CHEN LEE YUAN HUA v. HSIEH YANNIK AND OTHERS

HCCW 436/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO 436 OF 2012

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J U D G M E N T

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Background

1.  This is a hearing for two summonses:  (1) a summons issued by the respondents for the striking out of certain paragraphs and prayers in the Amended Petition; and (2) a summons issued by the petitioner to seek re‑amendments to the Amended Petition (prompted by the striking out application).

2.  The 4^th respondent, (“the Company”) was incorporated in 1992.  At all material times, it engaged and still engages in the business of, inter alia, trading and dealership of cameras and accessories.  The Company now carries on its business at a property it owns in Tsimshatsui.  The Company was co‑founded by 4 persons: (i) the petitioner; (ii) her husband (“CSL”); (iii) Mr Hsieh Chih Wu (“HCW”) and Mr Lan Chih Kuang (“LCK”).  At the inception, the shareholders/directors were as follows:

	No. of shares	%	Position
petitioner	600,000	20	-
CSL	600,000	20	director
HCW	1,500,000	50	director
LCK	300,000	10	director

3.  The 1^st respondent is a son of HCW.  In 1992 he began working in the Company after his overseas studies.  In 1995, HCW transferred 300,000 of his shares in the Company to the 1^st respondent who also became the 4^th director.

4.  In 1998, CSL’s health condition worsen and he transferred 450,000 of his shares in the Company to LCK. In the same year, HCW became engaged in certain Taiwan litigation and was subject to a restraining order preventing him from leaving Taiwan.  In the circumstances, HCW transferred his remaining 1,200,000 shares to the 2^nd respondent who is his other son.  The 2^nd respondent was appointed as the 5^th director, HCW remaining as one of the directors.  According to the petitioner’s case[1], HCW was “the de facto holder and owner of 50 % shareholdings in the Company”.

5.  CSL died in 1998 and the petitioner took up CSL’s shares in the Company.  She was also appointed as a director in place of CSL.  In 2000, the petitioner transferred 300,000 shares of the Company to the 3^rd respondent who was then an employee of the Company.  The 3^rd respondent became the 6^th director.

6.  In 2002, LCK decided to leave the Company.  The remaining shareholders resolved to distribute the shares held by LCK and as a result of the re‑organization, the shareholding/directorship became as follows:

	No. of shares	%	Position
petitioner	600,000	20	director
HCW	-	-	director
1st respondent	750,000	25	director
2nd respondent	1,200,000	40	director
3rd respondent	450,000	15	director

7.  In 2004, the Taiwan litigation was resolved and HCW could return to Hong Kong.  Disputes however arose between HCW and his two sons (1^st and 2^nd respondents) in relation to the ownership of those shares that HCW transferred to them earlier.  According to the Amended Petition, since 2006, the 1^st to 3^rd respondents have excluded the petitioner and HCW from the management of the Company.

8.  On 14 November 2006, HCW sought to convene a board meeting to discuss on the Company’s accounts for the period between August 2005 and October 2006 and its financial position.  The 1^st to 3^rd respondents refused to attend the meeting resulting in no accounts or financial information being provided to the petitioner and HCW.  By a writ of summons dated 16 December 2006, HCW commenced an action in Hong Kong against the 1^st and 2^nd respondents for the recovery of the shares he transferred to them.  On 1 April 2007, HCW was removed from the office of a director in the Company.

9.  Since the removal of HCW, the 1^st to 3^rd respondents dominated the board of directors and made all management decisions without consulting the petitioner despite the fact that she remained as one of the directors.  According to the petitioner, the Company was under the control of the 3^rd respondent (with the endorsement of the 1^st and 2^nd respondents).

10.  It is the petitioner’s case that the respondents instructed accounting staff of the Company to obstruct her intended inspection of books and account of the Company.  On 20 August 2012, the petitioner managed to make some inspection of the Company’s books and accounts and make some copies whilst the respondents were not in the office. She then discovered certain irregularities (which I would return to in due course).  She also discovered that despite having huge accumulated profits, the respondents withheld declaration of dividends without any justification[2].

11.  The petitioner considered that the affairs of the Company have been conducted in a manner unfairly prejudicial to her.  She issued the Petition on 26 November 2012 which was solely based on section 168A of the Companies Ordinance.  The Petition was amended slightly on 4 March 2013.  Although the Petition and the Amended Petition were solely grounded upon section 168A, they contained an averment that “it is just and equitable to have the Company wound up”. The Amended Petition (which is the subject matter of the striking out application) seeks the following reliefs:

(1) a buy‑out order against 1^st, 2^nd and/or 3^rd respondents;

(2) an inquiry as to the amount of private expenses of the respondents being charged in the Company account and the respondents repay to the Company such sums with interest;

(3) an account of profits made by the 3^rd respondent as a result of her breach of fiduciary duties as a director; and

(4) alternatively, a winding up order.

