CHOW SHIU KEI v. LEE WAI JANE

HCCW179/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS

NO. 179 OF 2006

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D E C I S I O N

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1. This is an application for specific discovery in the context of a petition for the winding-up of a company on the just and equitable ground pursuant to section 177(1)(f) of the Companies Ordinance. 

2. The basic dispute between the parties does not appear to be a particularly complicated one.  The company is called Ping On Ointment Company Limited.  It is owned as to 50 per cent by the 2nd respondent and as to 50 per cent by the petitioner and members of his family.  The petitioner himself owns one-third of the company, or 33.33 per cent of its issued shares, with the shares representing the remaining one-sixth interest in the company being held equally by two of his daughters.  His daughters are not co-petitioners, but they are named as respondents in these proceedings although they have taken no part in them. 

3. The main allegations that are made in the proceedings are that there has been a deadlock and a complete breakdown in the trust and confidence which had existed in the relationship between the petitioner on the one side, and the 2nd respondent on the other.  As a result, it is said, the company has no future, cannot sensibly be expected to carry on its business and should, therefore, be wound up.  The petitioner says that the 2nd respondent had proposed a winding-up at an earlier stage but, for reasons known to herself, ultimately changed her mind and decided that she did not wish to have the company wound up after all.  It was in these circumstances, where the petitioner says that there has been a complete deadlock and inability of the parties to continue to run the affairs of the company, that the petitioner brought this petition.

4. Apart from the allegations of deadlock and loss of confidence, the petitioner makes two specific complaints in relation to the way in which the company was run by the 2nd respondent, whom the petitioner says was the dominant person involved in the running of the company.  One complaint relates to the payment of salaries to persons who are said not have been in fact employed by the company.  The second complaint relates to an arrangement by which the company entered into an agreement with a subsidiary company known as Ping On Ointment International Company Limited (“International”). 

5. It was said that International was set up to provide services to the company in the marketing of its products overseas.  According to the petitioner, the 2nd respondent had suggested that it would be convenient to set up a separate company for this purpose.  It is said that International was paid a service fee of some $695,000.00 per year, and the complaint was that because of the shareholding structure of International, this was effectively a way in which part of the company's income or profits were distributed in a way other than that in which they would have been distributed if the business had remained within the company. 

6. This is because while the company is owned equally by the petitioner's family and the 2nd respondent respectively, International is only owned as to two-thirds by the company, the remaining one-third being owned in part by the petitioner, in part by the 2nd respondent's husband and, in part by two other persons who happen to share a surname with the 2nd respondent's husband, one of whom is said to be a relative but the other of whom does not appear to be related.  The effect of the existence of the other two shareholders is to give rise to a situation in which some part of the income of International will be paid, if there are distributions, to persons other than the 2nd respondent or her family and the petitioner and his family.

7. In the course of the evidence, a further complaint emerged which has not, as yet, been reflected in the petition.  This was a complaint that the company sold its products to International at a price significantly lower than the price at which it sold to outside customers.  Whereas it sold its products to outside customers at a price of $46.00 per dozen jars of the ointment that it manufactured, it was selling the same ointment to International at $31.00 per dozen jars, a reduction in price of about one-third.  It is suggested that in this way a further amount of profit that should have been earned by the company was effectively diverted to International to the detriment of the petitioner and his family, given the smaller interest that they had in International as compared with their interest in the company.

8. A discovery order was made in the proceedings requiring all the parties, including the company, to make mutual discovery of documents that they had in their possession, custody or power relevant to the matters in issue in the dispute by way of mutual exchange of lists of documents.  It appears that the petitioner and the 2nd respondent have exchanged lists of documents but the company has not complied with that order.  The reasons for such non-compliance are not entirely clear but it seems that although the company had at one stage taken steps to instruct solicitors to represent it in these proceedings, the solicitors that it has instructed do not appear to have felt it necessary to come on the record in these proceedings and the company has not taken any steps to comply with its obligations under the order for discovery.

9. Faced with this situation, the petitioner has taken out this summons seeking an order for specific discovery against both the company and the 2nd respondent for certain categories of documents.  The documents sought are as follows. 

10. First, the petitioner seeks discovery,on affidavit, of certain books and accounts of the company for the period from 1 April 1999 to 31 March 2006, these being the general ledger, the sales day-book, the sale and purchase contracts, purchase orders and other documentation in relation to the sale of Ping On ointment by the company to International, the company's management accounts and its audited accounts. 

11. Secondly, the petitioner also seeks disclosure of certain books and accounts of International for the period from 5 October 2001 to 31 March 2006.  In particular, it seeks International's management accounts and audited accounts and sale and purchase contracts and other documentation relating to the purchase of Ping On ointment by International from the company. 

