RE YICK FUNG ESTATES LTD

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

(Consolidated by the Order of the Honourable Mr. Justice Jones made on the 27th April 1984)

__________

JUDGMENT

__________

Cons, J.A.:

1. On the 3rd May this year Jones J. appointed the Official Receiver as provisional liquidator of two companies, the Yick Fung Estates Ltd. and the Shui Hing Investment Co. Ltd. On the 16th July we set aside that order, reserving the delivery of our reasons until later. In order that they may be properly understood it is necessary to record briefly the background of events.

2. In May 1976 a joint venture was formed to develop land in Shatin, Shatin Town Lot No. 11, by the construction thereon of high density residential accommodation. The parties to the venture were Waychong Estates Ltd., a Mr. Cheng Kwei Sheng, a Mr. T.H. Wang and his wife Nina. The vehicles through which the venture was to be operated were the two companies I have first mentioned. Both companies had been initially under the complete control of Mr. and Mrs. Wang who were to be the principal parties in the venture, taking between them 80% as compared with the 10% each of the other two. The share holding of the two companies was adjusted to reflect those proportions.

3. Appointed as directors of the Yick Fung were Mr. Wang, Mrs. Wang, one Tai Ching Ping who is employed by the Wangs, Mr. Ho Chew who represented the Waychong Estates and Mr. Cheng Kwei Sheng himself.

4. Appointed as directors of Shui Hing were the same persons together with Sunday Investment Ltd., a company which is also controlled by Mr. and Mrs. Wang.

5. It was agreed that the management of the project should be in the hands of Mr. and Mrs. Wang. Mr. Ho and Mr. Cheng were appointed only as non-executive directors.

6. The project was impressive, calling for the construction of 14 tower blocks. The building covenant required them to be completed by the 31st December 1982. They were not. By that date only 8 had been finished, with occupation permits issued on the 7th January that year. The foundations had been put down for the remaining 6 towers but in only two had the superstructure been commenced. I understand there has been no further progress since then.

7. Differences between the parties surfaced in 1982. Exactly how or when is not apparent, but by the end of the year solicitors had been brought in on both sides, that is Mr. and Mrs. Wang (the fangs) on the one hand and Waychong Estates and Mr. Cheng (the minority) on the other.

8. On the 15th April 1983 the minority commenced a derivative action on behalf of the companies against the Wangs and other necessary parties claiming damages for fraud and conspiracy together with necessary accounts and inquiries etc. The Defence was filed in July, with further and better particulars later in the year. The Reply was put in during April 1984.

9. Just before that, on the 19th March, the minority presented petitions to wind up the two companies on the ground that winding up would be just and equitable. There was not then, nor is there now any suggestion that the companies are insolvent. Indeed Mr. Millett, who has appeared for the opposing contributories both below and before us, asserts that the companies are in fact in very good financial standing.

10. At the same time that the petitions were presented application was made for the appointment of a provisional liquidator. It did not come on for hearing until the 31st July when, before Jones J., it was by consent adjourned sine die with liberty to restore upon terms included in the court order.

11. In the meantime motions to strike out the petitions had been heard and dismissed by the same Judge. An appeal against the dismissal was subsequently compromised on terms which are of no concern to us now, save that I should mention that as a result the action and the two petitions will be heard together and that the hearing, presently estimated to last 6 weeks, will commence on the 1st October this year.

