Re MEDIAVISION LIMITED

CWU No. 141 OF 1993

HEADNOTE

Company winding-up petition - Company ceased trading in manner intended - No case that substratum has gone - Case fit for trial that company is being run in a manner oppressive to part of the shareholders.

IN THE SUPREME COURT OF HONG KONG

COMPANIES (WINDING UP)

NO. CWU 141 OF 1993

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D E C I S I O N

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1. These are two applications. They arise in the matter of a petition by Mr. Alexander Zilo. Mr. Zilo's petition is for winding-up of the company, Mediavision Limited, on the grounds that is just and equitable under s.177(1)(f) of the Companies Ordinance and for relief under s.168A of the Companies Ordinance on the grounds that the affairs of the company are being conducted in a manner unfairly prejudicial to the interests of some part of the members including, of course, the Petitioner, Mr. Zilo, himself.

2. The first application is an application to strike out the petition which is made by two of the shareholders, Grandom Ever Spring Ltd. and Cineplex Limited, on the grounds primarily that it discloses no reasonable grounds for relief; the usual grounds that the petition is frivolous and vexatious and is an abuse of the process of the Court are really thrown in for good measure.

3. There is also an application to amend the petition which is resisted on the grounds that the amendments are useless and do not cure the defects complained of.

4. Briefly, the company was formed as a shelf company in May 1983, but it was not until a shareholder's agreement on 31st August 1987 that the company was resurrected from being a shelf company and was acquired in effect by the parties to the agreement and put into operation.

5. The Petitioner, Mr. Zilo, has at all times been a shareholder holding 20% of the company and he has at all times been a director. The other shareholders are at present largely British Virgin Island Companies, although it is very difficult to say exactly who is behind those companies. The Petitioner says that it is probably in effect the same people who were always behind the companies and the Petitioner says that one way or another they all link up with the group of companies, known as the Dransfield Group which is, of course, a public company in Hong Kong. That is disputed in the evidence but I cannot take the matter any further today than that.

6. The history of the company in so far as it is relevant for this matter is really set out in the various paragraphs which are numbered 7 in the draft amended petition. What lay behind the shareholder's agreement, to which I have referred, in the early history of the company was that Mr. Zilo and in the early stages Mr. Homer who dropped out before the shareholder's agreement was signed, had the idea that a film and video production and post-production company would be a viable operation in Hong Kong. They had the expertise but they did not have the finance to run it. They therefore enlisted the help of a firm of accountants in which Mr. Yao was the leading light.

7. Perhaps one can briefly say this, Mr. Yao appears to have been an assiduous accountant and he watched very carefully the balance sheets and the income and expenditure and so forth which was perhaps not the same way in which more artistically inclined people would look at the operations of a film and video production company. They would be looking more to expansion of future business and artistic considerations and so on and so forth.

8. It is said that Mr. Yao initially wanted the company to purchase premises in Tai Po. That seemed bad enough to Mr. Homer and that was apparently the cause of Mr. Homer dropping out of the venture. However, the Tai Po premises fell through and eventually premises were purchased in Fanling. They were not even in a very accessible part of Fanling, they seem to have been located on a back road which is difficult to get to and so that in itself has caused difficulty.

9. The Fanling premises are perhaps best described in the report by the surveyors which has been put in as Exh. 11 to an affidavit of Mr. Warren Ma and really it seems to be this: They are large premises; they are some 30,000 sq. ft. in total. They are not all on one floor, but the building does not have a lift. From the look of the photographs which were also exhibited to Mr. Ma's affidavit they are fitted out quite pleasantly really as a film production establishment.

10. The surveyor's report makes it quite clear that the only use which any other person who would take on these premises could find would probably be as a warehouse. They are not really suitable for a warehouse, first because they are inaccessible, second because they do not have a lift. They put the probable rent for this warehouse at about $1.46 per sq. foot which may or may not, and I have not been informed about this, be a cheap or low cost warehousing due to the undesirable location and so forth.

