FRIENDSHIP INVESTMENTS LTD v. TO CHUN FAN AND OTHERS

HCCW 197/2018

[2019] HKCFI 1669

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 197 OF 2018

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D E C I S I O N

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1.  By summonses dated 9 November 2018, 19 March 2019 and 6 May 2019, the Petitioner seeks interlocutory injunctive relief in respect of four properties (the “Properties”) owned by the 7^th Respondent (the “Subsidiary”).

2.  The forms of order sought are to the effect that pending final resolution of the Petition or further order:

(1)  the Respondents be restrained from disposing of or dealing withthe Properties or their proceeds of sale, without the Petitioner’s prior written consent (the “Prohibitory Injunction”);
alternatively

(2)  the Respondents notify the Petitioner in writing of any intention to sell or deal with the Properties at least 14 days priorto so doing, and provide various forms of specified information together with any such notification (the “Notification Injunction”).

3.  At the hearing before me, Mr Alan Kwong appearing for the Petitioner [1] indicated that although the application for the Prohibitory Injunction was not formally abandoned, his submissions would focus on asking for the Notification Injunction [2].

4.  At the conclusion of the hearing I reserved my decision, which I now give.

The Petition

5.  The Petition seeks the winding up of the 6^th Respondent (the “Company”) on the just and equitable ground, alternatively, remedies for unfair prejudice pursuant to sections 724 and 725 of the Companies Ordinance (Cap 662) (the “CO”).

6.  The background to the Petition has been summarised in a Decision of Deputy High Court Judge Le Pichon dated 8 March 2019 (the “Order 14 Decision”) [3] in HCA 1607/2018 (the “1607 Proceedings”) at §§4 – 10; and further appears from the pleadings filed herein.

7.  The Petitioner is a 30% shareholder of the Company, with the remaining 70% shares currently held by the 1^st Respondent (“To”), the 2^nd Respondent (“Yu”) and the 5^th Respondent (“Nuevopak”).  The current directors of the Company are the 3^rd Respondent (“Simon Chan”) and the 4^th Respondent (“Li”), who are the husbands of Yu and To respectively.  Nuevopak is a company wholly owned by Simon Chan.  I will refer to the 1^st to 5^th Respondents, who effectively control 70% of the voting shares in the Company, as the “Majority Group”.

8.  The shareholders of the Petitioner are Chan Yuk Ying (“Eliza Chan”) and Chan Hon Hung (“William Chan”), with some shares held on trust for Leung Siu Kung (“Leung”).  I will refer to these three individuals collectively as the “Minority Group”.

9.  The Company is a corporate vehicle which wholly owns the Subsidiary [4].  The Subsidiary has been engaged in the business of importing and selling domestic electrical appliances.  The Subsidiary is the registered owner of the Properties and has conducted its business from the Properties [5].

10.  The current shareholding structure is summarised in the chart annexed to this Decision.

11.  The Petition relates to a shareholders’ dispute between the Minority Group (through the Petitioner) and the Majority Group, the facts underlying which have also given rise to other litigation.

12.  The key allegations in the Petition include the following:

(1)  Before the incorporation of the Company in 2001, the Minority Group were responsible for the management of General Appliance Company Limited (the “Old Company”), which was the predecessor of the Company and the Subsidiary.  

(2)  Around May 2001, with a view to rescuing the Old Company from financial difficulties, the Minority Group invited Simon Chan (the 3^rdRespondent) to become a de facto business partner.  An oral agreement and/or mutual understanding was reached between the Minority Group on the one hand, and Simon Chan, Li and Hau Shek Wai (“Hau”) (collectively, the “CHL Group”)on the other, for the purpose of acquiring and continuing the Old Company’s business.

(3)  It was a term of the agreement/understanding that the Minority Group and/or the Petitioner would be entitled to participate in themanagement and affairs of the Company/Subsidiary and would be vested with powers to handle the day-to-day business.

