GIGIG STARKE-KWONG WOON CHING v. WAYSNAR ASIA LTD

HCCW 203/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 203 OF 2003

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(Heard Together)

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REASONS FOR DECISION

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1. By two summonses both dated 3 March 2003, Mr Joachim Wolfgang Starke ("Mr Starke") and his wife, Mrs Gigig Starke-Kwong Woon Ching ("Mrs Starke") sought the appointment of provisional liquidators in respect of GFT Fashion Limited ("GFT") and Waysnar Asia Limited ("Waysnar") respectively. Mr Starke had presented a petition for the winding up of GFT on the just and equitable ground on 20 February 2003, while Mrs Starke had presented a similar petition in respect of Waysnar on 27 February 2003. Both Petitions and applications arose out of a common factual background, which I shall summarise briefly below. The winding up petitions and the appointments of provisional liquidators were opposed by Peyo Limited ("Peyo") (in relation to GFT) and International Marketing Services Limited ("IMSL"), both of which are companies which appear to be associated with or controlled by Mr Marcus Wenzel ("Mr Wenzel").

2. On 26 March 2003, about a week before the hearing of the applications for the appointment of provisional liquidators was to take place, Peyo applied for a stay of all further proceedings in respect of the GFT petition pursuant to section 34C of the Arbitration Ordinance (Cap. 341), on the basis that there was a binding arbitration agreement between Peyo and Mr Starke which required that any dispute between them in relation to the affairs of GFT should be referred to arbitration. As Practice Direction 6.1, which deals with proceedings in the Construction and Arbitration List, provides (by paragraph 11) that all interlocutory applications made under the provisions of the Arbitration Ordinance shall be made to the judge in charge of the Construction and Arbitration List, regardless of whether or not the action in which such application is made is in that List, Mr Thomson, appearing for Peyo (and IMSL) submitted that I should adjourn the application for a stay to Burrell J., the judge in charge of that List, and decline to deal further with the applications for appointment of a provisional liquidator.

3. Having heard submissions on this, I concluded that while the application for a stay of proceedings in respect of the GFT petition should properly be dealt with by Burrell J., as the GFT petition would remain in existence pending the hearing of the application for a stay (and might do so even if a stay were granted), I nonetheless had jurisdiction to hear the application for the appointment of provisional liquidators in respect of GFT. As, on the evidence before me, it appeared that the question of whether or not provisional liquidators should be appointed was of some urgency, I concluded that it should proceed so long as this did not prejudice Peyo's position in relation to its stay application, a matter which it seemed to me could be achieved by the giving of a suitable undertaking by Mr Starke. Following a short adjournment, Mr Beresford, appearing for Mr and Mrs Starke, indicated that Mr Starke was willing to undertake that opposition by Peyo to the appointment of provisional liquidators would not be taken as a submission to the jurisdiction of the Court, and on this basis, I adjourned the hearing of Peyo's application for a stay for argument before Burrell J. on a date to be fixed, and went on to hear the applications for the appointment of provisional liquidators in respect of both companies.

4. On 8 April 2003, at the conclusion of the hearing of the applications, I made orders appointing Messrs Steven Briscoe ("Mr Briscoe") and Fan Wai Kuen ("Mr Fan") of RSM Nelson Wheeler Corporate Advisory Services Ltd as Joint and Several Provisional Liquidators of both GFT and Waysnar, and indicated that I would give my reasons for doing so in due course. This I now do.

5. Before turning to the applicable legal principles and the respective contentions of the parties in relation to them, it is necessary to set out the background leading up to the presentation of the winding up petitions in respect of GFT and Waysnar. I should make it clear that while this summary is based on the material which appears in and exhibited to the various affirmations which have been filed respect of these applications, it is neither necessary nor appropriate at this stage for me to make any conclusive findings of fact, and I should not be taken as having done so in the summary which follows, particularly in relation to matters which are in dispute between the parties.

6. GFT is a company involved in the import and export of textiles and garments. It was incorporated on 14 March 1997, and its shares were initially owned as to 50% by Mr Starke, and as to 25% each by two other gentlemen, a Mr Fleischer and a Mr Ziegler. It appears that towards the end of 1998, Messrs Fleischer and Ziegler wished to sell their shares in GFT. Mr Starke says that he then approached Mr Wenzel, whom he had known for some time, with a view to Mr Wenzel becoming involved in the business of GFT. It was eventually agreed that Peyo, a company incorporated in the British Virgin Islands which is described, in the recitals to the Exit Agreement to which I will refer later, as being beneficially owned by Mr Wenzel, would acquire the shares of Messrs Fleischer and Ziegler.

