DONALD QUINTIN CHEUNG v. WANG TEH HUEI AND OTHERS

IN THE SUPREME COURT OF HONG KONG

COMPANIES (WINDING-UP) No. 399 OF 1984

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BETWEEN

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JUDGMENT

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1. At the hearing of this motion I made an order staying proceedings on the petition apart from discovery. I said I would give my reasons in writing which I now do.

Preliminary

2. This is a motion whereby the Respondents seek an Order that either the petition for winding-up be struck out or alternatively that all future proceedings in relation to the petition be stayed until the hearing of other High Court Actions in which the Petitioner is the plaintiff and the Respondents are defendants. The grounds on which the Respondents rely are that the central issue between the parties concerns the question of whether the Petitioner is the beneficial owner of shares in the 4th Respondent ("Beta") or whether he holds those shares as trustee for the 1st and 2nd Respondents.

3. These other actions were filed in November 1984. In Action No. 7811 the Petitioner is the Plaintiff, the four Respondents here are Defendants, together with Chinachem Investment Co. Ltd.  ("Chinachem"). The action is brought by the Plaintiff as a minority shareholder in Beta and for the benefit of Beta. The Plaintiff seeks declarations regarding certain shares in another company, Dragon-fly Limited, ("Dragon-fly"), in particular in relation to shares held by Chinachem, a company controlled by the 1st and 2nd Respondents, and interest on funds held allegedly by Chinachem on behalf of Dragon-fly and on moneys lent to Chinachem by the 3rd Respondent, Chime Corporation Limited.    

4. In Action No. 7812 the Defendants are the 1st and 2nd Respondents herein together with Wang Ding-sing, Kam Ting Company Limited and Ching Wing Company Limited. The Action concerns the proceeds from a company On Shiu Limited in which the parties were shareholders and which was wound-up in 1975. The proceeds from that winding-up were then transferred to a partnership known as the Kam Ting Partnership. Plaintiff seeks an Order that the partnership now be dissolved and the proceeds be distributed. He also seeks interest on moneys allegedly lent by the partnership to Kam Ting Company Limited. While the parties in that action are not the same as in the petition and it is concerned with another company, On Shiu Limited, the same allegation is made by the 1st and 2nd Respondents. herein, i.e. that the On Shiu shares were held by the Petitioner as a trustee for them.

5. The third action was also commenced in November 1984, No. 7810. The defendant is Tam Wai Kuen, the liquidator of Dragon-fly and the claim therein is very much related to Action No. 7812. In it the Petitioner claims that he was the beneficial owner of shares in Dragon-fly Limited pursuant to his shareholding in On Shiu Limited. Once again the central issue is whether he was in fact such a beneficial owner or whether he held the shares as a trustee.

6. Time-tables have been submitted relating to each action and it would seem that steady progress is being made with them and the only major matter now outstanding is discovery. That will no doubt be a complicated matter as the actions involve events going back some 15 years and there are no doubt many documents involved.

The case for the Respondents

7. Mr. Lightman submits that where there is an issue concerning the ownership of shares in a company that issue should be decided before the hearing of any petition for its winding-up. If it is found that the petitioner is in fact only a trustee and not the beneficial owner of the shares he has no right to petition for a winding-up and that issue should therefore be decided before there is any consideration of the winding-up petition.

8. There are essentially three issues between the parties to all these actions.

9. The Respondents submit that these questions are better decided not in a winding-up petition but in the hearing of the other three actions. Mr. Lightman points out that the parties to the actions and the petition, while they overlap, do not coincide. In 7811 for instance relief is claimed against the 1st and 2nd Respondents and also Chinachem and Chime Limited. Those two companies are not parties to the petition. In 7812 the 3rd, 4th and 5th Defendants are not parties to the petition and in 7810 the Defendant is not a party. to the petition. It is also pointed out that in the Petitioner's own affidavit the value of the shares in Beta which he claims cannot be ascertained until after the hearing of the actions. It is further submitted that not only should the petition not to be heard before the actions but that it should be struck out. Mr. Lightman submits that this would not result in any injustice to the Petitioner as a fresh petition could be brought following the actions if he is successful in then. He submits however that it is unfair to Beta to have a winding-up petition hanging over its head until the actions have been heard. There was some dispute as to whether any concession had been made when a previous matter was being heard in the Court of Appeal and there was a suggestion that counsel for the 1st and 2nd Respondents had conceded that it did not matter if there was a winding-up petition pending as Beta was not trading. It was however disputed that such a concession had been made and it does seem that Beta is in fact receiving income from interest and rent.

The case for the Petitioner

10. Mr. Ching for the Petitioner submitted that the Petitioner had a right to bring the petition and had a right to have it heard as soon as it was possible to do so. These actions are brought on a basis that the Directors have been in breach of their duty to the company. They seek Orders that funds be paid to the company. The petition is an action to enable the minority shareholder to get his money out of the company and is for a completely different purpose to the derivative actions. If the petition is not allowed to proceed the Respondents may well continue what is alleged to be unlawful conduct to the detriment of the company and of its minority shareholder. While the Petitioner does agree that the value of his shares will have to be assessed this does not mean that he should not be able to seek an Order that the be paid such amount as is eventually found due to him and even if the other actions succeeded he is still locked into Beta until a winding-up order is made. If there is a rule of practice that issues such as the beneficial ownership of the shares should be settled before the hearing of a winding-up petition it is a rule of practice only and in appropriate circumstances should not be followed. Here such circumstances exist. It is also submitted that if the Petitioner does hold his shares as a trustee it is by no mean certain who is the beneficiary of that trust. It could be the 1st and 2nd Respondents, it could be any of the other companies which make up what the Respondents refer to as their "group" of companies and some 150 in all.

