CHOW YICK TING SUSANNA v. HUNG WAN TAXI CO LTD AND ANOTHER

HCCW 576/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 576 OF 2004

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J U D G M E N T

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1.  This is an application by the 2^nd Respondent to strike out the petition in these proceedings on the grounds that it is frivolous and vexatious or otherwise an abuse of the process of the Court.

2.  The Petitioner is the holder of 30% of the issued shares in the Company, while the 2^nd Respondent holds the remaining 70% .  The Petitioner and the 2^nd Respondent are also wife and husband.  They were married in December 1998.  The Company was incorporated on 3 September 1997.  According to the Petitioner, she and the 2^nd Respondent were courting at the time, and the Company was founded on the basis of the personal relationship between them.  The Petitioner says that since the Company’s incorporation until about October 2003, she had been responsible for maintaining the paperwork and accounts of the Company while the 2^nd Respondent dealt with the Company’s external business dealings, and that the Company was operated on the basis of a relationship of mutual trust and confidence between them.

3.  It is common ground that the Company is a property holding company, owning three properties, all of which appear to be rented out.  The Petitioner says that she contributed to the financing of the down payments which the Company made in respect of such properties.

4.  The 2^nd Respondent denies that the Petitioner is beneficially entitled to the 30% shareholding standing in her name.  He says that he provided the subscription monies for such shares and that she holds that shareholding on trust for him.  He also disagrees with the Petitioner’s allegation that she contributed to the purchase price of the properties owned by the Company.

5.  Unfortunately, the personal relationship of the Petitioner and the 2^nd Respondent has deteriorated, and the Petitioner filed a petition for divorce on 13 November 2003.  According to the petition in these proceedings, about a month before that, in mid-October 2003, the 2^nd Respondent came to the Company’s office and told the Petitioner to leave, that she should not come back to the office, and that henceforth her duties would be carried out by someone else.

6.  On 20 March 2004, the 2^nd Respondent’s solicitors wrote to the Petitioner demanding that she transfer her shareholding in the Company to the 2^nd Respondent, alleging that she held such shares on trust for him.  On 26 March 2004 and 23 April 2004, the 2^nd Respondent sought the convening of an Extraordinary General Meeting of the Company, at which two resolutions would be proposed.  The first resolution was for the appointment of an additional director of the Company, and the second was to provide for the 2^nd Respondent to have sole power to deal with all of the Company’s affairs.

7.  The Petitioner says that these events constitute conduct by the 2^nd Respondent that is unfairly prejudicial to her interests, and have destroyed the trust and confidence between herself and the 2^nd Respondent, so that it would be just and equitable that the Company should be wound up.  As an alternative to a winding up order, an order is sought for the appointment of a receiver to manage the Company’s business until the conclusion of the matrimonial proceedings between the Petitioner and the 2^nd Respondent.

8.  The 2^nd Respondent says that after the presentation of the petition, he realised that as the Company was only a property holding company, and having regard to its financial position, there was little point in continuing to maintain the Company in existence.  On 17 August 2004, his solicitors wrote to those acting for the Petitioner, stating that the Company was in fact insolvent because the value of the properties it owned (which were said on the basis of a valuation obtained by the 2^nd Respondent to be HK$17.3 million) was insufficient to cover all its liabilities, consisting of the mortgage liabilities incurred to finance the purchase of the properties (of approximately HK$9.3 million) and unsecured debts owed to the Petitioner, 2^nd Respondent and a related company (said in a letter dated 20 August 2004 to total about HK$11 million, with slightly over HK$7 million owing to the 2^nd Respondent, and just over HK$2 million owing to each of the Petitioner and the related company).  It was also pointed out that the surplus of rent over mortgage payments was insufficient to cover the expenses of operating the Company.

9.  On 24 August 2004, the Petitioner’s solicitors responded that the Petitioner would not object to a sale of the properties owned by the Company at market price (which they said was higher, around HK$20 million), and suggested sale by tender or auction.  They also expressed the view that the net sale proceeds, following repayment of outstanding mortgage loans, should be paid into court in connection with the divorce proceedings pending resolution of the Petitioner’s claim for ancillary relief, on the basis that the amounts due to the Petitioner, 2^nd Respondent and the related company should be regarded as family assets.