(4)  Accordingly, the Company was incorporated as holding vehicle of the Subsidiary. The Minority Group held a 30% interest in the Company through the Petitioner, and the CHL Group held a 70% interest through CHL Enterprises Limited (“CHL”). This gave rise to a quasi-partnership between the two groups of shareholders founded on mutual trust and confidence.  

(5)  In 2008, CHL’s shares in the Company were transferred to Hau, To and Yu.  The agreement/understanding survived this change in shareholding structure.

(6)  In 2017, unbeknown to the Petitioner/Minority Group, Hau transferred his shareholding in the Company to Nuevopak (whollyowned by Simon Chan), with the result that To, Yu, Simon Chanand Li held 70% of the voting rights in the Company.

(7)  Since that time, the Majority Group has taken a series of steps to exclude the Petitioner and the Minority Group from participating in the Company’s business affairs, in breach of the agreement/understanding [6].  The said steps are said to have caused prejudice to the Company and the Subsidiary since the Majority Group lack the skills/experience required for operating the Company’s business as well as relationships with wholesalers, traders and agents, leading to a drop in profits of the Subsidiary and the Company.

(8)  The Petitioner pleads loss of substratum, loss of confidence due to mismanagement, breakdown of trust and confidence, unfair prejudice, and breaches of its rights/legitimate expectation to participate in the management of the Company.  The remedies sought include winding-up the Company on the just and equitableground, alternatively, an order that the Majority Group purchasethe Petitioner’s 30% shareholding under section 725(2)(a)(iv)(B) of the CO. 

13.  The pleaded position of the Majority Group (the 1^st to 5^th Respondents) includes the following: 

(1)  The Majority Group accepts that the Company was and is a quasi-partnership founded on mutual trust and confidence.

(2)  However, the Majority Group disputes the terms of the agreement/understanding between the two groups of shareholders.  The Majority Group claims, amongst other things, that both groups of shareholders were entitled and/or had a legitimate expectation to participate in management and operation of the business.  This was subject to caveats that such powers must be exercised in the best interests of the Company, the Subsidiary and the shareholders, and that if the performanceof the Company/Subsidiary was unsatisfactory for a prolonged period, the incumbent management (the Petitioner) should not object to intervention from the other shareholders.

(3)  The Majority Group alleges that the business and financial position of the Company/Subsidiary under the Petitioner’s management has been deteriorating, and that there have been conflicts of interest and breaches of fiduciary duty by the Minority Group.  Eliza Chan was aware of the transfer of Hau’s shareholding to Nuevopak, after which the Majority Group took steps to regain control of the Company and Subsidiary in order to rescue them from the Petitioner.  The removal of the Minority Group from their posts was necessary to prevent further mismanagement and abuse of powers, was in the best interests of the Company/Subsidiary and was not in breach of the agreement/understanding.

(4)  The Majority Group denies loss of substratum and resists and a winding-up order.  They assert that the Petition is for an ulterior purpose, namely to secure a higher price in buyout negotiations. Whilst the business and profits have been on a downward trend, improvements can be made given further time.   

Relevant procedural history

14.  The relevant procedural history falls to be considered together that of related litigation: see the Order 14 Decision in the 1607 Action at §§11 – 19.

15.  On 17 May 2018, the Subsidiary commenced HCA 1148/2018 (the “1148 Action”) against Eliza Chan and Leung, alleging breaches of fiduciary duty and unjust enrichment in relation to certain allegedly wrongful transactions entered into and payments made by the Subsidiary, at the time it was under the control of the Minority Group. 

16.  Also in May 2018, the Subsidiary’s solicitors sought the return from the Petitioner and Eliza Chan of the title deeds and documents (the “Title Documents”) in respect of the Properties, but these were not provided.   

17.  On 11 July 2017, the Subsidiary issued: (i) proceedings in the 1607 Action against the Petitioner and the Minority Group seeking, inter alia,return of the Title Documents; and (ii) a summons for injunctive relief in those proceedings.  

