RE PRUDENTIAL ENTERPRISE LTD

HCCW594/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO.594 OF 1999

-------------------

-------------------

---------------------

D E C I S I O N

---------------------

1. This is the petitioners' application for the appointment of provisional liquidators under section 193 of the Companies Ordinance.

BACKGROUND

2. In 1958, The Prudential Enterprise, Limited ("the Company") was formed by Mr Lee Man Wa ("MW Lee") and Mr Lee Chai Cheong ("CC Lee"), who were cousins. The 1st to 4th petitioners and the 1st respondent are the children of MW Lee. Until his death, CC Lee was also one of the petitioners. The 7th to 14th petitioners are the children, brothers, sisters and sister-in-law of CC Lee. The 15th petitioner is a company founded by the late fathers of WM Lee and CC Lee in 1929. The 3rd to 6th respondents are the children of the 1st respondent. The 7th respondent, N & L Investment Limited ("N & L") is the nominee company of the 1st respondent.

3. The Company is essentially a family company. There are a number of shareholders in the Company. For ease of reference, the shareholding can be grouped as follows :

(1) the 1st to 4th petitioners;

(2) the estates of MW Lee and his wife, Ng Chan Wah;

(3) the estate of CC Lee and the children and the extended family members of CC Lee;

(4) the 15th petitioner;

(5) former employees of the Company and other relatives; and

(6) the 1st, 3rd to 7th respondents.

4. The shareholdings of these groups of shareholders, have evolved over the years, and the position since 1995, according to the records filed with the Company Registry, can be summarized as follows :

5. At its incorporation, the board of directors of the Company comprised MW Lee and CC Lee, who were the permanent managing directors. After the death of MW Lee, Madam Ng Chan Wah was appointed a permanent managing director in 1979. The 1st petitioner was appointed a director in 1959. Since 1978, the 1st respondent has been a director of the Company. In 1985, CC Lee and the 1st petitioner resigned from their directorship. N & L was appointed a director in 1985 and has remained so since then. Between 1989 and 24 September 1997, the 3rd respondent, Patrick Lee ("Patrick") was a director. Since 30 March 1995, the 4th respondent, Samathur Li ("Samathur") has become a director of the Company. It is fair to say that since 1985 the Company has been managed and controlled by the 1st respondent and his children and nominee company.

6. In these proceedings which were commenced on 3 July 1999, the petitioners petition for a winding-up order based on just and equitable ground and for relief under section 168A of the Companies Ordinance, including an order that their shares be bought out. A variety of complaints have been made on the petition, to which I shall return later. By a summons issued on 5 October 2000, the petitioners applied for the appointment of provisional liquidators to take over the assets and undertakings of the Company.

THE RELEVANT PRINCIPLES

7. Under section 193(1) of Companies Ordinance, the court may appoint a liquidator provisionally after a winding-up petition has been presented. The authorities have established, and counsel are in agreement, that there are two relevant considerations in the exercise of the power. The first is whether upon a provisional view, a good prima facie case for a winding-up order has been made out. Secondly, if a good prima facie case has been made out, whether in the circumstances of the case, it is right that provisional liquidators be appointed : Re Union Accident Insurance Co. Ltd [1972] 1 All ER 1105, applied in Re Five Lakes Investment Co. Ltd [1985] HKLR 273.

8. The court's power under section 193 is a general power and its exercise is not restricted to any particular circumstances : Re Five Lakes Investment Co. Ltd, SFC v. Mandarin Resources Corporation Ltd [1997] HKLRD 405. Generally speaking, jeopardy to assets, misappropriation of company assets, proof of insolvency are reasons for appointment of provisional liquidators, but there is no hard and fast rule governing the exercise of discretion. It all depends on the particular circumstances of the case. Matters such as the commercial realities, the degree of urgency and need and the consequences of appointment of provisional circumstances are also relevant in determining the balance of convenience. The various commonwealth authorities that had been referred to by counsel serve to demonstrate the wide and general nature of the power. As said in Re Club Mediterranean Pty Ltd, 1 ACLR 36, commercial realities are infinitely various, the circumstances justifying appointment of provisional liquidators therefore do vary.

9. With these principles in mind, I turn to examine the issues involved in the application.

GOOD PRIMA FACIE CASE

10. The petitioners have raised a number of allegations of impropriety against the respondents in their management of the Company's affairs and funds. In considering whether there is a good prima facie case on the petition, it is necessary to look at the core complaints and to assess their prospect of success. I do not however regard it appropriate to conduct a minute and detailed analysis of the evidence on the affidavits or to undertake a mini-trial of the allegations involved. A provisional view of the issues in question will be sufficient at this stage. Central to the petitioners' complaints in these proceedings are the Interstitial Scheme, the Rights Issue and the Wyatt Estates Limited ("Wyatt") loan transaction. I will deal with them in turn.

(1) Interstitial Scheme

11. This concerns three Guernsey companies called Interstitial Holdings Limited ("IHL") and Mount Eden Limited ("MEL"), both incorporated on 26 November 1993, and Mount Cook Limited ("MCL"), incorporated on 4 September 1998.