10.  On 1 September 2004, the solicitors for the 2^nd Respondent wrote to the Petitioner’s solicitors suggesting that since the Petitioner was agreeable to a sale of the properties, the winding up petition should be dismissed, and that to press on with it would amount to an abuse of process.  They said that as the Petitioner was still a director of the Company, she would be involved in any sale of its properties.  They disagreed with the suggestion that the net sale proceeds should be regarded as family assets and rejected the proposal that these should be paid into court in connection with the divorce proceedings.

11.  Thereafter, on 18 September 2004, the 2^nd Respondent’s solicitors wrote again, indicating that an offer had been received for the purchase of two of the properties (valued at HK$13.7 millon) for HK$12.3 million, subject to the existing tenancies and subject to any order that might be registered at the Land Registry by the Incorporated Owners of the building in which such properties were located.  This latter condition was included because there were ongoing proceedings in the Lands Tribunal, brought by the Incorporated Owners of the building against the Company and its tenant, in relation to certain structures which had been erected by the tenant of the property.  They enquired whether the Petitioner was agreeable to a sale on these terms.

12.  At about this time, the Petitioner received demands by the Company’s bankers asking her (as a guarantor of the Company’s debts to them) to repay the Company’s liabilities to them.  It appears that the Company had failed to make the regular instalment payments that it should have done because its bankers froze its bank accounts following the presentation of the petition, in consequence of which rental payments could not be paid into such accounts, and payments due under the mortgages of the properties could not be made.  Following enquiries on behalf of the Petitioner, on 21 September 2004, the 2^nd Respondent’s solicitors wrote to the Petitioner’s solicitors to confirm that the tenants had not defaulted in paying rent, and that rent was currently being paid to them and held by them on trust for the Company as its bank accounts could not be credited.

13.  On 15 October 2004, the Petitioner’s solicitors wrote to those acting for the 2^nd Respondent to say that the Petitioner had received an offer of HK$13.38 million for the two properties which were the subject of the earlier offer received by the 2^nd Respondent.  This led to an exchange of correspondence between the parties.

14.  On 19 October 2004, the 2^nd Respondent’s solicitors indicated that the offer would be acceptable providing that the sale was subject not just to the existing tenancies, but also subject to any “Building Orders, other court orders, lis pendens, charging order and to pay all disbursement, damages and costs arising out of the present legal proceedings affecting the subject premium (sic)”.  As appears from a later part of this letter, the reference to “premium” should have been a reference to the “properties”.  They said that the purchaser who had approached the 2^nd Respondent was willing to accept such a term, which they considered to be advantageous to the Company, since they were “given to understand that great amount of legal costs had been and would be incurred”.  They also sought agreement that the net sale proceeds should be paid into the Company’s account.

15.  On 31 October 2004, the Petitioner’s solicitors responded that the offer received by their client had been increased to HK$13.5 million, and queried how a purchaser could be expected to accept a term such as that proposed in relation to the existing litigation affecting the property when there was no indication of the likely cost to an intending purchaser of agreeing to such a term.  They also suggested (again) that the net sale proceeds should be paid into court, on this occasion stating that there appeared to have been other jointly owned companies the assets of which the 2^nd Respondent had dissipated.

16.  On 1 November 2004, the 2^nd Respondent’s solicitors wrote insisting on such a term being included, expressing doubt as to whether the Petitioner was genuinely seeking to dispose of the properties, insisting on net sale proceeds being paid to the Company, and threatening to go ahead with a sale to the 2^nd Respondent’s buyer in the absence of a firm offer with payment of a deposit from the Petitioner’s buyer.  This led to the Petitioner’s solicitors threatening (by a letter dated 5 November 2004) to apply for an injunction to restrain the 2^nd Respondent from seeking to dispose of the properties on behalf of the Company.

17.  On 24 November 2004, those acting for the 2^nd Respondent replied, stating that they considered their proposed term concerning the existing litigation to be a sensible one, as it would enable the Company to cease to have to deal with the existing proceedings once the properties were sold.  In this letter, they also expressed the view that there was no basis for any concern that the 2^nd Respondent could or would seek to sell the properties unilaterally, or to misuse the Company’s funds (which they said was not possible given the existence of the Petition).