18.  The Petition herein was presented on 19 July 2018.

19.  On 9 November 2018, the Petitioner took out an injunction summons (the “Injunction Summons”) in these proceedings seeking to restrain the Respondents from disposing of the Properties pending determination of the Petition.

20.  On 16 November 2018, the Subsidiary took out an Order 14 summons in the 1607 Action seeking an order for deliver up of the Title Documents.

21.  On 30 November 2018, the Injunction Summons in these proceedings was first heard by Deputy High Court Judge To, who adjournedit for argument.  No “interim-interim” injunction was granted, as the learned Judge saw no urgency since the Subsidiary did not then have possession of the Title Documents and was thus not in a position to dispose of the Properties [7].

22.  On 19 February 2019, the Subsidiary’s Order 14 and injunctionsummonses in the 1607 Proceedings were heard by Deputy High Court Judge Le Pichon, who delivered the Order 14 Decision on 8 March 2019.  I will not repeat the learned Judge’s reasoning in full, but the following points are noteworthy:

(1)  By the time of the hearing, the Petitioner/Minority Group wereagreeable to returning the Title Documents to the Subsidiary, but requested that the Court impose a condition under Order 1B, rule 3(a) of the Rules of the High Court, that the Subsidiary not dispose of the Properties without their consent pending resolution of the Petition.

(2)  The Petitioner/Minority Group relied (inter alia) on evidence similar or the same to that relied on before me, that potential purchasers had visited the Properties and that officers of the Bank of China (Hong Kong) Limited (“BOC”) had been invited to provide a valuation.  The Petitioner/Minority Group feared that the once the Title Documents were returned to the Subsidiary, the Majority Group would sell the Properties at gross undervalue or take the proceeds for their own benefit.  (§29)

(3)  The learned Judge declined to impose the condition sought by the Petitioner/Minority Group, and ordered them to deliver up the Title Documents to the Subsidiary.

(4)  The learned Judge’s reasoning included that: (i) whilst one could readily comprehend the minority’s disquiet and suspicions, it was quite another matter to say that a sale would be at gross undervalue, particularly where the majority themselves had a 70% interest in the assets (§33); (ii) a sale is not the same thing as dissipation/misappropriation, and the latter has to be supported by evidence, rather than speculation (§34); (iii) an appreciable risk of misapplication and/or misappropriation had to be shown to warrant the imposition of a condition that would constrain the exercise of full ownership rights, albeit on a temporary basis (§36); (iv) the learned Judge concluded, not without some hesitation, that no sufficient reasons had been shown to warrant the exercise of case management powers to impose the condition sought by the minority (§38) [8].  

23.  On 15 March 2019, the Title Documents were returned to the Subsidiary.

24.  On 19 March 2019, the Petitioner took out a summons seeking a Notification Injunction pending determination of its Injunction Summons herein.  At a call-over hearing on 8 April 2019, Harris J adjourned that summons to be heard together with the Injunction Summons, and declined to grant an interim-interim Notification Injunction pending this hearing.

25.  On 6 May 2019, the Petitioner took out a summons to amend its 19 March 2019 summons, such that the Notification Injunction is now sought pending final determination of the Petition rather than pending determination of the Injunction Summons.

The parties’ positions

26.  As noted above Mr Kwong, for the Petitioner, focused on the Notification Injunction.

27.  Eliza Chan gave affidavit evidence that she had been informed by a current employee of the Subsidiary that around August 2008, Li had invited potential purchasers to visit the Properties; and that Li and Simon Chan had invited officers of BOC to conduct a valuation.

28.  Mr Kwong argued (inter alia) that the Petitioner feared sale at undervalue to related parties of the Majority Group, which gave rise to a real risk that the Petitioner would suffer irreparable harm.  The risk of sale to a related party was, he argued, a factor which Deputy High Court Judge Le Pichon had overlooked.  Following the Order 14 Decision, the Title Documents were now with the Subsidiary, such that the Properties could be disposed of.  The Petitioner had previously offered to return the title documents subject to undertakings that the Properties not be sold, but the Majority Group had refused.  