7. In about January 1999, a detailed shareholders' agreement ("the Shareholders' Agreement") was entered into between Peyo and Mr Starke to provide for the organisation, management and operation of GFT. For present purposes, it suffices to note that the Shareholders' Agreement provided that:-

(1) the capital of GFT would be increased from HK$3 million to HK$6.6 million, to be allotted equally to Mr Starke and Peyo. Mr Starke was to pay the subscription monies of HK$3.6 million, with Peyo undertaking in consideration of this that it would procure banking facilities for GFT of up to HK$7 million from, inter alia, WestDeutsche Landesbank ("West LB") and Standard Chartered Bank ("SCB"). In the event that the banking facilities were withdrawn, steps were to be taken to reduce GFT's capital so as secure the return to Mr Starke of the HK$3.6 million (clauses 3.2, 3.3, 5.4 and 9.1.3);

(2) GFT would, every January pay whole of its distributable net income after taxation by way of dividend to its shareholders, subject to the parties agreeing to retain some part of this within the company (clauses 7.7 and 7.8);

(3) GFT's board would consist of two directors, to be nominated by Mr Starke and Peyo, each of whom could only be removed by the shareholder nominating him, each of whom would have one vote, with no casting vote being provided for, and neither director being entitled to remuneration unless otherwise agreed (clauses 8.1, 8.2, 8.7 and 8.9);

(4) management guidelines were put in place whereby provision was made for the delegation of the day to day management of GFT to Mr Starke, subject to monthly meetings being held, certain important financial and other decisions effectively requiring the consent of both shareholders, and all cheques and other banking documents requiring two signatories, one to be nominated by each shareholder (clauses 9 and 10 and the first Schedule);

(5) restrictions were placed on the transferability of shares, with a mechanism for valuation being provided for (clause 12); and

(6) any deadlock arising as a result of (in effect) the oppression of a minority by the majority should ultimately be resolved by arbitration (how this clause was intended to work in a situation where each shareholder held 50% of the company's shares is something that may have to be considered in the context of Peyo's application for a stay to arbitration) (clause 15).

8. It will be clear from the foregoing that the management structure created by the Shareholders' Agreement was such that while the day to day management of GFT was to be in Mr Starke's hands, the cooperation of both shareholders would be required for the company to be able to function. Mr Starke has said that his relationship with Peyo, and hence the basis on which GFT's affairs were conducted, was based on the mutual trust and confidence which he and Mr Wenzel shared, and that he regarded the relationship as one that was akin to a partnership (although it was not in fact to be deemed to constitute a partnership, this being expressly provided by Clause 19 of the Shareholders' Agreement).

9. In due course, Peyo acquired the shareholding of Messrs Fleischer and Ziegler, GFT's capital was increased as agreed, and Peyo procured the necessary banking facilities from West LB and SCB, Mr Wenzel's residence being pledged to West LB as security from the facilities provided by it. Mr Starke and Peyo became the sole directors of GFT, Peyo being represented by Mr Wenzel, who was also Peyo's nominated signatory for the various bank accounts of GFT. It seems that no dividends were in fact paid in respect of 1999, but that for the next two years interim dividends amounting to a little over HK$4 million and HK$6 million respectively were paid, although no final dividends were paid.

10. Mr Starke says that from about September 1999, differences began to arise in relation to the manner in which GFT conducted its business, with Mr Wenzel wanting to have control over the company's finances and bank accounts, while Mr Starke wished to retain the day to day control he had exercised over its business. Mr Starke says that for various reasons, it was also becoming less convenient for two signatures to be required for all cheques, particularly urgent payments. Eventually, it appears to have been agreed in November 1999 that an additional bank account should be opened with SCB which could be operated by a single signature of (among others) Mr Starke or Mrs Starke (who had by this time begun working at GFT). Mr Wenzel says that it was intended that not more than HK$100,000 should have been in this account at any time, as it was intended to be used only when necessary for reasons of urgency, and not for major or possibly controversial expenses. However, the bank mandate in respect of this account did not stipulate any limit on the amount of withdrawals or other transactions.

11. Thereafter, the affairs of GFT appear to have proceeded reasonably smoothly until the summer of 2002.

12. So far as Waysnar is concerned, it too is a company involved in the import and export of textiles and garments. It is a company with a nominal capital of HK$10,000, divided into shares of HK$1 each, which are owned as to 50% by Mrs Starke and 50% by IMSL. IMSL is a company incorporated in Mauritius, which Clause 13 of the Exit Agreement to which I shall refer suggests is a nominee of Peyo, and hence also beneficially owned by Mr Wenzel. It seems that Waysnar was incorporated with a view to taking over a business formerly carried on by a different company known as Waysnar Company Limited, which was acquired for a consideration of HK$500,000, put up equally by the Starkes and Mr Wenzel. It appears that GFT provides accounting and shipping services for Waysnar.

13. Although there is no shareholders' agreement regulating the relationship between Mrs Starke and IMSL in respect of the affairs of Waysnar, it would appear that this was broadly similar to that of Mr Starke and Peyo in respect of GFT. Thus, apart from each holding 50% of the issued share capital of Waysnar, both Mrs Starke and IMSL are directors of Waysnar; Waysnar's bank accounts were also maintained with, inter alia, West LB and SCB and could initially only be operated with signatures of two signatories, one of which was to be nominated by Mrs Starke and the other by IMSL; and like GFT, Waysnar did not pay fees to its directors, it being intended instead to distribute substantially all of its available profit each year, subject to such retention for future needs as might be agreed by the shareholders. Thus, as with GFT, the business of Waysnar required the cooperation of both its shareholders in order to operate smoothly. Again, as in the case of GFT, it was later agreed (in the case of Waysnar in about January 2002) that a further account should be opened with SCB that could be operated by the single signature of (among others) Mr or Mrs Starke, although in this case there was a limit of HK$50,000 imposed.