18.  On 9 December 2004, the Petitioner’s solicitors sought information and documents relating to the Lands Tribunal proceedings and information as to the costs incurred in relation to them so that this could be passed on to their prospective purchaser and estate agents.  They were told by the 2^nd Respondent’s solicitors to seek such information from the solicitors acting for the Company in those proceedings.  Despite doing so by a letter dated 14 December 2004, no response was received until 23 February 2005, when those solicitors indicated that the Company’s costs to date (which it had by then become clear were not intended to be borne by any purchaser) were around HK$200,000, and expressed the view that the Company had good prospects of success in the proceedings, either against the Incorporated Owners, or failing that, by way of indemnity from the tenant.  No information was provided as to the likely future costs of the proceedings, or as to the likely costs exposure in the event that the Company was unsuccessful.

19.  In the result, nothing has come of the various offers, and all of them have lapsed.

20.  Against this background, Mr Chain, appearing for the 2^nd Respondent, submitted that whatever may have been the position at the time when the petition was presented, in the light of the fact that both the Petitioner and the 2^nd Respondent are presently of the view that the Company’s properties should be disposed of, the petition is now an abuse of process.

21.  This submission was based on the following arguments:-

(1)	Having regard to the fact that all the issues that arise in these proceedings, whether financial or otherwise, can and should be tried in the Family Court as part of the divorce proceedings between the Petitioner and the 2nd Respondent, the petition serves no useful purpose and is therefore vexatious and an abuse of process; and/or
(2)	The petition is an abuse of process because it was launched or continued not with the genuine object of obtaining the relief claimed, but with the object of exerting pressure to achieve a collateral purpose.  In the 2nd Respondent’s affirmations in support of this application, it was suggested that the purpose of these proceedings was to exert pressure on him to settle the Petitioner’s claim for ancillary relief in the divorce proceedings.

22.  The court’s power to strike out a petition for winding up is one that should be exercised with caution, which should only be used in plain and obvious cases.  For the reasons which I explain below, I do not think that this is such a case.

23.  I consider first the argument that these proceedings can serve no useful purpose, on the basis that all issues, financial or otherwise, arising between the Petitioner and the 2^nd Respondent can be dealt with in the matrimonial proceedings.  It is undoubtedly the case that the Family Court has a wide discretion to make orders as to the financial arrangements between the Petitioner and the 2^nd Respondent so as to achieve a fair division of the family’s wealth between them, having regard to a range of factors.  As part of that exercise, that court may take into account the parties’ respective interests in the Company, and might consider it desirable to determine whether the Petitioner’s 30% shareholding in the Company is held by her beneficially or on trust for the 2^nd Respondent.  That said, however, it does not seem to me that it can be said that the petition in this case can be said to so plainly and obviously serve no useful purpose that it should be struck out as being an abuse of the court’s process.

24.  This argument was based on two English authorities - Re a Company (No. 003028 of 1987) [1988] BCLC 282 and Jaber v Science and Information Technology Ltd [1992] BCLC 764.

25.  In both of those cases, the position was somewhat unusual in that the petitioner in each case was also the plaintiff in other proceedings which were founded on essentially the same factual basis, and which raised issues the determination of which would be conclusive, one way or another, of the outcome of the petition proceedings.  In such circumstances, the petition for winding up would add nothing to the other actions, and so was regarded by the court in each case as vexatious and an abuse of the court’s process.

26.  In Re a Company (supra), the position was that the petitioner had commenced proceedings against a company of which he had been a director alleging that there had been a repudiatory breach of his employment contract arising from his eviction from the company’s office and termination of his employment with the company.  In that action, he claimed repayment of a loan which he had made to the company (as a loan, or alternatively as damages for breach of contract).  Having commenced the action, he then issued a winding up petition on the just and equitable ground, relying on the fact that he was a creditor of the company, and also on the allegation that the company was akin to a partnership, and should be wound up in the light of the termination of his employment.  Scott J (as he then was) came to the conclusion that all of the issues arising on the winding up petition would be resolved by the earlier action, since the circumstances of his eviction and dismissal were central to both the action and the petition.  If the plaintiff/petitioner’s case were accepted, there would have been a wrongful dismissal, and he would be entitled to repayment of the sums lent, either on the basis that the loan became repayable, or otherwise as damages for wrongful termination of his employment.  If the judgment for that amount were satisfied, he would have no remaining complaint that could justify the winding up of the company, so that the petition would have to be dismissed.  If the judgment went unsatisfied, he would be entitled to wind up the company ex debito justitiae, and the winding up petition as it then stood (being based as it was on unfairly prejudicial conduct) would be pointless.  On the other hand, if the plaintiff/petitioner’s case of wrongful termination of employment were rejected, that would have to be on the basis that his account of the circumstances of his dismissal were rejected, and it would follow, in the circumstances of that case, that his dismissal was due to his own unreasonable conduct.  In that situation, the petition would be bound to fail, since he would not be entitled to present a winding up petition on the just and equitable ground, being himself the cause of the breakdown in the relationship between himself and his fellow shareholder.