29.  Mr Kwong argued that there was a serious issue to be tried on the Petition, and the balance of convenience favoured injunctive relief.  He placed great emphasis on argument that the Notification Injunction, if granted,would cause little or no prejudice to the Respondents, since it only required notification of any intention to sell.  The correct approach was to adopt the course of action with the lower risk of injustice, and also to preserve the status quo.

30.  Mr Bernard Mak appeared for the Majority Group (the 1^st to 5^th Respondents).  Simon Chan’s affidavit evidence included that the Majority Group have no present intention to sell the Properties, and that the current management had never invited potential purchasers to visit.  Some officers of BOC did visit the Subsidiary’s office around the end of August 2018, but the purpose was to process a change in bank mandates and ascertain the status of the Subsidiary in light of the current proceedings, rather than to value the Properties.

31.  Mr Mak argued (inter alia) that there was no serious issue to be tried for a constraint on the Subsidiary’s ownership rights. Further, insofar as the balance of convenience was engaged, the pertinent question was whether the remedies sought in the Petition might be frustrated by the acts sought to be injuncted.  That was not the case, since any wrongdoing which might occur could be remedied in the Petition by an adjusted price on any buy-out order.  In addition, the Petitioner could not hope to show a “real risk of dissipation” of assets for the purposes of freezing-type relief. 

32.  Mr Roger Phang appeared for the Company (the 6^th Respondent) and the Subsidiary (the 7^th Respondent).  The Company took a neutral position, but the Subsidiary argued that any injunction order should not be made against it.  It is the Subsidiary’s position that it is not a proper party to the Petition at all.  That is the subject-matter of a striking out summons taken out by the Subsidiary in these proceedings, which is fixed to be heard on 11 October this year.

33.  Mr Phang relied on arguments related to those which support the Subsidiary’s striking out summons.  The Petition, he said, contained no “cause of action” against the Subsidiary nor sought any relief against it; and there was no “serious issue to be tried” as against the Subsidiary.  He invoked the principle against reflective loss.  In addition, Mr Phang argued that there were adequate remedies for any wrongdoing. He prayed in aid the reasoning in the Order 14 Decision as to the absence of evidence to support a risk of wrongdoing and thereby justify a constraint on the Subsidiary’s ownership rights.

Approach to injunctive relief

34.  There was considerable debate between the parties as to the correct approach to be applied to injunctive relief in the context of a shareholder’s petition of this nature.

35.  In Pringle v Callard [2008] 2 BCLC 505, the English Court of Appeal considered the approach to the grant of interim remedies on an unfair prejudice petition at §§21 – 27 (though not in the context of an asset-‌preservation order per se).  The general approach is for the Court to first consider whether there is a serious issue to be tried on the petition, and then whether there is an adequate remedy for the petitioner at the end of the day.  The discussion by Arden LJ suggests that the that adequacy of remedy as well as the authorities on preserving the status quo [9], are to be considered in light of the remedies which will be available at trial (including, in the unfair prejudice context, a buy-out order) and potential prejudice to those remedies.  

36.  In Re Wako Giken (HK) Co Ltd [2010] 4 HKLRD 121, Harris J granted injunctive relief in a petition for unfair prejudice and just and equitable winding-up, so as to enable the petitioner to retain control of certain subsidiaries pending the petition, in the face of complaints of misappropriation.  At §22, the learned Judge noted that in cases of that type the relevant factors include whether the relief sought would occasion irremediable prejudice, how expensive it would be to implement the injunctive relief, whether it would pre-judge the outcome of the trial, and whether the status quo should be continued.

37.  The Court’s powers to grant interim relief in petitions for just and equitable winding up and/or unfair prejudice include protecting the company’s assets from dissipation company pending resolution of a petition:see further Re Ravenhart Service (Holdings) Ltd[2004] 2 BCLC 376 per Etherton J at §404; HM Revenue & Customs v Egleton [2007] BCC 78 per Briggs J at§20.

