LAM DIP YEE v. BESTWELL FAREAST LTD AND OTHERS

HCCW1213/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO.1213 OF 2002

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

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

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

D E C I S I O N

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

1. This is the 1st, 2nd and 4th respondents' application to strike out parts of the Petition and the part of the relief that seeks a winding-up order.

Background

2. Bestwell Fareast Limited, the 1st respondent ("the Company"), is a company incorporated on 20 January 1997 and trades in the business of toys.

3. The petitioner and the 2nd to 4th respondents are the shareholders of the Company holding 40%, 25%, 25% and 10% of the shares respectively. They were also the directors until 1 February 2001 when the petitioner resigned from her directorship. The 2nd to 4th respondents remain as directors.

4. The Company is primarily a family company. The petitioner is the wife of the 3rd respondent while the 2nd and 3rd respondents are brothers. The petitioner is also the sister-in-law of the 2nd respondent.

5. On 24 January 2002, the Company together with another related company, Magawell Fareast Limited, instituted proceedings against the 3rd defendant under HCA313/2002 for breach of director's duties and misappropriation of profits of the two companies. The petitioner was joined as a defendant to the action on 14 April 2003.

6. On 4 November 2002, the petitioner commenced these proceedings against the respondents for relief under section 168A of the Companies Ordinance. Specifically, the petitioner claims for an order that her shares be purchased by the respondents and alternatively for an order that the Company be wound up.

7. On 15 January 2003, the 1st, 2nd and 4th respondents issued a Notice of Motion seeking to strike out part of paragraph 9, paragraphs 10, 13, 15, 17 of the Petition and also paragraph 3 of the prayer for the relief that seeks for a winding-up order.

8. On 14 March 2003, the petitioner took out an application for appointment of provisional liquidator to the Company. The application is pending.

Grounds for the application

9. In respect of paragraphs 9, 10, 13, 15 and 17, the application is made primarily on the basis that they are lacking in material particulars and are embarrassing. As for the relief for a winding-up order, the respondents apply to strike out on the ground that the petitioner is acting unreasonably in seeking to have the Company wound up.

Relevant principles

10. As in an application to strike out the entire petition, the court will only strike out parts of the Petition when it is plain and obvious that those paragraphs are inadequate, untenable or embarrassing. Similarly, the court will only strike out a claim for winding-up when it is clear that there is no real prospect of a winding-up order being made at the trial and/or that the petitioner is plainly acting unreasonably in insisting on the order when there is another alternative available.

The petition

11. Paragraphs 1 to 5 of the Petition set out the background of the Company. Paragraph 6 pleads that the shareholders had agreed that the business of the Company was to be operated as a partnership and on the basis of mutual trust and confidence. Paragraph 8 sets out the duties owed by the directors to the Company.

12. The bulk of the petitioner's complaints and the foundation of her claim are set out in paragraphs 9 to 15 of the Petition. They are as follows :

"Breakdown of mutual trust and confidence

9. Although the business of the operation was quite successful, the relationship amongst Your Petitioner, TDY, TSKB and TTMV began to deteriorate towards about 2000 when Your Petitioner requested TDY, TSKB and/or TTMV [sic] follow up the payments of projects engaged by TDY, TSKB and/or TTMV on behalf of the Company in order to facilitate the cash flow of the Company as well as demanding him to return all books and records of the Company so that the Company accounts could be properly audited.

10. The trust and confidence was further eroded when TDY and/or TTMV falsely alleging [sic] Your Petitioner and TSKB of making false accounting records, defrauding and misappropriated the Company money.

11. As a result of the above mentioned conduct/conducts of TDY and/or TTMV, the mutual trust and confidence which previously existed between Your Petitioner, TDY, TSKB and/or TTMV has been destroyed and Your Petitioner cannot reasonably be expected to carry on business with TDY, TSKB and/or TTMV.

Failure in reaching agreement for sale and purchase of Petitioner's shares to TDY and/or TTMV

12. The negotiation for the sale of all Your Petitioner's shares in the Company to TDY and/or TTMV was commenced since November 2001 until February 2002 when no valid agreement for sale and purchase had been entered into between the existing shareholders.