12. Two sums of $174.17 million and $615.35 million were paid by the Company to IHL on 25 January 1994 and between 19 December 1996 and 16 May 1997 in return for the allotment of preference shares in IHL. The first payment was derived mainly from the proceeds of the sale in the end of 1993 of listed shares held by the Company. The second payment was partly financed by a $500 million loan from HSBC to the Company secured on the core assets of the Company, being a mall and a hotel, and partly from resources with the Company. A total of 65,161,500 preference shares at ￡1 each were issued by IHL to Prudential (BVI) Limited, a wholly owned subsidiary of the Company. The total amount of $789.52 million paid into IHL was lent to MEL as unsecured loans in return for Eurobonds issued by MEL in favour of IHL. The money together with contributions from Wyatt and the 1st respondent's family members were used for the acquisitions of five lots of London properties initially held in the name of MEL. A substantial part of the properties had since been transferred to MCL. The respective contributions from the funds said to be from the Company, Wyatt and the 1st respondent's family to the purchase price of the five lots of properties are in the proportions of 75%, 14% and 11%. The petitioners' expert estimates these properties to worth about ￡279.5 million in September 1998.

13. In terms of rights, essentially the preference shares held by Prudential (BVI) Limited in IHL were to rank pari passu with each other as regards repayment of capital, and in priority to the ordinary shares in IHL as regards income. They carry the right to a non-cumulative preferential dividend at the rate of 1.5% above LIBOR per annum and the right on winding-up to the repayment of the nominal capital paid up on the preference shares. They carry no right to vote unless the dividend most recently payable has not been paid in full, or unless in relation to a resolution to vary or abrogate the rights under the preference shares. The preference shares confer no other right to participate in the profits or assets of IHL, or to the issue of bonus shares or shares issued by way of capitalization of reserves, or the surplus assets of the Company upon winding-up. They are redeemable only at the option of IHL after the third anniversary of the date of allotment. At redemption, an equity kicker will be given in lieu of their non-convertibility to ordinary shares and for the risk exposure in terms of security of the preferential shares. The equity kicker is defined as "equal to twice the premium of the net asset value of [IHL's] ordinary shares standing at the time of redemption calculated by the generally accepted international accounting practice supported by independent professional valuation of the assets of [IHL]." It is unclear from the evidence filed what the terms of the Eurobonds held by IHL are.

14. The petitioners' case is that the three offshore companies, IHL, MEL and MCL, are beneficially owned and/or controlled by the 1st respondent and his immediate family members and their nominee companies. They contend that through the Interstitial scheme, the respondents had channelled substantial funds out of the Company in furtherance of their own investments and benefits. In so doing, the respondents are said to have misappropriated funds of the Company, placed themselves in a position of conflict, and acted in breach of their fiduciary and/or other duties as directors.

15. In particular, the petitioners says that the respondents had deliberately refrained from obtaining the approval of the shareholders. As to the two board resolutions passed on 9 July 1993 and 17 July 1996 authorizing the two payments of $174.17 million and $635.35 million, the petitioners contend that they are invalid for failure to comply with Article 92 of the Company's Articles and Association. The article prohibits a director from voting on a contract or arrangement in which he is interested in, and further provides that his vote is not to be counted. By reason of the interest the 1st respondent, Patrick, Samathur and N & L had in the three offshore companies and the acquisition of the London properties, the petitioners say that none of them was entitled to vote at the board meetings such that the two resolutions were not validly passed.

16. Secondly, the petitioners say that the terms of the preference shares are prejudicial to the interests of the Company. By contrast, they are to the considerable benefit of the holders of the ordinary shareholders, being the nominee companies of the 1st respondent and his immediate family. It is said that the preference shares suffer from the drawbacks of not being able to be converted into ordinary shares, being illiquid in nature and lacking in security. It is considered to be no better than an unsecured lending. At the same time, the equity kicker is criticized as being unclear, ill-defined and incomprehensible such that no value can be placed on it. More specifically, contrary to professional advice available to the board of the Company, the equity kicker does not confer any option to subscribe to the ordinary shares in MEL. It is the petitioners' case that neither the preference shares nor the equity kicker is related to the value of the underlying property assets and the Company has no prospect of benefiting from the capital appreciation of the London properties.

17. Thirdly, the petitioners also complain that the costs of investment, notably the interests payable to HSBC on the $500 million facilities, is much higher than the dividend income from the preference shares. It is also pointed out that the declarations of dividends had been irregular and the substantial payment in 1998 was made only to enable the 1st respondent to participate in the Rights Issue. It is also the petitioners' case that the rights to receive dividends or to demand redemption, being at the option of IHL, is under the control of the 1st respondent and his family members.

18. Fourthly, the petitioners complain that the preference shares were invalidly created and confer no benefit on the Company. It is said that no valid members resolution had been passed or registered with the Guernsey Greffe for the increase of capital of IHL, as required under Guernsey companies law, and that the board resolution approving the increase of preference share capital of IHL only came into existence in 2000, but dated back to 18 January 1994, and was only filed with the Guernsey Greffe on 9 September 2000.

