LIU TIEH CHING BRANDON (also known as LAU TIT SHING) v. LIU JU CHING AND OTHERS

HCCW 109/2019 & HCA 931/2019
(HEARD TOGETHER)

[2021] HKCFI 823

HCCW 109/2019

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 109 OF 2019

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AND

HCA 931/2019

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO 931 OF 2019

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(HEARD TOGETHER)

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D E C I S I O N

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Introduction

1.  I have three summonses before me in HCCW 109 of 2019 (“Petition”) and in the related HCA 931 of 2019 (“Action”).  Two identical summonses taken out by the 1^st to 4^th Respondents and the 5^th Respondent respectively to strike-out or stay the Petition or parts of it.  There is also a summons taken out by the Defendant (“Brandon”) for the striking-out and dismissal, alternatively a stay of the Action pending determination of the Petition.

2.  As the names of the parties suggests the present litigation involves a dispute between members of the Liu Family.  The Company (6^th Respondent), which is the subject of the Petition was established by Liu Hao Tsing, who was apparently a successful businessman known in Hong Kong by the soubriquet “Hong Kong Oil Tycoon”, which indicates his business activity.  Liu Sr established two groups of companies known as the OAL Group and the FEOSO Group.  The OAL Group engaged in the business of shipping investments and operations, industrial machinery trading, chemical and oil-based manufacturing and trading and real estate.  The FEOSO Group had at its apex FEOSO Group Holdings Ltd, engaged in trading of marine fuel and bunker oil, retailing and management of petroleum fuel stations and manufacturing and trading of lubricant.  Liu Sr had three sons and three daughters, which in order of seniority are:

(1)  Liu Ling Po;

(2)  Brandon, the Petitioner and the Defendant in the Action;

(3)  Liu Shen Po, the 4^th Respondent to the Petition;

(4)  Liu Ju Ching, the 1^st Respondent to the Petition and the 2^nd Plaintiff in the Action;

(5)  Liu Yiu Ching, the 2^nd Respondent in the Petition; and

(6)  Liu Ping Po Peggy

3.  Until 21 November 2003 the Company’s entire 5,000 shares were held by Liu Sr.  On 21 November 2003 Liu Sr gifted 1,500 shares in the Company to the 5^th Respondent (“Foundation”), which was established by Liu Sr for educational charitable purposes.  The Foundation is limited by guarantee.  Liu Sr continued to hold the balance of the shares in the Company.

4.  On 16 December 2019 Liu Sr signed a statement in the presence of Liu Yiu Ching (“Statement”). It is written in Chinese.  In translation it reads:

“I, Liu Hao Tsing, hereby decide to make the following arrangement of the shareholding of ‘Overseas Associates Limited’:

(1)  The shareholding shall be held by Tit Shing, Ju Ching and Yiu Ching in the 4:3:3 ratio, and shall not be sold or transferred;

(2)  Overseas Associates Limited shall be chaired and managed by Ju Ching, all others shall not object;

(3)  Anyone of the three brothers shall not bring any legal actions against ‘Overseas Associates Limited’, ‘Liu Hao Tsing Education Foundation Limited’ or any of their subsidiaries or any of the Liu Siblings, damage Liu Family’s reputation. If anyone breaches this provision, their shares in Overseas Associates Limited shall be returned to ‘Liu Hao Tsing Education Foundation Limited’ and shall be enforced by the executor of my will.”

5.  It is the Respondent’s case that at a meeting on 4 December 2013 at Liu Sr’s office at the Company Brandon and Ju Ching signed the Statement indicating that they agreed to be bound by its terms.  Following the signing of the Statement the remaining shares Liu Sr held in the Company were gifted to Brandon, Ju Ching and Yiu Ching (his three sons).  In tabular form the shareholding became:

	Name of shareholder	No. of shares	Percentage
1.	The Foundation	1,500	30%
2.	Brandon	1,400	28%
3.	JC	1,050	21%
4.	YC	1,050	21%
		5,000	100%

6.  On 18 August 2016 Liu Sr died and on 5 July 2017 Ju Ching was appointed as executor of Liu Sr’s estate.

7.  On 11 April 2019 Brandon issued the Petition.  The Plaintiffs contend that this was in breach of the Statement.  Ling Siu Kwong (3^rd Respondent) is not a Liu Family member, but an employee of OAL, who had worked for OAL and Liu Sr for more than 50 years retiring around about the time of Liu Sr’s death.