12. The terms embodied in the consent order are comparatively short and it is worth setting them out in full:

"1.1    All monies in the hands of Yick Fung Estates Limited ('Yick Fang') and Shui Hing Investment Company Limited ('Shui Hing'), all proceeds from the sales of units in the Shatin Town Lot No. 11 Development ('the Development') and all rentals and other income be paid into an interest-bearing bank account to be opened in the names of Messrs. Woo, Kwan, Lee & Lo and Messrs. Philip K.H. Wong & Company jointly ('the Account').   1.2    The Account be one which can only be operated by signatures of at least 2 signatories, one of which must be one' of the partners of Messrs. Philip K.H. Wong & Company designated as signatories by the joint petitioners and one of which must be one of the partners of Messrs. Woo, Kwan, Lee & Lo designated as signatories by the opposing contributories.   1.3    The joint petitioners designate at least 3 of the partners of Messrs. Philip K.H. Wong & Company as such signatories. The opposing contributories desigante at least 3 of the partners of Messrs. Woo, Kwan, Lee & Lo as such signatories.   2.1    Except to the extent set out in paragraph 3.1 below, expenditure on the Development be against certificates of the authorised person, Mr. K.K. Wong and countersigned by a quantity surveyor to be appointed. The quantity surveyor be selected by agreement of the joint petitioners and the opposing contributories or, failing such agreement, by the Court.   2.2. Yick Fung and Shui Hing will not enter into any contract the terms of which provide for payment by them or either of them in excess of $10 million save with the prior approval of the joint petitioners or the Court.   2.3    This order is without prejudice to the right of the boards of Yick Fung and Shui Hing to exercise their own unfettered commercial judgment in good faith.   3.1    A cash impressed account be operated by Yick Fung and Shui Hing for miscellaneous expenses ('the impressed account').   3.2    $1 million be paid from the Account into the impressed account upon opening, and the amount therein shall never be allowed to exceed $1 million for fall below $100,000.00.   3.3     The opposing contributories will supply the joint petitioners with itemised statements of expenditure when seeking to replenish the impressed account.   4.1    Payments required to be made to the Government (e.g. premia, fines, taxes - whether in cash or otherwise) will be paid out of the Account if the funds in the impressed account are inadequate.   4.2    The payments referred to in paragraph 4.1 need not be supported by certificates.   5.    Within 56 days from the date hereof the opposing contributories shall make such contribution (according to their record as at the 30th June 1984) towards the costs of the Development as may be necessary to bring the contributories of the opposing contributories, Waychong Enterprises Limited and Mr. Cheng Kwei Sheng respectively to the proportions 80:10:10 respectively. The amount shall be adjusted as necessary on completion of audit of Yick Fung and Shui Hing's for the year ended 30th June 1984.   6.    The joint petitioners and their accountants fat their expense) shall within 14 days from the date hereof have access to the accounts and documents for carrying out an audit of Yick Fung and Shui Hing from the date of the last audited accounts, i.e. for the year ended 30th June 1981 for the purpose of carrying out up-to-date audits of Yick lung and Shui Hing.   7.    The opposing contributories will use their best endeavours on Yick Fung and Shui Hing's behalf to secure finance on reasonable commercial terms from banks or other financial institutions or by way of selling units in the Development in respect of fund's required for the Development and will not cause Yick Fung and Shui Hing to call for any further contributions unless such finance cannot be obtained from such sources on reasonable commercial terms desptie such endeavours or the monies obtained from the sale of such units.   8.    Without prejudice to the contentions of the parties herein or in High Court Action No.4298 of 1983, Wing Wong Company Limited and Ripple Corporation Limited ill be bound by all the terms hereof.   9.    The costs of the Summonses for the appointment of provisional liquidators be costs in the cause.   10.    For the purpose of the Orders made herein on 30th April of 1984, the date of this Order shall be deemed to be the date of hearing of the applications for the appointment of provisional liquidators.   11. Liberty to all parties to apply generally."

13. For reasons which will become apparent later the consent order was not a success. The application for a provisional liquidator was duly restored. It came on again before Jones J. on the 25th April. He had then of course to consider not only what Mr. Millett has called "the original allegations" contained in the petitions, but the fact of the consent order and the conduct of the parties in relation to it, not so much to decide whether either had been technically in breach thereof, but to assist him in assessing what might happen in the absence of a provisional liquidator during the period then remaining before the hearing could be concluded. The minority also put forward in support of their applications further matters that had occurred or come to light after the order had been made. The task of the learned Judge at that time then was to decide, in the light of all those considerations, and I adapt the words of Plowman J. in R. v. Union Accident Insurance Co. Ltd. ⁽¹⁾, whether the minority had made out a good prima facie case for winding up at the hearing of the petition, and if so, whether in the particular circumstances it was right that a provisional liquidator should be appointed.