19. The 1st respondent's response to the petitioners' complaints is that the Company's investment into IHL is a perfectly proper one and made for perfectly proper and legitimate reason. Firstly, it is said that the opportunity to acquire Langham Estate, which is the first lot of London Properties, was an opportunity that came to the 1st respondent personally and he made available the opportunity to the Company. Secondly, the 1st respondent says that he and/or his companies had sufficient finance to purchase the Langham Estate. It is pointed out the sale of the listed shares by the Company took place before the Langham Estate deal was completed. Thirdly, the 1st respondent says that professional advice had been obtained by the Company before undertaking the investment, which takes the form of preferential shares in IHL. Fourthly, the 1st respondent says that the investment was part of an asset protection plan and a tax efficiency scheme for the Company in the years leading up to the change of sovereignty in July 1997.

20. As to the terms of the preference shares, it is pointed out it was never intended that the Company should have a direct investment in the London properties because that could not be done in a tax efficient way. Additionally, because of the term of HSBC's borrowing that restricts alienation of the beneficial ownership of the 1st respondent and his direct family and the creation of ordinary shares in MEL, it was not possible for the equity kicker to be structured in the form of an option to subscribe or purchase shares in MEL. Despite these, the 1st respondent points out that expert evidence shows the return by way of dividends between 1994 and 2001 had been in line with the returns that other investments in UK property would have achieved. It is also emphasized that the intention was always that the equity kicker should relate to the capital appreciation in the underlying real estate.

21. On the Article 92 point, the 1st respondent says that on an analysis of the directorship and shareholding of IHL, MEL and MCL at the material times, Patrick and Samathur had no relevant interest or were not interested in the transactions before the board of the Company when the two resolutions of July 1993 and July 1996 were passed. Finally, the 1st respondent says that the irregularities involved in the creation of the preferential shares are insubstantial and capable of rectification and would have been rectified on the assumption that the registration with the Guernsey Greffe is being effected.

22. As for the 4th respondent, it is said that the first payment for the preference shares was made at a time when he was not yet a director of the Company. It is also said that there was no conflict of interest nor breach of fiduciary duties when analysing the various contracts underlying the whole scheme. Unlike the 1st respondent, the 4th respondent does not accept that the terms of the kicker are unclear or unenforceable and relies on the fact that the terms were drafted by solicitors. It is further said that by comparing with returns from UK property investment, the decision of the board is commercially justifiable.

23. In my view, there are several apparently disturbing features of the Interstitial Scheme. Firstly, the evidence does suggest that the 1st respondent, his children and direct family, whether individually or collectively, were and are beneficially interested in the investments and properties underlying the Interstitial Scheme. There are the Heads of Terms between HSBC and MEL dated 23 December 1993 and the HSBC's letter dated 21 January 1994 to the 1st respondent, which refer to MEL being beneficially owned by a private trust whose main beneficiaries are members of the 1st respondent's family and that the 1st respondent and his family interests beneficially owned all the ordinary shares in MEL. Until his fifth affidavit, the 1st respondent's position on the affidavits was that he and his family were beneficially interested in the ordinary shares of IHL. Despite the correction made in the fifth affidavit to the effect that he had by January 1994 disposed of his entire interest in IHL, the 1st respondent in his subsequent affidavits continued to refer to his family interests and his own involvement and interest in the acquisition of the London properties. The position taken by the 1st respondent at the hearing of the application is that IHL, MEL and MCL are owned and controlled by his son Christopher. It is therefore fair to say that prima facie, conflict of interests on the part of the board did exist at the time when the steps were taken and the resolutions passed approving the taking of preference shares in IHL. There is substance in the Article 92 argument of the petitioners. The 4th respondent's reference to the different underlying contracts as indicating no conflict of interest, in my view, is an over-simplistic approach to the matter and has ignored the relationship between the various companies in terms of their beneficial ownership and directorship.

24. Secondly, the facts that the opportunity to acquire Langham Estate was initially the 1st respondent's opportunity and/or that he and his family could have acquired Langham Estate on their own resources are irrelevant or of no significance. On the 1st respondent's case, the opportunity to acquire Langham Estate came to him at a time when the Company was also looking to making offshore investments, albeit in the USA. It may be said that the 1st respondent in the proper exercise of his fiduciary duties would in any event have to offer or make available the opportunity to the Company. It is not said that the opportunity is one which the Company would intrinsically reject or was unlikely to be interested in. It may well be that the 1st respondent and his companies could have financed the acquisition on their own, but the reality is that the Company, on the board's decision, did participate in the investment and on the stated intention that the Company is to benefit from the capital appreciation of the London investment.

25. Thirdly, having regard to the apparent conflict of interests, it would be a counsel of prudence to refer major decisions to the members. There is no perceivable reason for not communicating to the members the asset protection and tax efficiency scheme, and also the professional advice received.

26. Fourthly, to the extent that the professional advice had been sought on the terms of participation by the Company in the investment, it would be incumbent for the board, who was in a potential conflict, to observe the advice as closely as possible and only to depart from it unless on strong grounds. I do not intend to dwell into the details of the advice received from the solicitors, tax advisers, accountants and bankers that had been put before the Court. It is sufficient to say that they were cautious advice and the emphasis had been to ensure that the terms of the Company's investment were commercially justifiable, if not attractive. Against the declared intention at the July 1993 board meeting of enabling the Company to share in the capital gain of the London properties, it cannot be seriously denied that the preference shares and the equity kicker do not achieve this intention.