12.  The 2^nd and 3^rd prayers relate to the “irregularities” discovered by the petitioner.  They were described in the following paragraphs of the Amended Petition:

“32. During the inspection, the petitioner discovered that certain expense items adjustments had been made to internal accounts thereby reducing the profits reported to the tax authority and hence tax liability. The adjusted profits were used for the purpose of defraying private expenses of the directors of the Company which the petitioner had had no knowledge about such arrangements and did not receive any benefit therefrom.

33. The accounting documents show that the accumulated adjustments in a total sum of HK$4,236,856.61 had been made for reducing the profits of the Company as at 31 March 2011.

34. Besides, the accounting records show that the average gross profits and net profits of the Company was around 15 % and 5 % respectively. However, the Petitioner found that the 3^rd respondent allowed unusual low sales prices (which were about 5 % less than normal sales prices) to a particular customer known as 佛山市偉豐貿易商行 with credit payment terms of 3‑4 months.

35. Such transaction arrangements, in effect, brought no net profits to the Company but financing the business of that customer which clearly shows that the 3^rd respondent has been in breach of fiduciary duties as a director without acting in the best interest of the Company by allowing such low sales prices to that particular customer佛山市偉豐貿易商行.”

The Striking‑out and the Proposed Re‑amendments

13.  On 22 March 2013, the respondents issued a summons seeking for the striking out of the following contents and prayers in the Amended Petition:

(1) parts of paragraphs 23 and 38 which alleged that the respondents had excluded the petitioner and HCW from management and that it was just and equitable to wind‑up the Company;

(2) the prayer for an inquiry into and an order to repay the Company in respect of private expenses of the respondents charged in the Company’s account and the prayer of account of profits by reason of breach of fiduciary duties by the 3^rd respondent; and

(3) the alternative prayer to wind‑up the Company.

14.  After a series of affirmations filed in relation to the striking out application, the petitioner eventually on 8 August 2013 (less than 2 weeks prior to this hearing) issued a summons seeking to re‑amend the Petition. Essentially, the proposed re‑amendments are:

(1) to include a plea of “quasi‑partnership” based on trust and confidence amongst the co‑founders; that the Company would be operated as quasi‑partnership for the benefit of the co‑founders and their respective successors; and that despite subsequent changes in shareholders/shareholdings, the Company continues to operate as quasi‑partnership; and

(2) to include an averment that by reason of the matters giving rise to the “unfair prejudicial” claim, the relationship of mutual trust and confidence has also been damaged irreparably and has broken down.

15.  The proposed re‑amendments were clearly prompted by the striking out application.  The original Amended Petition was solely based on section 168A.  There was no averment of “quasi‑partnership” such as to ground an application for winding‑up on the basis of section 177(1)(f) and Ebrahimi v Westbourne Galleries Ltd[3].  There is otherwise no other proposed re‑amendment.

16.  Mr Suen, counsel for the respondents, fairly accepted that the court has to approach his striking‑out application in the light of the proposed amendments.  He said that for the purpose of saving costs and time, the respondents would not oppose the proposed re‑amendments.  Consequently, he would not pursue the original striking out application in relation to the “contents” of paragraph 23 and 38 of the Amended Petition.  He would however maintain his argument that the prayer of winding‑up should still be struck out as an abuse of process basing on the Wong To Yick line of authorities.  In relation to the prayer of an inquiry into and an order to repay to the Company those private expenses charged to the Company’s accounts and the prayer for account of profit based on breach of fiduciary duties, Mr Suen argued that these prayers should also be struck out based on the Re Chime line of authorities.  Mr Cheung, counsel for the petitioner argued that all these reliefs should be allowed to be pursued in this Petition.  The battle fronts have now been clearly drawn.