14. Mr. Levy, who appears for the minority in this appeal, suggests that the initial requirement has been conceded by Counsel for the Wangs. Certainly some concession was made below, and again before us, but I must confess, with the greatest respect to Mr. Millett,who otherwise advanced his submissions with the greatest clarity, that I never managed completely to comprehend the exact nature of what he did intend to concede. On consideration I think he was doing no more than declining to suggest, at this stage, that the initial requirement has not been made out. It is necessary therefore to consider only the second question and in this respect the particular matters that were raised before the learned Judge below and again before us. I hope Counsel will forgive me if I do not deal with them in the same detail in which they were taken before us. A bare outline will I think be sufficient-to explain my conclusions. It must also be remembered that in so far as I may comment on the evidence, the evidence so far is only documentary. It may appear in a completely different light when witnesses are called and examined at the hearing. I turn first to the "original allegations".

Wing Wong and Ripple

15. On the 4th December 1979 the companies concluded an agreement for sale and purchase of two of the tower blocks then in the course of construction to a company by the name of the Wing Wong Co. Ltd. at a price which discounted, by I think 10%, the total of the individual prices already fixed for the flats contained therein. On the 25th February 1980 a similar agreement was concluded in respect of a further 2 blocks in favour of a company known as the Ripple Corporation Ltd. No conveyances have ever been executed to complete these agreements. When the individual flats were sold on by wing On and Ripple the companies joined in the individual conveyances as "the original vendors". Wing On and Ripple are private companies effectively owned and controlled by the Wangs.

16. The minority allege that they had no idea of these arrangements until they were led to make inquiries by the sight of an individual agreement for sale in January 1982, when further searches revealed the truth. They suspect that the Wangs had originally intended a secret profit to themselves. It was only very belatedly, so the minority suggest, that the Wangs disclosed declarations of trust executed by Wing Wong and Ripple in favour of the companies. Moreover, by failing to join the minority as parties to the agreements, as required by particular Land Office circular memoranda, the minority having provided some of the unsecured loans to finance the development, the Wangs had laid the companies open to government sanction or at least to the possibility of difficulty in future negotiations with the Land Office.

17. The Wangs justify the transactions on two grounds. Firstly fiscal, in that it was at that time thought possible to exploit a loophole in the tax legislation by making use of a company incorporated and doing business prior to 1974, and which would then cease business at a financially opportune moment; and secondly conveyancing, in that block sales of that kind more easily coped with governmental restrictions on the forward sale of property still under construction. The fiscal hope was thwarted by legislation in 1980, but whether or not the minority in fact knew of the actual transactions the idea was common knowledge and indeed in the very early stages of the joint venture the minority had offered one of their own companies for this very purpose. The failure to join the minority as parties was not essential. The object of the circulars in question was to protect the actual purchasers from the possible financial failure of the development companies. To this end undertakings were required from financiers. In this instance the Wangs, despite the restriction of their liability within the companies to 80%, were willing to give 100% undertaking to the government.

18. There are many questions of fact in this connection which will have to be determined at the hearing, but it appears unchallenged at the moment that even before any question was raised by the minority the full purchase monies for the individual flats were being credited direct to one of the companies accounts. This seems in total contradiction to the suggestion made by the minority. Furthermore, with the remaining part of the project still at the stage that it is there can be no likelihood that any similar transactions will be entered into between now and the completion of the hearing later this year.

Excessive Architects Fees

19. The architect for the project is a Mr. K.K. Wong. He is a salaried employee on the staff of the Chinachem group, the collective name by which the various companies effectively owned and controlled by the Wangs are known.

20. The minority raise two complaints. Firstly that Mr. Wong's connection with the group was not disclosed to them. Secondly that the fees charged for his services, $4,259,815 as at December 1982, were excessive, particularly in view of the fact that an initial offer by an independent firm of architects to carry out the work for $1.2 million had been rejected by the Wangs as too expensive.

21. These complaints are rejected by the Wangs, but whether or not there is substance in them is something that can only be determined at the hearing. There is no suggestion of other than financial prejudice. If at the hearing the Wangs are found to be at fault this can then be remedied. That is all. The appointment of a provisional liquidator would do nothing to alter the position.

The Citibank Loan

22. Between the 3rd October 1980 and the 2nd February 1981 the companies borrowed $50 million from Citibank, ostensibly to finance building costs. Figures set out by the minority in their petitions indicate that this should not have been necessary. Alternatively the minority suggest that if further funds were needed at the time they should have been provided by the Wangs themselves who at that stage had contributed in comparison with the minority far less than their 80% share. The minority suspect that the true object of the loan was to enable the Wangs to escape doing so, or rather to put the cost of meeting that contribution upon the companies and not upon themselves.