38.  In Palmer v Loveland 2017 WL 04552554, Warren J considered applications for freezing orders against the shareholder and company in an unfair prejudice petition, and appears to have proceeded on the basis of a need to show a risk of dissipation of assets (§§30 and 34).  The Judge further reasoned that the Court has jurisdiction to prevent the company from dissipating its assets, simply as an aspect of its powers to grant injunctive relief to prevent wrong-doing (§41).

39.  In addition, the principles applicable to the grant of interlocutoryinjunctive relief should not be applied as though they were rigid pre-requisites,but rather in a flexible and sensible manner with reference to the justice of the case and the competing risks of injustice [10].

Analysis

40.  I am satisfied that there are serious issued to be tried on the Petition, and at least a triable prospect that the remedies sought by the Petitioner might ultimately be granted (notably a buy-out order or winding-uporder).  The numerous detailed disputes which arise on the Petition fall to beventilated in due course, and I am not in a position to assess their competing merits at this stage.  

41.  I accept Mr Mak’s submission that the next pertinent question, if one takes an American Cyanamid–type approach, is the adequacy of the Petitioner’s remedies in these proceedings; or more to the point, whether, in the absence of injunctive relief sought, there is a risk of prejudice to those remedies [11]. In this regard, the Petitioner seeks to convince me of a real risk that it will suffer irreparable harm in the absence of injunctive relief, should the scenario which it claims to fear materialize.

42.  The Petitioner formulates this risk not merely as one that the Properties might be sold, but that they might be sold by the Majority Group at undervalue to a connected party and/or that the proceeds might be dissipated.  Any such unlawful/ wrongful disposal of the Properties would, Mr Kwong argued, seriously affect the value of assets distributable to the Petitioner in the event of a winding-up. 

43.  It is at this point that, I consider, the Petitioner’s argument runs into difficulty.  The evidence and basis for suggesting that there is such a risk is sparse, to say the least. 

44.  In this respect, the reasoning of Deputy High Court Judge Le Pichon in the Order 14 Decision, seems pertinent: see §22(4) above.  As the learned Judge reasoned, a sale is not the same thing as a sale at undervalue or dissipation of assets, and the evidence relied on by the Petitioner to suggest anything of the latter nature is speculative, at best.  Indeed, the relevant evidence relied on by the Petitioner before Deputy High Court Judge Le Pichon and myself, was the same or very similar. 

45.  Mr Kwong argued that the legal questions and tests at the hearing before Deputy High Court Judge Le Pichon were not the same as those before me; and further that the Order 14 Decision and subsequent Decision on Costs [12] suggest that it was not the learned Judge’s intention to pre-empt the outcome of this hearing.  I accept both of these points.  Notwithstanding this, I consider that similar reasoning applies to the matters before me and militates towards a similar result.

46.  Mr Kwong argued that Deputy High Court Judge Le Pichon failed (at §33 of the Order 14 Decision) to consider that there may be a sale at undervalue to a related entity of the Majority Group.  However, the answer is again, that there is simply no serious evidence to suggest that this might occur, beyond the Petitioner’s speculation and general mis-trust of the Majority Group.

47.  When pressed during oral submissions, Mr Kwong accepted that a risk of dissipation of assets—even if not a formal requirement for granting relief of the type sought—is at least a factor relevant to the exercise of the Court’s discretion.  He relied on five points to argue that there was a risk of dissipation or prejudice to his client’s remedies, in the absence of injunctive relief. 

48.  The first point was Eliza Chan’s evidence as to visits by potential purchasers and valuers: §27 above.  However, this is disputed, and importantly, is at most evidence of an intention to sell the Properties, rather than to sell at undervalue or dissipate proceeds. 

49.  The second point was the Respondents’ repeated refusals in correspondence to undertake not to dispose of the Properties.  However, I consider this to be somewhat circular.  If injunctive relief is unwarranted on the facts, it does not become warranted because a respondent refuses to consent to it or offer equivalent undertakings.

