YEUNG SIU MING v. MAN LUNG TEXTILES LTD AND OTHERS

HCCW 425/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 425 OF 2016

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AND

HCCW 426/2016

COMPANIES (WINDING-UP) PROCEEDINGS NO 426 OF 2016

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(Heard Together)

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DECISION

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Introduction

1.  This is the hearing of the 2^nd Respondent’s application to strike out the petition on the ground that the Petitioner has no locus standi to present the petition and that the petition is an abuse of process of the court.  Alternatively, the 2^nd Respondent sought a validation order to allow payments made into and/or out of the bank accounts for settling debts incurred by the captioned two companies in the ordinary course of business.  At the hearing on 23 March 2017, Anthony Chan J granted the validation order.

The background

2.  The Petitioner was until 15 May 2014 a shareholder of the twocompanies in question, ie Man Lung Textiles Limited in HCCW 425/2016 (“Man Lung”) and Man Shing Textiles Limited in HCCW 426/2016 (“Man Shing”).  Man Shing has a subsidiary in Dongguan (“Man Hei”) which serves as the manufacturing arm of the companies.  On 15 May 2014, the Petitioner resigned from his directorship of the two companies.  By an agreement dated 30 January 2015 (the “Agreement”), he sold all his shareholdings in the two companies to the 2^nd and 3^rd Respondents at a consideration of $3.39 million.  The consideration was to be paid by nine instalments until 28 January 2016, leaving a sum of $390,000 (the “set off sum”) to be kept by the 2^nd and 3^rd Respondents and to be paid to the Petitioner or set off in the manners stipulated under clause 3.2(f) of the Agreement.   

3.  After the sale it had been uneventful until 4 July 2016 when the 2^nd Respondent received a letter from the Petitioner’s solicitors alleging that the balance of purchase price of $1 million was still unpaid and further requested for return of the set off sum of $390,000 from the 2^nd and 3^rd Respondents.  The 2^nd Respondent denied the Petitioner’s claim and counterclaimed for a set off in the sum of $1.53 million being loss suffered by Man Hei based on the audit report.  The parties’ solicitors engaged in a series of correspondence, but no settlement was reached. 

4.  On 25 November 2016, the Petitioner filed the petitions against the two companies, pursuant to section 177(1)(f) of the Companies(Winding Up and Miscellaneous Provisions) Ordinance.  His grounds are essentially about the irregularities in the audit report on the profits and loss of Man Hei up to 20 January 2015; that he had not consented to the appointment of the auditor; that the 2^nd Respondent refused his and the 3^rd Respondent’s request to hold an annual general meeting to deal with the Companies’ matters and specially to appoint directors of the companies; and that the 2^nd and 3^rd Respondents’ conduct has prejudicially affected his interest in the companies.

Locus standi

5.  The 2^nd Respondent’s first ground for striking out is that, having sold his shares to the 2^nd and 3^rd Respondents, the Petitioner has no locus standi to present the petition.  He relies on section 179(1)(a)(ii) of the Companies Ordinance which provides that only the company, its creditors, contributories or the trustee in bankruptcy or the personal representative of a contributory may present a winding up petition against the company.  In addition, a contributory may not present a petition unless the shares in respect of which he is a contributory were originally allotted to him or have been held by him, and registered in his name, for at least six months during the 18 months before the commencement of the winding up, or have devolved on him through the death of a former holder.  Mr Cheung, counsel for the 2^nd Respondent, submitted that as the Petitioner’s shares were sold on 30 January 2015 and the petition was presented almost 22 months afterwards on 25 November 2016, he has no locus standi to present the petition.

6.  Mr So, counsel for the Petitioner, disagreed.  His argument is that as it is the 2^nd Respondent who sought to strike out the petition, the 2^nd Respondent has the burden of proving that the Petitioner is not a contributory qualified to present a petition pursuant to section 179(1).  He further argued that as the 2^nd Respondent had not addressed this issue or produced the register of members showing that the Petitioner’s name is not on the register, he has failed to discharge the burden of proof.

7.  I respectfully disagree with Mr So’s submission.  It is trite law that the burden of proof is dictated by the pleadings.  The Petitioner pleaded in paragraph 5 of the petition that he once held 4,000 shares in thecompany and then in paragraph 9 that he sold them on 30 January 2015 to the 2^nd and 3^rd Respondents.  Hence, by the time he presented the petition, he fell clearly outside section 179(1)(a)(ii).  It is therefore part of the Petitioner’s case that at the time of presentation of the petition he was not a shareholder and had not held shares in the companies for at least six months during the 18 months before the commencement of the proceedings.  On his pleaded case, he has no locus standi to present the petition.  Thus, there is no burden on the 2^nd Respondent to prove that the Petitioner was neither a current shareholder nor has held the shares in the companies for six months during the 18 months prior to his presentation of the petition.  He has pleaded a defective case which is bound to be struck out.  This is sufficient to dispose of this application.

