RE WICKSON HOLDINGS LTD

HCCW223/2008

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO.223 OF 2008

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J U D G M E N T

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Introduction

1.  As a result of a dispute between its shareholders, a petition to wind up Wickson Holdings Limited (“the Company”) was brought by a group of minority shareholders on 26 May 2008.  A winding up order was made on 12 January 2009 and Mr Bruno Arboit and Mr Simon Blade were appointed joint and several liquidators of the Company (“the Liquidators”).

2.  The Company was founded by Mr Poon Kam, who died in 2004.  He left two wives and children from each of the wives: the first wife had four children and the second had two.  The first wife and her children constitute the majority shareholders (“the Majority Shareholders”) and the second wife and her children constitute the minority shareholders (“the Minority Shareholders”).

3.  The Company is solvent and has assets comprising of (i) cash at bank of approximately HK$1.25 million, (ii) interest income of HK$8,861, (iii) a debt from Asia Magnifiers Company (NZ) Limited (“Asia Magnifiers NZ”), a related company, of approximately NZ$3.5 as at 31 March 2008, and (iv) a payment received from Asia Magnifiers NZ of NZ$500,000 on or around 14 July 2010.

4.  The Company’s creditors are the IRD, to whom HK$242,671 is owed, and another related company Asia Magnifiers Company Limited (in liquidation) (“Asia Magnifiers HK”), to whom HK$431,727 is owed.  There are currently sufficient funds in the Company’s liquidation to declare a dividend to the IRD.  As for the debt owed to Asia Magnifiers HK, the Company is a shareholder of Asia Magnifiers HK which has surplus assets of which the Company’s share will exceed the Company’s liability in question. (Although there is a dispute between the Liquidators and the Minority Shareholders as to the precise percentage of the Company’s shareholding in Asia Magnifiers HK, the share of surplus assets is sufficient to meet the liability whether the Liquidators or the Minority Shareholders are right on the shareholding dispute.)

5.  The debt due from Asia Magnifiers NZ arises from a loan assigned by Mr Poon Kam to the Company by an assignment dated 18 May 1994 (“the Loan”).  Initially, the Loan was interest free but it is said it was subsequently agreed that it should carry interest at 8% per annum, which was later increased to 12% per annum.

6.  The NZ$500,000 payment from Asia Magnifiers NZ was made pursuant to an abortive settlement agreement proposed by the Majority Shareholders.  There was a dispute as to the validity of that settlement agreement and the Liquidators have accepted its termination.

7.  As at 6 January 2011, the surplus funds payable to the shareholders after provision for the costs of the liquidation, excluding the Loan but including the NZ$500,000 receipt are HK$5,066,988 (assuming the Company’s interest in Asia Magnifiers HK is 28%) or HK$2,052,623 (assuming the Company’s interest in Asia Magnifiers HK is 8.3%).

8.  The shareholding structure of the Company and Asia Magnifiers NZ, upon a distribution of the estate of Mr Poon Kam, is set out in tabular form in the 4th affidavit of Mr Arboit (see §5).  In summary, the Majority Shareholders hold, in aggregate, 66.67% of the shares of the Company and the Minority Shareholders hold, in aggregate 33.33% of the shares in the Company.  They each also respectively hold, in aggregate, the same proportion of shares in Asia Magnifiers NZ, i.e. 66.67% by the Majority Shareholders and 33.33% by the Minority Shareholders.

The Liquidators’ Application and the respective positions of the Majority Shareholders and the Minority Shareholders

9.  By a summons dated 25 November 2010, which I gave leave to the Liquidators to amend at the beginning of this hearing, the Liquidators seek the court’s sanction or directions under ss.199(1) and (2), 200(3) and/or 208 of the Companies Ordinance, Cap.32 (“CO”), in respect of (i) the Loan and (ii) the NZ$500,000.

10.  In summary, the Liquidators have identified two options for dealing with the Loan.  They propose that:

(1)     The Loan is compromised, waived or discharged completely (“Option 1”); or

(2)     The Liquidators be at liberty to assign the Loan to the Company’s shareholders (“Option 2”).

Of these two options, the Liquidators propose Option 1 as the preferred choice and the amendment to their summons reflects this.

11.  A third option is that the Liquidators commence proceedings to recover the Loan from Asia Magnifiers NZ (“Option 3”).  The Liquidators do not propose that this option be pursued.