27. Admittedly, the purpose of the kicker was to improve the return which the preference shareholders would get over and above the returns by dividends because the dividend right is not sufficiently attractive to an investor. Evidently, the equity kicker does not serve the purpose of an additional inducement. The 1st respondent's own experts clearly do not think much of it in terms of its worth. The 4th respondent's argument that the preference shares and kicker confer defined rights is undermined by the 1st respondent's experts who had said that the terms were "poorly drafted", "unclear and could not be understood by accountants, corporate financiers and others": see the respective reports of Mr Hasan and Mr M itchell. Among the various advice received, Miss Agnes Wong of Banque DeGroof had advised MEL to grant to IHL an option to subscribe its shares, which could be assigned to the Company as the kicker for the preference shares. The 1st respondent explains that the option was not granted because of the restriction in the convenant MEL gave to HSBC, as advised by the tax adviser, Miss Brenda Coleman of Messrs Herbert Smith. Quite apart from whether this is the only means of enabling the Company to benefit from the capital appreciation of the London Properties, the explanation does not explain why the board of the Company should nevertheless proceed with the transaction when the stated intention could not be met. It also does not explain why the board did not consider it necessary to and did not as a matter of fact refer the matter to the shareholders for a decision at a general meeting. It is suggested that Miss Coleman's advice came very close to the completion date and there was a time constraint with regard to the first payment of $174.17 million in 1994. Such a suggestion will be no answer to the 2nd payment of $615.35 million in 1996. The inadequacy of the equity kicker was not even discussed in the July 1996 board meeting. Given the admitted purpose of the kicker and the inability to attain the purpose, a fact that must be apparent to the board in 1994, the failure of the board of the Company to address the structure and terms of the preference shares and kicker in approving the 2nd payment in 1996 is prima facie a failure in the directors' duties.

28. Mr Todd SC says that the 1st respondent accepts that the issue has to be addressed now to ensure that the benefit of capital appreciation is available to the Company. But he emphasizes that back in 1996, there was no reason for the board to be unduly concerned with the problem since the 1st respondent and his family members were on amicable terms. The term used is that "peace and love existed in 1996 within the nuclear S.T. Lee family". That however misses the point. This is not a case of the 1st respondent dealing with his or his family's companies and affairs. The subscription of the preference shares in IHL is an investment of the Company and the board had to take care of the interests of all the shareholders. There are shareholders other than the 1st respondent and his immediate family and nominee company. While there may be harmony and trust within the 1st respondent's family, the 1st respondent had not been on amicable terms with the other shareholders for a long period of time. He, if not the board, should be very weary not to give cause for further dissention.

29. Mr Todd SC also says that it is always possible for the matter to be put right now because the directors of IHL in 1996 were and are Prudential (BVI) Ltd, Wyatt, which is the 1st respondent's company, and Octaland Holdings Ltd, controlled by Christopher, and there is a close relationship between the 1st respondent and Christopher. It is to be noted that Christopher has not entered appearance in these proceedings, and that the 1st respondent stated on previous affidavit that he does not and cannot control Christopher. Even acting on the assumption of Mr Todd SC's submission, it still does not lessen the complaints the petitioners make on the inadequacies of the terms and the structure of the investment.

30. It is also submitted that there is no evidence of improper motive and the investment into IHL was a commercial decision which the board was entitled to make, provided that the correct steps and advice had been taken. I accept that on the affidavits there may not be direct evidence as to motive. I also agree that it is within directors' power to undertake commercial decisions, including investment decisions, for the company. What is at the crux of the issue must be whether the decision on an objective assessment gives cause for concern as to the propriety of the directors' conduct and the decision. The evidence on the investments into IHL in my view does give rise to a good prima facie case for drawing adverse inferences against members of the board at the material time. Among other things, effectively IHL was acting as a financier to MEL in the acquisitions of the London properties. In acting as the financier, IHL was in turn financed by the Company. Despite that, the Company does not presently stand to benefit directly or indirectly from the appreciation of the properties. There is additionally the point that the preference shares were not created properly and in compliance with the legal requirements of the Guernsey law. Irrespective of whether, as a matter of law, the irregularities can be and have been rectified, the failure in the first instance is not a matter to be lightly ignored, when viewed against the other complaints made on the investments.

(2) Rights Issue

31. This is associated with the issue of 8,126 new ordinary shares at HK$31,721 by the Company in October 1998. The shares were offered to all the shareholders and the open offer was underwritten by the 1st respondent in full. Despite objections from a number of shareholders, including the petitioners, the shares were allotted to the 1st respondent, the 6th respondent, Annabell Lee ("Annabell"), Christopher, Samathur and N & L. As a result of the allotment, the total shareholding of the 1st respondent, his children and N & L increased from 26.86% to 68.75%, and they together became the controlling shareholders of the Company.