Conduct of the directors called for investigation

13. In the premises, it is submitted that the conduct of TDY, TSKB and/or TTMV called for investigation. Further, Your Petitioner has now lost confidence in TDY, TSKB and/or TTMV, his/their propriety and good faith. The mutual trust and co-operation which formed the basis for undertaking the business of the Company have been replaced by suspicion and hostility. TDY, TSKB and/or TTMV have conducted the affairs of the Company in an oppressive, unfair and prejudicial manner in detriment to the interests of Your Petitioner. For instance, the said directors have written off a substantial part of the bad debts without first instituted legal recovery actions for the recovery of the same. Further the existing term of directorship of TDY, TSKB and/or TTMV had already been [sic] expired on last expiry in 2000 and/or 2001 but they had failed and/or refused to retire such that acting in breach of the previous under the MAA of the Company.

14. As a result of my lost [sic] of confidence in TDY, TSKB and/or TTMV, I therefore resigned from the Board of Directors of the Company on 1st February 2001.

15. Despite of [sic] my request and demand, the Company had failed and/or refused to pay me the following items in respect of the fiscal your [sic] of 1999/2000, namely :-

(i) Dividend;

(ii) Commission/Salary for the year, and

(iii) Director's Petty Cash Reimbursements."

13. Paragraph 16 pleads that the Company is solvent. Paragraph 17 reads :

"By reason of the matters aforesaid, the purpose for which the shareholders incorporated the Company has been defeated and it is just and equitable that the Company wound up."

Paragraphs 9 and 10

14. Paragraphs 9, 10 and 11 come under the heading of "Breakdown of mutual trust and confidence". It would appear from paragraph 11 that the petitioner's case is that as a result of the conduct of the 2nd and 4th respondents pleaded in paragraphs 9 and 10, there had been a breakdown of mutual trust and confidence between the petitioner and the 3rd respondent on the one hand and the 2nd and 4th respondents on the other hand.

15. Paragraph 9 begins by claiming that the shareholders' relationship began to deteriorate towards about 2000. The rest of the paragraph, however, does not plead any conduct on the part of the 2nd and 4th respondents. What is said is that the petitioner had requested the 2nd to 4th respondents to follow up on the payments of some projects, and the petitioner had made a demand for the return of books and records of the Company.

16. It is, first of all, unclear from whom the petitioner had allegedly demanded the return of books and records of the Company. Secondly, it is totally unclear from paragraph 9 as to what is the conduct that the petitioner is complaining of. There is no apparent link between the averment in paragraph 9 and the plea in paragraph 11 that the trust and confidence among the shareholders had been destroyed as a result of conduct on the part of the respondents. This part of paragraph 9 that the 1st, 2nd and 4th respondents seek to strike out is plainly irrelevant and embarrassing.

17. As to paragraph 10, it contains a bare assertion that the 2nd and 4th respondents had made false accusation of misappropriation against the petitioner and the 3rd respondent. There is no particular as to the date when and the manner in which the accusation was made. Particular of the falsity is also not given.

18. In her affidavit verifying the Petition, the petitioner stated at paragraph 5 that :

"There was absolute trust between the parties until in the year of 2000 when it was discovered that TDY, TTMV and/or TSKB has been misappropriating the Company funds and failed to return the accounts and records of the Company."

19. Paragraph 5 of the verifying affidavit is in stark contrast to paragraph 10 of the Petition. The former is a positive assertion by the petitioner that the respondents were found to have been misappropriating company funds whereas the latter avers that the 2nd and 4th respondents made false accusation of misappropriation against the petitioner and the 3rd respondent. Although the petitioner had filed two affidavits to resist their application, she did not offer any explanation on this in any of them. Miss Lau, counsel for the petitioner, in her submissions suggests that paragraph 5 of the verifying affidavit contains a mistake. But there is no basis for the submission, given that the matters in paragraph 5 of the verifying affidavit were deposed to by the petitioner on oath. Paragraph 10 of the Petition is in the circumstances an embarrassing averment.