8.  In general terms it is Brandon’s case that in 2012 and 2013 Ju Ching with the support of Yiu Ching and Shen Po began to exclude him from the business of OAL and change the basis upon which OAL had been managed.  Also he began to have suspicions about the conduct of the affairs of the FEOSO Group and, in particular, Ju Ching, Yiu Ching and Shen Po’s role in it and fund flows between the two Groups of companies.  Brandon says that he could not get satisfactory answers to his questions about the FEOSO Group’s affairs.  Since 2014 Brandon says Ju Ching with the support of Yiu Ching and Shen Po have excluded him from the businesses of both Groups.

The Applications

9.  The Respondents apply to strike-out the Petition on the grounds that it is in breach of the Statement and have commenced the Action to enforce its terms with the consequence, they say, that Brandon’s shares in the Company are forfeited and thus he has no locus to present the Petition.  Brandon’s summons seek to strike-out or stay the Action pending the determination of his Petition.  Essentially the applications are the respective camp’s case on the impact if any of the Statement on Brandon’s rights to commence the Petition.

10.  There are also subsidiary complaints by the Respondents including one that the Petition was advertised early and in breach of Rule 24 of the Companies (Winding Up) Rules (Cap 32H) thus depriving the Respondents of the opportunity to apply to court to enjoin Brandon from presentation of the Petition.  It is said this is an abuse, which renders the Petition liable to be struck-out.  Before describing the Respondent’s case in a little more detail, I would make the obvious point that I am not asked to determine preliminary issues.  I am asked to determine applications by both camps to strike-out the whole or part of the proceedings against them.  This I should only do if I am satisfied that it is a plain and obvious case for dismissing either the whole or part of a case using the summary power to be found Rules of the High Court O18 r19 [1].  In practice this means that the court approaches the application guided by the following principles:

(1)  The power to strike-out pleadings is a draconian one and will only be exercised in plain and obvious cases.

(2)  The claim must be “obviously unsustainable”, the pleadings “unarguably bad”, and it must be impossible, not just improbable, for the claim to succeed before the court will strike it out.

(3)  One must be careful not to drive a plaintiff from the judgment seat nor to have the court decide difficult points of law on a strike-out application:[2]

(4)  There should be no trial upon affidavits.  Disputed facts are to be taken in favour of the party whose pleading is sought to be struck out.  The mere fact that the case is weak and not likely to succeed is no ground for striking-out:[3]

(5)  If the pleading is liable to be struck-out, the opportunity to amend may be given when there is reason to believe that the case can be improved by amendment, even if the formulation of the amendment is not before the court:[4]

Respondent’s Case

11.  The Respondents say that the Petition should be struck-out in its entirety on the following three grounds:

(1)  The Respondents contend that the effect of the Statement is clear.  In exchange for receiving the shares Brandon agreed not to commence proceedings against the Company, the Foundation or his siblings.  There is no qualification to this restriction.  As a consequence presentation of the Petition was an abuse.

(2)  It is also argued that the circumstances in which Rule 24 was breached was an abuse and the Petition should be struck-out.

(3)  Finally, that insofar as the complaints in the Petition are of misconduct they should be dealt with by a derivative action.  It is an abuse to raise them in an unfair prejudice petition.

12.  There are the following additional grounds advanced for striking-out particular sections of the relief:

(1)  The winding up relief is liable to be struck-out because the alternative relief of a buy-out is available.

(2)  There is no real prospect of the principle relief sought, namely, a distribution in specie, being granted.

(3)  Brandon seeks an order that Ju Ching and Yiu Ching buy out the Foundations shares, but Brandon has no locus to bring that claim.

(4)  Finally, the Petition should be struck-out against Siu Kwong and Shen Po as no relief is sought against them.

13.  The principal attack on the Petition is that, which relies on the Statement.  There is no dispute about its interpretation.  It is not controversial that the Statement purports to restrict Brandon presenting the Petition and, if he should breach this restriction, requires the executor of Liu Sr’s estate to take action to have Brandon’s shares in the Company transferred to the Foundation.  The dispute can be summarised thus: Does the Statement constitute an absolute bar to Brandon presenting the Petition or is the condition purporting to prohibit this unenforceable because it is an impermissible restriction on Brandon’s right to exercise the rights attaching to the Shares, which were transferred to him by his Father, Liu Sr?