14. Mrs Starke says that having regard to the circumstances in which Waysnar was set up, and the manner in which it was run, her relationship with IMSL in respect of its affairs was similarly based on a relationship of mutual trust and confidence between herself and Mr Wenzel.

15. As in the case of GFT, the affairs of Waysnar appear to have proceeded reasonably smoothly and harmoniously until about July 2002.

16. On about 26 July 2002, Mr Wenzel told Mr Starke that he wished to withdraw from GFT and Waysnar, and provided Mr Starke with a copy of a valuation report prepared by a Swiss firm, Fincor M&A Advisors AG, of the same date, valuing Peyo's interests in GFT at US$5,439,480. Mr Starke was also given a draft sale and purchase agreement in respect of Peyo's interest in GFT to consider. On the same date, Peyo wrote to Mr Starke and GFT demanding to be paid dividends representing the distributable net income of Peyo for the years ended 1999, 2000, and 2001, to the extent that these had not been distributed.

17. Mr Starke did not accept the valuation report, pointing out that it had not been prepared in accordance with the basis provided for in clause 12 of the Shareholders' Agreement. He considered that if that basis were used, GFT would have a much lower, even negative, value, since he believed that it was likely to make a loss in the current year (2002). It is Mr Starke's case that Mr Wenzel, for his part, was not prepared to accept a valuation in accordance with clause 12.

18. Mr Starke says that this is when the problems started. Mr Wenzel, acting for Peyo, failed to sign and return the draft financial statements for the year ended December 2001, which had been sent to him in July with a request that he sign them before leaving on a trip to Europe, resulting in the Inland Revenue Department rejecting GFT's profits tax as incomplete, since the accounts had not been signed by its directors. The result was that GFT became subject to assessment to profits tax on the basis of the previous year's results, which would have meant a higher liability to tax than should have been the case, together with being exposed to the risk of penalties being imposed. From 29 August 2002, Mr Wenzel began to cause difficulties for GFT by refusing to sign cheques and other documents in relation to its accounts with West LB, apparently because he wished to obtain the release of the property (where he lived) which had been charged to West LB as security for facilities it had extended to GFT. Later, in early September 2002, Mr Wenzel told Mr Starke that he would not sign cheques or other bank documents until he had received a cheque for the dividends which he considered to be outstanding. He also indicated that he wished to conclude negotiations for the sale of his shareholding quickly.

19. Mr Starke says that this brought the operations of GFT close to a standstill, and resort had to be had to the single signature account with SCB in order to enable GFT to continue operating. During this period, it appears that similar problems were experienced in relation to Waysnar.

20. It is clear from the voluminous bundles of correspondence that have been exhibited that there appears to be material which, on the face of it, lends support to the description of events up to this point that has been given by Mr and Mrs Starke. However, the next event of importance was that an agreement ("the Exit Agreement") was entered into on 25 September 2002 between Mr Starke, Peyo and Mr Wenzel, which set out the terms on which Mr Starke would acquire Peyo's shareholding in GFT, and IMSL's shareholding in Waysnar. Mr Wenzel was a party to the Exit Agreement, providing a guarantee as to Peyo's performance of its obligations under it.

21. The Exit Agreement had the following main terms:-

(1) The price to be paid for Peyo's shareholding in GFT would be one half of the valuation of the Company to be made by a Mr Charles Dickson, acting as an expert and whose decision would be final. He was, however, directed to consider all monies due to GFT and Rosefield, that the valuation was to be an "ongoing business valuation", that previous dividends may have been paid in full, and that the Shareholders' Agreement provided for unequal cash contributions to the company (clauses 5.1 to 5.3);

(2) Mr Dickson was to be given "full and proper access" to the financial records of GFT and an associated company, Rosefield Limited ("Rosefield") (clause 5.1).

(3) None of the parties to the Exit Agreement was to have any contact with Mr Dickson unless initiated by Mr Dickson and none of them should in any way attempt to influence his calculation of the valuation of GFT (clause 5.4).

(4) Mr Starke was to pay a deposit of HK$4 million to Peyo's solicitors, Messrs Oldham, Li & Nie, on the date of the Exit Agreement, to be held by them as stakeholders (clauses 3.1.1 and 6.1).

(5) The deposit was to be released to Peyo, and Mr Starke was to pay the balance of the purchase price (up to a further HK$4 million) to Peyo, seven days after being notified of the valuation by Mr Dickson ("the First Payment Date") (clauses 3.1.2, 6.2 and 6.3), any remaining balance of the purchase price being payable at the rate of HK$3 million per year, completion being delayed until payment in full had been effected, unless satisfactory security for the payment of the balance were provided (clauses 3.1.3, 6.4 and the Schedule).

(6) Peyo would resign as a director of GFT on the later of the date of the First Payment Date or the release of Peyo's property in which Mr Wenzel resided from the charge to West LB (clause 7.6).

(7) The Shareholders' Agreement would terminate on the First Payment Date (clause 6.4).

(8) Mr Starke undertook to procure payment to Peyo of all outstanding dividend entitlements for the years 1999, 2000 and 2001 as soon as possible (clause 9.2).

(9) Mr Wenzel guaranteed the obligations of Peyo under the Exit Agreement (clause 10).