23. I do not think any assistance is to be gained from this transaction. Detailed financial investigation and evidence will be needed to resolve the true situation as it was at that time. This will not be affected by the appointment of a provisional liquidator. If in the end the Wangs are found to have been at fault that will again be remedied by the order made at the hearing.

Private Legal Fees

24. Perusal by the minority of the tax returns of the companies indicated that legal fees of $6,414 had been debited to the companies accounts in November 1977. Further inquiry revealed that the fees related not to the companies but to advice taken privately by the Wangs, albeit in connection with the joint venture. The letter from the solicitors enclosing the bill in question was captioned "Re: Shatin Town Lot No. 11". By understandable error the cashier in the Chinachem group had debited the fees to the companies instead of to the Wangs' personal account. As soon as the matter was drawn to their attention, in May 1984, the error was corrected, together with a similar error regarding a further $2,000 which the cashier had consequently discovered for himself. I see nothing sinister in these transactions.

25. I turn now to consider the conduct of the parties in relation to the consent order.

The Joint Bank Account

26. Following upon Clause 1.1 of the Consent Order the Wangs wrote to the minority on the 15th August proposing that the joint account should be opened in the Continental Illinois Bank Ltd. The Chicago parent of that bank was at that time in financial difficulties and following an exchange of letters, to which I need not refer, the minority wrote back on the 4th September that they did not wish to put $23 million odd, the amount then involved, at risk in this manner but would prefer instead that the account should be opened in the Hongkong & Shanghai Banking Corporation or the Chartered Bank. All the correspondence was of course between the solicitors for either side. I use the terms I have used only for convenience.

27. It would seem that there were then telephone discussions in which the Wangs suggested amongst others the Chase Manhattan Bank, a suggestion agreed to by the minority in a letter of the 24th September.

28. At the end of October the minority wrote again pointing out that the account had not in fact been opened but no reply was received, possibly because the Wangs were in the course of changing their solicitors. This meant also that in effect Clauses 1.1, 1.2 and 1.3 of the Consent Order would have to be amended, for they made express reference to the original solicitors. On the 17th October the Wangs wrote asking for the agreement of the minority to the necessary changes. For some reason that we do not know that agreement was not forthcoming until the 1st February this year. Other correspondence followed dealing with such matters as the nature of the account to be opened at the Chase Manhattan. Eventually completed specimen signature forms were sent by the minority to the Wangs on the 6th March.

29. On the 18th March the Wangs wrote a long letter to the minority reciting their original suggestion of the Continental Illinois, its rejection by the minority, and then adding -

30. They drew attention also to the fact that Chase Manhattan was still unwilling to open the imprest account and then, giving their opinion that the problems of the Continental Illinois were now past history and that it was only proper that both accounts should be with the same bank, they renewed their proposal that the bank in question should be the Continental. Illinois.

31. The minority rejected the suggestion in a letter of the 27th March which recited their view of the past correspondence and included this paragraph

32. What the minority did not know at that time was that the Wangs had in fact already opened an account with the Continental Illinois. In an affirmation filed for the purpose of the restored hearing Mr. Wang said:

33. Mr. Wang cannot have given much care to his choice of words. Not surprisingly Mr. Millett took "at all material times" to relate at least as far back as the 31st July. For myself I would have thought perhaps the time of the first sale in 1982. However we now know, from evidence adduced without objection by the Official Receiver, that the account was not opened until the 31st August.

34. The judge's conclusion on this aspect is terse -

"	In my judgment there is abundant evidence that the deliberately delayed the opening of the accounts, and have now raised Wangs have the issue of interest as a further excuse for delay."

35. It is possible to doubt that the correspondence I have briefly outlined supports such a sweeping interpretation, but two things do clearly emerge. One is that the Wangs were intent on reneging from an agreement firmly made and adhered to for 6 months. The other is that they were prepared to deal, and secretly, with the companies' monies in a manner they knew full well was contrary to the wishes of the minority. That was certainly not in the spirit of the Consent Order.

36. I have not referred to the construction point raised upon Clause 1.1, that is that the wording of the clause, either alone or together with Clause 2.3, gives the sole right of choice to the Wangs, or alternatively that words are to be implied, as are in fact expressed in other clauses, that in default of agreement the decision should be that of the Court. No such suggestion appears in the correspondence and I feel that the conduct of the Wangs cannot have been in anyway influenced by thoughts along those lines.