27.  In the Jaber case, the action and petition were commenced at the same time, and based on the same factual allegations.  The object of the petition was essentially to serve as a vehicle for the obtaining of interlocutory relief (which the court considered could just as well have been sought in the action).  As the factual allegations were the same, the action and the petition would have been ordered to have been tried together, in which case, the petition would have no purpose, since there would be no point in seeking interlocutory relief at the trial of the action.  In those circumstances, the court considered that there was no independent purpose to be served by the petition, which it struck out.

28.  Here, however, it does not seem to me that the allegations in the petition, particularly those concerning the exclusion of the petitioner from the Company and the breakdown in the relationship between herself and the 2^nd Respondent as directors and shareholders in the Company would necessarily arise for decision in the divorce proceedings.  It is quite possible that the Family Court would deal with the question of ancillary relief without considering these matters.

29.  Moreover, as Chung J pointed out in Re Carryman Industrial Ltd [2000] 3 HKLRD 295, the nature of the exercise which the court dealing with the matrimonial proceedings is concerned with is quite different from that which a court hearing the present petition would be concerned with.  The Family Court’s objective is to make financial provision as between the parties to the divorce, in the course of which it may order the transfer of property as between them.  In doing so, it may, but need not necessarily, determine the question of beneficial ownership of the shareholding registered in the Petitioner’s name.

30.  Further, it seems to me that if one considers the position when the petition was presented, it would be difficult to suggest that it could serve no useful purpose.  At that point, assuming (as I think one should for present purposes) the Petitioner’s case as to beneficial ownership of her shareholding and the nature of her role in the Company to be well founded, the actions of the 2^nd Respondent would have had the effect of excluding her from management of the Company, and leaving her in a situation in which she would be unable to participate in its management, or exercise any oversight in relation to the manner in which the 2^nd Respondent might deal with the Company’s affairs.  Having regard to the breakdown in their relationship, this would be a situation which the Petitioner would understandably view with considerable concern.  Such concerns would have been exacerbated by the attempts in March and April 2004 to obtain a transfer of her shareholding to the 2^nd Respondent, and to secure the passing of resolutions which would have given the 2^nd Respondent apparently unfettered control over the affairs of the Company.  In those circumstances, it seems to me that it could not be said that the petition could serve no useful purpose, since it would, if successful, result in the bringing to an end of the apparently unfair and prejudicial behaviour complained of, and would enable the parties’ interests in the Company to be realised.

31.  I do not think that the fact that both parties appear to accept that there is no further purpose in maintaining the Company in existence changes this.  It is clear from the abortive attempts to sell the property that neither is content to leave the disposition of the Company’s assets in the hands of the other, and that it must be very doubtful whether they will be able to cooperate in achieving this end.

32.  So far as the offers which have been received are concerned, I reject the suggestion that the Petitioner was unreasonable in her approach to the term which the 2^nd Respondent sought to impose on any sale, namely that the buyer should bear the risk of the proceedings in which the Company is currently involved, having regard to the fact that the Company’s solicitors have been unable to provide any indication of the likely exposure of a buyer (in financial terms) of accepting such a condition.  Absent any indication of the potential costs involved, even in approximate terms, I do not see how a buyer could be expected to put forward an offer at a price which took into account the risk to it in agreeing to such a term.  Nor would it be possible to make any meaningful comparison of the offers obtained by the parties, since one could not know whether or to what extent the differential of about HK$1 million between the rival offers properly reflected the effect of such a term.

33.  If the petition were to be dismissed, the position would simply be that the Company would continue to remain in a state of deadlock, and it is difficult to see that much progress would be made in disposing of its assets and winding up its affairs.  In those circumstances, something would still need to be done to enable this to happen, and the most obvious way of doing so would seem to be for the Company to be put into liquidation.

34.  Even assuming that the Company were able to dispose of its assets, the question of how the net sale proceeds should be dealt with would still have to be addressed.  I do not regard the 2^nd Respondent’s suggestion that there would be no cause for disquiet on the part of the Petitioner if these were paid into the Company’s account to be justified.  If the petition were dismissed, the Company would be free to deal with its assets, including the funds in its bank account without the constraint of having to apply for and obtain a validation order before doing so.  There is no evidence as to the manner in which its bank account is operated, and it is therefore possible that it could be operated without the cooperation of the Petitioner.

