RE CHYNCHEN ASSOCIATES LTD

IN THE SUPREME COURT OF HUNG KONG

HIGH COURT

COMPANIES WINDING UP NO. 309 OF 1986

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JUDGMENT

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1. On the 15th October 1986 a petition was presented on behalf of John Howard Chynchen (the petitioner) to wind up Chynchen Associates Limited (the company) on the just and equitable ground. On the 10th November, C.S. Toh (the applicant) issued a summons for the appointment of a provisional liquidator. The summons came before me for hearing on the 14th November and was adjourned on that date to the 20th November. Meanwhile the petition came before me for call over on the 17th November at which time no notice of intention to appear had been filed, nor had any affidavit in opposition been filed within 7 days of the affidavit verifying the petition. However, Mr. Smith appeared at the hearing on behalf of the applicant, when the petition was also adjourned to the 20th November, but to await the outcome of the application for the appointment of a provisional liquidator.

2. The facts reveal that the petitioner is a chartered land surveyor who formerly carried on the business of land survey in Hong Kong under the name Chynchen Associates. The company was incorporated in June 1984. In December 1984 the petitioner entered into negotiations with the applicant which eventuated in the applicant purchasing a 50% interest in the company together with a 50% interest in another business owned by the petitioner in Singapore Chynchen Associates Pte. Limited. The petitioner and the applicant were to be the only directors of the two companies. The petitioner was also to be employed by the company as general manager for five years from the 1st January 1985. Both companies were to be jointly managed by the applicant and the petitioner. All the professional work was to be done by the petitioner whilst the applicant, who has no professional qualifications with regard to land surveying, was to provide financial and administrative skills. In fact it appears that the applicant has invested a substantial sum of money in the company. The agreement between the parties in respect of the Hong Kong company was entered into on the 22nd December 1984 which resulted in the applicant receiving 5,000 ordinary "B" shares of $10 each and the petitioner 5,000 "A" shares of $10 each.

3. In the petition it is alleged that the applicant has withdrawn from the day to day participation in the business of the two companies. That in September 1985 the applicant requested the petitioner to reduce his shareholding in both companies from 50% to 26% which the petitioner declined. Since that time there has been virtually no contact between the parties. The petitioner also alleged that the applicant purported to appoint his son Mr. Tony Toh to carry out his duties in the company. It is the petitioner's case that he has been excluded from the company. and has not been paid his salary as general manager since September 1985. There are a number of other allegations that have been made in the petition but it is unnecessary for me to refer to them for the purposes of the present application. There have been no directors or shareholders' meetings since 1985.

4. The applicant has filed evidence in which he disputes the nature of the allegations made by the petitioner, but has conceded through his counsel that the business relationship has irremedia bly broken down. As a result of the deadlock the company is paralysed and is unable to function. It is common ground that since the breakdown in the relationship between the parties the applicant has had control of the assets.

5. The petitioner has also presented a petition to wind up the Singapore company on the just and equitable ground which petition is also opposed by the applicant.

6. The applicant's solicitors wrote to the petitioner's solicitors on the 11th September 1986 when they set out the applicant's position, as follows

 

"             SUBJECT TO CONTRACT

 

Re: Chynchen Associates Ltd.

 

We refer to our meeting at the offices of the Company on 7th August 1986.

As you are aware, our client, Mr C.S. Toh, has adopted the following position in relation to his future association with the Company :-

 

 

In the absence of any specific proposals from Mr Chynchen, our client has formulated the following alternative proposals for your consideration :-

                (i) EITHER

 

Mr Chynchen agrees to purchase our client's interest in the Company on terms which make a provision for, inter alia

 

        (ii) OR

Mr Chynchen agrees the voluntary dissolution of the Company and the distribution of its assets between the parties.

 

Our client has it in mind that any valuation of his interest in the Company for the purposes of identifying a sale price in connection with option (i) above would be conducted by independent accountants instructed jointly by the parties who would apply an appropriate multiplier of the Company's profits in the current financial year. We anticipate that such a valuation would suggest a sale price of approximately $1.6 million.

 

Please let us know whether you wish to explore either option in further discussions. "

The petitioner's solicitors replied on the 23rd September 1986 agreeing that the relationship between the parties had broken down irremediably and that no future business association between the parties would be possible. The petitioner agreed to accept the alternative proposal for the company to be wound up voluntarily and for the distribution of the assets between the parties. However as the petitioner's solicitors had already drafted the present petition they suggested that the petition be proceeded with and that no opposition be offered by the applicant.

7. Although the applicant agrees that the business relationship has completely broken down he seeks to oppose the application for a winding-up order on the grounds that a firm of international surveyors Knight Frank Kan & Baillieu, are willing to acquire the assets of the company including the work at present in hand. However, this firm by a letter of the 30th October to the applicant's solicitors merely states that they are prepared to enter into discussions with the company without commitment.