32. The petitioners' complaint on the Rights Issue is manifold. Firstly, they say the offer price of $31,721 was based on a gross undervalue of the shares in the Company. Secondly, it is said that the manner in which the open offer was made is oppressive, having regard to, inter alia, the short notice given, and the fact that some of the shareholders were resident overseas and that the 1st respondent had instituted winding-up proceedings against the corporate shareholders and other proceedings against some other shareholders. Thirdly, according to the 1st respondent, on 12 October 1998, MEL declared ￡20.12 million dividend in favour of Millport Investments Limited ("Millport"), which was beneficially owned and controlled by Christopher. Christopher had made an advancement of ￡20.12 million to the 1st respondent. The money was used to underwrite the new shares. The petitioners say that the subscription money was in fact funds of the Company, but had been siphoned off to MEL through IHL under the Interstitial Scheme. The allotment is therefore said to contravening section 47A of the Companies Ordinance. The petitioners further complain that given it was a declaration of dividend by MEL, the money had gone out of reach. There is effectively a dissipation of the assets belonging to the Company.

33. The 1st respondent disagrees with the suggestion that the purpose of the Rights Issue is for him and his family to acquire a controlling shareholding in the Company. Primarily the exercise was said to be occasioned by the need for the Company to strengthen its capital base consequential upon pressure from HSBC, and also the need for acquiring working capital to develop the Blue Pool Road Project. The board had obtained and relied on independent advice with regard to the valuations of the shares. As to the funding for the Rights Issue, it is contended that there is no evidence that the funds for the dividend declared and paid by MEL to Millport came from IHL. The evidence also does not show financial assistance being given by the Company or its subsidiaries in the acquisition of the Company's shares in the Rights Issue, hence a contravention of section 47A of the Companies Ordinance. It is pointed out that neither IHL nor MEL is a subsidiary of the Company within the meaning of the Ordinance.

34. I accept that issue as to undervaluation is a matter that can only be resolved at the trial. Similarly, it may be right that the ultimate source of the ￡20.12 million dividend declared in favour of Millport, which Christopher then advanced to the 1st respondent for underwriting the 8,126 shares, can only be fully investigated and determined at the trial. But the objective circumstances surrounding the Rights Issue, as identified by the petitioners on affidavit and in Mr Fung SC's submissions, do prima facie give rise to concern as to whether the 1st respondent and/or the board had acted even-handedly in making the Open Offer. The fact that the tax voucher relating to the declaration of dividend by MEL in favour of Millport was only effected two days before the commencement of the hearing, some three years after the Rights Issue had taken place, is also a matter that calls into doubt the true genesis of the funds involved.

(3) Wyatt

35. This relates to a loan made by the Company in 1985 to Wyatt, which was and is owned and controlled by the 1st respondent. In August 1985, Wyatt was indebted to Wardley in the sum of $40 million and the indebtedness was secured by a first mortgage over its assets. The board of the Company approved a loan of $4.5 million to Wyatt on terms that included an option to exchange the whole or part of the capital and unpaid interest into Wyatt's share at $7 per share, to be exercised within three years. At an EGM of the Company held on 23 October 1985, a resolution was passed approving a loan to Wyatt to be secured by a second mortgage over its assets, despite protests and objections from the members of the CC Lee branch. The board of the Company was empowered by the resolution to fix the details of the loan, including the amount and terms and conditions thereof. Eventually on 16 July 1986, the Company made a loan of $7 million to Wyatt secured by a second charge on its assets. In 1989, the board of the Company resolved to extinguish the loan (totalling over $8.8 million) by subscribing for 276,621 shares in Wyatt at $32.04 each. Subsequently, the Company was allotted 276,621 shares in Wyatt. Then in January 1994, two ordinary shares were created by Wyatt and allotted to the 1st respondent and Wyatt Estate (BVI) Limited. Further the ordinary shares held by the Company were converted into non-voting 5% deferred shares of $10 each, carrying restrictions in terms of the entitlement to dividends and return, including the return of capital upon winding-up. The restrictions were introduced by Article 35A to the Articles and Associations of Wyatt, which was passed at the same time as the conversion of the Company's shares. Under the Article, the deferred shares' entitlement to dividend is non-cumulative and fixed at 5%, and subject to the directors' resolution and only when the net profits available for dividend in any financial year exceeds $10 billion. Further, there will be no return of capital to the deferred shareholders unless and until $10 billion has been distributed to the two ordinary shareholders, being the 1st respondent and Wyatt Estate (BVI) Limited.

36. The petitioners' main complaints are that the conversion of the loan into shares in Wyatt was not in accordance with Wyatt's proposal put before the board and at the EGM and was not in the best interest of the Company. The petitioners complain that there was an under-allotment of some 980,000 shares. It is further said that the Company's shareholding in Wyatt has become practically worthless in terms of income and capital return as a result of the conversion into non-voting 5% deferred shares and having regard to the restrictions.

37. The 1st respondent's arguments are that firstly, the side letter from Wyatt containing the proposal that was put before the board and at the EGM was only to demonstrate a basis on which the share value of Wyatt would be calculated. It was not something contractual and did not set out the final terms of the loan. Secondly, the conversion was considered by the board at the time to be in the interests of the Company. The shares which the Company had taken in extinction of the debt had greatly increased in value. Thirdly, it is said that there is an incomplete understanding of the 1989 tax efficiency and asset protection scheme, in which Wyatt was also involved. The scheme resulted in shares in Wyatt being converted into an identical shareholding with similar rights in the offshore holding company, Wyatt Estate (BVI) Ltd. It is further pointed out that the Wyatt loan had twice been approved at general meetings.