Prayer for winding‑up

17.  Mr Suen first referred me to the decision of Yuen J (as she then was) in Wong Tin Chee & oths. v Wong To Yick & ano.[4]. Her ladyship began with stating that a claim for winding‑up order is not doomed to fail by reason only that an alternative relief (eg buy‑out order) has been sought in the petition.  However, the court would take into account this fact and assess the reasonableness or otherwise of the petitioner’s action in seeking a winding‑up order instead of pursuing the alternative remedy.  There are two reasons for this approach: (1) the time‑honoured recognition that the remedy of winding‑up is one of last resort; and (2) section 180(1A) of the Companies Ordinance.  Mr Suen accepted that the onus is on the respondents to show that there is an available alternative remedy and that the petitioner is acting unreasonably in not pursuing it.  He also accepted that in the context of a striking‑out application, he has to establish that “there is no real possibility or prospect of a winding‑up order being made” such that this court should exercise its discretion to strike‑out the claim for a winding‑up order.  I would also endorse Yuen J’s caution that I should approach this application with the greatest circumspection because it is only in plain and obvious case that the court should exercise its discretion to strike‑out a claim before it has a chance of full hearing.  On the other hand, as Yuen J said, if it is clear that there is no real possibility or prospect of a winding‑up order being made at the hearing by a court applying section 180(1A), it cannot be just for a company to have the threat of a winding‑up order hanging over its head like a Sword of Damocles.

18.  In the case of Wong Tin Chee, the factor that influenced Yuen J most was the fact that the subject company was solvent and had been very profitable.  Her ladyship said that “It would be unlikely to the extreme for such a successful company to be ordered to be wound‑up by the court when there was an available alternative remedy being sought at the same time by the petitioners”. In that case, the alternative remedy sought was a buy‑out order.

19.  Mr Suen then referred me to the following dictum[5]:

“There would be no real prejudice to the petitioners by a striking‑out of the claim for winding‑up order. Counsel for the petitioners accepts that on their case as disclosed in the amended petition, there is no ground or basis which would entitle them to a winding‑up order only, but not an order under s 168A.

Further there is no substantive benefit they would gain from a winding‑up order which they would not from a buy‑out order.  There is no evidence that a winding‑up order is the preferred remedy for any of the petitioners, and no reasons given for any preference.” [emphasis added by underlying]

20.  The latter part of the above quotation gave rise to an argument in the Court of Appeal[6].  The relevant part of the judgment of Le Pichon JA read:

“The parties’ wishes

11. Ms Lai submitted that in exercising her discretion, the judge failed to consider the wishes of the parties, ie whether the petitioners wished to sell their shares and whether the first respondent wished to buy the petitioners’ shares.

12. But the first respondent had made his position clear by making the application to strike out the winding‑up prayer. Should the petitioners ultimately prevail in their claim, the appropriate relief would be a buy‑out. So far as the petitioners’ wishes are concerned, it is to be noted that the alternative relief sought was a buy‑out order.

[after referring to the above quoted dictum of Yuen J.]  Given the nature of the application, it was incumbent upon the petitioners to file evidence to state why a winding‑up order is the preferred remedy and the reasons therefor.  In the absence of any such evidence, the judge was perfectly entitled to conclude that they were not opposed to a buy‑out order.”

21.  In the present case, a buy‑out order was put as the first prayer in the Amended Petition.  The winding‑up order was merely stated as an alternative remedy.  Mr Suen also referred me to the affidavit evidence and submitted that the petitioner did not say she preferred the remedy of winding‑up and provided any reason therefor.  Mr Cheung stated that he has no arguments on the legal principles.  He however submitted that the respondents had failed to establish that there is an available alternative remedy because the respondents had not set out their financial ability to pay for the shares price if a buy‑out order is made.  With respect, this is an unattractive argument for the following reasons:

(1) It is the petitioner who put forward a buy‑out order as the primary relief in the Amended Petition.  In my view, it lies in her mouth to suggest that somehow, it is not an available alternative;

(2) It is first incumbent on the petitioner to provide evidence to explain why she preferred a winding‑up order than a buy‑out order.  If she genuinely had doubts about the respondents’ financial abilities, it could well be a reason to put forward.  She did not do so. It is in my view thoroughly unfair for her to suggest now that there is “no evidence” of the respondents’ financial abilities.  As Mr Suen submitted, his clients were ambushed.  If the petitioner had put that as a reason for preferring a winding‑up order, the respondents could have filed evidence to rebut the suggestion that they are not of means; and