20. Furthermore, insofar as paragraphs 9 and 10 set out to support the plea of breakdown of mutual trust and confidence, those paragraphs contain no particulars that go to show a breakdown of trust or confidence. The allegation is no more than a bare assertion.

Paragraph 13

21. Paragraph 13 of the Petition contains a number of assertions. Specifically, it asserts that the 2nd to 4th respondents have conducted the affairs of the Company in an oppressive, unfair and prejudicial manner in detriment to the petitioner's interests. Two matters are pleaded as examples. The first is that the respondent directors had written off a substantial part of the bad debts without first instituting legal actions for recovery. The second example is that the respondent directors did not retire from their directorship in 2000 and/or 2001, in breach of the Articles of Association of the Company.

22. In respect of the first example, the audited report of the Company for the year ended 31 March 2001 shows that bad debts totalling some HK$4 million had been provided for. They relate to six customers and include two unpaid claims for defective goods. No doubt, the bad debts written off are of substantial amount. But it must be borne in mind that the financial statements and accounts had been audited and the auditor had certified that the financial statements gave a true and fair view of the state of the Company's affairs and of its loss. Further, according to the 4th respondent, the bad debts were written off upon advice of the accountant.

23. More importantly, it is not pleaded in paragraph 13 that the decision to write off the bad debts was made in bad faith or in breach of duties. Directors are in the normal course of events entrusted with the power and duties to make management and commercial decisions. In the absence of such pleas, it is difficult to see how it can be said that the decision on the bad debts gives rise to oppressive, unfair and prejudicial conduct.

24. As to the respondents' failure to retire from their directorship, Article 7 of the Company's Articles of Association prescribes that the directors shall retire at the annual general meeting, but are eligible for re-election. It is unclear from paragraph 13 of the Petition as to what exactly is the petitioner's complaint, whether she is complaining that no annual general meeting had been held or that despite the holding of annual general meetings, the respondent directors refused to resign. In her affidavit opposing this application, the petitioner stated in paragraph 13 that she had not received any notice of annual general meeting after 2000 or 2001, nor had she signed any minutes of annual general meeting.

25. On the basis of this affidavit, it would seem that none of the directors, including the petitioner before her resignation in 2001, had retired annually, at least for the year of 2000, because no annual general meeting was held. Indeed the 4th respondent said in his affirmation that since the inception of the Company, the directors have not formally resigned from directorship annually. This is not challenged by the petitioner. That being the case, although there has been non-compliance with the Articles of Association, the pleading as it now stands, does not show that the non-compliance amounts to unfair prejudicial conduct that operates to the detriment of the petitioner.

26. Miss Lau has in her written submission argued that the petitioner has been deprived of an opportunity to be re-elected as a director and, as such, she was denied access to the conduct and management of the affairs of the Company. This submission fails to recognize that it is the petitioner's case that she resigned from the board of directors due to loss of confidence in the 2nd to 4th respondents. It would be inconceivable that she now complains of being denied the opportunity of becoming a director and being involved in the Company's affairs.

Paragraph 15

27. In paragraph 15 of the Petition, the petitioner pleads that she has not been paid dividends, salaries and commissions as well as petty cash reimbursement for the fiscal year of 1999 to 2000. No particulars have been pleaded as to the amounts, calculations or the circumstances under which she claims to be entitled to be reimbursed. In her affidavit opposing this application, the petitioner exhibited a letter of demand dated 5 May 2001 from her former solicitors to the Company demanding the payments of dividend, salary, commission and petty cash reimbursement. The letter however contains no particulars of the demand.

28. With regard to the dividend, the audited account of the Company for the year ending 31 March 2001 records a declaration of dividend in the amount of $2 million for the year 2000. The audited account also records dividend in the sum of $4 million had been paid out by the Company in the year 2000. The audited account however does not reveal any debt due from the Company to its shareholders, whether in respect of unpaid dividend or otherwise. In the circumstances, it must be incumbent upon the petitioner to particularize her case with regard to the non-payment of dividend. In the absence of particulars, the bare allegation of non-payment of dividend is bad.