38. I am of the view that the Wyatt loan prima facie is unfairly prejudicial to the Company in two respects. Firstly, when the board of Wyatt proposed by notice dated 20 October 1988 to its shareholders to allot new shares at $17.50 per share, a discount of 35% was adopted in arriving at "a fair net asset value". Similarly, the further offer to subscribe for new shares at $20.82 per share made in the notice dated 8 March 1989 also adopted a 35% discount. Yet, the shares offered to the Company to extinguish the loan was at the undiscounted price of $32.04 per share. It is not a subscription at "cheap bargain value" as put to the shareholders of the Company. It also does not appear that the matter of discount had been made known to the shareholders when the 1st respondent dealt with questions on the Wyatt transaction at the AGM held on 6 December 1991. Secondly, having regard to the restrictions in Article 35A of Wyatt's Articles and Association, the conversion of the shares held by the Company is on rather unfavourable terms.

39. In short, I take the view that there is a strong prima facie case on the merits of the petition. The 1st respondent has submitted that the petitioners' primary relief is for a buy-out of their shares. That being the case and bearing in mind that the Company is solvent and the 1st respondent had been offering to purchase the petitioners' shares, there is no realistic prospect of a winding-up order being made. I am unable to agree with this submission. The fact that the section 168A relief was pleaded before the relief of a winding-up order in the body of the petition appears to me to be more a matter of drafting style than a positive indication that the petitioners only want to have their shares bought out. The 1st respondent's offer to purchase the petitioners' shares had been rejected, and his attempt to strike out the proceedings on the basis of the offer had also failed.

40. As to the suggestion that not all the shareholders are before the court and the wishes of the non-aligned shareholders have to be taken into account, the short answer is that none of the other contributories has applied to be joined for the purpose of opposing the petition. While the court will have regard to the interests and wishes of the contributories, it does not mean that the court should refuse a winding-up order where there are non-aligned shareholders when they have not chosen to take a stance or make their stance known.

THE COURT'S DISCRETION

41. I turn now to deal with the question of whether it is right for the appointment to be made. This involves the court balancing a number of factors, including the reasons and necessity for the appointment and the consequences of an appointment on the Company. As a starting point, it must be recognized that the appointment of provisional liquidators is a drastic step that usually carries with it serious commercial consequences : Re Yick Fung Estates Limited and Shui Hing Investment Company Limited [1986] HKLR 240. There will also be some effect on the goodwill and reputation of the company, especially in the case of a solvent and active company. The appointment will also interfere with and intrude upon the constitutional arrangements of a company. The power should therefore only be exercised when it is necessary, just and expedient in all the circumstances of the case.

The reasons and necessity for an appointment

42. The principal grounds upon which the petitioners base their application are that :

(1) There is a need to ascertain the nature and whereabouts of the funds and assets of the Company, with particular reference to the Interstitial Scheme. It is said that the rights and assets associated with the Company's investment in IHL are obscured and ill-defined such that provisional liquidators are required to ascertain the position, to safeguard the Company's interests and to bring the assets back into responsible hands.

(2) There is a need to guard against further dissipation of assets given that the Company's assets are in jeopardy. Reliance is placed on the fact that Christopher, whom the 1st respondent says is how in control of the London properties, has not appeared in these proceedings so that there is an immediate need to fix the problems relating to the preference shares and the kicker. It is further pointed out that there is a continuous dissipation of assets arising out of the large interest payments attributable to the loan from HSBC. The petitioners also rely on the belated disclosure of the declaration of ￡20.12 million dividend by MEL in favour of Millport and the large amount of consultancy fee paid out of IHL as indications of the funds of the Company being in jeopardy.

(3) There is a justifiable lack of confidence in the present directors of the Company in view of, what the petitioners regard as, a pattern of misconduct in the management of the Company's affairs. It is contended that there is a strong possibility that without the appointment, the Company's affairs may be conducted for the benefit of the directors and not in the interests of the Company as a while. Particular reliance is placed on the conflict of interest that exists between the directors and the Company and the utilization of company funds for the Rights Issue. It is said that the appointment of provisional liquidators would enable proper investigations to be conducted into the matters complained of.

43. That one or more of the reasons advanced by the petitioners may in principle support an appointment of provisional liquidators cannot be doubted : Re Five Lakes Investment Co. Ltd, International Westminster Bank plc v. Okeanos Maritime Corp [1987] BCLC 450, Re Latreefers Inc [1999] 1 BCLC 271, Re Nerang Investment Pty Ltd, 1 ACLR 36, Re San Imperial Corporation Ltd [1980] HKLR 649 and Montgomery Windsor (NSW) Pty Ltd v. Ilopa Pty Ltd (1984) 2 ACLC 224.

