently does, or if the parties reached a sensible decision that one should buy out the other as a matter of compromise, the assets would be capable of specific valuation in much the same state as they had been before the breakdown had taken place. It seemed to me in the original case In Re a Company, and it seemed to me on Mrs. Jeska’s application in this case, that such a doctrine is a sound approach and, in my view, such a doctrine supports the idea that in a case like this, acting by analogy with partnership, the court might well think fit to appoint a receiver.”

This passage is repeated in the judgment of Kwan J in Re HK Sindy Footwears Limited [3].

14.  The way in which Mr Khaw SC framed his submission interpreted these passages as suggesting that the court would commonly be justified in appointing receivers in the case of shareholders disputes in order to ensure the status quo ante is preserved.  Insofar as this is what in Re a Company holds I would respectfully disagree that this is a correct statement of general principle.

15.  The appointment of receivers over an ongoing business has considerable and generally adverse effect.  First, it is expensive and depletes the assets of the company.  Secondly, it is generally damaging to businesses such as that of the present Company, which involves manufacturing and sale of items, as opposed, as was the case in Re a Company, to a more static business such as letting commercial or residential property. This is recognised in a number of Hong Kong decisions.  In Wong Luen Hang and Tsui Kowk So v Chan Yuk Lung and others [4]DHCJ Le Pichon says this in §§74 and 90:

“74. I bear in mind that there must be ‘solid evidence’ of the risk of dissipation. A receivership order is a serious infringement of rights and is only justified on appropriately clear and strong facts and risks. The standard of proof of the real risk of dissipation is relatively high: see Colman J in Laemthong International Lines Co Ltd v Artis [2005] 1 Lloyd’s Rep 100 at §60 citing Thane Investments Ltd v Tomlinson [2003] EWCA Civ 1272. That standard is applicable to all applications whether inter partes or ex parte.

…

90. Moreover, that the appointment of receivers is likely to impact adversely on the reputation of a company is a view that is widely held and a reality in the commercial world.  It creates a negative impression and is generally not well perceived.  How severe the impact is likely to be in any particular case is necessarily fact-sensitive.”

Madam Justice Chu (as she then was) is to similar effect in Re Full Billion Shipping Limited [5] in §48:

“48. I accept that it is probable that the appointment of receivers may be misunderstood by people dealing with Lishui as indicating that Lishui is financially or otherwise in trouble. As observed by Ferris J in Jaber v Science & Information Technology Ltd [1992] BCLC 764 at p.789G, it is inevitably difficult for people in the outside world to clearly differentiate between receivers appointed on grounds of insolvency and receivers appointed on other basis. In Floydd v Cheney [1970] Ch 602 at p.610F–H, Megarry J further observed that:

… I do not think that it can be denied that news that a receiver of a business or a professional practice has been appointed is news that may well cause members of the general public to hesitate in resorting to that business or practice. It may indeed be that some of the inferences that the public would draw from the appointment of a receiver would be quite wrong; but one cannot expect the public to have a precise appreciation of every aspect of the institution of receivership.”

16.  Thirdly, in cases such as the present where clearly the principal relief sought is a buy-out, it will generally be desirable commercially that the business is operated by the persons likely to take control of it if they are ordered to purchase the petitioner’s shares or a price is agreed voluntarily.  It is recognised in a number of authorities that where a petitioner seeks a buy-out the courts are reluctant to make an order that keeps the petitioner involved in management against the wishes of the prospective purchaser: see §17of my decisionin Re Roeders (China) Limited [6]and the authorities referred to in footnote 2.

17.  It seems to me that a similar logic applies in the case of receivers.  If a petitioner seeking a buy-out order wishes to appoint a receiver, he has to demonstrate that there is sufficient risk to the economic value of the company to justify such an intrusive order.  There is not some form of presumption that if the petitioner is excluded from management he is entitled to have a receiver appointed.  In practice the court will have to balance the evidence of the risk of dissipation of assets or general damage to economic value against the disadvantages of appointing receivers.  Each case will depend on its facts.