12. At the hearing today, the petitioner has been represented by Mr Simon Lui and the 2nd respondent by Mr William Wong.  The company has not appeared before me and is unrepresented.  In essence, the dispute in relation to the summons is between the 2nd respondent and the petitioner.  Mr Wong, for the 2nd respondent complains that it was inappropriate for the 2nd respondent to be made the subject of the summons on a number of grounds.  He says, first, that the documents that are sought are not relevant to any of the issues in these proceedings; second, that there is no reason for suggesting that the 2nd respondent is, in fact, in possession, custody or control of such documents; and third, it is suggested that the petitioner has already had substantially all of the documents that are sought disclosed to him in the context of other proceedings which were brought in 2003, in which the petitioner sought and obtained an order for the company to provide him with inspection of its accounting books and records pursuant to section 121 of the Companies Ordinance.

13. I shall deal first with the question of whether or not the documents sought are relevant to the issues in these proceedings.  Mr Wong submitted that the documents were not, in fact, relevant to any of the issues in the proceedings, having regard to the way in which the allegations in the petition are framed.  It seems to me that there is some substance in this argument, in that Mr Lui indicated in his submissions that the documentation that is sought is wanted principally in relation to the allegations as to sales by the company to International of the ointment that it produces at substantially less than the price that it sells to its other customers. 

14. It seems to me that, in general terms, the documents that are sought are clearly relevant to that allegation.  But, says Mr Wong, that allegation is not one that actually appears in the petition and, for the purposes of these proceedings, the petitioner should be held to the allegations in the petition and not be permitted to travel beyond them.  That is, I think, correct as a matter of practice.  Although a petition in a winding-up matter is not a pleading in the way that a statement of claim or defence is a pleading in an ordinary High Court action, it has been held on a number of occasions that the petition serves the important function of defining the issues between the parties and governs the issues that the court will be called on to investigate at the trial. 

15. In those circumstances, where a party wishes to raise a matter that is not already raised in its petition, the appropriate course is for the party to seek to amend its petition to make the specific allegation sought, after which it will be possible for that allegation to be pursued.  So far as the petition as it stands is concerned, the complaint about the interposition of International was quite specific – it is clear from the petition that the complaint related to the payment of the management fee by the company to International.  The allegation that is now sought to be made and for which discovery is sought is, I think, sufficiently different in its nature and the facts necessary to support it, that it should be regarded as a separate allegation, which requires to be specifically pleaded.

16. If the petition remains in the form that it currently bears, therefore, I would be inclined to agree with Mr Wong that the documents sought are not strictly relevant to the issues that arise on this petition.  However, it seems to me that it would be perfectly possible for the petitioner to seek to amend the petition so as to make the necessary allegations so as to raise the additional complaint about the price at which the company sold its product to International.  This is a matter which is already raised in the petitioner's affidavits which have been filed in relation to this matter, and I do not think that there could be any real basis for objecting to the amendment being made to bring the petition into line with the allegation in the affidavits.  It is clear that the allegation is already in place, and it could not be said that the petitioner is putting forward a speculative case or one that is unsupported by any evidence. 

17. It seems to me, however, that it would be desirable for the petitioner first to amend its petition before it is permitted to pursue this allegation, whether for the purposes of discovery application or at trial.  During the course of argument, Mr Lui informed me that it would be possible for the petitioner to proffer an amendment within a very short time and, in the circumstances, rather than take the strict line that the application should be dismissed simply on the basis that the discovery sought is not presently relevant to any issue in the proceedings, it seems to me that it would be more sensible and economical to consider the application on its merits, dealing with the fact that the petition does not at present contain the necessary averments by making it clear that compliance with any order that I make in relation to discovery should only be required a certain time after the petition has been amended. 

18. I shall come back later to deal with the precise terms of such an order at the end of this judgment.  On the basis that the petition will, in due course, be amended to raise the allegation that is made in the petitioner's affidavit and which Mr Lui has relied upon, I proceed to consider whether or not it can be said that it was appropriate to bring this application against the 2nd respondent. 

19. The 2nd respondent's case is fairly straightforward.  She says that she is only a director of the company and that, as such, she cannot be said to be in possession, custody or control of any of the documents which are sought.  The position, she says, of the company itself is quite different and there is no reason why an order for discovery should not be made against the company, which will then have to comply with the order or face consequences if it fails to do so.  In the context of a company, of course, the consequences of non-compliance with a court order will fall principally on its directors and since both the 2nd respondent and the petitioner are directors of the company, the 2nd respondent says that it is to be anticipated that the company will take steps to comply with the order, just as it did when it was faced with an order to permit the petitioner to inspect its books and accounting records in the previous proceedings that he had taken out in 2003. 