Contribution

37. Clause 5 of the Consent Order required the Wangs within 56 days to put into the companies the monies fairly due from them as at the 30th June 1984 "according to their record". One would not expect the Wangs to have kept records separate from those of the companies, for which in any event they were responsible, and I assume that what the minority were looking for from that clause was that the Wangs would go to the companies' records, would make their calculations accordingly and pay in the appropriate amount. It may have taken a little time and effort to extract the various figures from the different records but there was ample time allowed.

38. In fact the Wangs did nothing of the kind. They left it until the 56 days had almost expired and then sought a firm of accountants, other than that usually responsible for auditing the group's accounts, to carry out soon internal audit of the companies and advise them as to the amounts to be paid in. The first firm approached eventually declined to accept instructions and it was not until November that a second firm could be found. That firm was exceptionally busy and the task had apparently not even been commenced when the matter came back again before the Judge. Added to that the Wangs had not thought fit at any time to breathe even one word to the minority of what they were doing.

39. The Judge felt that the Wangs had "treated the concent order with complete disdain". So far as these two particular aspects of it are concerned I do not think his choice of words is unduly harsh.

Lack of Disclosure

40. Clause 6 required that the minority's accountants - Messrs. Coopers and Lybrand were subsequently appointed - be given "access to the accounts and documents for carrying out an audit of Yick Fung and Shui Hing from the date of the last auditied accounts, i.e. for the year ended 30th June 1981 for the purpose of carrying out Up-to-date audits of Yick Fung and Shui Hing".

41. The Judge commented that "From the outset they encountered difficulties in obtaining the necessary records". That is perhaps a little unfair, for all that the Wangs did was to query a request for bank statements relating to the 4 years prior to 1981. Once the necessity for this was explained to them attempts were made to get copies from the relevant banks, albeit even now they have not been completely successful.

42. In the end there were 3 requests made by Messrs. Coopers & Lybrand by letter of the 12th December. The first was that the companies closed their books for 1984 so that the accountants could go on to finish the task for which they had been instructed. One can sympathize with the frustration expressed in that letter, but when the books are closed is a matter for the companies. The Consent Order gave the minority no special rights in that respect.

43. The second request was a reminder for the bank statements to which I have already referred. The third was for copies of certain contracts made between the companies and other companies within the Chinachem group. These have not yet been delivered. It is explained that the request was overlooked as the gentleman in Chinachem who had been handling that particular matter left the group at about that time.

44. Without doubt these matters do constitute breaches of this part of the Consent Order, but they could only be helpful if they were deliberate. The Judge declined to find that they were.

45. I turn finally to those matters which have arisen since the Consent Order was made.

The Land Exchange Entitlements

46. In January 1934 the Crown re-entered the uncompleted part of the land for failure to comply with the building covenant. In February the Crown offered to cancel the re-entry upon payment of a premium of just over $6.7 million, which it was willing to accept in the form of Monetarised Land Exchange Entitlements, commonly known as Letters B. That amounted in effect to a discount of about 15%. In order to avail themselves of that discount the Wangs suggested that they should sell to the companies Letters B to a face value of 80% of the premium and that the minority should do the same for the balance. This was agreed and carried out. The land was recovered.

47. The purchase price of the land had been $66.5 million. It was being paid by instalments. By May of 1984 the 7th and 8th instalments had become due, roughly $10,75 million. The Wangs suggested that this should be dealt with in the same way. The minority had no objection to payment of the monies due by means of Letters B but indicated that they themselves did not wish to procure the sale of any.

48. The Wangs have not yet explained what happened immediately thereafter but the documents shout that at some stage the Yau Fook Hong Co. Ltd. - another of the Wang controlled companies - made an offer to government to surrender particular Letters B to the necessary value. Unfortunately the title to some of those letters appears to have been defective and the government were not willing to accept them without a bank or insurance guarantee. The Wangs' solicitors advised against doing that. They took the view that the cost of the indemnity was not a commercially attractive proposition. They therefore sought the agreement of the minority to pay in cash. That was refused. In the opinion of the minority the cost of the indemnity ought to be borne by Yau Fook Hong for it was that company which had sold with a defective title.