8. As submitted by Mr. Smith; who appeared for the applicant, the nub of the applicant's case is set out in paragraph 41 of the applicant's affirmation made on the 13th November which reads :

"41.         I desire to take a stand against what is submitted is the commercial impropriety of the petitioner. I am informed and verily believe that the petitioner is in hopes of securing substantial contracts in the immediate future. There is now produced and shown to me marked "CST-24" a copy of a letter dated 8th October 1986 from the Company to Kumagai Gumi (HK) Ltd. in respect of works shown as Terminal 6, Kwai Chung Container Port. I am advised and verily believe that fees for land surveying work at this site will eventually be approximately HK$14m over three years and that the Company has a good chance of winning this work. "

Paragraph 42 and 43 of the applicant's application are also of significance and these read :-

 

43.        In the event of his so claiming successfully, the benefit of the contracts would accrue to the petitioner personally. In view of the very considerable losses sustained by reason of my making the agreement of 28th of December 1984, it is respectfully suggested that the injustice thereof is apparent, and the benefit to the petitioner quite unwarranted. "

9. The object of the appointment of a provisional liquidator is to maintain the status quo by preserving the assets pending a full determination of the petition at the hearing. In order for the appointment of a provisional liquidator to be made, the applicant must establish that there is a prima facie case for the making of a winding-up order and whether in all the circumstances, it is right to make an appointment. Upon the facts and having regard to the agreement between the parties that the relationship has broken down, there are sufficient grounds to support the petitioner's contention that a winding-up order will be made at the hearing of the petition.

10. The normal case for the appointment of a provisional liquidator arises where the assets of the company are in danger or in jeopardy or are likely to be dissipated. However, it was held in Re Union Accident Insurance Company Ltd.⁽¹⁾ that the power conferred by section 238 of the Companies Act 1948 the equivalent to section 193 of the Companies Ordinance which relates to the appointment and powers of a provisional liquidator creates a general power on the court to appoint a provisional liquidator depending on the circumstances of each particular case. The power is not limited to cases where special circumstances exist, but also include other factors such as the public interest. There is an unfettered discretion conferred upon the court to make such an appointment if it is necessary in all the circumstances.

11. Mr. Smith contended that a provisional liquidator can carry on a business if it is necessary for the beneficial winding-up of the company whether it is a creditor's petition or a contributory's petition, see Wilsons (Glasgow and Trinidad) Limited (in Liquidation)⁽²⁾.

12. The only asset in this case is the good will of the business which necessarily depends upon the involvement of the petitioner as he is the only professionally qualified member of the company. The applicant has referred in his affirmation to a Mr. Garforth, a qualified land surveyor who is willing to accept employment from the company although it is firmly opposed by the. petitions. It appears that the applicant has a scheme in mind to effect a sale with Mr. Garforth acting in a professional capacity in place of the petitioner with Mr. Tony Toh dealing with the administrative side. Such a sale of the business as a going concern is no doubt a method whereby the applicant hopes to obtain the benefit of the restraint of trade clause which is set out in paragraph 42 of the applicant's affirmation. This clause would cease to be effective if a winding up order is made. Mr. Barlow, counsel for the petitioner, asserts that by his application the applicant is seeking an alternate remedy to a winding-up order for he believes that a provisional. liquidator can sell the business as a going concern which impliedly a liquidator does not have power to do.

13. If a provisional liquidator is appointed his powers will necessarily be limited and any sale that is effected will, in any event, be dependent upon the making of a winding-up order. In the unlikely event that a winding up order is not in fact made, a sale of the business could, of course, not preserve the status quo.

14. As the goodwill is vested in the petitioner, any sale that takes place would result in a sale of the company with the petitioner's name but without his participation whilst the applicant will no doubt claim the benefit of the restraint of trade clause.

15. The appointment of the provisional liquidator could be for a prolonged period, but Mr. Smith in his reply was content to restrict the period to one month.

16. Although the applicant's evidence expressed optimism for the sale of the business, there is in fact no immediate prospect of one taking place.

17. The sole reason for the application is to achieve a final resolution to the dispute through a provisional liquidator who would have more limited powers than those of a liquidator appointed after a winding-up order is made. The assets so far as the applicant is concerned are not in jeopardy as they are under his control.

18. Miss Lee who appeared on behalf of the Official Receiver took a neutral stance but pointed out the difficulties that would arise by having to continue the business if a sale is not effected.

19. Mr. Smith disagreed with Mr. Barlow's submission that this is a case where the principles enunciated in In re. Westbourne Galleries Ltd.⁽³⁾ apply. He contended that the relationship was that of a joint venture and not a partnership. However, I am unable to agree for the association was entered into between the parties for their mutual benefit which clearly encompassed mutual trust and confidence. That relationship having broken down it necessarily follows that an order should be made to wind up the company.

20. The stance now adopted by the applicant is wholly inconsistent " with his earlier proposal for a voluntary winding-up and an equal distribution of the assets. Such a change on the part of the applicant tends to dilute the genuineness of his application.

21. In all the circumstances, I am far from satisfied that there are circumstances special or otherwise to justify the appointment of a provisional liquidator. Accordingly in the exercise of my discretion, the application is refused and the summons will therefore be dismissed.

(1) [1972] 1 All E.R. 1105
(2) [1912] 2 Scots Law Times 330
(3) [1973] Ac 360