50.  The third point was based on a letter dated 2 April 2015 from solicitors then acting for Yu and To, to Eliza Chan, which is said to have evidenced a consensus at that time that the Company and Subsidiary be wound up voluntarily and the Properties be sold.

51.  However, I do not see how this letter takes matters further.  It appears to form part of a chain of discussions or negotiations for a possible agreement at that time, including potential sale of the Properties and sale/closure of the relevant business, on various proposed terms.

52.  Mr Kwong submitted that it was suspicious that at that time the Properties were to be sold, yet the Majority Group now claims no intention to sell.  But the letter is just a proposal, written several years ago. I do not see an inconsistency with the present stance of the Majority Group, nor that that this gives rise to any justified suspicion of an intention to sell at undervalue to a related party or dissipate proceeds.

53.  The fourth point was that, on the Petitioner’s evidence, the Subsidiary’s business has largely or entirely ceased, so there is no pointin keeping the Properties.  However, the Respondents give contrary evidence that the Subsidiary’s business continues and is intended to be expanded in various respects.  More importantly, this could at the most suggest that the Property might be sold, but provides no evidence of a risk of sale at undervalue or dissipation.

54.  The fifth point was put in terms of proportionality, namely, that the Respondents instructed two teams of lawyers to vigorously oppose the relief sought.  Mr Kwong invited the Court to draw adverse inferences asto their intentions.  However, I consider that this runs into similar difficulties to the second point: see §48 above. 

55.  Ultimately, the Petitioner has not been able to adduce any serious evidence pointing to an appreciable risk of nefarious conduct by the Majority, namely, selling the Properties at undervalue to a related party or dissipating proceeds [13].  

56.  The only real point that the Petitioner has is that the NotificationInjunction occasions very little prejudice (or no prejudice) to the Respondents. Whilst there is some force in this argument, I am not persuaded that it is, by itself, sufficient to warrant relief.  The onus is on a party seeking injunctive relief to justify the Court’s intervention in order to protect its interests [14], and I do not think that that has been done in this case.

57.  The Respondents argued that even if the Properties were wrongfully sold, this could be addressed by an adjustment to the purchase price on any buy-out order, and/or remedies pursued by a liquidator in any winding-up.  As against this, Mr Kwong argued that the Majority Group may not be able to fund a buy-out order, such that winding-up may be required.  Further, any remedies available to a liquidator in respect of a wrongful sale, would require funding and incur delay.  

58.  Given my other findings above—that there is insufficient evidence to justify a fear of sale at undervalue or dissipation—I do not consider it necessary to deal with these arguments in detail.  Suffice it to say that even if the Properties were sold at undervalue or the proceeds dissipated,there is at least a reasonable chance that this could be addressed by an adjustment to the sale price on buyout, or remedies pursued by a liquidator in a winding-up. I take this into account as a further matter‌—‌though not a conclusive point‌—‌in the exercise of my discretion.

59.  Mr Kwong further argued that if the Properties had been owned by the Company rather than the Subsidiary, any disposition would have required a validation order pursuant to section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32).  It would be unfair, he said, if the Majority Group were permitted to avoid the Court’s control simply because the Properties are held through the Subsidiary.

60.  I do not think that this argument adds much, or anything, to the analysis.  Since the Properties are owned by the Subsidiary and the proceedings are against the Company, section 182 does not bite.  The Petitioner’s application falls to be determined in accordance with established principles for the grant of injunctive relief.  For the reasons set out above, I conclude that relief is not justified on the basis of those principles.

Relief against the Subsidiary

61.  There was considerable argument as to the propriety of granting injunctive relief against the Subsidiary: see §§32 and 33 above.

62.  Given my conclusions above, it is unnecessary to deal with these points, which in any event overlap with the Subsidiary’s striking out summons due to be heard in October of this year.

Disposition

63.  For the above reasons, I dismiss the Petitioner’s summonses dated 9 November 2018, 19 March 2019 and 6 May 2019.

64.  I make an order nisi that the Petitioner pay the Respondents’ costs of those summonses, to be taxed if not agreed.  

Annexure

Current Shareholding Structure