14.  I do not understand there to be any dispute that the determinative issue is that to which I have just referred.  If the prohibition is not what is referred to in the authorities as a repugnant condition, it can be enforced as the Respondents contend by an order for specific performance.  The relevant principle is, as might be anticipated because of its application to transfer of assets such as land and shares, of some age.  In Byng v Lord Strafford [5] the Master of the Rolls, Lord Langdale, summarises it as follows:

“It is undoubtedly the duty of the Court to give effect to the intention of testators, as far as the rules of law will permit; but if a testator uses words, which by their plain import, give an absolute estate, the circumstances of his giving the same absolute estate to a succession of legatees in a manner incompatible and inconsistent with the property plainly given to the first, will not authorise the Court to alter the effect of the words by which that property is given.

The first legatee of a quasi estate tale in personality has the absolute interest, notwithstanding a manifest and avowed intention to give a succession of limited interests.  If an absolute interest be given upon an express condition, which may be lawful in itself, but is incompatible with the free enjoyment of the property, the Court does not modify the absolute interest, for the purpose of giving effect to the condition, but declares the condition void, for the purpose of supporting the absolute interest.  Where the condition intended to be annexed to a gift is inconsistent with, and repugnant to the gift itself, the condition is held to be wholly void.  Bradley v Peixoto (3 Ves. 324); Ross v Ross (1 Jac. & W. 154).”

15.  I agree with Mr Shieh that although this is said in the context of a will, there is no doctrinal reason why it does not equally apply to a gift inter vivos. Mr Manzoni does not dispute this.  The Respondents objections are that the principle has no application in a case in which the restriction arises from an express agreement made by the transferor and transferee.  The cases relied on by Mr Shieh are different.  They all involve either a gift under a will [6] or settlements [7] on terms including restrictions to which the beneficiary was not asked to agree and there is no evidence did so. Mr Manzoni argues that in these circumstances this is not a case of an objectionable restriction on a beneficiaries ability to exercise the rights attaching to the asset gifted to him, but rather a simple matter of contract involving a clear agreement by Brandon not to do the thing that he has done. Mr Manzoni points to the fact that it was Brandon, who suggested that lawyers be present when the Statement was executed and there is no suggestion that he did not fully appreciate to what he was agreeing.

16.  There is clearly no reason at this juncture not to proceed on the basis that both Liu Sr and Brandon intended at the time they signed the Statement that it did restrict Brandon from commencing, as the Statement as a matter of language provides, any legal proceedings against the Company, the Foundation or any of his Siblings.  The difference between the two camps cases are very stark.

17.  Given that I am dealing with strike-out applications I proceed on the basis that the facts and matters asserted by Brandon in the Petition demonstrate a prima facie case for relief for unfairly prejudicial conduct and matters, which, to use the Latin maxim, constitute probabilis causa litigandi.  In these circumstances is Brandon to be held to his bargin or is the restriction in the Statement an impermissible interference with the rights that were transferred to him?  It does not seem to me that the answer to this question is plain or obvious.  The difficulty in answering the question is illustrated by a second ground of attack on the restrictions advanced by Mr Shieh, namely, that it is inconsistent with public policy because it purports to restrict the statutory right Brandon has a shareholder to seek relief for unfairly prejudicial conduct.  There is force in my view in Mr Manzoni’s submission that a restriction imposed by a gift of shares to one shareholder is different from a restriction that has been found to objectionable in articles that purport to restrict all shareholders’ rights to present a winding up petition. However, restricting a shareholder’s right to seek relief in circumstances that are manifestly justified (which for the purpose of argument I assume) does seem to me require consideration of policy like matters.  It is arguable, I would have thought, that the present owners of shares cannot transfer them with restrictions that purport to exclude statutory rights, because to do so would be fundamentally inconsistent with the corporate governance regime established by the Companies Ordinance, Cap 622 (“Ordinance”) for Hong Kong incorporated companies.  It might be thought, for example, that the rights that attach to the shares are by their nature not ones that can be interfered with if they are transferred; in other words the present shareholder does not have a right to restrict the way the rights attaching to shares can be exercised when the shares are transferred.  It might be argued that this is implicit from the provisions of the Ordinance and, depending on the restriction, the agreement contained in the articles of association, which bind each shareholder inter se when they become a shareholder.

