RICCO (INTERNATIONAL) CO LTD v. UNI HARVEST INTERNATIONAL LTD

HCMP 1808/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO. 1808 OF 2016

___________________

__________________

__________________

________________

J U D G M E N T

________________

1.  By an Originating Summons filed on 15 July 2016, the Plaintiff (Ricco) seeks to set aside an allotment of shares (Allotment and Shares) in it made in favour of the Defendant (Uni-Harvest) which took place in August 2007.

2.  Ricco says that the Allotment was in breach of s.47A of the old Companies Ordinance, Cap 32 (Ordinance), which was applicable at the material times, in that it was done with its financial assistance.  The financial assistance was in the form of a loan provided by it (Loan) to pay for the Shares.

3.  Prior to the Allotment, Ricco’s shares were held by Ms Lui Fung Yee (Lui) and Uni-Harvest in equal proportions.  Uni-Harvest was the corporate vehicle of Mr Chan Kwok Hung (Chan).  Chan was in an intimate relationship with Lui and they were living together.  Chan had passed away in April 2015.

4.  There is no controversy over the essential facts.  As demonstrated by the undisputed documents, the Allotment was made on 16 August 2007 by which Ricco’s issued share capital was increased from HK$3 million (M) to HK$7M with the creation of 7M new shares of HK$1 each. 

5.  The Allotment was recorded as fully paid up. However, Ricco did not receive any payment for the Shares.  According to a witness of Uni-Harvest, the accountant who handled the Allotment (Mak), the share capital of HK$7M for the Allotment was “booked as a loan, with the understanding between [Chan] and [Lui] that it would be paid from later profit distribution of [Ricco]”. 

6.  Although no books of account of Ricco has been produced before the court, it is reasonably clear that the Loan must be one from Ricco in favour of Uni-Harvest.  Further, as submitted by Ms Law, appearing for Ricco, if the loan had been paid off, Uni-Harvest would have adduced evidence to such effect.  There is no such evidence.  

7.  Even on Uni-Harvest’s evidence, it is quite plain that the Allotment was in contravention of s.47A of the Ordinance.  The only issues are: (a) whether these proceedings should be adjourned to be heard together with 2 other actions brought by Lui and Ricco against Uni-Harvest as well as the Estate of Chan (one of these actions (HCA 1856/2016) concerns, inter alia, the recovery of the Loan); (b) whether the court should decline the relief sought by Ricco by reason of its delay in bringing these proceedings and the prejudice to Uni-Harvest due to the fact that it is unable to adduce any evidence from Chan on these matters; and (c) whether the exemption to s.47A provided under s.47C can be relied upon by Uni-Harvest. 

Adjournment

8.  It should be pointed out that in HCA 1856/2016, it has been made clear in the Statement of Claim that credit would be given for the Loan in the event that the Allotment is declared null and void. 

9.  I believe that this issue turns upon the merits of Ricco’s claim herein.  If there is no defence to such claim, there can be no legitimate reason to delay the resolution of these matters. 

Delay

10.  A delay of nearly 10 years is extraordinary. However, Mr Wong, appearing for Uni-Harvest, accepted that, absent any prejudice, such delay cannot per se operate as a bar to the relief claimed. 

11.  In respect of the suggested prejudice, given that the essential facts are not controversial, I am unable to see what evidence could have been provided by Chan which is not before the court.  Mr Wong submitted that Chan would have been able to provide evidence on the purpose of the Allotment. 

12.  In this regard, the court has the evidence of Mak on the instructions he received from Chan for purpose of the Allotment. Mak’s evidence is that the Allotment was for “business expansion” of Ricco.  In particular, Chan “considered that the then HK$3M share capital was inadequate for [Ricco’s] then increasing business volume in the jewellery business”.  As Ms Law has pointed out, such evidence is not disputed by Ricco. 

13.  In the premises, I see nothing in this argument. 

s.47C

14.  Section 47C(1) of the Ordinance provided as follows :

“(1))  Section 47A(1) does not prohibit a company from giving financial assistance for the purpose of an acquisition of shares in it or its holding company if–

(a))  the company’s principal purpose in giving that assistance is not to give it for the purpose of any such acquisition, or the giving of the assistance for that purpose is but an incidental part of some larger purpose of the company; and

(b)  the assistance is given in good faith in the interests of the company.”

15.  As submitted by Ms Law, there are 2 requirements under s.47C: (a) either a principal purpose which was not to give assistance for the acquisition of shares or some larger purpose; and (b) the assistance was given in good faith in the interests of the company.

16.  In respect of the 1^st requirement, the guiding authority is that of the House of Lords in Brady v Brady [1989] 1 AC 755, dealing with the equivalent English legislation, where Lord Oliver held at 779G-780C :

“In particular, if the section is not, effectively, to be deprived of any useful application, it is important to distinguish between a purpose and the reason why a purpose is formed. The ultimate reason for forming the purpose of financing an acquisition may, and in most cases probably will, be more important to those making the decision than the immediate transaction itself. But ‘larger’ is not the same thing as ‘more important’ nor is ‘reason’ the same as ‘purpose’. If one postulates the case of a bidder for control of a public company financing his bid from the company’s own funds – the obvious mischief at which the section is aimed – the immediate purpose which it is sought to achieve is that of completing the purchase and vesting control of the company in the bidder. The reasons why that course is considered desirable may be many and varied. The company may have fallen on hard times so that a change of management is considered necessary to avert disaster. It may merely be thought, and no doubt would be thought by the purchaser and the directors whom he nominates once he has control, that the business of the company will be more profitable under his management than it was heretofore. These may be excellent reasons but they cannot, in my judgment, constitute a ‘larger purpose’ of which the provision of assistance is merely an incident. The purpose and the only purpose of the financial assistance is and remains that of enabling the shares to be acquired and the financial or commercial advantages flowing from the acquisition, whilst they may form the reason for forming the purpose of providing assistance, are a by-product of it rather than an independent purpose of which the assistance can properly be considered to be an incident.”

17.  The above dicta falsify the argument advanced on behalf of Uni-Harvest that the Allotment was to serve the larger purpose of business expansion.  Such “larger purpose” was merely the reason for the Allotment.

18.  As regards Mr Wong’s submission that in the present case Ricco was not out of pocket as a result of the Allotment, I am not attracted by the same.  The Allotment was meant to result in a larger capital base for Ricco.  That purpose was not achieved, and as pointed out by Ms Law, the trading partners and creditors of Ricco might have been misled by the Allotment exercise.

19.  Finally, Mr Wong has urged the court not to dispose of these matters in a summary manner.  The answer is that there is no material factual dispute which may justify a full trial.

20.  For these reason, I hold that the Allotment was in breach of s.47A of the Ordinance.  I shall hear the parties on the appropriate relief and costs.