12.  The respective positions of the Majority Shareholders and the Minority Shareholders are starkly opposed.  This reflects the hostility that evidently exists between the two groups of shareholders.  For their part, the Majority Shareholders agree with the Liquidators’ preferred choice of Option 1 for dealing with the Loan, with Option 2 being a fallback.  They oppose Option 3.  As for the Minority Shareholders, they propose Option 3 as the only viable option and object to both Option 1 and Option 2.

13.  So far as the NZ$500,000 is concerned, the Liquidators propose that it be returned to Asia Magnifiers NZ on the basis that the sum was paid in accordance with a settlement agreement with the Majority Shareholders which has been terminated. The Majority Shareholders agree but the Minority Shareholders do not.  They say the NZ$500,000 should be retained by the Liquidators.

The statutory provisions

14.  For present purposes, the material parts of s.199(1) of the CO are sub-paragraphs (a), (b) and (f):

“Subject to section 193(3), the liquidator in a winding up by the court shall have power with the sanction either of the court or of the committee of inspection—

(a) to bring or defend any action or other legal proceeding in the name and on behalf of the company;

(b) to carry on the business of the company, so far as may be necessary for the beneficial winding up thereof;

…

(f)    to compromise all … debts, and liabilities capable of resulting in debts, and all claims, present or future, certain or contingent, … subsisting or supposed to subsist between the company and a contributory, or alleged contributory, or other debtor or person apprehending liability to the company, and all questions in any way relating to or affecting the assets or the winding up of the company, on such terms as may be agreed, … and give a complete discharge in respect thereof.”

15.  By s.199(2)(a) of the CO, the liquidator in a winding up by the court shall have power “to sell the real and personal property and things in action of the company by public auction or private contract, with power to transfer the whole thereof to any person or company, or to sell the same in parcels”.  The exercise by the liquidator in a winding up by the court of the powers conferred by this section shall be subject to the control of the court, and any creditor or contributory may apply to the court with respect to any exercise or proposed exercise of any of those powers (CO s. 199(3)).

16.  By s.200(1) of the CO, the liquidator of a company which is being wound up by the court shall, in the administration of the assets of the company and in the distribution thereof among its creditors, have regard to any directions that may be given by resolution of the creditors or contributories at any general meeting, or by the committee of inspection.

17.  By s.200(3) of the CO, the liquidator may apply to the court for directions in relation to any particular matter arising under the winding up, and by s.200(5), any person aggrieved by any act or decision of the liquidator may apply to the court, which may confirm, reverse, or modify the act or decision complained of, and make such order as it thinks just.

18.  Finally, by s.208 of the CO, it is provided that:

“Where in the case of a winding up there is no committee of inspection, the court may, on the application of the liquidator, do any act or thing or give any direction or permission which is by this Ordinance authorized or required to be done or given by the committee.”

The applicable principles

19.  The Liquidators submit, and I agree, that the following principles are applicable when considering the statutory provisions in question:

(1)     Although the court has the ultimate say on the directions to be made to the Liquidators for the treatment of the Loan and the NZ$500,000, the court would, by reason of s.200(1) of the CO, give due regard to any resolution by the contributories or shareholders, and in the present circumstances, this would be reflected by the wishes of the Majority Shareholders.

(2)     The principle governing the directions sought in the present case is akin to the principle to be applied where a liquidator disagrees with the wish of the majority members of a committee of inspection, namely, whilst the court will have regard to the wish of the committee of inspection, it is not bound by it and the court will depart from it if there is good reason to do so: see Re Luen Yick Water & Drainage Works Limited, unrep., HCCW209/2002, 30.11.05 (per Barma J).

(3)     In deciding whether or not to give sanction, the court will give weight to the wishes of the creditors and contributories who will be affected by the decision and to the views of the liquidator, who will normally be in the best position to take an informed and objective view: see Gore-Browne on Companies (45^th Ed.) Vol.2 (Update 84) at §58[2B].

(4)     In the administration of the company’s assets, where a liquidator has decided to embark on a particular course of action, the person aggrieved by the liquidator’s decision will need to demonstrate, before the court will interfere with the liquidator’s decision or act pursuant to s.200(5) of the CO, that the liquidator has either:

(a)   not exercised his power in good faith or has acted in a way in which no reasonable liquidator could have acted; or

(b)   made a ruling or decision in the course of the administration which directly affected a party’s right and has not acted even-handedly as an impartial neutral: see Eagle Queen Co Ltd & Anor v First Bangkok City Finance Ltd [1989] 2 HKLRD 71 per Hunter JA at pp.73H-74C.