20. In those circumstances, I think it might be as well, first, to get the position of the company out of the way.  It seems to me that the books and accounts of the company which are sought under paragraph 1 of the summons are clearly documents that are relevant to the issue which will shortly become an issue in these proceedings and so I think that, in the circumstances, it would be appropriate for me to make an order that the company at least should make disclosure on affidavit of those books and records.  This will require the company to make an affidavit through a proper officer.  It may well be that the proper officer will, at the end of the day, prove to be the 2nd respondent, but she will then be making discovery on behalf of the company, in her capacity as an officer of the company, and any costs of that exercise will fall on the company (and as to such costs, I do not see that there should be any difficulty about obtaining the necessary validation order to cover any costs that are incurred in the exercise of giving discovery). 

21. So far as the second paragraph of the summons is concerned, however, I think the position is slightly different.  In order to require the company to make discovery in relation to books and accounts of International, it will be necessary for it to be shown that the company is in such complete control of International that International can be regarded effectively as its alter ego.  In this context, the case of Innovisions v Charles Chan Sing Chuk & Others [1992] 2 HKLR 306 is relevant.  In that case, it was held that the court may, in certain circumstances, have power to order a director of a company to make disclosure of documents of the company on the basis that they are in his control.  But it will only do so where the control that the director exercises over the company is so overwhelming as to show that the company is no more than his alter ego.  As Kaplan J pointed out in that case (at page 311 of the report), the fact that a director exercises a degree of dominance over the decision-making process of a company does not suffice to make the company his alter ego.  It is necessary to show that there is unfettered and almost absolute control. 

22. In the particular circumstances of this case, it does not seem to me that it can properly be said that the company is in such unfettered control of International, which has its own (and differently constituted) board of directors, as to make International the alter ego of the company.  In any event, even if that is not right, it seems to me that having regard to the nature of the documents that are sought in respect of International, what is sought is no more than the mirror image of the documents that are sought from the company's side in relation to transactions between the company and International.  The documents sought on the company's side should, if they are properly maintained, disclose all the transactions that have taken place between the company and International and, for that matter, the company and its other customers.  But since what is sought as against International is documentation in relation the self-same transactions that it has had with the company, I would not have thought that it was necessary for that further amount of disclosure to be made even if it could be said that International was no more than the alter ego of the company so that its documents could be regarded as being in the possession, custody or control of the company.  For that reason, I would make an order against the company in terms of paragraph 1 of the summons but not in respect of paragraph 2.

23. I turn then to the question of whether or not an order should also be made against the 2nd respondent.  As to this, it seems to me that, again, the Innovisions case is to the point.  Although it would appear that the 2nd respondent was an active director of the company and that it may be - although this is disputed - that she exercised a somewhat dominant role within the company, I am not satisfied on the evidence before me that she exercised such overwhelming control over the affairs of the company as to render the company no more than her alter ego.  The fact is that this is a case in which the allegation is that there is a deadlock in the management of the company, an allegation which clearly suggests that the company has a management but that the management is unable to co-operate internally.  That is, I think, inconsistent with the suggestion that the 2nd respondent was in such complete control of the company that it should be regarded as no more than her alter ego so that its documents should be regarded as being within her control. 

24. It was also suggested that the 2nd respondent had physical custody of the documents because they were kept in locked drawers in an office to which she had the keys.  The evidence as to this is, in my view, inconclusive in that it appears to be the case that although the documents are kept in a locked drawer, it appears to be accepted by both sides that both sides have access to that drawer and have the necessary keys to enable them to access documents within the drawer.  The only area of some doubt is as to what precisely the situation is in relation to the office in which the desk containing that drawer is to be found.  On the petitioner's side, it is said that the desk in which the drawer containing the relevant documents is kept in a room within the company’s office, which has its own door which is locked when the 2nd respondent and her husband are not in the office, and that the petitioner does not have a key to that room.  The 2nd respondent, for her part, says that when the office is occupied – and certainly when she is in the office - the door is generally left unlocked although there may be times when it is locked when nobody is using that particular room. 

25. In the circumstances, I do not think that it can be said that the 2nd respondent has such exclusive possession of that room as to be able to be said to have possession or custody of the documents that are inside it.  In those circumstances, it does not seem to me that it would be appropriate in this case to require the 2nd respondent also to give discovery on her own account, and I therefore decline to make an order against the 2nd respondent personally. 

26. Thus, on the petitioner undertaking to amend its petition within seven days of today, the company will be ordered to give discovery by affidavit of the documents referred to in paragraph 1 of the summons within 21 days after the petition has been amended.