(10) Each party agreed to act in good faith from the date of the Exit Agreement in connection with the ongoing operations of GFT, with Peyo adding Mr Gordon Oldham ("Mr Oldham") as an additional signatory for GFT's bank accounts (clause 11).

(11) Mr Starke agreed to purchase from Peyo or its nominee what was described as Peyo's 50% shareholding in Waysnar, with the value of that 50% shareholding being determined by Mr Dickson in substantially the same way as for Peyo's shareholding in GFT, payment of such value similarly being due seven days after Mr Dickson's valuation was notified to the parties (clause 13).

22. It is, I think, pertinent in the context of these proceedings to note that the valuation was to be carried out by Mr Dickson without any attempt by either party to influence him, and also that his valuation was to be carried out on an ongoing business basis, the parties being obliged to act in good faith in connection with GFT's ongoing operations. This latter obligation would seem to be of particular importance given the stipulated basis of the valuation.

23. Mr Dickson was duly appointed on 25 September 2002 to provide the required valuation, and the next day, 26 September 2002, Mr Starke paid the deposit of HK$4 million to Messrs Oldham, Li & Nie as stakeholders. It appears that a number of the banking and other documents which had, prior to the signing of the Exit Agreement, been awaiting Mr Wenzel's signature were returned duly signed promptly thereafter. However, it is said that Mr Wenzel did not sign banking documents relating to facilities with West LB, insisting that he wished to have his residence released from being security for such facilities.

24. However, Mr and Mrs Starke say that only a week after the Exit Agreement was signed, from 3 October 2002 onwards, Mr Wenzel again began to create difficulties for the operation of GFT and Waysnar's businesses, once again refusing to sign banking and other documents promptly. It appears from summaries that have been prepared by Mr and Mrs Starke that there were many occasions from October 2002 onwards when there was delay in signing cheques and other documents, and there were several occasions (particularly after December 2002) when documents were simply never signed, leaving GFT and Waysnar to have to make use, so far as possible, of their respective single signature accounts with SCB. As with the period before the signing of the Exit Agreement, the fact of these delays appears, on the face of it, to be borne out by the frequent e-mail and other correspondence between the parties and their legal representatives. Mr Wenzel has said that he has always been prepared to sign documents as long as they relate to proper payments to be made by GFT and Waysnar, but he apparently does not include within this category payments to parties such as those mentioned below. I note, however, that while several of the delayed and outstanding documents appear to relate to such payments, there appear to be a substantial proportion which do not, on the face of it, relate to them, but relate to matters in respect of which Mr Wenzel does not appear to have specifically complained.

25. Mr Wenzel was also, through October 2002, pressing for payment of the outstanding dividends. It seems that these were eventually paid in about the first week of November 2002.

26. The correspondence between the parties was also, from about October 2002 onwards, becoming more intemperate in tone, and by the end of October 2002, Mr Wenzel was accusing GFT (which was, of course, under the Starke's management) of paying bribes, laundering money, building up hidden reserves and generally cheating on him. He also raised queries about the propriety of certain payments and cash amounts which were said to be due to various parties, including a customer known as Bluhm Koeln ("Bluhm"). In his affidavits filed in relation to these applications, Mr Wenzel has deposed to his suspicions as to the propriety of GFT's dealings with Bluhm, and dealings with two other customers known as Peek & Cloppenburg and Hervis Sport, suggesting that improper payments were being made to representatives of these companies known as Steffen Schraut and Markus Munch respectively.

27. Meanwhile, Mr Dickson had commenced work on his report. It appears that shortly after his appointment, he asked for certain information to be supplied to him as to the background of the companies, and on 2 October 2002, Mr Starke provided, through his then solicitor, a short paper setting out certain matters that he says he believed were what Mr Dickson was asking for. During the course of October 2002, Mr Dickson requested forecasts from the Starkes in respect of the anticipated financial results of the companies for the year ending in December 2002. Such projections were provided to Mr Dickson in due course in November 2002.

28. At the beginning of November 2002, Peyo notified Mr Starke that it wished to inspect the financial records of GFT and Waysnar through a representatives of the accounting firm Ferrier Hodgson. It seems that Mr Starke at first thought that this was in connection with the allegations of impropriety which had recently been made, and he seems to have readily agreed to allow such inspection to take place. It would appear that both Mr Dickson and Ferrier Hodgson were afforded substantial access to the books and records of both companies. During the course of November 2002, it appears that Mr Dickson became aware of Ferrier Hodgson's involvement and of the fact that they were preparing a report on their work, and towards the end of November, Mr Dickson indicated that he wished to defer his valuation until after Ferrier Hodgson had completed their report. Initially, the Starkes suggested that Mr Dickson's valuation was a quite different matter from whatever Ferrier Hodgson were working on, but eventually they did not insist on Mr Dickson pressing on with his valuation immediately.

29. In fact, it transpired that Ferrier Hodgson were not simply looking into possible improprieties, but were also examining the profit forecasts which had been supplied by the Starkes to Mr Dickson. Their report, which was a bulky document running to well over 100 pages of report and appendices, did not disclose any impropriety, but made a number of suggestions for substantial upward adjustments to the profit forecasts prepared by the Starkes. The Ferrier Hodgson report was, on its completion, provided to Mr Dickson under cover of a long letter dated 18 December 2002 from Messrs Oldham, Li & Nie, which itself appeared to make various suggestions and submissions as to the approach that Mr Dickson should take to the valuation which he was carrying out.