49. If the minority are correct, and the companies are eventually wound up, it may be that the liquidator will in due course see fit to take action against Yau Fook Hong. I do not think a provisional liquidator would do much in the next few months.

Sales Commission and the Management Charges

50. The companies audited accounts for 1932 and 1983, both of which were signed in June 1984, revealed to the minority that in round figures $12.76 million were paid to Yau Fook Hong - the Wangs' company I have just referred to - and in 1983 a further $16.1 million. These sums are entered in the accounts as "sales commission" and "management fees".

51. This discovery came as a great surpirse, for not only do the minority see 7.5% as an excessive rate, but in a letter dated 28th February 1983 the Wangs had, when being at pains to point out the advantages of working together with the Chinachem group, expressly observed that "no overheads are charged nor are there charges in respect of staff". The minority see it as another example of the Wangs' enriching themselves at the expense of the companies.

52. The Judge accepted their submission:-

53. I have no doubt the latter conclusion is correct in the sense that similar entries will appear in the 1981 accounts, but as these transactions seem to be accounting adjustments between companies within the same group rather than actual payments of cash I do not think anything further will happen during the rest of this year. As to lack of explanation Mr. Wang has affirmed on two occasions that there is nothing improper or wrong in such payment. Only at the trial can it be determined whether he is right.

The One Eight Contract

54. In October last year the Wangs invited tenders from 10 building contractors for the completion of the remaining blocks. Only one replied, that is to say only one put in an actual tender. Subsequent inquiries led the Wangs to think that the financial structure of the company was not sufficiently sound and they declined to accept. Instead they proposed a contract with one of their own companies, the One Eight Investment Co. Ltd. They did not initially disclose that this was one of their own companies, albeit they contend that this fact was well known to the minority. Nor did they in the first instance explain why the contract price was $30 million over and above the figure in the tender refused. Curious conduct in the face of the allegations which they knew were being made against their handling of the companies' affairs. More was to follow. When asked for a copy of the quantity surveyor's report, by reference to which they had eventually explained the $30 million difference, they refused to supply one, saying that it had been privately commissioned. How could they expect the Consent Order to work when they behaved like that?

55. Two more factors were drawn to our attention, but with only the faint suggestion that they supported the appointment of a provisional liquidator, namely the award of the contract for the now completed part of the project without first going out to tender, and the failure of the Wangs to agree to the attendance of a solicitor and an accountant at regular board meetings of the companies as alternative directors for the minority. With every respect I do not think they take the matter any further.

56. It is unusual to appoint a provisional liquidator to a company that is solvent. It is sometime necessary, as in one of the cases to which we referred ⁽²⁾, when those responsible for directing the company are at loggerheads and stalemate has resulted. But it is a drastic step where the company is continuing to trade and to trade, as it is suggested here, very successfully. In such a case the consequences of appointment must be weighed very carefully indeed against the risks attendant upon a refusal to appoint.

57. It is not clear from the judgment how the Judge conducted that weighing exercise. At one stage he almost gave the impression that appointment was automatic upon breach of the Consent Order. He said. -

58. His intention was specifically drawn to one particularly adverse consequence of the order, namely its likely effect upon tenders being made for the completion of the outstanding tower blocks. However he brushed it aside as irrelevant. Alternatively he thought that all possible damage had already been done. With respect I do not agree. The presentation and advertisement of a petition is by no means so serious a step.

59. In that circumstance I think it incumbent upon this Court to set aside his discretion and decide for ourselves whether it is right that a provisional liquidator should be appointed. For my part I do not think it is. I have already indicated that in most instances the appointment of a provisional liquidator would have little or no effect upon the matters complained of. The remaining incidents reflect no credit upon the Wangs. On the other hand I am not persuaded that in all the circumstances they indicate a real risk that if the Wangs are left in control of the joint venture, as they had been until May, then should the companies be wound up later this year or some other order be made by this Court the minority will not receive what is properly and justly due to them.

60. It was for these reasons that I concluded that the order for the appointment of a provisional liquidator should be set aside.

Sir Alan Huggins, V.-P.:

61. I agreed. With respect to the judge I thought that he never properly balanced all the competing factors, so that we were compelled to substitute our own discretion.