Which of the options should be preferred?

20.  Subject to the resolution of what should be done with the Loan and the NZ$500,000, the Liquidators are in a position to proceed to distribute the remaining surplus assets of the Company to the shareholders, with a view to finalising the liquidation of the Company.

21.  Having regard to the evidence in this matter, I have no doubt that Option 3, the commencement of litigation against Asia Magnifiers NZ would not be the preferred choice because the evidence discloses that the legal costs to the Company and the costs and expenses of the Liquidator in pursuing such a claim could be in the region of HK$1,525,000 to HK$1,805,000 and the proceedings could take between 18 to 24 months to complete.  Although the Company would be entitled to recover its legal costs if successful, there is a need to incur the costs up front and a risk that it may not recover those costs.  Litigation against Asia Magnifiers NZ would have to take place in New Zealand and would obviously delay the finalisation of the Company’s liquidation.  I think it is right to bear these figures in mind and not to assume, as the Minority Shareholders would have me do, that any litigation in New Zealand would be undefended or would not result in hostile and protracted litigation between the two camps of shareholders. Indeed, the acrimony between them is apparent and I consider it reasonable to proceed on the assumption that litigation to recover the Loan in New Zealand would be contested.

22.  More significantly, in my opinion, is the fact that the net effect of the litigation contemplated by Option 3 would be that, from the perspective of the shareholders of the Company, money would be coming from one of their own pockets (i.e. Asia Magnifiers NZ) and going back into another of their own pockets (i.e. the Company).  Since both camps of shareholders, indeed all the individual shareholders, hold the same percentage of shares in the Company as they hold in Asia Magnifiers NZ, the net effect of the litigation would, from their perspectives, be the same whatever the outcome.  This is a realistic commercial stance since the evidence discloses Asia Magnifiers NZ is solvent and has minimal external liabilities so that the assets of Asia Magnifiers NZ would fall to be distributed to its shareholders upon a winding up in exactly the same percentages as those same shareholders would be entitled to distributions from the Liquidators of the Company.

23.  Of the remaining two options, Option 1 (waiver of Loan) and Option 2 (assignment of Loan), the unchallenged evidence of New Zealand law, in the form of an opinion from Messrs Buddle Findlay, a firm of New Zealand lawyers, is that a waiver or remission of the Loan in full by the Liquidators should not give rise to any tax liability on the part of Asia Magnifiers NZ.  The Liquidators had previously been told by the Minority Shareholders that there might be such a tax liability but the hearsay evidence to this effect is now contradicted by the advice of Messrs Buddle Findlay.  In fact, it now transpires, from Messrs Buddle Findlay’s advice that the assignment of the Loan under Option 2 might attract a tax liability, so that there is a distinct advantage in adopting Option 1 over Option 2.

24.  The additional advantage of Option 1 over Option 2 is that it will result in one less dispute between the two warring factions of shareholders.  Indeed, the extent of the likely dispute between the shareholders in respect of Option 2 is quite apparent from the lengthy submissions that the respective shareholders have made on the question of whether it is possible to assign the Loan to the Company’s shareholders in specie in proportion to their percentage shareholding in the Company.

Is there a valid objection to Option 1?

25.  The Minority Shareholders objection to Option 1 is based on a number of contentions.

26.  First, they rely on the proposition that the liquidator is an agent of the company and as such owes a duty to the company to exercise reasonable care in exercising his function and also the same fiduciary duties as were owed by the former directors he has replaced.  For example, a liquidator selling a company’s assets owes the same duty of care as a selling mortgagee.

27.  This is not disputed by the Liquidators or the Majority Shareholders, although the latter point out that a liquidator must also use his powers in the interests of the creditors and contributories.

28.  Next, in this context, the Minority Shareholders submit that by remitting the Loan in full, the Company would be losing its major asset for nothing in return.  This submission is based on a contention by the Minority Shareholders that the Company “at all times retains the legal and beneficial interest in the Loan”.

29.  In my opinion, this contention is wrong as a matter of law.  A winding up divests the company of the beneficial interest in its property: see McPherson’s Law of Company Liquidation (2^nd Ed.) at §7.006 (p.322) citing Millett LJ (as he then was) in Mitchell v Carter [1997] BCC 907 at p.912 where he said:

“the making of a winding-up order divests the company of the beneficial ownership of its assets which cease to be applicable for its own benefit. They become instead subject to a statutory scheme for distribution among the creditors and members of the company.” (Emphasis added)

30.  The Minority Shareholders relied on the decision of Kwan J (as she then was) in Re Zhu Kuan (Hong Kong) Co Ltd [2007] 4 HKLRD 1 to support a submission that the company retains a separate personality from that of its creditors and contributories and also that the persons interested in the liquidation, i.e. the creditors and contributories, do not hold a beneficial share of the company’s assets.