30. It is not altogether clear from the correspondence whether Mr Dickson actually requested the Ferrier Hodgson report to be supplied to him. However, it does seem that he was in contact with representatives of Ferrier Hodgson (as well as the Starkes, Mr Wenzel and their respective solicitors) from time to time before the report was completed, and that an expectation had perhaps arisen that the report would be supplied to him.

31. The letter from Mr Oldham to Mr Dickson, and the supply of the Ferrier Hodgson report to him, met with complaints from Mr Starke and his then solicitor, Mr Jerry Yip of Messrs J. Chan, Yip, So & Partners. Their reaction was to demand an opportunity to respond to it. The response of Mr Oldham to this request was to protest at any opportunity being given for such a response to be made, on the basis that both parties had had ample opportunity to prepare their respective cases, and there was no reason now to give the Starkes an opportunity to put their house in order.

32. It is not entirely clear whether or not Mr Starke had appreciated that Ferrier Hodgson were working on a report commenting on the projections which he and Mrs Starke had prepared in respect of GFT and Waysnar. Although it may well be that he thought initially that Ferrier Hodgson were looking only at the improprieties which had been alleged by Mr Wenzel, there are indications (not least in the way in which the case is put in the respective petitions) that it might have been realised before the report was submitted that it was likely to be rather more wide ranging, and might impinge more substantially on the valuation on which Mr Dickson was working.

33. In the event, Mr Dickson offered a period of some four weeks for a report in response to be prepared on behalf of Mr Starke. However, during this period, matters developed further.

34. Towards the end of 2002, Mr Wenzel announced that he was leaving for an extended trip to Europe. He suggested in a letter to Mrs Starke dated 30 December 2002 that arrangements should be made for documents which required his signature to be sent to him in Europe once a week, to be signed by him and returned thereafter. In this letter, he also indicated that Peyo did not feel bound any longer to provide guarantees in respect of GFT and Waysnar's accounts with SCB.

35. On 13 January 2002, Messrs Robertsons wrote to Mr Oldham to advise that they had been appointed as legal advisors to Mr and Mrs Starke, in place of Messrs J. Chan, Yip, So & Partners. In their letter, they made a number of observations on the Shareholders' Agreement, and complained that Peyo had acted in breach of that agreement (which remained in effect at that stage, since the First Payment Date under the Exit Agreement had not yet been reached) in a number of respects. They went on to complain that the provision of the Ferrier Hodgson report to Mr Dickson, and the contents of the covering letter from Mr Oldham under which it was sent, constituted serious breaches of the Exit Agreement, since they constituted attempts to influence Mr Dickson in his valuation, contrary to clause 5.4 of the Exit Agreement. They indicated that Mr Starke was considering his options, but would be prepared to have the valuation exercise done afresh by a different valuer.

36. On 25 January 2003, however, the businesses of GFT and Waysnar suffered a further blow, when SCB indicated that it would be withdrawing the trade financing and credit facilities which it had hitherto provided to them, as Peyo had indicated that it intended to revoke the guarantees which it had provided for such facilities. Demands were made for immediate payment of all liabilities, or for cash cover to be provided in respect of them. Demands were also made on Mr Starke under a personal guarantee which he had provided in respect of such facilities.

37. On 29 January 2003, Messrs Robertsons wrote to Messrs Oldham, Li & Nie, Peyo, Mr Wenzel and Mr Dickson. In summary, they stated that as a result of the attempts to influence Mr Dickson, and as a result of the serious breach of the obligations to cooperate in the operation of the businesses of GFT and Waysnar, in particular the causing of the cancellation of its facilities with SCB, Mr Starke regarded the Exit Agreement as having been repudiated, accepted that repudiation, and that accordingly the Exit Agreement had been terminated. They suggested that Mr Dickson should stop work on his report, and demanded from Oldham, Li & Nie the return of the HK$4 million deposit which had been paid by Mr Starke. They also indicated that they regarded the Shareholders' Agreement as having been breached by Peyo causing the SCB facilities to be withdrawn, and demanded that steps be taken to secure the repayment to Mr Starke of the HK$3.6 million in further capital which he had paid for under that agreement. On behalf of Peyo and Mr Wenzel, Mr Oldham's response was to deny that there had been any breach of the Exit Agreement, and to insist on Mr Dickson completing his valuation.

38. In the event, Mr Dickson did provide a valuation of the companies, on a continuing business basis, on 27 February 2003. He made it clear that he had based the valuation on, among other things, the Ferrier Hodgson report and the letter from Messrs Oldham, Li & Nie of 18 December 2002. He also made it clear that he had not had any input from Mr Starke or anyone representing him in relation to those matters. He stated that he had ignored the suggestion that Mr Wenzel's actions had damaged the companies, or impaired their value. It is to be noted that in his report, he expressly stated that he did not find any evidence of hidden reserves, or, it seems, any problems in relation to transactions with Bluhm. He appears to have accepted (although not completely) most of Ferrier Hodgson's proposed adjustments to the projections supplied to him by the Starkes, and valued the companies at about HK$22.5 million.