62. I understood it to have been conceded that there was a prima facie case for a winding-up of the Companies. The Petitioners then contended that, as the evidence in support of the application to wind up related to alleged misfeasance by the other directors and shareholders, that same evidence justified the appointment of a provisional liquidator or was at least a very strong factor to be considered. I accepted that it was a relevant factor, but the fact that there had been misfeasance in the past did not necessarily mean that only by the appointment of a provisional liquidator could the assets of the Companies be protected from further misfeasance.

63. The judge appeared to base his decision solely upon what he found to be breaches of the consent order and, in particular, he said that it was irrelevant that the appointment of a provisional liquidator might deter builders from tendering for the work which still remained to be done on the Companies' site. It was uncertain to what extent possible tenderers would be more likely to be deterred by the appointment of a provisional liquidator than they would be by the already common knowledge that a petition for winding up had been presented. Nevertheless I thought the possibility of additional deterrence existed and that it was a relevant factor.

64. I had prepared a statement of my own reasons for thinking that our discretion should be exercised in favour of the majority, but, although we had drawn conclusions different from some of those drawn by the judge from the evidence, having had the advantage of reading in draft the reasons just delivered by Cons, J.A., I decided that no useful purpose would be served by, in effect, merely repeating what he had said. I entirely concur with his reasons and his conclusions.

Fuad, J.A. :

65. The background to the issues which divide the parties to this appeal has been fully reviewed in the judgment of my Lord Cons, J.A. and although I have reached a different conclusion on the result, my observations can be quite short.

66. I agree with my Lord, for the reasons he has given, that the learned judge's exercise of his discretion must be set aside so that we are entitled to exercise an original jurisdiction of our own.

67. It was, of course, necessary for the Petitioners to establish by affidavit evidence, that there were sufficient grounds for the appointment of a provisional liquidator. There can be no doubt that such an appointment can be made after the presentation of the petition if it is shown that the assets of the company are in jeopardy or that those in control are misappropriating its assets. Ultimately the burden is on the Petitioners to persuade the Court that a holding operation under the control of a provisional liquidator is appropriate in all the circumstances, until the petition is heard and determined.

68. The Petitioners here were required first to make out what Plowman J., in Re Union Accident Insurance Co. Ltd.,⁽¹⁾ termed "a good prima facie case" for a winding-up at the hearing of the petitions. To decide this question it would not be right to look only at the allegations made by the Petitioners. All the material before the Court must be examined including the affidavit evidence put in by those opposing the application. The Court must then form a provisional view and decide whether, as the matter then stands, there is a reasonable prospect that the petitions might succeed.

69. In this case, precise factual evidence has been presented by the Petitioners, and for the most part, the basic facts are common ground. Whether they show, as the Petitioners allege, that the majority shareholders have been making a private profit at the expense of the companies and to the detriment of the minorities, can only be decided at the hearing after cross-examination of the deponents of the relevant affidavits. And the decision will turn upon whether the explanations put forward by the majority are accepted. For my part I am quite unable to take a provisional view on the material before us that the explanations (and in some cases, the excuses) advanced by Mr. & Mrs. Wang are so obviously cogent as to reduce the strength of the Petitioners allegations to such a degree as to compel me to hold that a good prima facie case" has not been made out for a winding-up order.

70. I would mention here that perhaps the most serious allegations made by the Petitioners are those which concern the "Wing Wong and Ripple Agreements." I feel bound to comment that if the elaborate arrangements were indeed devices to achieve tax savings, this does not explain the discounts given which would seem to have lost to the Petitioners their share of some $55 million. It may be that a ready explanation can be given but none has been offered so far.

71. Another matter which wiil have to be gone into at the hearing is the Wangs' conduct of the tender for blocks C1, C2, D1 and D2. It seems to me somewhat extraordinary, as the matter now stands, that once the Petitioners' had challenged the choice of the "One-Eight" company at their price of over $111 million, which was considerably higher than the one tender that had been received, (a challenge which was met with the response "So what?" and criticized as displaying "sheer ineptitude and lack of commonsense") the Wangs withheld from the Petitioners' the report of the unnamed quantity surveyor which they alleged fully justified the proposed selection of one of their own companies.