(3) In any event, the petitioner also stated in the Amended Petition[7] that according to the Company’s audited accounts as at 31 March 2011, it had accumulated profit of HK$18,570,207.00 and “cash or cash equivalent of HK$14,795,788.00”.  She continued to complain about the respondents not declaring dividends.  At the hearing, Mr Cheung argued that the Company did not have sufficient liquid cash to provide sufficient dividends to the respondents to support their buy‑out.  It seems the petitioner is blowing hot and cold.  Mr Suen pointed out that from the latest balance sheet, the Company’s “cash in hand” and “cash in bank” already exceeded HK$7 million.  Since the respondents collectively owned 80 % of the Company’s shareholding, they can expect to have at least HK$5.6 million.  That would already be sufficient to cover the estimated price of HK$4.5 million put forward by Mr Cheung as the rough value of the petitioner’s shareholding.  I also note that the balance sheet shows that the Company is currently holding over HK$13 million worth of stocks (ie cameras and accessories).  They (or a significant part thereof) could well be realized within relatively short period of time.  When a buy‑out order is made, the shares would have to be valued by experts and that could take some time before the respondents would be called upon to make the purchase payment.  If there be such need, the Company’s stocks could be realized within this window of time to generate more funds for the distribution of dividends to all shareholders.

22.  In the circumstances, I accept the submissions of Mr Suen and in so far as it is necessary, I rely on the dictum of Le Pichon JA in Re Wong To Yik Wood Lock Ointment Ltd[8].  I conclude that there is noreal possibility or prospect of a winding‑up order being made in this case.  I accordingly strike out the prayer seeking for a winding‑up order.

The misconduct relief

23.  On this issue, both counsel agreed that the governing principles are derived from Re Chime[9] as applied in Re Linea Trading Co Ltd[10].  This case turns on the application of its facts to the 3 criteria set out in the Judgment of Barma J in Re Linea Trading Co. Ltd:

“18. There is one further issue of law which it would be convenient to deal with at this point. This arises out of the fact that may of the prayers for relief complained of seek orders for the payment of money by the respondents to the Company. As I have observed, such claims are more usually to be found in actions by a company against its directors, whether brought by the Company itself, or derivatively on its behalf by a shareholder.

19. Mr Remedios did not dispute that a court hearing a section 168A petition had jurisdiction to grant relief in favour of the company. However, he suggests that although the court has such jurisdiction in the strict sense, it will not necessarily be appropriate for it to exercise that jurisdiction in every case. He submitted that whether or not the court dealt with such claims in a section 168A petition was a matter of discretion, which should be guided by the following considerations:

(1) the order sought under the section 168A petition must be the same as the order to which the company would be entitled if the allegations has been successfully prosecuted in an action by the company (or in a derivative action on its behalf);

(2) it is clear, at the pleading stage, that the amount claimed from the director can be easily determined at the hearing of the petition;

(3) it should be borne in mind that there could be unfairness in allowing such a course to be taken in that a director who successfully resisted such a claim in a section 168A petition might later find himself faced with an action by the company, or a derivative action, founded on substantially the same facts.

20. I accept these propositions, which derive from the judgment of the Court of Final Appeal in Re Chime Corporation Ltd. . .”

24.  In the present case, Mr Suen presented no argument under the 1^st criterion.  His main focus was on the 2^nd and 3^rd criteria.  In relation to the 3^rd criterion, Mr Cheung submitted that there is no real likelihood of “double jeopardy” in this case because there are only two camps of shareholders: the petitioner on the one camp and the 3 respondents on the other.  If the petitioner fails to establish the “private expenses” issue and the “breach of fiduciary duty by under‑pricing” issue, the 3 respondents, who jointly control the Company, would not bring company action/derivative action upon themselves.  Mr Suen replied by reminding the court that there is an outstanding action between HCW and two of the 3 respondents on the ownership of 1,500,000 shares in the Company.  It is HCW’s case that he is the beneficial owner of those shares.  If he succeeds in that action, there is every likelihood that he would then either cause the Company to pursue against the 3 respondents on those same issues once again or would do so derivatively.

25.  Mr Suen also stressed that the Company is merely a nominal 4^th respondent in the Amended Petition and there is no lis between the Company and the 3 respondents especially on the two aforementioned issues.  He reminded me of the dictum of Kwan J (as she then was) in Re Shun Tak Holdings Ltd[11].

“71. If the petition were dismissed after trial, there is still a risk of double jeopardy recognized by Bokhary PJ in Re Chime Corp Ltd at para 28. The individual respondents could still be vexed again by a derivative action bought in the name of the Company, or a multiple derivative action in the name of Interdragon. The issue in the petition is whether the court should direct the Company to bring proceedings against the wrongdoers, whereas in the derivative action the issue is whether the underlying complaint is made out substantively. The court in dismissing the petition may not find it necessary to make binding determinations or findings, so issue estoppels may not be invoked by the respondent directors, quite apart from the difficulty there is no lis between the respondent directors and the Company in the petition.”