39. Meanwhile, however, Mr Wenzel had written to Mr Starke in early February 2003 (although the letter is dated 6 February, it is thought that it may in fact have been written some days earlier), alleging that there had been an improper diversion of payments to GFT and Waysnar into the single signatory accounts, thereby avoiding the use of the double signatory accounts over which Mr Wenzel had some control. He also complained that the cash balances of GFT had been reduced from some HK$21 million at the end of September 2002 to some HK$11 million odd by the end of the year, and that Mr Starke was allowing some major customers, such as Bluhm, to withhold payment. He accused Mr Starke of bleeding the company, and building up cash elsewhere.

40. At about the same time, it appears that Mr Wenzel was in contact with SCB, alleging that the making of payments into the single signature account was fraudulent. Messrs Oldham, Li & Nie also wrote to SCB on 5 February 2003 urging it to freeze transactions on the single signature accounts. This resulted in SCB freezing the single signature accounts of both GFT and Waysnar on 12 February 2003.

41. I should add that on 6 February 2003, Mr Wenzel had written to Mr Starke, suggesting that they jointly approach SCB and request reinstatement of the facilities which had been suspended, and that all transactions be carried out on a double signature basis. In his evidence filed in opposition to these applications, Mr Wenzel has reiterated his willingness to cooperate in relation to all "proper" transactions of the companies.

42. Thereafter, Mr and Mrs Starke presented their petitions in respect of GFT and Waysnar respectively, and took out their applications for the appointment of provisional liquidators in respect of each company.

43. Mr and Mrs Starke say that, as the Exit Agreement has been repudiated by Peyo and Mr Wenzel (and in consequence terminated by Mr Starke) and the companies are now no longer operational, there is no alternative but for the companies to be wound up. They say that the appointment of provisional liquidators is necessary to break the deadlock, because the companies can otherwise no longer function, and the longer this state of affairs continues, the more detrimental it will be to the companies, since the companies will face claims for payment and perhaps damages by suppliers who have shipped goods to them, claims for damages by suppliers who have suspended shipments because payment or payment arrangements have not been made, claims for damages from customers whose orders cannot be fulfilled, and difficulties in collecting debts from customers who owe them money. On the basis of material provided by Mr Briscoe, Mr and Mrs Starke suggest that if provisional liquidators are appointed, while there will inevitably be some reduction in the level of recoveries, it is hoped that the companies will remain solvent or substantially so, whereas without such appointments, there is a real risk that the companies will turn out to be insolvent at the end of the day.

44. Mr Wenzel, however, suggests that the appointment of provisional liquidators is unnecessary, saying that he is willing to cooperate in relation to all aspects of the business of the companies which he is satisfied are in order, and pointing out that the appointment of provisional liquidators is likely to involve considerable expense, and may also result in difficulties in dealing with suppliers and customers, and in particular make it harder to recover the companies' receivables.

45. The basis on which the Court exercises its discretion as to whether or not to appoint provisional liquidators in respect of a Company against which a winding up petition is outstanding is well established. It is necessary for the applicant to show first that there is a good prima facie case for the making of a winding up order at the hearing of the petition, and secondly that it is appropriate for a provisional liquidator to be appointed, having regard to the commercial realities, the degree of urgency and need established by the applicant and the balance of convenience in all the circumstances of the case (see Re Five Lakes Investment Co. Ltd [1985] HKLR 273, at 285A-C; Re Hang Tak Buddhist Hall Association Ltd [2002] 2 HKLRD 863, at 869C-D and 870C-G, paragraphs 19 and 22 of the judgment). As I understood their submissions, Mr Beresford and Mr Thomson did not really differ in relation to these basic principles. Where they differed was as to the application of these principles to this case.

46. I deal first with the question of whether or not a good prima facie case for the making of a winding-up order has been made out by the petitioners. On the face of it, having regard to the evidence which has been filed by them, I am entirely satisfied that they have met this requirement. The evidence of Mr and Mrs Starke credibly suggests that the affairs of both GFT and Waysnar were, while under the ownership of themselves and Mr Wenzel's companies Peyo and IMSL, run as quasi-partnerships, on the basis of mutual trust and confidence between themselves and Mr Wenzel, but that that trust has now broken down, leaving the companies effectively deadlocked and incapable of operating normally, since it has proven virtually impossible to operate the double signature accounts, and the single signature accounts have now been frozen in the circumstances described above.

47. Although Peyo and IMSL, through Mr Wenzel, have filed evidence disputing the Starkes' version of events, it is neither necessary nor possible to resolve such conflicts of evidence at this stage. It will only be after the evidence has been fully tested at the hearing of the petitions that it will be possible for the Court to make concluded findings of fact and resolve these differences. Nonetheless, as Mr Thomson made a number of submissions in respect of this aspect of the matter, I shall deal with them briefly.

