LEUNG TAK MING v. CHAN CHING CHUEN AND OTHERS

HCCW 196/2018

[2019] HKCFI 1017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 196 OF 2018

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D E C I S I O N

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1.  This is the 1^st and 2^nd respondents’ application made by summons dated 3 September 2018 to strike out the winding-up relief in the petition.

2.  The petitioner issued the petition in these proceedings on 19 July 2018 seeking a winding-up order and other incidental relief.  The petition is a just and equitable petition and the underlying dispute is a shareholders’ dispute.

3.  In broad terms, the 1^st and 2^nd respondents’ complaint is that there is no realistic prospect of the court making a winding-up order as the dispute between the parties would be resolved by the court ordering that one or other of the shareholders buy out the other. 

4.  The petitioner and the 1^st and 2^nd respondents are shareholders of the company presently holding 35%, 35% and 30% of its shares respectively.  The 3^rd respondent is the company, Good Time Refrigeration Company Limited.  It has taken no part in these proceedings.

5.  The evidence is contained in the affirmations of the 2^nd respondent and the petitioner.  In brief, the petitioner, who says that he started the business, the 1^strespondent and the 2^nd respondent were engaged together in an air conditioning business.  The company was formed in 2008 with the petitioner, at that stage, holding 70% of the shares. 

6.  Unfortunately, the parties fell out and at a board meeting on 2 October 2015, the respondents, the petitioner says unlawfully, removed him as a director.  He says that he has been shut out of the company ever since.

7.  In 2016, the parties were in discussion as to buying out the petitioner’s shares.  The 1^st respondent and the 2^nd respondent sought to impose a condition that the petitioner did not contact the company’s clients.  The discussion did not result in agreement and on 20 July 2017, the petitioner obtained a consent order in proceedings HCMP 539/2017, under which the 1^st and 2^nd respondents undertook to provide the company’s documents for inspection.

8.  These proceedings were brought under section 740 of the Companies Ordinance.  And according to his affirmation in support, the reasons for the petitioner’s application were (1) to investigate the affairs of the company in order to decide whether to bring proceedings on the basis that he had suffered prejudice as a member of the company; and (2) to assess the fair value of his shareholding.

9.  The parties are in dispute as to whether that order has been properly complied with.  Negotiations for the sale of the petitioner’s shares to the 1^st and 2^ndrespondents, resumed in 2018.  However, the parties did not reach agreement and on 19 July 2018, the petitioner issued the winding-up petition on the basis that the company’s affairs were being conducted in a manner prejudicial to his interests and seeking to wind the company up on just and equitable grounds.

10.  The allegations are that the 1^st and 2^nd respondents breached their director’s fiduciary duties and general duties towards the company by operating a competing business and by misuse of the company’s assets; andby wrongfully excluding the petitioner from the management of the company and removing him as a director of the company as well as withholding the company’s financial records and documents from him.

11.  The 1^st and 2^nd respondents complain that the issuance of the petition caused temporary difficulties with their bank accounts, although a validation order was made by consent on 13 August 2018.  The strike-out summons, as I have said, was issued on 3 September 2018.  On 16 October 2018, the company, which is of course controlled by the 1^st and 2^nd respondents, began High Court proceedings against the petitioner alleging that he had diverted business prior to his ousting as a director.

12.  In short, the 1^st and 2^nd respondents maintain that the winding-uppetition is simply a device to put pressure on them to buy out the petitioner’s shares whilst the petitioner says that the High Court proceedings have been begun simply to exert pressure on him.

13.  Following the issuance of these proceedings, the petitioner sought to resume the negotiations by suggesting an independent valuer, but the 1^st and 2^nd respondents were non-committal in their response.

14.  The case of the 1^st and 2^nd respondents is as follows. 

15.  First, it is well‑established that if a petitioner has made out a case of unfair prejudice, the court will not order a winding-up if an alternative relief is available.  This is based on the principle that companies that are carrying on business should not be burdened with the inconvenienceand stigma of a winding-up petition hanging over them.  As such, this petitionis bound to fail because of the inclusion of a claim for an alternative relief in the form of a buyout order on the basis of the petitioner’s interests being unfairly prejudiced.

16.  Secondly, it is also well-established that in seeking a winding-uporder against a solvent company, the petitioning shareholder should state why a winding-up order, rather than a share buyout order may be necessary.  To present a petition which does not do so is, prima facie, an abuse of process.

17.  No explanation has been provided by the petitioner in the petition for the inclusion of a prayer for a winding-up order.  Neither is thereanything in the petitioner’s affirmation.  Indeed, given that the company is a going concern, with substantial turnover and profits, the winding-up relief is bound to fail.

18.  Third, the petitioner is acting unreasonably in seeking to have the company wound up instead of pursuing the alternative remedy of a buyout order.  This is especially so when there has been no suggestion that the1^st and 2^nd respondents cannot afford to buy out the petitioner’s shares or any reason for the petitioner to think that he would be better off if the company were to be wound up.  Indeed, the petitioner has offered to sell his shares and the 1^st and 2^nd respondents have offered to buy his shares.  There is, therefore, no objection to the relief of a buyout order.

19.  In the circumstances, the inclusion of a winding-up relief is notfor bona fide reasons, but purely to put pressure on the 1^st and 2^nd respondentsto improve their offer and/or prejudice the ability of the company to conduct its affairs in the normal manner.

20.  The petitioner’s case is as follows. 

21.  From the background and conduct of the 1^st and 2^nd respondentsbefore the institution of the petition, it is more than likely that the 1^st and 2^nd respondents were, and are, unwilling and unable to buy out the petitioner’s shares in the company.  After misappropriating the assets of the company and diverting its business to their own competing business, the 1^st and 2^ndrespondents sought to keep the petitioner in the dark so that the option to buy out the petitioner’s shareholding would no longer be attractive.  In the end, the company would be left with nothing.