11. The other assets of the company are the electrical, electronic and video equipment which were purchased. The cost of that at the time it was purchased, which was sometime ago now, was I am told in the exhibits over $8 million. In fact it was about 4 times the amount that was paid for the premises which was just over $2 million.

12. Over the course of time, one way or another the Petitioner has put a substantial amount of money into the company. On a monthly basis sums were being deducted from his salary which was otherwise paid to him for working in the company, sums of approximately $10,000, at times, to the extent that his interest in the company, either by way of loans or direct investment, is significant.

13. However, things did not work out very well and some 2 or 3 years ago the Petitioner left the company. He ceased to be an active executive director, although he remains a director of company. He went to work for another public group in Hong Kong. Whilst there, he was able to arrange for some of the assets of Mediavision Ltd. to be used and a substantial income did come as a result of that use although it was not in relation to the company itself undertaking business, as opposed to lending out its premises and its equipment.

14. He says in para. 7N of the petition that at the time of his resignation from the company, which I think was October 1990, the Petitioner believed and still believes that the company could have continued with its business as before. He left behind a general manager who unfortunately has now also left the company. What has happened since then is that, in effect, the company has stopped all its operations. The only thing that happens there now is that the Dransfield Group is using about a third of the premises as a warehouse. As a result, therefore, persons who the Petitioner says have a majority interest in the company are getting low cost, albeit inconvenient, warehousing.

15. The Petitioner, on the other hand, is getting nothing. The company is not in operation; it has got substantial assets in the way of a building and its equipment and these I view really in the form of wasting assets. The lease is slowly ebbing away no doubt and the equipment certainly is not improving by being stored and not used and it is not getting more up to date by the day. Whether or not the equipment is getting seriously out of date, I know not.

16. The first part of the petition, as I have said, is that a winding-up is sought on the grounds that it is just and equitable under s.177(1)(f) on the basis that the substratum has gone. The cases on that to which my attention has been drawn are strong in that regard and I do not think that I need refer to any more than the decision in Galbraith v. Merito Shipping Co. [1947] S.C.446. On appeal the Lord Justice-Clerk Moncrieff said at p.456 that:

"so long as this does not evidence a final and conclusive abandonment of the business, and so long moreover as the resources of the company as regards management and money have been conserved so as to admit of its re-entry on its interrupted activities when this shall be judged expedient."

the circumstances for winding-up on the basis that the substratum had gone did not exist.

17. Now, I read that in conjunction as I have been asked to with Re Kitson & Co. Ltd. [1946] 1 All E.R. 435, which has been referred to in Hong Kong in particular in Re Chinese Estates Ltd. [1976] HKLR 369, as indicating this: that although the directors of the company may have decided to cease business or a particular line of business, that decision by the current management of the company could be reversed at any time and one cannot say that the substratum has gone simply because the present management are not willing to undertake a particular line of business. That management may change, that management could indeed change its own mind.

18. It is a strong remedy to strike out a petition. It is a strong remedy because the Court drives a party from the Court without giving it a hearing on the merits. My attention has been drawn to the obiter of Mr. Justice O'Connor in Re San Imperial Corporation Limited [1980] HKLR 649. Mr. Justice O'Connor said that once the Court reached the conclusion that there is no case, then it really should follow that and not be too timid to strike a case out. On that occasion, of course, he did not feel those circumstances had arisen.

19. I regret to say that unfortunately however much sympathy I have for the Petitioner in this case, as regards this aspect of the case, I have reached the conclusion that there is no case on the facts put in the petition that the substratum has gone and that there is no case to wind-up the company on the grounds that it is just and equitable.

20. The kernel of the Petitioner's case is probably expressed best in para. 8 of the draft amended petition, where it is said "the company has not traded since in or about the 3rd quarter of 1991, accordingly the purposes for which the company was formed have now been concluded". If I thought that it was a mere verbal lapse then I would not place reliance on that and if it was merely a question of tidying up the wording and crossing out the word "accordingly" or crossing out the words before "accordingly", I would not consider that this was a case for striking out. But I do not think that it is a mere verbal lapse. I think it is the way the matter is put, that because the company has not traded, it is said that the purposes for which the company was formed have now concluded. The brunt of the allegation is that the company, through the choice of the directors, is now being kept in such a condition that it is not operating. But, as I pointed out, all the assets are still there, apart, of course, from the expertise of the payroll staff in so far as they can broadly be referred to as assets. But, as is pointed out in Mr. Ma's affidavit, staff could, if the company so chose, be hired and it seems to me that, if the present management of the company chose, the company could be run broadly as envisaged in the shareholder's agreement with hands on management. No allegation is made that it cannot be so run.