29. As for the salary or commission and reimbursement, the petitioner says in her affidavit that the reimbursement is in the sum of approximately $97,701.22. She also exhibits the minutes of a meeting held on 15 February 2001 and relies on it as evidence of the Company's indebtedness. Paragraph 3 of the minutes is to the effect that the unpaid petty cash and the commissions for February to December 2000 would be settled upon the transfer of shares.

30. Prima facie, non-payment of sums by a company to its shareholder does not per se constitute unfair conduct prejudicial to the shareholder's interest as a shareholder. At the most, it gives rise to a claim in debt against the Company. It is a quantum leap to say that because the Company has failed to pay the petitioner commission and salaries as well as reimbursement for expenses, the respondent directors are guilty of unfairly prejudicial conduct. This is particularly so when there was, on the petitioner's own evidence, an agreement to defer the payment until the transfer of shares takes place. Paragraph 15 is clearly bad.

Paragraph 17

31. If the foregoing paragraphs are struck out, then there will no foundation for the averment in paragraph 17.

Conclusion on paragraphs 9, 10, 13, 15 and 17

32. Evidently, these paragraphs are wholly inadequate and do not inform the respondents of the case that they have to meet. They are unparticularised such that the respondents are not in a position to know what evidence to adduce to deal with the assertions contained therein.

33. I had in the case of Re Tourmaline Limited [2000] 4 HKC 348 at 354C-D said that :

" Although a petition does not constitute a formal pleading, it serves to define the scope of the matters in issue and the disputes that the court has to resolve. Accordingly, a petition must set out with precision and sufficient particulars the matters complained of or relied on by a petitioner in justifying a winding-up order on just and equitable ground, and the court will not travel beyond the allegations contained in the petition in adjudicating the matter : In re Fildes Bros. Ltd [1970] 1 WLR 592 at pp.597G-598C. It follows that a sufficient case must be stated on the petition and defects or omissions in the petition cannot be cured by the supporting affidavit : see Derek French, Applications to Wind Up Companies, pp.86-88; Re Wear Engine Works Co. (1875) LR 10 Ch.App.188 at p.191."

34. Miss Lau submits, however, that defects in a petition are capable of being cured by the affidavits filed. She relies on a passage in Re W R Wilkocks & Co. Ltd [1973] 2 All ER 93 at 96C-D in which Plowman J (as he then was) said :

"It may well be that if the affidavit had condescended to particulars of the allegations in para.7 of the petition, the deficiencies in that paragraph would have been made good."

35. This statement in my view hardly supports the submission. All that Plowman J was saying was that the petitioner may be able to look to the verifying affidavit for particulars to make good the allegations in the petition. In that case, similar to the present case, the petition was supported by a very short affidavit, giving no particulars of the pleaded allegation that differences had arisen between the two shareholders and directors over the conduct of the Company such that there was deadlock between. Plowman J ordered that the petition be struck out on the ground that the petition was embarrassing in that the allegation was wholly unparticularized and the defendant had not been informed of the precise case he had to meet and had no means of knowing what evidence to adduce.

36. Miss Lau also submits that where the matters complained of is capable of being cured by amendments, the Petition should not be struck out. That principle is relevant when considering whether a claim should be struck out and dismissed. It is inapplicable when the application is to strike out parts of the Petition and when no proposed amendment has been formulated for the court's consideration.

37. For the reasons above, paragraphs 9, 10, 13, 15 and 17 of the Petition are embarrassing and/or irrelevant. They should be struck out and I so order.

The claim for a winding-up order

38. In respect of the claim for a winding-up order, section 180(1A) of the Companies Ordinance provides :

"Where the petition is presented by members of the company as contributories on the ground that it is just and equitable that the company should be wound up, the court shall not refuse to make a winding-up order on the ground only that some other remedy is available to the petitioners unless it is also of opinion that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy."