18.  In the present case the petitioner points to two matters to suggest that there is a risk to the assets of the Company, and the accounts of the Company being so unreliable that a future valuation will be difficult.

19.  First it points to the initial correspondence in August 2016 after the petitioner found out that Mr Jessop had written to Eastside.  Oldham, Li and Nie (“OLN”) clearly stated, Mr Khaw SC argued, that money received by Fully Plan will be held by it on trust for the Company. However, subsequently in the evidence he has filed, Mr Jessop says that in fact Fully Plan did not receive any such payment and that such cheques as were received were paid into the Company’s account.  Mr Khaw SC argued that this is inconsistent with the wording of the letter sent by OLN and that it is also difficult to believe as there were periods between September and 9 November 2017 when cheques could not be deposited into the Company’s account. What happened to the money, he asked rhetorically.

20.  I accept that the language of OLN’s letter suggests money had been received. However, Mr Jessop’s evidence is clear and I can see no reason to conclude that he is lying rather than that whatever tense OLN may have used in their letter, what they were in fact intending to state was an intention rather than record a fact that had occurred.

21.  The second is a payment made on 2 June 2017 to Fully Plan from OLN for US$295,200.  The petitioner became aware of this as it is detailed in the statement and supporting documents provided to the petitioner for the June 2017 period pursuant to the validation order I granted in November 2016.  The petitioner has not written asking for an explanation for this payment, which was clearly not hidden from it.  It may be that it was a reimbursement of part of the sums Mr Jessop says he paid on behalf of the Company when its account was frozen.  I do not know, largely because the petitioner has not raised it in its evidence.  I do not think that it provides any basis for concluding that there is sufficient risk to assets to justify appointing receivers.

22.  There is a final point raised by Mr Maurellet SC which I should address.  The summons was issued pursuant to the undertaking given to DHCJ Ismail SC in September 2016.  It was, however, set down for hearing by the 1^st respondent not the petitioner.  Mr Khaw SC argued that the delay was attributable to the 1^st respondent’s delay in filing evidence in opposition.  I find this explanation unconvincing. Clearly in September what was envisaged was an expedited hearing.  The petitioner has, however, never sought an expedited hearing and the present hearing has, as I have mentioned, been fixed at the 1^st respondent’s instigation.  This is inconsistent with a genuine concern on the petitioner’s part that it is necessary to appoint a receiver as opposed to a tactical application made out of a combination of necessity, given the undertaking that was given to the DHCJ, and a general commercial motive.

23.  I dismiss the application to appoint the receiver. I can see no justification for granting the injunction that is sought in the alternative given the effect of section 182 and the terms of the validation order.

Costs

24.  Mr Maurellet SC has asked for an order that the 1^st respondent’s costs of the application are paid forthwith by the petitioner. 

25.  Mr Khaw SC brought to my attention the decision of the Court of Appeal in King Fung Vacuum Limited v Toto Toys [7].  Rogers V-P explains the normal practice in respect of costs of applications for interlocutory injunctions, which Mr Khaw SC submitted, applies equally to an application to appoint interim receivers.  In §27 the V-P says this:

“The final matter is the matter of costs. The Judge made an immediate order as to costs and there was an application to set that aside. By reason of the judgment which I have already given, that order, of course, has gone. But I will say this as to the question of costs. The traditional order on interlocutory injunctions has been that the successful party in any application for an interlocutory injunction would have his costs in the cause. Following the American Cynamid decision, the practice has frequently been to make both parties’ costs, costs in the cause. There is no justification if one applies American Cynamid principles for giving the successful party his costs in any event, or worse still an immediate order as to costs, unless of course, that party has acted improperly or is in some way to be penalised. It could be, for example, that if a plaintiff seeks an interlocutory injunction and the application is totally baseless and does not even establish, for example, that there is a matter fit to be tried, that the Court would then consider that such an order might be made. But those would be very special circumstances. Normally an order of either costs in the cause, or perhaps the successful party’s costs in the cause would be appropriate.”