48. Mr Thomson first suggested that there was in fact no personal relationship of mutual trust and confidence between the petitioners, Mr and Mrs Starke, and Peyo and IMSL, which were overseas companies. Insofar as this is based on a suggestion that there must be considerations of a personal character arising between one individual and another in order to bring the just and equitable ground for winding-up into play, I reject this submission. While it is true that in Ebrahimi v Westbourne Galleries Ltd [1973] AC 360, Lord Wilberforce spoke (at p. 379B-380B) in terms of such considerations of a personal character, and while it may well generally be the case that the just and equitable ground will arise most often in relation to companies whose shareholders are natural persons, I see no reason why it should not, in principle be available in relation to companies whose shareholders are themselves corporate entities, at least where such corporate entities are owned and controlled by individuals, and/or where they exercise their rights as shareholders (and perhaps also as directors) of the company concerned through individuals who are in a relationship of mutual trust and confidence. It will not be uncommon for individuals to choose to arrange their business affairs through the use of companies owned and controlled by themselves, and it would, I think, be an unfortunate and unnecessary restriction on the availability of the just and equitable ground for winding-up if it were not to be capable of being invoked in such cases, where it could be required just as much as in the case of companies which have natural persons as their shareholders. On the basis of the evidential material available, I have no difficulty in concluding that insofar as Peyo and IMSL were beneficially owned by and controlled by Mr Wenzel (as to which there appears to be at least some credible evidence to which I have already referred), it was possible for the necessary relationship of trust and confidence to exist between them and the Starkes.

49. Further, quite apart from a breakdown of mutual trust and confidence, a winding-up on the just and equitable ground can be based on a complete deadlock having arisen in relation to a company, so that it is unable to function (see e.g. Re Yenidje Tobacco Co. Ltd [1916] 2 Ch 426). Indeed, prior to the decision in the Ebrahimi case, this was thought to be the only basis on which a company could be wound up on the just and equitable ground (see Ebrahimi (supra), per Lord Wilberforce at p. 376C-E). In this case, there is clearly credible evidence of the companies being now effectively unable to operate at all. Whatever may have been the position in September or December 2002, the situation prevailing at the date of the presentation of the petitions would seem to be one that could credibly be described as a total deadlock. In this respect, I do not attach much weight to Mr Wenzel's professed willingness to cooperate in relation to the operation of the companies if provisional liquidators are not appointed, having regard to the apparent reservation which is made in relation to matters that he considers questionable.

50. Mr Thomson also suggested that the existence of the detailed Shareholders' Agreement meant that there was no room for the operation of the just and equitable ground for winding-up, since the parties had clearly put their relationship on a commercially agreed basis. With respect, I do not think that this follows. Even where a shareholders' agreement exists, it may be that the circumstances are such that it would be meaningless to insist on the parties being left to their rights to seek enforcement of it. If, for example, one shareholder were to make it clear that he had no intention whatsoever of honouring his obligations under a shareholders' agreement that he had entered into, it seems to me that it would be unsatisfactory if the other party were not able to put an end to the relationship between them by winding-up the company concerned, and were left to seek such remedy as he might have for breach of the shareholders' agreement. On the evidence put forward by Mr and Mrs Starke here, I consider that notwithstanding the existence of the Shareholders' Agreement, it would be open to the court hearing the petitions to make winding-up orders in relation to GFT and Waysnar.

51. Mr Thomson next suggests that the entry into of the Exit Agreement means that there could not properly be a winding-up order made, since the parties had already agreed to a mechanism whereby their relationship in the companies would be severed, and they should be held to that agreement. However, to accept this submission would be to overlook the petitioners' case that the Exit Agreement has been repudiated by Peyo and Mr Wenzel, and such repudiation having been accepted by Mr Starke, the Exit Agreement terminated (before any valuation had been produced by Mr Dickson) and is accordingly no longer of any effect. The evidence of the petitioners again establishes, in my view, a good prima facie case to this effect. It is fair to say that there are a number of arguments open to Peyo and IMSL in respect of this part of the petitioners' case, which Mr Thomson raised. However, I am satisfied that none of them is so obviously cogent or well-founded as to render the petitioners' position untenable, which is what would have to be done in order to neutralise this aspect of their case.

52. Thus, although it may ultimately turn out that the contention that Mr Starke was himself first in breach of Clause 5.4 of the Exit Agreement by submitting views to Mr Dickson on 2 October 2002 is well founded, at this stage, it cannot be said that this will necessarily be the case, having regard to the earlier correspondence which suggests that Mr Dickson had initiated this by a request for information channelled through Mr Starke's solicitor, Mr Yip.

53. Similarly, while it might be said that Mr Dickson requested the provision to him of the Ferrier Hodgson report, and thus initiated that particular contact, it would at least be arguable that under clause 5.4 of the Exit Agreement, even contact that was initiated by Mr Dickson should not be used so as to provide a vehicle for attempting to influence his valuation. There would, moreover, be an issue as to whether, leaving aside the Ferrier Hodgson report, the letter of 18 December 2002 from Oldham, Lie & Nie amounted in itself to a breach of clause 5.4. It seems to me that while there may be arguments in relation to all of these matters, it cannot be said that the petitioners' case in relation to them is not a credible one.

54. Further, while it might be (and was) pointed out that there was apparently no suggestion, immediately after the Ferrier Hodgson report and the covering letter of 18 December 2002 were sent to Mr Dickson, that this was a breach of the Exit Agreement, let alone one which entitled Mr Starke to terminate it, it does not follow that this amounts to a waiver of the breach (if breach it was) so as to preclude Mr Starke from seeking to terminate the Exit Agreement on account of it when he did. Moreover, it is to be noted that the termination of the Exit Agreement was not founded solely on the alleged breach of clause 5.4, but also on the alleged breach of clause 11 thereof, in the light of the cancellation of the SCB facilities on 25 January 2003, only four days before Mr Starke sought to terminate the Exit Agreement on 29 January 2003. Thus, it does not seem to be to be possible to say that there is not even a prima facie case that the Exit Agreement was validly terminated.