The rationale behind the section is that winding-up by a contributory is a remedy of last resort and would not be granted if the petitioning contributory was acting unreasonably in insisting upon it where there was an alternative remedy. The onus is upon the parties opposing the petition to show that there is an available remedy and that the petitioner is acting unreasonably in not pursuing it : Re Wong To Yick Wood Lock Ointment Ltd [2001] 2 HKC 618 at 622-623; upheld in CACV867/2001 (unreported) 23 April 2002.

39. In the present case, there is no dispute that the Company is solvent and trading profitability. Prima facie, it is not in the interest of its members to have a solvent company wound up. Secondly, all the parties, including the petitioner, had expressed an interest in having the petitioner's shares bought out. As late as January 2002, the parties were engaged in active discussions about the valuation of the shares. By seeking a buy-out order as the primary relief in these proceedings, the petitioner has implicitly indicated that she remains interested in a buy-out. The 2nd and 4th respondents, on the other hand, through this application to strike out, will appear to maintain the same position. As le Pichon JA pointed out in Re Wong To Yick Wood Lock Ointment Ltd (CA) at para.12, given the nature of the application, it is incumbent upon the petitioner to file evidence to state why a winding-up order is the preferred remedy and the reasons therefor. In the absence of such evidence, the court may conclude that the petitioner is not opposed to a buy-out order.

40. Miss Lau submits that the claim for winding-up order is justified because of 2nd and 4th respondents' conduct in setting up another company called Bestwell Fareast Group Company Limited ("BF Group") and in diverting payments of the Company to BF Group. It is said that the conduct merits investigations. The 4th respondent explains in his 2nd affirmation that BF Group was set up on legal advice and as a counter measure to the petitioner's threat to wind up the Company.

41. In the first place, the allegations relating to BF Group were not pleaded in the petition and is not yet part of the petitioner's case. Therefore, it is immaterial that a need to investigate can provide a proper ground for a section 177(f) winding-up.

42. Secondly, while it is not disputed that a need to look into the conduct of the directors or other shareholders may found a winding-up order, what is at issue is whether there is any real prospect of the court making a winding-up order at the trial in the sense that there is no other available alternative remedy. Notwithstanding the discovery of the setting up of BF Group, the petitioner has not abandoned her claim for a buy-out order. It would also appear from counsel submissions that the petitioner's primary claim remains to be for a buy-out order.

43. Previously, the petitioner and the respondents had agreed to adopt 31 December 2002 as a cut-off date and valuation of the Company shares had been carried out on that basis. The negotiations broke down because of disagreement over the discount to be applied to the price. 31 December 2002 was a date considerably before the incorporation of BF Group. Although it is within the court's discretion to fix the date for valuation and that an updated valuation may be affected by the incorporation of BF Group, it is not impossible to make suitable adjustments for the effect and consequences brought about by the incorporation of BF Group.

44. In the circumstances, given that the Company is solvent and successful, it would be very unlikely for the court to order a winding-up when there is an available alternative remedy being sought at the same time by the petitioner. It is in any event not in the interests of the parties to break-up the company and have its assets sold at break up value. The petitioner has not been able to identify what substantial benefit she stands to gain from a winding-up order. Neither has she shown what real prejudice she stands to suffer by striking out her claim for a winding-up order. The petitioner is therefore acting unreasonably in insisting on the claim for a winding-up order. Paragraph 3 of the prayer for relief should accordingly be struck out.

Conclusion

45. The order that I make is as follows :

(1) The part of paragraph 9 of the Petition that reads :

"when Your Petitioner requested TDY, TSKB and/or TTMV on behalf of the Company in order to facilitate the cash flow of the Company as well as demanding him to return all books and records of the Company so that the Company accounts could be properly audited",

together with paragraphs 10, 13, 15, 17 and paragraph (3) of the prayers for relief be struck out.

(2) There be an order nisi that the petitioner pays the 1st, 2nd and 4th respondents' costs of this application, to be taxed if not agreed.