35.  Mr Chain suggested that the Petitioner had accepted that there was no evidence of a risk that the 2^nd Respondent would misuse the Company’s assets, by reference to paragraph 21 of the Petitioners [3^rd] affirmation.  However, it seems to me that this ignores the fact that the statement in that paragraph was made in the particular context of the Petitioner’s concern, expressed in that affirmation, as to the whereabouts of the rental payments which the Company should have been receiving.  Moreover, in a later affirmation of the Petitioner, concerns are expressed as to the manner in which the 2^nd Respondent has dealt with the assets and business of two related companies, a matter which was first raised in the Petitioner’s solicitor’s letter of 5 November 2004, some time after her 3^rd affirmation was made.  I therefore do not think that it is possible to dismiss the Petitioner’s concerns as having no evidential foundation.  Nor do I think that it is sufficient to say that there is no evidence of any cause for concern in relation to this Company, as opposed to any others.  If there is, as there seems to be, a basis for concern arising out of the way in which the 2^nd Respondent has dealt with the affairs of other companies in which the parties are interested, this would equally form a basis for concern as to the way in which he might deal with the Company’s affairs.

36.  Thus, it seems to me that the petition cannot be said to serve no useful purpose, even assuming that the parties are agreeable to the Company disposing of its properties.  If anything, the making of a winding up order would seem more likely to achieve this objective.  It is true that the interposition of a liquidator would have the effect of adding to the expenses of doing so, with the result that the parties might receive less at the end of the day, whether by way of repayment of their unsecured loans to the Company or by way of distribution of any surplus assets to them in their capacity of shareholders, but this seems an unavoidable price to pay in a situation where the parties appear unable to act together.

37.  Mr Chain also suggested that the 2^nd Respondent was not in a position to agree to a winding up, since this might result in an issue estoppel arising in respect of the Petitioner’s claim to be entitled to a beneficial interest in the 30% shareholding registered in her name, so as to prejudice the 2^nd Respondent in relation to the matrimonial proceedings.  With respect, I do not think that this follows.  I can see no reason why the 2^nd Respondent’s position could not be clearly stated, so that if he considered that the sensible course would be to permit the Company to go into liquidation, this could happen without prejudice to his position as to the beneficial ownership of its shares.

38.  For these reasons, I consider that the petition may well serve a useful purpose, notwithstanding the existence of the divorce proceedings (and certainly would not be prepared to accept that it does not at least arguably do so), and would not be prepared to strike it out on this basis.

39.  As to the other basis for striking out, the Petitioner has in her affirmations denied that she had any ulterior purpose in bringing these proceedings.  Having regard to my conclusion that the winding up proceedings could serve some useful purpose in dealing with the situation that the Company now finds itself in, I can see no reason to reject this evidence.  I do not think that the suggestion by the Petitioner’s solicitors that net sale proceeds from the sale of the Company’s properties should be treated as family assets and paid into the Family Court requires me to conclude that these proceedings were brought with the alleged ulterior purpose in mind.  Once the properties had been sold, it would have been necessary to deal with the funds in the Company’s possession, as there was no further purpose to be served by the Company’s continued existence.  This would involve repayment of the unsecured loans and distribution of any surplus thereafter.  Since all such payments would be made to the Petitioner, 2^nd Respondent and another company in which they were both interested, it seems to me understandable that they should be viewed as family assets, particularly in the light of the fact that such funds were generated by the property investments of the Company, which the Petitioner says she and the 2^nd Respondent owned between them, and which she says was funded by both of them.  Nor, to my mind, does the nature of the alternative relief sought in these proceedings require such a conclusion to be drawn.

40.  Further, given that the 2^nd Respondent appears to accept that there is no particular purpose in the Company’s continued existence, it is difficult to see why the continuation of these proceedings should result in his being pressurised to reach more favourable terms than he would otherwise have done in the matrimonial proceedings.

41.  I would not, therefore, be prepared to accede to the striking out application on this ground either.

42.  It follows that the 2^nd Respondent’s application fails, and I therefore dismiss it, with a costs order nisi that the 2^nd Respondent is to pay the Petitioner’s costs of this application, to be taxed on the party and party basis if not agreed.