18.  I am not, therefore, satisfied that this is a suitable case for a strike-out.  It maybe, if the material facts can be agreed and/or the scope of the evidence that needs to be called agreed, suitable for determination as a preliminary issue.  I will address the question of a stay of the Action later in this decision.  In the case of the Petition the Respondents have as I have explained advanced alternative grounds for striking-out the Petition.  It follows from this conclusion that I will dismiss Brandon’s application to strike-out the action on the grounds that the statement is clearly unenforceable.

19.  The Respondents complain that the Petition was advertised in breach of Rule 24 of the Winding Up Rules (Cap 32H), the material part of which is in the following terms:

“Every Petition shall be advertised 7 clear days or such longer time as the court may direct before the hearing, as follows…….”

This includes advertising in the Gazette.

20.  The Petition was issued on 11 April 2019.  It is not clear to me when it was served.  On 17 May 2019 Nixon Peabody, solicitors for the Respondents, wrote to Brandon’s solicitors drawing to their attention the Statement and asking for the Petition to be withdrawn and requesting that it would not be advertised. The Petition was listed for hearing on 12 June 2019.  The Respondents say that it should, therefore, not have been advertised until seven clear days before that date.  Unbeknown to Nixon Peabody at the time of sending their letter the Petition has been advertised; on 18 April 2019.  The Respondents complain that not only was this in breach of Rule 24, but as Brandon’s action in writing immediately after presentation of the Petition to the Company’s bankers bringing the Petition to their attention demonstrates, it was done with the conscious intention of causing problems to the Company and the Respondents.  It is not clear from Brandon’s evidence whether he had any active involvement in the decision to immediately advertise the Petition or whether this was treated by his solicitors as a routine procedural step and determined by them without client involvement as would commonly be the case.

21.  Mr Shieh argued that Rule 24 must be read as meaning at least seven clear days before the hearing of the Petition and the power to extend time intended to allow the period to be shortened not lengthened.  Mr Shieh advanced various reasons for so reading the Rule.  First, that it is unclear why advertising earlier would be considered a matter which required court approval as the purpose of the Rule was to ensure the creditors and contributories were given adequate notice of the hearing.

22.  Mr Manzoni submitted that English authorities [8] suggested that the equivalent rule in England was intended (A) to allow a company time to settle a debt before advertising, alternatively to apply to court to enjoin advertising in the event the Company believed that it has a bona fide defence on substantial grounds to the petition, which consequently was liable to be dismissed and (B) inform creditors and contributories of a company of the hearing of a petition.  This I accept.  I also accept that a sufficiently serious infringement of the Rule might be capable of constituting an abuse of process that justified striking-out a petition.  However, that turns in the first instance on identifying what Rule 24 requires, which takes me to Mr Shieh’s next submission.

23.  It would appear, argued Mr Shieh, from other Rules that Rule 24 is likely to have been intended to read that advertising was required at least seven clear days before.  There are various other provisions, which point to this interpretation says Mr Shieh.  Rules of the High Court O3 r2(4) provides that “Where the act is required to be done a specified number of clear days before or after a specified date, at least that number of days must intervene between the day on which the act is done and that date”.  The Rules of the High Court apply to winding up proceedings if there is no equivalent Winding Up Rule [9].  Rule 24(b), which applies in the case of non-Hong Kong companies requires a petition to be advertised “twice at least in one local newspaper”.  This is not workable if the advertisement has to take place on one day.  A similar point arises from the fact that the Gazette is normally published on a Friday thus making it in practice impossible to comply if the time period is exactly seven clear days before a hearing on a Wednesday before a Master.  Mr Shieh made a number of other peripheral points to the same effect.  In addition there is also the matter that in order to obtain a Registrar’s certificate it is necessary to have demonstrated that the hearing date has (or presumably will) be advertised.  Having checked with the Masters who deal with the initial stages of the winding up petition process it appears that petitions are invariably advertised more than seven days before the hearing and they have treated Rule 24 as requiring a petition to be advertised at least seven days before the hearing of the Petition.

24.  What is clear is that the operation of Rule 24 and its wording has not been well thought through. It would seem to me that the most sensible reading of it is that it means at least seven clear days before the hearing of the petition.  If I am wrong about that I would still not be inclined to strike out a petition because of a failure to comply with what in my view is an ambiguous Rule and for doing what seems to be a normal practice.

25.  The second ground for seeking to strike-out the entire Petition is that the complaints relied on concern director’s misconduct rather than mismanagement of the Company’s affairs to a degree that constitutes unfair prejudice.  The distinction and its significance are explained by me in Re Plankton Limited [10].