31.  I accept that the case supports these submissions but the ratio of Zhu Kuan is that the court cannot order that the assets and expenses of two liquidations be commingled.  There, an application was made to charge the liquidation expenses of a parent company against the assets of its subsidiary, also in liquidation, and it was held there was no jurisdiction to do so, even where the expenses might be regarded as having also been incurred for the preservation, realisation or getting in of the assets in the subsidiary.

32.  I do not, however, accept that Zhu Kuan precludes the Liquidators in the present case from considering the underlying positions and interests of the shareholders of the Company, having regard to the fact that they are also the shareholders in equal proportions of Asia Magnifiers NZ.  It is clear that, with appropriate sanction, a liquidator may enter into any compromise which the company itself could have entered into and the case of Taylor, Noter [1992] BCC 440 provides an example of a case where the separate identities of a number of companies controlled by the same person were disregarded for the purpose of entering into a settlement: see Butterworth’s Company Law Handbook (12^th Ed.) at §199.08 and Loose on Liquidators (6^th Ed.) at §7.30.

33.  In the present case, since the Company is solvent, I agree with the submission made on behalf of the Majority Shareholders that Option 1 is a financially beneficial solution which is ultimately in the interests of the shareholders as a whole.  The Liquidators have considered the expense of Option 3 (commencing litigation against Asia Magnifiers NZ) and have reasonably concluded, in my opinion, that it is not in the commercial interests of the Company’s shareholders to pursue that option.

34.  The Minority Shareholders suggested that the application of the principles in Re Rothwells Ltd (1988-89) 15 ACLR 142 would lead to the conclusion that the court should not sanction the waiver of the Loan.  I am not satisfied those principles, which are applicable to a provisional liquidator, apply here.  But in any event, without resolving that issue, I am satisfied that the Liquidators here have properly exercised their independent judgment, assisted by their solicitors, in reaching the view that Option 1 is the preferred way to proceed.

35.  Secondly, the Minority Shareholders submit that the deprivation of the Company’s shareholders collective right to sue Asia Magnifiers NZ, without compensation, cannot be said to be beneficial to their interests.

36.  I do not accept the premise on which this submission is made.  The waiver of the Loan does represent a benefit to all the shareholders of the Company in their capacity as shareholders of Asia Magnifiers NZ.  Although this benefit is enjoyed by them in a different legal capacity to that of shareholders of the Company, the financial benefit is the same and is obvious.

37.  Thirdly, the Minority Shareholders submit that it is far from true that the remission of the Loan merely means benefits flowing from one pocket to another.  They rely on the fact the Company was wound up on the just and equitable ground to support this submission and to contend that they are entitled to expect the Liquidators to take all reasonable steps to recover the assets of the Company for distribution.  By remitting the Loan, the Minority Shareholders say they have been deprived of the protection afforded by the court and are left to their own devices to fight against the Majority Shareholders.

38.  The thrust of this submission is by no means clear.  The Minority Shareholders obtained a winding-up order in respect of the Company on the just and equitable ground (under s.327(3)(c) of the CO).  Upon that order being made, the statutory process is engaged, the ultimate end of which is the proportionate distribution of the Company’s assets amongst its shareholders.  The Liquidators have now realised the assets of the Company such that there will be distribution to the shareholders.

39.  It would seem that the underlying complaint here is the fact that the Minority Shareholders have grievances against the manner in which the Majority Shareholders have been managing Asia Magnifiers NZ.  But if that is the true complaint, the remedy lies in the Minority Shareholders taking some form of action against the Majority Shareholders in respect of the management of Asia Magnifiers NZ in New Zealand or by way of petition to wind up Asia Magnifiers NZ in that jurisdiction.  It is true that waiving the Loan means that the Liquidators will not recover the Loan for distribution to the shareholders of the Company, but so far as the commercial reality of the Loan is concerned, the waiver of the Loan produces a netting-off of an asset of the Company against a liability of Asia Magnifiers NZ, both of which are shared in the same proportions by all the shareholders of the Company.  Furthermore, the costs of litigation to recover the Loan will not be incurred.  As noted above, given the acrimony evident between the two camps of shareholders, it is by no means clear that litigation to recover the Loan in New Zealand would not be contested, whether rightly or wrongly.  Finally, litigation to recover the Loan would delay the finalisation of this liquidation which is otherwise nearing the stage of completion.