21. Mr. Yu on behalf of the petitioner says that facts may emerge that show that it is now not possible to run this company for the purposes intended, but I do not consider that a petition can be kept alive for speculative purposes on the basis that something may turn up.

22. That, of course, is not the end of the matter, because there is the application under s.168A that the affairs of the company are being conducted in a manner unfairly prejudicial to the interests of some part of the members including the Petitioner.

23. As I have indicated there was in August of 1987, a shareholder's agreement. That shareholder's agreement provides in clause 1 that the Syndicate, who will be the other members of the company other than the Petitioner, shall procure the acquisition of the company, which was going to be a million dollar company. Then it goes on, in the shareholder's agreement, to describe how the Petitioner shall have a 1/5th share of that and put in, in effect, 1/5th of the moneys that required to establish the company.

24. In para. 8 it describes how in broad terms the company should be run, the quorum of the meetings shall be three persons, meetings are to be held and in clause 8.3 that matters at meetings of the Board shall be decided by simple majority of voting directors present, save for those matters listed in Schedule 1, in respect of which the positive votes of at least one director appointed by each party shall be required. So that in effect requires Mr. Zilo's agreement, to those matters set out in Schedule 1. They include, as has been pointed out to me, changes in the nature of the business of any company in the group and there is only one and of course that must by definition mean changes in the nature of the business of Mediavision.

25. This company has in effect had its operations stopped. The Petitioner is not happy with that. Whilst I consider one has to be careful in the way shareholder's agreements are to be read, because they cannot supplement memorandum and articles, one has to bear in mind how this company came into existence and the purposes for which it did. I have to ask myself, on the facts presented in the petition, can it be said that the company is being run in a manner which is prejudicial to some part of the shareholders. I consider that on the basis that the overwhelming majority of the shareholders are acting in concert, or may be said to be acting in concert, in a manner which effectively not only stops the company trading but also stops it acting in accordance with the fundamental shareholders agreement, then it is clearly arguable that it is being run in a prejudicial manner to the Petitioner.

26. Mr. Yu on behalf of what I shall term the Opposing Contributories says that it is not prejudicial to part of the shareholders because in effect if it is prejudicial, it is the same prejudice to all. I do not think that that is necessarily so. In contrast to the other shareholders Mr. Zilo the Petitioner is an individual. That in itself may be significant. What may be prejudicial to an individual may not be prejudicial to a corporation. If a company is set up to run as a film production company and instead it is run in a way that the overwhelming majority are getting the benefit of low cost warehousing and the minority is getting nothing despite a substantial investment, then I am not prepared to say there is nothing in the Petitioner's case that the company is being run in a manner prejudicial to him.

27. Carrying on business is what a company is all about. Stopping a company from doing business and doing the business for which it was brought into existence, creates circumstances which seem to me to require investigation. If the majority impose their will whereby the only use for the wasting assets of the company is for the use of the majority alone, but not the intended use of the assets of the company, they may not be guilty of dereliction of duty or misfeasance, but I am not prepared to say to a litigant that he cannot seek to show his entitlement to relief from the Court on the basis that the company is being run in a manner prejudicial to him.

28. As I said what is sauce for an individual goose is not necessarily sauce for a corporate gander. Put another way if the majority choose to close down a company's operations and keep them closed, tieing up the assets, I cannot see why it should be said that a minority cannot say that way of carrying on is hurting him far more than it is hurting the others and that if they want to carry on in that fashion rather than to carry on business, they should buy him out.

29. In those circumstances, therefore, I feel constrained to strike out the prayer seeking winding-up of a company but not in respect of the s.168A application.