“12.  There is also an established limitation on the extent to which a petitioner can rely on misconduct, as opposed to mismanagement, by officers of a company as constituting unfair prejudice in a petition issued under section 168A. The following principles emerge from a consideration of the authorities:

(1)  If the essence of the complaint being made is of director’s misconduct, rather than of director’s mismanagement, the proper vehicle for seeking and obtaining relief would usually be a derivative action, rather than a section 168A petition: Re Charnley Davie Ltd (No 2) [11] (Millett J); Re Chime Corporation [12] §§47-48 (Lord Scott NPJ); Waddington Ltd v. Chan Chun Hoo [13] §77 (Lord Millett NPJ).

(2)  The very same facts may provide the foundation for both a derivative action and a section 168A petition. Indeed, directors’ acts of misconduct may well provide the requisite evidence to establish a charge of unfairly prejudicial management. See: Hollington, Shareholders’ Rights, 6^th edn, §§7-12, 7-66 to 7-68; Joffe, Minority Shareholders, 4^th edn, §§7.182 to 7.187, 7.196; Re Charnley Davies Ltd supra [14] (Millett J); A R Evans Capital Partners Limited v Novel Alternative Investment Limited [15] §77 (Barma J).

(3)  Therefore, in order to ascertain whether a complaint is one of misconduct or mismanagement, it is not enough simply to look at the acts complained of. Instead, it is necessary to look at the nature of the complaint and the relief sought. As Millett J explained In Re Charnley Davies supra at 783f-h:

‘In my judgment the distinction between misconduct and unfairly prejudicial management does not lie in the particular acts or omissions of which complaint is made, but in the nature of the complaint and the remedy necessary to meet it…If the whole gist of the complaint lies in the unlawfulness of the acts or omissions complained of, so that it may be adequately redressed by the remedy provided by law for the wrong, the complaint is one of misconduct simpliciter… It is otherwise if the unlawfulness of the acts or omissions complained of is not the whole gist of the complaint, so that it would not be adequately redressed by the remedy provided by law for the wrong.’

In Re Shun Tak Holdings supra, Kwan J explained at §35:

‘…the key to the [misconduct/mismanagement distinction] is not just to look at the nature of the complaint…It is to look at the nature of the complaint together with the relief sought. If the whole gist of the complaint is misconduct and the objective of the litigation is to seek redress for the company for the misconduct, then it is squarely a case within derivative action territory...’

13.  It determining whether or not a particular claim is inconsistent with these principles it is, therefore, necessary to consider not only the factual complaint but the relief that is sought. The authorities recognise that matters which constitute breach of duty by a director may be relied on as unfair prejudice by a petitioner so long as they form part of a broader complaint. If they constitute the whole of the complaint they are more appropriately and efficiently remedied by a derivative action. Similarly, if such matters are the basis of a claim for relief that could be sought in a derivative action generally a derivative action is the correct process by which to pursue the relief.

14.  In paragraphs 18 and 19 her judgment in Re Shun Tak Holdings Ltd ibid Kwan J explained that the principles applicable in a strike out application on the basis that a case is advanced, which is properly brought as a derivative action, are the same as those that generally apply in applications to strike out unfair prejudice petitions, namely:

(1)  The court will assume that the facts alleged in the petition and supporting evidence are correct;

(2)  The burden is on the applicant to prove that it is a plain and obvious case for a striking out as the case is bound to fail; and

(3)   It is inappropriate to strike out a petition based on a pleading point that can be remedied.”

26.  It follows that what is required is a consideration of the extent to which the complaints, which arise from matters that could be addressed by a derivative action if a company is not willing to seek redress in respect of them, can fairly be said to constitute the substance of the complaint or whether they demonstrate unfairly prejudicial behaviour, which a petitioner credibly contends justify granting him a personal remedy such as an order that his shares be purchased rather than leaving the complaint to be remedied by an action for recovery of loss caused to a company.

27.  In the present case the relief that is sought is:

(1)  As the primary relief, an order for distribution of assets in specie;

(2)  An order that Ju Ching and Yiu Ching do sell their 1,050 shares in the Company;

(3)  Alternatively, that Ju Ching and Yiu Ching buy Brandon’s Shares;

(4)  And injunction; and

(5)  Alternatively an order that the Company be wound up.