The Law

11. The Respondents rely heavily on in Re Bambi Restaurants 1965 2 AER 79. In that case there were 999 shares in a company, 499 registered in the-name of the Petitioner, 499 in the name of her husband and 1 in the name of a Mr. Smith, its auditor. It was disputed as to whether Mr. Smith held the shares on trust for the Petitioner or for her husband. At page 81 Pennycruick, J. said -

Later in the same page he goes on -

In Re J.N. 2 Limited 1977 3 AER 1104 there was a dispute as to whether the petitioner, who was not registered as a shareholder, was in fact a contributory and therefore entitled to bring a petition. At 1108 Brightman, J. said -

12. In an unreported decision in Re Wilsons Automobiles & Coach Words Limited, where again there was a dispute as to the beneficial ownership of shares, Buckley, L.J. said that to strike out any proceedings in limine under the inherent jurisdiction of the Court is a course which should be taken with the greatest caution but where the petition was one which could not succeed then it should be struck out. Here clearly if at the hearing of the derivative actions the Respondents claim that the Petitioner holds his share as a bare trustee succeeds then the petition must inevitably fail. That decision is found support in the dicta of O'Connor, J. in Re San Imperial Corporation Limited 1980 HKLR 649 on which Mr. Ching for the Petitioner relies. At page 650 O'Connor, J. said -

He went on at 652 -

13. Finally I have also been referred to the very helpful but unreported case of in re Claybridge Shipping Co. S.A. No. 001342/1980. That was an appeal from a decision of Vinelott, J. who had said that as the debt was disputed according to the practice of the court the petition should be removed from the file. That decision was overruled and Mr. Ching cites the Court of Appeal decision as authority that even if that is the practice it is not always to be followed. Denning M.R. said -

He does on to cite with approval a passage from Buckley on Companies (13th Ed.) P. 736 -

Denning M.R. goes on to say that this is to avoid assets being redved from the jurisdiction. He then, however, goes on to say -

If the defence is clearly lacking real merit the petition should be allowed to go on. He was supported by Sham, L.J. and Oliver, L.J. who was the Companies expert on the Court, who said -

The appeal was allowed and the petition restored.

14. Mr. Ching submits that here the Respondents case is so unsubstantial that I should accept the invitation offered by Claybridge Shipping and allow the petition to go on. The 1st and 2nd Respondents were, at the time the Petitioner purchased his shares in Beta, very experienced and highly successful property developers. It is inconveivable that they were not aware, as they allege, of the consequences of allowing the Petitioner to buy shares in Beta and he was under no duty to advise them on that or to recommend they obtain independent advice. That may in the event be found to be correct but I can't, at this stage, accept that the defence is so shadowy as to have no real prospect of success. There are aspects of the Petitioner's case which will also no doubt be the subject of attack at the trial of the derivative actions. There has certainly been no application made to strike-out the Respondents' counter-claims.

15. The case on which Mr. Ching mainly relies, and which he suggests is on all four with the present one, is Re Garage Door Associates Ltd. 1984 1 AER 434. There it was held that a petition for winding-up would be dismissed as an inappropriate means of settling a dispute about the ownership of shares if the petitioners case is solely concerned with that issue but it would be allowed to go on if it was coupled with a complaint made under Section 75 of the Companies Act. (Section 168A of our Companies Ordinance.). In that case there were two petitions and the question of the owner ship of the shares was raised in each of them. On counsel's undertaking not to advertise the petition Mervyn-Davies, J. allowed the petitions to go ahead. He said at P. 437 -

There were apparently no other actions commenced in that case whereas here there are three others commenced by the Petitioner before he filed his petition, in which he does allege mal-practise in the running of Beta, no undertaking about advertising the petition has been given here but Beta is not actively "trading".

Decision

16. I am satisfied from these authorities that the general rule of practice is that if there is a genuine dispute as to ownership of shares that dispute should be settled before a petition for winding-up is considered unless it can be shown that harm will be done to a minority shareholder because in the interim period the majority shareholders are able to take steps which will reduce the value of his shareholding. Mr. Ching for the Petitioner suggests that if the allegations made by the Petitioner of non-payment of interest proved to be correct further such harm may well be done to the company. I do not accept that view. I do not think that any steps are likely to be taken which could not be remedied if and when a winding up order is finally made. At the same time I am also satisfied that while the company is receiving income. it is not actively trading in such a way that a winding up petition is likely to do harm by being on the file. I therefore do not consider it is necessary for the petition to be struck out but that it should be heard either together with or after the other actions. I am however in no doubt that there are no circumstances here which justify a departure from the general rule of practice.

17. Discovery will be very similar in all actions as well as in the petition and I do not think that discovery should be delayed on the petition but there will be an order thatapart from discovery all further proceedings in the petition will be stayed until the trial of High Court Actions 7511 and/or 7512 or until further order.

18. The Respondents have in my view substantially succeeded in their action although the petition has not been struck out. Their main purpose was that the petition should not be heard until the derivative actions and in this they have succeeded. They are entitled to the costs of these proceedings.