LAU CHI YAN ROGER AND OTHERS v. TUNG KA HUNG AND OTHERS

HCCW1097/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO.1097 OF 2002

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

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

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

D E C I S I O N

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

1. This is an application to continue the ex parte injunction obtained by the petitioners before Woolley DJ on 2 October 2002, restraining the 1st and 2nd respondents and the 11th respondent from carrying into effect of any resolutions made at the extraordinary general meeting of the 11th respondent held on 2 October until further order and restraining the 1st and 2nd respondents from procuring the 11th respondent to change the present board members of the 12th respondent until further order.

2. On the return date, that is, 11 October 2002, Cheung DJ continued the injunction, leaving open the question whether the ex parte order should be discharged on the ground of material non-disclosure of determination of the judge hearing the inter partes summons. The matter now comes before me.

Background

3. The background leading to this application can be briefly stated as follows. The protagonists were involved in the business of manufacturing and trading of printed circuit boards. The petitioners' case is that in about March 1999 merger discussions began, and in the course of such discussions, various representatives were made by the 1st and 2nd respondents. The discussions resulted in a merger exercise. But after the merger, the petitioners found out that the said representations by the respondents were untrue. The parties then agreed to demerge, pursuant to an agreement made in October 2001 and January 2002. However, the 1st and 2nd respondents were unco-operative. The dispute eventually gave rise to a series of litigations in court, including the present winding-up petition filed on 2 October 2002.

4. On the same day, the respondents' camp of shareholders purported to hold an EGM with the intention to increase the number of directors of the 11th respondent to a total of 11 and appoint additional directors to fill up the vacancy. The reconstituted board purported to pass resolutions to remove the petitioners' camp of directors from the board and management of the 11th respondent and all the subsidiaries within the group. The petitioners took out the ex parte application and an injunction was granted by Woolley DJ.

Material non-disclosure

5. In light of the submissions advanced before me today, it is, I think, logical to first deal with the question of material non-disclosure. It is argued on behalf of the respondents that the petitioners were guilty of material non-disclosure when their legal representatives appearing before Woolley DJ at the ex parte hearing failed to disclose to the court a letter of the same day from the respondents' solicitors advising them, inter alia, that the EGM was purported to be convened pursuant to section 114A of the Companies Ordinance. The petitioners' case advanced before Woolley DJ was that the meeting was purported to be convened under section 13 of the same ordinance. It should be noted from the submissions filed with the court in support of the ex parte application, illegality of the notice was one of the grounds relied on by the petitioner before the deputy judge.

6. The handling solicitor now justifies the non-disclosure by saying that he was unable to make sense of this particular letter which was shown to him in the course of submissions made to the court.

7. At first glance, it appears that the failure to disclose this letter is material. Indeed, in the course of submissions, I might have given the impression to those appearing before me that the failure amounted to a material non-disclosure. I have even invited submissions on the question whether, if I were to discharge the injunction on material non-disclosure, I should nevertheless exercise my discretion to re-grant a fresh injunction in the terms of the ex parte order. But over the short adjournment and having further considered the submissions in this regard, I am persuaded by Ms Liu that this is not a material point after all.

8. It can be clearly seen from the transcript of the ex parte hearing that the deputy judge granted the injunction in order to preserve the status quo of the company in question and also the balance of the power in the board, pending the resolution of all the disputes between the parties. Even if the letter had been disclosed and the deputy judge accepted that the meeting was regular, in my view, he would have come to the same conclusion by granting the injunction to preserve the status quo. Thus the failure is not material. I should, however, add that, as a matter of prudence, the solicitor ought to have shown this letter to the deputy judge. I accept that it is an innocent mistake on his part, and perhaps an error of judgment.

9. Even if I were wrong on the material non-disclosure point, I would nevertheless still exercise my discretion to re-grant a fresh injunction in terms of the ex parte injunction. In this regard, the reasons are just the same for continuing the ex parte injunction.

Continuing the ex parte injunction

10. There is no dispute that there are serious questions to be tried. The debate that took place before me related solely on the question of balance. I agree with Ms Liu that an injunction is appropriate in the circumstances of this case to preserve the status quo, pending the resolution of all the factual disputes which will be hotly contested at trial.

11. The present composition of the board of the 11th respondent was agreed to by the parties before any dispute arose. The respondents, who are the majority, say that they have now lost confidence in the board and, as the majority, they should be able to control the company by changing the composition of the board. In my view, it is not a sufficient ground to disrupt the status quo. The wish of the majority should not be given too much weight in the particular circumstances of this case. If they were able to change the composition of the board, then the petitioners' camp of directors would certainly be removed from management. That is something which should not happen at this stage of affairs.

12. Mr Lo, counsel for the respondents, took a further point. He submitted that looking at the petition and the prayer, the petitioners are only interested in three of the companies. The scope of the injunction, even if granted, should only be confined to those subsidiaries. The others, including the 11th respondent which the respondents' camp of shareholders are interested in, should be controlled by them. In my view, in light of the allegations and factual disputes regarding the merger and demerger, it is too simplistic to just divide the companies into two groups and then assigning the companies to the respective camp of protagonists.

13. Further, the injunction is limited to the board of the 11th and 12th respondents. On its face, it does not effect the composition of other subsidiaries within the group which the respondents may or may not be interested in. In any event, as I have mentioned earlier, if the status quo is to be preserved, then the status quo regarding the subsidiaries and the group as a whole should be preserved as well.

14. The respondents complain that there are risks of further unauthorised sale and dissipation of funds by the petitioners if they were allowed to remain in control of the company. These allegations, of course, are denied and they cannot be resolved here. I note, however, there is no evidence to suggest that alleged misconduct will happen again. The alleged unauthorized sale took place in early 2002, whereas the alleged dissipation of funds took place in January and February 2002, long before the presentation of the winding-up petition and the application for ex parte injunction. The respondents have failed to adduce evidence to show that after the alleged wrongful disposal of assets and funds the petitioners did or attempted to repeat the same misconduct before or after the presentation of this petition.

15. Mr Lo then complained that damages may not be adequate as a remedy in the event that the respondents win at the end of the day. But the same can be said regarding the petitioners' position as well. That is why the status quo should be preserved.

16. Mr Lo also queried about the adequacy of undertakings as to damages offered by the petitioners. There is, however, no evidence to suggest that the offer was not good or that the petitioners were not able to make good the offer in the event that the injunction is to be discharged later. The suggestion that the shares in the company may fall after the disposal of the petition is, at this stage, speculative.

17. For these reasons, the balance of convenience tilts strongly in favour of continuing the ex parte injunction or, alternatively, re-granting the injunction in the terms of the ex parte injunction.

[Submissions on costs]

18. The costs will be the petitioners' costs in the cause.