26.  In the end, I agree with the submissions of Mr Suen and conclude that the 3^rd criterion has not been met with in this case.

27.  On the 2^nd criterion, Mr Cheung first dealt with the “private expenses” issue and referred me to paragraphs 32 to 35 of the Amended Petition.  He also referred me to a document named “2010‑2011 Break down between Auditor Ledger and Internal Ledger”[12]. He explained that the petitioner’s case is that the items of expenses set out in the document (totaling HK$4,236,856.61) were fictitious.  He relied on paragraph 33 of the Amended Petition and this document and submitted that the pleadings already show clear quantification in relation to the “private expenses” issue.  Mr Suen disagreed.  He submitted that the petition merely put up a bare allegation and has not condescended on particulars as how much of the said HK$4,236,856.61 had allegedly been spent on defraying the respondents’ private expenses.  I agree with Mr Suen.  On proper reading of paragraphs 32 and 33 of the Amended Petition, the figure of HK$4,236,856.61 was just put up as the “depressed profit” of the Company.  In fact the petitioner said she had no knowledge of the arrangements.  The fact that she prayed for an inquiry indicated that there is no quantification at this stage.

28.  However, in my view, counsel’s submissions based on a strict application of the 2^nd criterion as described in Barma J’s dictum seem to have overlooked one important distinction.  In Re Linea Trading Co Ltd, Barma J was dealing with prayers seeking orders of payment of specific sums[13].  Hence whether the claim could be clearly quantified at pleading stage so as to demonstrate that it was a matter suitable for resolution at a petition hearing was a material consideration.  The present case is different in that the prayer asked for an inquiry into the amount of private expenses wrongfully defrayed by the use of Company’s money.  The question for the court would be whether there are grounds upon which such an enquiry should be ordered.  I cannot say that this is a matter that would be inconvenient for the court to decide upon the hearing of a petition.

29.  On the “breach of fiduciary duty by under‑pricing” issue, Mr Cheung submitted that paragraph 34 of the Petition already stated the amount as 5 %.  The amount involve could be easily worked out with reference to those invoices relating to that customer.  The real issue is whether the discounts given to the customer were genuine and at arms’ length.  Mr Suen submitted that one should focus on the relief prayed.  It asked for an “account of profits made by the 3^rd respondent. . .”.  There was absolutely no particular as to how the 3^rd respondent could be said to have profited from a discount given to a customer.  Furthermore, if there were allegation of collusion between the 3^rd respondent and that customer (which has not been made), that customer should have been made a party to properly instituted proceedings.  Otherwise, it would not be appropriate to make such a serious finding in his absence.  If this matter is left to be pursued by a derivative action, the customer could be joined as a defendant.  I tend to agree with Mr Suen’s submissions.

Conclusion

30.  In the end, it is a matter of exercise of my discretion.  What influences me most is the failure to meet the 3^rd criterion in this case.  I cannot ignore the real likelihood that HCW could come back to vex the respondents once again even after the petitioner fails to establish her case in this petition. Furthermore, I cannot see the petitioner suffering any prejudice if I should disallow the inclusion of these 2 prayers in the Amended Petition.  She could still present her case on these issues because they are relevant to the “management issue” which is at the heart of a section 168A petition.  Furthermore, if her case is made out at the end of the day, those matters could be properly accounted for in the valuation of the shares accompanying the buy‑out order[14].

31.  In all the circumstances of this case, I order the striking out of prayers (2), (3) and (4) of the Amended Petition.  Subject to that, I grant leave to the petitioner to re‑amend the Amended Petition as per the draft annexed to the Summons dated 8 August 2013.  I also wish to point out that paragraphs in the said draft seem to have been wrongly numbered.  I hope solicitors for the petitioner can attend to that.

Costs

32.  The respondents are the winning parties.  I shall make the following costs orders nisi, which would become absolute if no application for variation is made within 14 days from the date hereof:

(1) the petitioner do pay to the 1^st to 3^rd respondents costs of and occasioned by the respondents’ summons dated 21 March 2013, to be taxed if not agreed;

(2) the petitioner do pay to the 1^st to 4^th respondents costs of and occasioned by the re‑amendment of the Amended Petition to be taxed if not agreed; and

(3) the petitioner do pay to the 1^st to 3^rd respondents costs of the hearing on 21 August 2013 to be taxed if not agreed.