On the strength of this passage, Mr Khaw SC sought an order that the 1^st respondent’s costs of the application be the 1^st respondent’s costs in the cause. I queried whether this still represented the practice of the court in the light of the Civil Justice Reform (“CJR”). 

26.  Mr Maurellet SC referred me to a judgment of Mr Justice Johnson Lam (as he then was) in Midland Business Management Limited v Lo Man Kui (No 2) [8]. In §§1 to 8 of the decision, Lam J discusses the authorities relevant to the incident of costs prior to CJR, and then says as follows in §§9 to 11:

“9. Under Civil Justice Reform, the court is encouraged to order immediate payment of costs of interlocutory proceedings and if possible by way of summary assessment of costs. The objective is to discourage unnecessary and disproportionate interlocutory applications. It is recognised that the lack of immediacy of orders to pays costs ‘in the cause’ or ‘in any event’ weakens costs as a sanction against unwarranted applications or resistance, see paras.529–536 of the Final Report of the Chief Justice’s Working Party on Civil Justice Reform.

10. By reason of O.62 r.5(1)(aa), the court should take into account the underlying objectives in O.1A r.1 in the exercise of its discretion. The objectives in r.1(a), 1(c) and 1(d) are particularly relevant in the present context. In my view, the approach recommended by the Working Party should be adopted in furtherance of these objectives. Unwarranted interlocutory applications should normally be sanctioned by an immediate costs order.

11. In so saying, I must not be taken as saying that an immediate costs order should be made against every unsuccessful party in an interlocutory application. I can readily see that there are cases where such a party may have a proper justification for making an interlocutory application even though he fails at the end of the day. There could also be cases where the court considers that it would be more appropriate to make an order ‘in any event’ or ‘in the cause’ or to reserve costs.”

What Lam J’s observations recognise is that the current practice of the court is to treat interlocutory applications as being discrete, and there is a greater readiness to make orders that the costs of an interlocutory application are paid immediately.  This, in part, represents a recognition that it will commonly be appropriate for a successful party to recover payment immediately, rather than have to wait until the end of a case.  It also represents an attempt to incentivise litigants to approach interlocutory applications in a responsible way and not to make unnecessary or speculative applications. 

27.  In practice, it may be that there is not a significant difference between the approach described by Rogers V-P and that described by Lam J.  There may now be a greater willingness to make immediate costs orders in respect of interlocutory applications.  But that does not necessarily mean that the reasons for the approach traditionally adopted when dealing with interlocutory injunctions cease to be relevant, as their justification would appear to be a recognition that whatever the view taken of the relevant evidence by the judge hearing the interlocutory application may be, it is possible that the way in which matters develop at trial will demonstrate that it would be inappropriate for the unsuccessful party to the interlocutory application to have to bear the costs.

28.  What, however, does seem to me to be important is that it is clear what the approach of the court is, in order that a party’s legal advisors can give comprehensible and reliable advice as to the likely consequences of an application being unsuccessful, in order that the prospective applicant can weigh whether or not it considers it appropriate to make the application and risk an immediate adverse costs order. 

29.  My own preference is for a robust and clear approach.  It seems to me generally that when faced with an application such as an application for the appointment of interim receivers, the position will be that if the application is unsuccessful, the applicant will pay the costs, and pay the costs forthwith unless it can be demonstrated that there is reason to think that at the conclusion of the proceedings, the trial judge may be persuaded that that is an unfair order to make. 

30.  In the present case, it does not seem to me that the application falls into the speculative category, although, as will be apparent from my reasons, it seems to me that the application should have been seen long before this hearing to be weak.  In the circumstances, therefore, I will order that the petitioner pays the 1^st respondent’s costs forthwith.