40.  Finally in this context, the Minority Shareholders take issue with the advice of Messrs Buddle Findlay to the effect that waiver of the Loan would not attract a tax liability on the part of Asia Magnifiers NZ.  They make three submissions in this regard.

41.  The first submission made by the Minority Shareholders is that the opinion of the New Zealand lawyers is not supported by case law.  That is not, in my opinion, a reason to disregard the opinion of Messrs Buddle Findlay since they were construing the provisions of a relatively recent tax statute, namely the Income Tax Act 2007.  There is no reason to assume that there is case law in respect of that particular statute.  In any event, it is the substance of the opinion that is material.  If there are relevant authorities to contradict that opinion, the Minority Shareholders have had an opportunity to present them but have chosen not to do so.

42.  The second submission of the Minority Shareholders is that the opinion proceeds on an incorrect assumption of fact, namely that the shareholders of the Company and of Asia Magnifiers NZ are the same.  The Minority Shareholders point to the fact that the late Mr Poon Kam was not a shareholder of Asia Magnifiers NZ.  However, once the distribution of his estate is completed and taken into account, the shareholders of the two companies will be identical.  The Liquidators’ evidence is that Mr Poon Kam passed away in 2004 and that probate is completed.  For all practical purposes, the shareholders are therefore in fact identical, even if the particulars held by the Company’s Registry have not been updated.  This distribution from the estate of Mr Poon Kam is itself referred to and assumed by Messrs Buddle Findlay in §8(c) of their opinion and reflected in the table in the Appendix to their opinion setting out the shareholders of two companies.

43.  The third submission of the Minority Shareholders is that doubt is cast on the correctness of Messrs Buddle Findlay’s opinion since the New Zealand Master Tax Guide 2009 at §16-725 states that a transfer of value from one fellow subsidiary to another fellow subsidiary sharing the same holding company does not amount to a dividend.  However, foreign law is a matter of fact to be proved by evidence.  Here, the Minority Shareholders have not adduced any evidence as to New Zealand tax law and I do not think it would be right to discount Messrs Buddle Findlay’s opinion on the basis of this submission without contrary evidence.

44.  For these reasons, I conclude that there is no valid objection to Option 1 and that it is the preferable way to deal with the Loan.  The Majority Shareholders submitted that, if the court were to direct this option, the word “compromise” should be omitted from any order to be made since there was an argument that “compromise” under s.199(1)(f) of the CO might require something more than the total waiver or discharge of liability.  I am content to do so.  This does not affect the conclusion of the appropriateness of Option 1, since its direction clearly falls within the wording of s.199(1)(f) which includes “complete discharge” of a “call, debt, liability or claim”, if not also the residual power in s.199(1)(h).

Unnecessary to consider other options

45.  In light of the shareholders’ respective positions, and my conclusions in respect of Option 1 above, it is unnecessary to address the submissions made in respect of Option 2 (assignment of the Loan).

46.  It also follows from my conclusions on Option 1 that I do not consider that the Liquidators should be directed to adopt Option 3 (litigation by the Company against Asia Magnifiers NZ).

The NZ$500,000

47.  Given my conclusion that the preferable course is for the Liquidators to waive the Loan, their retention of the NZ$500,000 cannot be justified.

48.  It was suggested by the Minority Shareholders that the court might direct the waiver of part of the Loan only, thereby retaining the NZ$500,000 so that it can be distributed in this liquidation.  However, the Liquidators have pointed out that this would attract stamp duty of approximately HK$180,000.  In the circumstances, it seems to me that there is no particular advantage in making a direction that leads to the Liquidators retaining the NZ$500,000 rather than waiving the whole of the Loan.

Disposition and costs

49.  For the reasons set out above, I direct that the Liquidators be at liberty to discharge or waive the Loan and that the Liquidators be at liberty to return the NZ$500,000, less any bank charges, to Asia Magnifiers NZ.

[Argument on costs.]

50.  I direct that the Liquidators’ costs of this application be paid out of the assets of the Company.  The costs of the Majority Shareholders in relation to this application be paid by the Minority Shareholders, to be taxed if not agreed.