28.  Paragraph 132 of the Petition pleads:

“In accordance with sections 724 and 725 of the CO, BL seeks as his primary relief an order that:

132.1.  the assets of OAL Group be assessed at their fair market value taking into account the adjustments to the value of OAL Group as pleaded in paragraph 133.3 below; and

132.2.  the assets of OAL Group be distributed to the shareholders of OAL in specie, in accordance with their respective interest in OAL and on such terms as the Court sees fit.”

29.  Paragraph 133.3 pleads:

“LJC, LYC, LSP and LSK are liable to compensate OAL Group for any loss suffered as a result of their unfairly prejudicial conduct complained on in Sections C1 to C9 above together with compound interest on the amounts LJC, LYC, LSK and/or LSP are liable to account to OAL.”

30.  Section C of the Petition deals with the matters, which Brandon contends constitute unfair prejudice.  In [40] of the Petition these matters are divided into nine categories:

“40.1.  Unauthorised and unjustified interest was paid by FEOT to LJC, LYC, LSK and LSP from 2011 onwards (Section C1);

40.2.  Unauthorised and unjustified interest was paid by OAL to several companies in OAL Group and other related companies from 2011 onwards (Section C2);

40.3.  Questionable payments were made by FEHK for alleged commissions, bonuses, red packets, cash advances, payments to ‘Jiangsu’ and payments to Low Hee Teck (‘Low HT’), which were recorded as temporary payments in FEHK’s ledgers and as the amount due from LJC in FEHK’s audited accounts for the period from 1 April 2016 to 31 December 2016 (Section C3);

40.4.  Misappropriation of dividends payable to the shareholders of FEHK and OAL by purportedly applying the dividends to repay the temporary payments owed to FEHK (Section C4);

40.5.  Misappropriation of OAL’s and FEOT’s funds to pay the personal expenses or for the benefit of LJC, LYC, LSK and LSP, and improper accounting to conceal the true nature of the payments (Section C5);

40.6.  Unauthorised and unjustified fund transfers between OAL and FEOSO Oil Trading Ltd (Section C6);

40.7.  Unauthorised use of OAL Group’s assets for FEOSO Group’s purposes (Section C7);

40.8.  Falsification of company’s documents (Section C8); and

40.9.  BL has been wrongfully excluded from the management of the financial affairs of OAL Group and has been denied his right to have full access to the information and documents of OAL Group (Section C9).”

31.  Categories 8 and 9 concern the alleged filing of forms with the Companies Registry falsely recording the resignation of Siu Kwong and Liu Sr as directors and the exclusion of Brandon from management.  These are conventional types of complaints of unfair prejudice and are an unobjectionable basis for presentation of the Petition. The first seven grounds are different relating as they do to payments of various sorts that are said to have been improper.  If the factual allegations underpinning these complaints were to be proved I accept that they would probably justify the Company recovering the resulting loss as a consequence of the breaches of duty they involved and, if the Company was not prepared to take steps to recover that loss, Brandon could have commenced a derivative action to do so.  However, as the principles summarised in [25] demonstrate it does not follow that the complaints can only properly be advanced as part of proceedings brought by, or on behalf of, the Company.  The distinction between cases in which relying on breaches that could be remedied by a derivate action results in an improper use of Part IV of the Ordinance and those in which it is permissible, commonly turn on the relief that is sought and the extent to which it can fairly be said that it forms part of a genuine case of unfair prejudice rather than a misconceived attempt to remedy a wrong done to a company.  The line which divides the permissible and the improper will not always be distinct or precise.

32.  The principal relief sought by Brandon is a distribution of the assets set out in Section D1 of the Petition.  Section D1 consists of two  sub-paragraphs.  Paragraph 132.1 seeks the valuation of the Company’s assets on a fair market basis.  Paragraph 132.2 seeks a distribution to the shareholders of the Company’s assets in specie in proportion to their respective interests in the Company.  No adjustment to the proportion of the assets to be distributed is sought to reflect the misappropriations and payments complained on in sections C1 to C7. This is only sought in the alternative reliefs.

33.  The complaints contained in sections C1 to C7 serve two purposes.  First, to demonstrate unfairly prejudicial conduct.  Secondly, to explain the circumstances in which Brandon says he was excluded from the management of OAL.  He does not seek a payment from any of the Respondents to the Company.  As I have said his preference is for a division of assets in specie.

34.  In my view it is not plain and obvious that if the matters relied on are proved by Brandon he would not be able to obtain relief for unfairly prejudicial conduct, because the complaints are more appropriately remedied by proceedings brought by or on behalf of the Company.  I, therefore, reject the application to strike-out on this ground.