44. What I find disturbing in the present case is the fact that nearly all of the factual matters relied upon as supporting the need for an appointment either occurred years ago or have been in existence for a considerable period of time. The Interstitial Scheme, for instance, started in 1993. The Rights Issue took place in 1998. The Wyatt loan transaction had started in 1985 with the conversions of shares occurring between 1994 and 1997. In this regard, I am conscious of the petitioners' argument that the relevant information had not been disclosed or fully disclosed to them until after the commencement of these proceedings, and that further discovery was only made near to the hearing of the application. That said, it remains a fact that at least some of the petitioners had in the past raised concerns and objections to some of the affairs and transactions now in issue. It seems to me that it cannot be said that they were totally ignorant of these matters, although I have no hesitation accepting that a better and clearer picture of the Interstitial Scheme, the Rights Issue and the Wyatt transaction only came about after the presentation of the petition herein.

45. It is further to be noted that the present application was only issued some 15 months after the petition was presented. The lapse of time is not necessarily fatal nor is it an absolute bar to an appointment. It is however relevant when assessing the claim of risks of imminent irrepairable injury, hence the necessity for an interlocutory relief. In the present case, I note Mr Fung SC's submissions that the petitioners had adopted a cautious approach and had carried out thorough preparations before embarking on the application. That however does not distract from the fact that the lapse of 15 months operates to mitigate against the suggestion that there is a present and urgent need for intervention.

46. There is at the same time the evidence of Mr Hague on the asset position of the Company and its subsidiaries. It is pointed out that the major assets of the group, being the mall, the hotel and the Blue Pool Road development, are all illiquid assets. This is an aspect of the present case that distinguishes it from the case of Okeanos. As to the other assets of the Company, they comprise essentially shares in private companies that include Wyatt and IHL. Secondly, the likelihood of further financing by the group is limited in view of the restriction imposed under the terms of the HSBC's borrowing, namely, the consent of HSBC is required. Thirdly, in terms of cash flow, the Company and its subsidiaries remain obliged to meet repayment and interest payment commitments owed to HSBC. In view of these considerations, the risks of dissipation of assets of the Company cannot be said to be high or imminent.

47. No doubt the petitioners will find considerable comfort in the appointment of independent third parties to oversee the affairs of the Company, given their distrust of the present board, which is understandable in view of their position of apparent conflict. That however only means that it is desirable for the interlocutory relief to be granted, but does not of itself points to a present need for the appointment, having regard to the other considerations identified above.

48. For the reasons indicated, I am not persuaded that the petitioners have demonstrated a present and urgent need for provisional liquidators to be appointed.

CONSEQUENCES OF APPOINTMENT OF PROVISIONAL LIQUIDATORS

49. As to the likely consequences attendant upon an appointment, the petitioners and the 1st respondent had filed very substantial expert evidence on the matter. The experts are in agreement that the appointment would be an event of default under the HSBC's terms of borrowing. Mr Hague, the 1st respondent's expert and a practicing insolvency practitioner, points out that upon an appointment being made, there are three possible scenarios :

(1) HSBC will freeze the Company's existing lines of finance and appoint receivers to the two subsidiaries, namely, Prudential Mall (BVI) Limited and Prudential Hotel (BVI) Limited, which hold two of the principal assets of the Company;

(2) HSBC will freeze the Company's lines of finance but does not appoint receivers; and

(3) HSBC will continue to provide finance under the existing facilities.

50. In Mr Hague's view, scenario (2) is likely to be the initial reaction of HSBC, who would adopt a wait-and-see approach. It is postulated that HSBC would not advance any further facilities and this would impact on the cashflow position of the Company. This in turn would affect the prospect of the completion of the Blue Pool Road construction project undertaken by Dorfit Properties Limited ("Dorfit"), the Company's subsidiary. It is said that Dorfit may be put into liquidation if it were unable to meet its payment obligations. There would be a forced sale of the Blue Pool Road development and the Company would stand to suffer economically. In time, the situation could deteriorate into scenario (1) in the event the Company and its subsidiaries fail to meet the interest payments or should HSBC consider that its security was at risk. Mr Hague estimated the likely loss to the Company and its subsidiaries under the three scenarios to be $234 million to $578 million, $214 million to $234 million and $58 million to $78 million respectively.

51. The petitioners' experts, Mr Hudson and Mr Robinson, a merchant banker and an insolvency practitioner respectively, do not consider that HSBC would jump to scenario (1). They are of the view that HSBC is well covered by the security it holds and that even if HSBC were to withdraw its lines of finance, it will not be difficult for the Company to obtain alternative financing arrangements with other banks or financial institutions. Evidence was produced to show that Bank of East Asia is prepared to offer bridging and alternative finance to cover the needs of the Company.

52. In considering what is the likely reaction of HSBC, the court has to act on the assumption that HSBC will act reasonably and with a sense of commercial pragmatism. In an analysis of the Company's assets and financial position and its lending arrangement with HSBC, I am in agreement with the observation that HSBC's position is well covered in view of the back-to-back deposit of $1.3 billion and the charge over the mall and the hotel. It is submitted HSBC has attached considerable importance to the 1st respondent being in control of the Company and its subsidiaries and that the removal of the 1st respondent from the management of the Company upon an appointment may give HSBC cause for concern. In my view, any concern as to changes in the management of the Company must be viewed against the basis of these proceedings. HSBC has been fully informed of these proceedings and will no doubt appreciate that the petition was brought on just and equitable grounds, and that any appointment of provisional liquidators is not based on insolvency of the Company. To any commercial banker, the ability of the borrower to repay or meet his interest commitments must be its primary concern. The removal of any individual from the key position in the management should not be the paramount or only concern.