22.  Their refusal to consider buying out the petitioner’s shares had been unequivocally stated during the Board meeting in October 2015 when the petitioner was removed by the 1^st and 2^nd respondents, as one of the directors of the company.

23.  The 1^st and 2^nd respondents have not been sincere about an amicable buyout of the petitioner’s shares, otherwise they would have not evinced their hostility towards the plaintiff, by taking out the present application and by instituting a separate action.  From the correspondence and negotiation between the parties since early 2016, it can easily be concluded that the 1^st and 2^nd respondents have no real intention to buy out the petitioner’s shares.

24.  The petitioner has not acted unreasonably in seeking a winding- up order, because by reason of these factors the petitioner has been kept in complete darkness regarding the operation and finances of the company.  Before commencing these winding-up proceedings, the petitioner did not even know whether the company was a going concern or financially solvent. 

25.  The facts contained in the petition do support and justify a prayer for winding-up.  Finally, as a matter of law, the court’s discretion to strike-out part of a winding-up petition, should be exercised very sparingly and should not be exercised on these facts.

26.  There is no dispute between the parties as to the applicable legal principles.  These have been set out in a number of decisions of Harris J, most recently Re Sun Light Elastic Ltd [2013] 5 HKLRD 1 and Marrakesh Investments Ltd v Tangiers Holdings Ltd HCCW 352/2016 (28 November 2017).  The latter case summarises earlier authority.

27.  As Harris J stated in the Sun Light case at paragraph 3:

“ It is not in dispute that if a petitioner has made out a case of unfair prejudice, the court will not order a winding-up if alternative relief under s.168A is available. This principle and the fact that the companies that are carrying on business do not wish the inconvenience and stigma of a winding-up petition hanging over them frequently leads to applications by respondents to petitions‌… seeking to strike out alternative relief for a winding-up order on the grounds that there is no prospect of such relief being granted.”

28.  In paragraph 4, Harris J summed up the principles by reference to which such applications are assessed:

“ (1) It is assumed that the particulars and allegations in the petition and the supporting affidavits of the petitioner would be established and the conflicts resolved in favour of the petitioner;

(2) The application should be approached with the greatest circumspection and it is only in a plain and obvious case that the court should exercise its discretion to strike out the petition for winding-up, or the parts complained of;

(3) The burden is on the applicant to show that it is plain and obvious that the petition for winding-up would fail on the ground there is an alternative remedy available to the petitioner and that the petitioner is acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy; and

(4) Where proposed amendments are put forward in an application tostrike out, the court should have regard not only to the allegations in the existing petition but also to matters in the proposed amendments.”

29.  Harris J goes on to state in paragraph 9 that what is clear from the authorities is that the court will only grant a winding-up order rather than relief under section 168A, if there is good reason to do so.  If a winding-up order is to be sought, particularly in the alternative, it should only be because the petitioner has a particular reason for doing so.

30.  In paragraph 10 of his judgment, Harris J says that:

“ It seems to me that to require a petitioner to state in his petition why he has sought in the alternative a winding-up order is not onlysensible but consistent with the requirement that a petition must adequately set out the grounds on which relief is sought”.

31.  I now come to apply these principles to the present case.  Although the 1^st and 2^nd respondents did not accept this, I consider that the petition does show why a winding-up order may be necessary.  In any case, any deficiency in this regard is rectified by the evidence filed by the petitioner.

32.  Among the explanations given are explanations that go to the state of the company and the behaviour of the 1^st and 2^nd respondents in relation to the company.  Of course at this point I need make no comment on these, or whether there is any force in them, but the point is that the explanations are given.  The further explanation which is given is that the 1^st and 2^nd respondents have not been sincere in entering into negotiations to buy out the petitioner.  This is set out at some length in the petitioner’s evidence.

33.  It is not surprising that the 1^st and 2^nd respondents should have offered a lower price than the petitioner asked for.  However, on the face of it,they were not entitled to link their offer to an undertaking by the petitioner not to compete with the company.  There is no anti-competition agreement orrestrictive covenant in the company’s favour and the 1^st and 2^nd respondents cannot rely on the director’s fiduciary duties in this regard, since their case is that the petitioner was removed as a director in 2015.

34.  Further, it is relevant to observe that their reaction following the issue of the petition to the petitioner’s proposal that an independent valuer be appointed, was equivocal.  Their lawyer’s letter of 8 October 2018 states simply that:

“ Our clients will give due consideration to the value determined by the jointly appointed independent valuer and may purchase your client’s shares at the said value.”

35.  It seems to me to be important where respondents are seeking to strike out that part of a petition seeking a winding-up order on the basis that the company is solvent and winding up is unnecessary, that the respondents are doing their part to facilitate a share buyout. The respondents cannot both seek to confine the petitioner to an order that the other shareholders buy the petitioner out and drag their feet in that regard.

36.  It is also worth noting that though the company is solvent in the present case, the auditors referred in the 2016 accounts to the company’s liabilities exceeding its assets, and material uncertainty causing significant doubt on the company’s ability to continue as a going concern.  The 2017 accounts do not contain such a statement but the petitioner did not receive these accounts until they were produced as evidence in these proceedings.

37.  Finally, I keep in mind that the power to strike out should only be exercised in a plain and obvious case.  I have concluded that this is not such a case.  I do not consider that there is no prospect of the court making a winding-up order.

38.  The summons of the 1^st and 2^nd respondents must therefore be dismissed.

39.  On a nisi basis, the petitioner is entitled to his costs.