35.  The next ground is that the winding up relief should be struck-out because of the availability of other relief.  I explain the relevant principles in Re Sun Light Elastic Ltd [16]:

“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 [17] I explained how this divergence of approach should be resolved:

…

‘[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 s.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.”

36.  The Petition was issued on 11 April 2019 and was presumably drafted with regard to the principles and their application explained in Sun Light Elastic [18].  The ground for including winding up as an alternative to the first four forms of relief sought is pleaded in [137]–[138] of the Petition which read:

“137.  OAL and OAL Group are solvent. In a winding up of OAL, there would be a substantial surplus for the shareholders:

138.  BL has a genuine interest and basis in seeking this alternative winding-up relief in that:

138.1.  the various unauthorised or unjustified payments from OAL Group and other wrongdoings of LJC, LYC and LSK should be properly and fully investigated by an independent liquidator;

138.2.  it would put a stop to the misapplication of OAL Group’s funds by LJC, LSK and LYC;

138.3.  OAL is an asset/investment holding company and does not carry on business operations in its own right.  A winding-up of OAL would not have any adverse impact on any ongoing business or operations of the companies within OAL Group or affect their value.”

37.  Winding up is commonly included as an alternative to a buy-out order.  The justification is normally said to be the possibility that a respondent may not be able to pay the acquisition price or that it may become clear that valuation is not practical. That is not suggested in the Petition and the explanation pleaded in [138] is difficult to reconcile with the Petitioner’s preferred remedies.  It may be that reasons of the sort contained in [138] might have justified seeking primarily a winding up on the grounds that it was be far and away the most practical relief.  However, that is not the way the Petitioner has put his case.  My impression from the order in which the relief has been pleaded is that there has been a failure to think through in an informed way what would be the most realistic relief to seek.  This is unfortunately far too common a problem.

38.  As the Company is solvent and carrying on an active business and no reason is given for thinking that the 2^nd or 3^rd preferred forms of relief (orders for Ju Ching and Yiu Ching to sell their shares to Brandon and vice versa) might prove impractical, in my view there is no basis set out in the Petition for concluding that the Company should be wound up and it is obvious that such relief will not be granted on the basis of the facts and matters pleaded in the Petition—largely because they do not suggest any reason why the 2^nd or 3^rd preferred forms of relief would not be ordered if Brandon is successful on liability.

39.  As I have explained the Petitioner’s preferred relief is a distribution of the assets in specie. The Respondents seek to strike-out this relief on the grounds that it is clear from the authorities that the court will not grant such relief.  I think it is more accurate to say that the authorities demonstrate a recognition by the courts of the difficulties of dividing up assets unless there are few of them and the division would be straightforward.  The kind of difficulties that make a distribution in specie problematic is described by Spigelman CJ in [212]–[213] of Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd [19].

“212.  In my opinion, this court should not embark on the course of attempting to divide the assets in this case. Indeed, save in a situation of a limited range of assets with little interconnection between them, I doubt if it would ever be appropriate for a court to attempt such a task. The court should not be placed in a position where:

(i)  it may have to make commercial judgments;

(ii)  it runs the risk of being dependent on commercial or political negotiations: and

(iii)  it may have to make contingent or alternative orders, subject to the outcome of commercial or political negotiations.

213.  As Mr Gotze said, the ‘process of dividing the assets’ is a process which must be ‘designed and managed’.  It is not a process which can readily be conducted by means of judicial findings on the basis of evidence.  It is not, in my opinion, an appropriate task for a court.”

40.  Spigelman CJ’s decision is referred to by Lewison J with approval in Hawkes v Cuddy (No. 2) [20].  Lewison J adds these comments in [250]:

“I respectfully agree. One might also add that the position of creditors would have to be safeguarded. Although such an order is probably theoretically possible on a petition under section 994 it is one that should rarely be made. It may be that if, for instance, a company was trading in two comparable but physically separate locations, each one of which was managed day to day by one of two directors, it might be right to allow each of the directors to continue trading in one of the two locations. But in general a court should not compel a company to distribute its assets in specie to its members.”