55. Given that there is, to my mind, at least a good prima facie case that the Exit Agreement was validly terminated, it does not seem to me to be open to Mr Thomson to rely on it as a ground for rejecting the existence of such a prima facie case for the making of a winding-up order.

56. This being so, it seems to me that it also follows that Mr Thomson's suggestion that the applications should be dismissed because the petition could not succeed, being brought for a collateral or improper purpose, namely, to escape the consequences of the Exit Agreement, must also be rejected (this point was also raised as a basis for suggesting that Mr and Mrs Starke did not come to the court with clean hands). Indeed, this argument seems to me to put the cart before the horse, for it would, I think, be necessary, given the existence of the Exit Agreement, for Mr and Mrs Starke to show that it was not effective or no longer binding in order to have a credible case for the making of winding-up orders in their favour. Whether this is done in the context of the winding-up proceedings themselves, or in separate proceedings, is not, to my mind, important. If Mr Starke was entitled to, and did, terminate the Exit Agreement (and I have concluded that there is a good prima facie case to this effect), it cannot in my view be an impediment to the winding up proceedings.

57. I do not think that the various submissions of Mr Thomson to the effect that there had been exaggerations of the true extent of the problems, so that there was no real deadlock; that such problems as there are relate only to the single signature account, and that Mr Wenzel is prepared to operate the double signature account; that the companies still have facilities with West LB; and that Peyo and IMSL were genuinely concerned about improper payments to Bluhm and other suppliers or customers take the matter any further, as these are all matters that can only be resolved after there has been a full investigation of all the evidence.

58. Finally, in relation to the first stage of the test, Mr Thomson submitted that any deadlock was in fact brought about by the Starkes themselves, so that they could not rely on the deadlock as a ground for obtaining a winding-up order on the just and equitable ground (see Re Shiu Fook Co. Ltd [1989] 2 HKC 342). In my view, this submission, like those mentioned in the preceding paragraph, is necessarily founded on the Court accepting the evidence of the opposing shareholders to that of the petitioners, but whatever may be the outcome at the end of the day, it does not seem to me that the evidence put forward by Peyo and IMSL is not such as would demonstrate that the petitioners have not, at this stage, shown by credible evidence a good prima facie case for the making of winding-up orders in their favour.

59. I turn now to consider the second stage of the test. In relation to this aspect of the matter, factors such as the commercial realities, the degree of urgency and need established by the petitioners and the balance of convenience all come into play.

60. Mr Thomson criticised the quality of the evidence in relation to jeopardy to the assets of GFT and Waysnar. He said that apart from the assertions of Mr and Mrs Starke, there was no real evidence that there had been any real problems, or threats of action by trading partners, or difficulties in effecting recoveries. However, it appeared to me on the basis of the correspondence that there was some evidence of complaints by at least one of the suppliers. Moreover, these are all matters that are inherently likely to arise in a situation where a company is in a state of paralysis, and I therefore consider that Mr and Mrs Starke's evidence to this effect is credible.

61. It was also suggested by Mr Thomson, relying on Re Yick Fung Estates Ltd and Shui Hing Investment Co. Ltd [1986] HKLR 240, that as the companies were both solvent, there was no reason to appoint provisional liquidators. However, what was held in that case was that it was an unusual and drastic step to appoint provisional liquidators to a company which was both solvent and continuing to trade. In the present case, having regard to the deadlock that appears to be affecting GFT and Waysnar, the absence of banking facilities or operable bank accounts, and in the light of the evidence of Mr and Mrs Starke to the effect that the companies are no longer taking orders, it does not seem that the companies are in fact actively trading any longer. Moreover, as Mr Beresford pointed out, although the companies are at present solvent on the basis of the book values of their assets, the evidence indicates that this is a state of affairs that may not persist if nothing is done to get in their assets and minimise, so far as possible, any liabilities which they may face.

62. I have also had regard to the fact that the appointment of provisional liquidators is likely to be expensive. However, given the apparent inability of the shareholders to cooperate with one another, it is difficult to see what other alternatives might exist.

63. In these circumstances, I concluded that the balance of convenience called for the appointment of provisional liquidators to both companies in order to break the deadlock that appears to have arisen, and to collect in the assets and deal with the liabilities of the companies in as prompt and effective a manner as may be possible in the circumstances.

64. For all of these reasons, I made an order appointing Messrs Briscoe and Fan to be the provisional liquidators of each of GFT and Waysnar, with the powers sought in the summons. At the request of Mr Thomson, I also empowered the provisional liquidators to investigate the affairs of the companies and to submit a report to the Court as to any matters which they might think it desirable to bring to the notice of the Court, should they think fit to do so. As the petitions would still have to be heard, and given that the views which I have come to on the evidence so far are provisional ones, which have been expressed only for the purpose of considering whether or not a prima facie case for a winding-up order has been made out, I considered that the appropriate order for costs would be that the costs of the applications should be in the respective petitions.