72. As I have said, these and the other allegations will have to be gone into the hearing but there are certain matters upon which it is proper to form a firm conclusion. Whether or not breaches of the consent order dated 31 July 1984 had been established, I find that the conduct of the minority over the opening of a joint interest-bearing bank account in the names of the respective parties solicitors was most unhelpful (para. 1.1). It seems to me that it was quite unreasonable on the part of the Wangs not to have allowed the account to be opened at the Chase Manhattan Bank as once had been agreed, and to insist upon a bank which had had to be rescued by the U.S.A. Federal authorities. Speaking for myself, I am unable to accept, the contention that the reservations of the minority were so absurd as to be brushed aside. If a bank account had been opened as agreed, one of the Petitioner' major worries would have been set at rest.

73. As regards paragraph 5 of the consent order, the Wangs clearly undertook to ascertain, from the accounts as they stood, whether their contributions towards the costs of the venture had been to the proportion 80:10:10, and if they had not, to make up the deficiency within 56 days. This paragraph was inserted on the understanding that there had been a deficiency. The Wangs appear to have totally ignored their obligations. Nor did they take their obligations under paragraph 6 of the consent order sufficiently seriously.

74. The attitude of Mr. & Mrs. Wang to the compliance with the spirit of the consent order, it seems to me, justifiably fuelled the Petitioners' fears, and does them little credit.

75. In my judgment, in view of the breakdown in the working out of the consent order, the Petitioners were fully justified in restoring the Summons for the appointment of a provisional liquidator. I entertain no doubt that the Petitioners themselves in no way contributed to the breakdown. I cannot accept the proposition that their only proper course was to seek to enforce tile consent order under the "liberty to apply" provision or otherwise. When they again appeared before the judge, they were entitled to a decision one way or another on their summons and I am not at all surprised that the judge declined the invitation to further adjourn the matter so that undertakings by the majority could be given. If I may say so, such a suggestion comes ill from the mouths of those who treated the consent order in such a cavalier fashion.

76. I am fully satisfied that the Petitioners have surmounted the first hurdle of showing"a good" prima facie case for a winding-up order.

77. To decide the next question (whether in all the circumstances it is right that a provisional liquidator be appointed) one has to start from the basis that it is a most serious and expensive step to make such an appointment where the companies are solvent, particularly where the skill and experience of those in control of the company are necessary for the venture to flourish. But if the Court concludes that the facts warrant the appointment of a provisional liquidator, such considerations cannot be allowed to prevail. The provisional liquidator and the special manager have one essential quality not possessed by the parties: independence from the controversy, and with it the ability to keep a fair balance between the interests of the majority and the minority.

78. In my judgment, the concession made by Mr. Millett assumes some importance. The learned judge stated the concession in this way in his judgment:

"Mr. Millett who appeared for the companies on the present applications concedes that if the evidence of the petitioners is accepted at the trial, a winding up order will be made and equally justifies grounds for fearing that the assets of the company are in jeopardy. He also concedes that the petitioners had produced prima facie evidence in June 1984 to support some of their allegations."

 

Before us, Mr. Millett courteously challenged the judge's recollection, although he frankly conceded that he had no note of the precise form of his concession. He told us that what he had intended to say was this: "If the evidence is accepted at the trial a winding up order would be made, and would equally justify fearing that the assets would be in jeopardy if a winding up order were not made." I do not wish to make too much of a concession abut which Counsel was clearly unhappy, but it seems to me that the second part of it does implicitly recognise that the assets would presently be in jeopardy if the Petitioners' allegations are, in the event, substantiated.

79. Be all that as it may, when one examines the nature of the Petitioners' allegations, it is clear that they are founded on the premise that Mr. & Mrs. Wang were acting dishonestly in enriching themselves at the expense of the minority. Put another way, the averment is that their fraudulent behaviour evidenced a lack of probity in the management of the affairs of the companies to the detriment of the Petitioners.

80. In these circumstances, in my view, once a good prima facie case has been made out, the appointment of a provisional liquidator, with appropriate powers, is essential to preserve the legitimate interests of the minority until the petitions are heard.

81. And so, by a different route, I reach the same conclusion as did the judge, and I would dismiss the appeal.

(1)    (1972) 1 All E.R. 1105 at 1110

(2)    in Re Five Lakes Investment Company Ltd. (unreported Co.W.U. 78 of 1983)