41.  Any judge who has experience of shareholder disputes and the difficulties that arise during the valuation of companies in a case in which orders are made for one shareholder to buy-out the shares of another, knows that valuation can prove as controversial, difficult and time consuming to resolve as the allegations of unfair prejudice, and determining how assets should be divided up in the case of a group of companies such as the present would be problematic at best and likely impossible.  The Petition contains no facts and matters that so much as hint at how it might be done.  As is far too frequently the case this relief seems to have been included without any consideration of the need to plead relevant facts and matters that provide some basis for assessing at trial whether the relief should be granted.

42.  It seems to me obvious that in the face of objection from the Respondents it would never be ordered and I will strike-out [132] of the body of the Petition and [1] of the Prayer.

43.  It will be noted from the relief that I have described in [30] that in addition to seeking an order the Ju Ching and Yiu Ching purchase Brandon’s shares there is also sought an order that they buy the Foundation’s shares.  The Respondents seek to strike-out this relief on the grounds that Brandon does not have locus to seek such an order on behalf of the Foundation.  Brandon has agreed to abandon this relief.

44.  Finally, the Respondents challenge the inclusion of Siu Kwong (3^rd Respondent) and Shen Po (4^th Respondent).  They do so on the basis that no relief is sought against Shen Po and that the injunction sought against Siu Kwong is misconceived as the injunction that is sought, which is pleaded in [139], is in the following terms:

“If and insofar as it is necessary to preserve the assets of OAL Group from further dissipation and misapplication by LJC, LYC and LSK, BL will seek an injunction against LJC, LYC and LSK to restrain them from dealing with the assets of OAL and OAL Group other than in the ordinary course of business.”

It is, submit the Respondents, clear that any injunction to preserve the Company’s assets would be made against the Company and there is no reason to join Siu Kwong simply because he is allegedly a de facto director, Siu Kwong having ceased to be a de iure director at the end of 2015.  I cannot see any sensible reason for thinking that if after trial the court were to conclude that it was necessary to grant an injunction to prevent the Company makes payments to the individual Respondents it will be necessary to grant an injunction against Siu Kwong.  Certainly no facts or matters that suggest why it is necessary have been pleaded in the Petition and the inclusion on this basis smacks of maliciousness or at least consciously aiming to cause trouble for tactical reasons.

45.  The other ground advanced by Brandon for joining Siu Kwong and Shen Po is that as it is alleged that they have been recipients of what Brandon says are improper payments they are necessary parties because if the court directs a valuation of the Company’s shares it will be necessary to take an account of the payments of which Brandon complains some of which were to Siu Kwong and Shen Po.  That maybe, although I note that the Petition fails to plead the basis upon which a valuation should take place, for example, the date of valuation or whether a discount should be given to reflect a minority interest, which as I have repeatedly told lawyers acting for petitioners seeking such relief needs to be thought through before issuing a petition and set out clearly in it.  The 6^th Prayer is a catch all referring to “Such further or other orders, accounts, directions and other relief as may be necessary”.  However, the Petition clearly does not seek any relief relating to valuation of shares or taking of an account against either Siu Kwong or Shen Po and neither does it contain an allegation, which suggests they are necessary parties for the purposes of such exercises.  To the extent that at some time in the future it may be necessary for an account to be taken of how much they have received from the Company no reason is set out in the Petition for thinking that such information will not be available, as one would expect, from the Company’s books and records and self-evidently there is no derivative claim against either of them for return of any money.  In my view they are not proper parties and the Petition against them should be struck-out.

46.  In conclusion:

(1)  Paragraph 132 and Prayer 1 of the Petition are struck-out.

(2)  Paragraphs 136 to 138 and Prayer 5 of the Petition are   struck-out.

(3)  The Petition against the 3^rd and 4^th Respondents are struck-out.

47.  Both Brandon and the Respondents sought orders in the alternative to their strike-out applications that the Petition or the Action be stayed pending the outcome of the other proceedings.  In my view, it may make sense for the Action to be brought on first as presumably if successful it would dispose of the Petition.  I will adjourn the applications for a stay sine die with liberty to restore in order that the parties can consider this and if possible, agree directions for the matter to be brought on promptly.

48.  Given my conclusions I will make a costs order nisi that:

(1)  The Petitioner pays the 3^rd and 4^th Respondents’ costs forthwith such costs to be taxed if not agreed with a certificate for two counsel.

(2)  Given that the other Respondents have succeeded on three of the other five grounds and failed on two I will make no order as to costs as between the Petitioner and the other Respondents.  Given my findings in the Respondents favour on some grounds but not others, this seems to me to be a fair result.