53. As to the impact on the cashflow position of the Company and the effect on the Blue Pool Road construction project, much of the weight of Mr Hague's concern that Dorfit might fail in its commitments resulting in the loss of the group's key project is lost by the fact, lately unearthed by the petitioners, that the occupation permit for the building had been issued on 21 June 2001. Mr Fung SC had criticized the 1st respondent's failure to draw this fact to the attention of Mr Hague and the court. It is a well justified criticism. Indeed no explanation has been offered as to why such an important information was not forthcoming even in the update given to the Court during the hearing. The materials adduced by the petitioners also show that the building had been actively marketed for tenants. While it is true that the issue of occupation permit does not mean that Dorfit has no other financial commitment to meet, the risk of a forced sale of Blue Pool Road even before completion is clearly less real, if not unreal.

54. On the disruption to management, the appointment of provisional liquidators will undoubtedly bring about changes in the senior management level of the Company. For one thing, the directors will be suspended from their power. This is a situation that invariably arises on an appointment of provisional liquidators. Afterall, the Company is a holding company not a trading company. The disruptions to the day-to-day operations of the Company which are carried out through the subsidiaries and their management cannot be over-stated.

55. At the same time, experienced professionals are presumed to act rationally and have regard to the best interests of the Company. Save for good reasons, the provisional liquidators, if appointed, will not remove the entire management team of the mall and the hotel and have them substituted by completely new personnel.

56. In short, I do not regard the evidence as pointing overwhelming to grave consequences and risks to the Company upon an appointment being made. I accept however there are possible risks of HSBC withholding further advances to the Company, in which case the Company will need to find alternative financing.

Cross undertaking as to damages

57. The petitioners had initially offered a cross undertaking in damages but withdrew it subsequently on correspondences, on the basis that it is not required.

58. In Highfield Commodities Ltd [1985] 1 WLR 149, Megary J pointed out that the general practice is for an undertaking as to damages to be given upon an ex parte application for provisional liquidators, but that such an undertaking would not be required on an inter partes application. In Clemada Pty Limited v. Hire It Pty Limited (No.2) [1990] 3 ACSR 202, Yeung J after referring to Highfield Commodities Ltd observed that the practice in the Equity Division of the New South Wales Supreme Court is to require an undertaking as to damages even on an inter partes hearing. In Zempilas v. JN Taylor, 3 ACSR 518, King CJ said however (at 522) that there appears to be no requirement of law or practice to extract such an undertaking as a condition to the appointment of provisional liquidators.

59. I am not aware that in Hong Kong there is a similar practice of requiring an undertaking on an inter partes application, although in ex parte application, an undertaking would be required by reason of the risks associated with the fact that only one party has been heard : see also Atkin's Court Form (1999 Issue) Vol.9(2), para.45. I am also not aware of authorities pointing to the requirement as a matter of law. In my view, the availability or otherwise of an undertaking is only a factor to be taken into account in weighing the balance. There may well be cases where it is necessary to extract an undertaking on an inter partes application. Equally there will be cases where an undertaking is clearly not necessary. In the case of a thriving and successful company, when deliberating over the need for an appointment and assessing the risks or harm to the company attendant upon an appointment, the undertaking as to damages will be a relevant consideration.

60. As to the issue of the fees and disbursements of the provisional liquidators in the event no winding-up order is made or the proceedings are stayed, I am of the view that the court does have power to order that the costs of the provisional liquidators be met otherwise than by the assets of the company. Rule 28(3) of the Companies (Winding-up) Rules provides that the provisional liquidators' entitlement to be paid out of the property of the company, is "subject to any order of the court". It recognizes and confers on the court the power to order, for instance, that the applicant indemnifies the Company for the costs and loss arising out of the appointment of provisional liquidators in the event that the appointment proves to be wrongful. The Company will not be left with no recourse even in the absence of an undertaking as to damages.

Undertakings offered by the respondents

61. Five sets of undertaking from the 1st respondent, Christopher, MEL, MCL and IHL had been offered to the Court, the petitioners and to the 1st respondent on the basis of no appointment of provisional liquidators. I do not propose to set them out. It is sufficient to note that they are not accepted by the petitioners for the various reasons indicated by Mr Fung, SC. Difficulties of policing and enforcement resulting from the ousting of the Hong Kong Court's jurisdiction are the principal objections. Given the reservations expressed and the fact that they had been rejected, I do not consider it necessary for me to deal with them in determining the exercise of the discretion.

62. Having regard to the matters discussed above, in the absence of a present and urgent need for the intervention by provisional liquidators, I am of the view that the discretion will have to be exercised against the appointment of provisional liquidators.

CONCLUSION

63. The petitioners' application is therefore dismissed with an order nisi that the costs of the 1st, 2nd and 4th respondents be paid by the petitioners in any event, to be taxed if not agreed. There is a certificate for three counsel.