8.  Putting aside the actual pleading in this case, Mr So’s submission is wrong in principle.  A petitioner has to plead he is entitled to present a petition under section 179.  If he pleads he is a contributory, he bears the burden of proving that he comes within section 179(1)(a)(ii), including that his name has been entered in the register of members of the company at the material time.  Usually, if he is entitled to present a petition, this will not be challenged.  If challenged, it still remains his legal burden to prove his locus standi.  This burden of proof never changes during the entire proceeding.  It may be argued that the burden has shifted to the respondent when he seeks to challenge the petitioner’s locus standi.  But, in reality, what has shifted is the evidential burden.  That is only a burden of producing some evidence so as to pass the judge.  The respondent may discharge that evidential burden by producing the register of member or other proof acceptable to the court evidencing the petitioner’s lack of locus standi, such as evidence of his having disposed of all his shares in thecompany.  Once he discharged that evidential burden, the petitioner has to discharge his legal burden.  It is wrong in principle to argue that in an application to strike out the petition, the respondent bears the legal burden of proving that the petitioner does not have the necessary locus standi.  The respondent has to discharge an evidential burden only.

9.  Putting aside the petitioner’s defective pleading, the 2^nd Respondent has discharged his evidential burden as there is no dispute that the Petitioner’s shares had all been sold and the Petitioner had not held any shares for at least six months during the 18 months before presenting the petition. It is therefore the Petitioner’s burden to produce the register of members.  He can request the 1^st Respondent to produce the register.  But, this is wholly academic as his shares had all been sold.  Even if for some reason the register has not been updated, the Respondents could have it updated in no time before production.

10.  Mr So relied on the Annual Return of Man Lung dated 2January 2017, which showed that the Petitioner, the 2^nd and 3^rd Respondents were shareholders of the company as evidence that the Petitioner was a member at the time of presentation of the petition.  That argument is extremely artificial.  Be that as it may, that evidence is rebutted by the Agreement.  In any event, it cannot stand in the face of paragraph 9 of the petition.  

11.  Assuming for argument sake that the Petitioner’s name is for some reason still entered inthe register of shareholders, Mr So made the following submission.  But, inmy view, the argument is wholly artificial and based on invalid assumptions.  However, as he had quoted some authorities, I shall deal with it.

12.  Mr So referred to Yan Kwok Kin Julian v Yan Kwok Kee Gay[1] and Cheung Kwan v Xu Shengheng & ors[2].  In Yan Kwok Kin Julian, the administratrix of a deceased member sought to attend and vote at meetings of the company without having first transferred the shares to her name.  In dismissing her case, Le Pichon J said[3]:

“ When one looks at the provisions of the Companies Ordinance (Cap 32), as regards the obligation to maintain a register of members under s 95 and who is considered a memberof the Company under the provisions of s 28, it is quite clear that only those persons whose names appear on the register can be sotreated.  Pender v Lushington (1877) 6 Ch D 70 is authority forthe view that the register is the only evidence by which the rights of members to vote at a general meeting could be ascertained.”

The issue in that case was whether a person who is entitled to the shares but whose name is not entered in the register of members may attend and vote at the meetings of the company.  The court held on the authority of Pender v Lushington that the register is the only evidence by which the rights of members to vote at a general meeting could be ascertained.  That case was about attending and voting at general meeting.  It is not directly on the point.

13.  In Cheung Kwan, it is not disputed that the petitioner was nota member of the company when the petition was presented.  In striking out the petition, Deputy High Court Judge Le Pichon quoted Yan Kwok Kin Julian and said[4]:

“ 5. It is trite law that only a ‘member’ of the company (within the definition of that term in section 28 of the Ordinance) may present a petition under section 168A. In other words, only a person whose name ‘is entered on [the] register of members’ of the company on the date the petition is presented would have the requisite standing to present such a petition. See Yan Kwok Kin Julian v Yan Kwok Gay & Others [1997] 3 HKC 237, 241F–H.”

That case is directly on the point, but it does not assist the Petitioner.  I think that case was quoted for the purpose of applying the principle in Yan Kwok Kin Julian to a winding-up petition.

14.  Mr So submitted that section 28 of the former Companies Ordinance which was in force at the time of those decisions is similar to section 2 of the current Companies Ordinance, ie a member means a founder member of the company or a person who has agreed to become a member and whose name is entered as a member in the company’s register of members.  Hence the ratio decidendi in Yan Kwok Kin Julian is also applicable to the construction of section 2 of the current Companies Ordinance.  I have no disagreement with his proposition.  But the question is what have those two authorities decided and whether those authorities are applicable to the facts of the present case. 

15.  I think what those cases have decided is that only persons whose names appear on the register can be treated as members.  So far as the right to attend and vote at company’s meeting is concerned, the register is conclusive, but not for other purposes.  There is obvious policy reason for such a rule of convenience.  But these cases did not go that far as to support the proposition that the entries in the register is conclusive evidence of membership.  In fact, there is strong authority to the contrary.  In Reese River Silver Mining Co Ltd v Smith[5], Lord Westbury held that the register is only prima facie but not conclusive evidence.  The court would always look at the factual circumstances of the case.  He said[6]:

“ Now, my Lords, it is idle to contend that the register of shareholders is, under the Act of 1862, made final and conclusive. It is no such thing. If it had been so it would have been simply necessary to say that all persons who appeared as shareholders on that register at the date of the winding-up order should continue liable to the creditors. No such thing is said, but on the contrary this is said, that those only are liable to the creditors who have agreed to become shareholders and whose names appear upon the register. Even that is not strictly accurate, because a man may be made a shareholder, and be liable, who has simply agreedto become a shareholder, although his name is not de facto on the register. Again, it is clear that the register is not final, because the register, after an order, may be purged of a number of persons whose names appear there, if it be shewn that their names have been placed there without any authority or any agreement on their parts. But it does not rest there, because the Act of Parliament contains a provision which not only makes it the duty of the directors to alter the register from time to time, but gives power to the Court, after an order, to rectify the register in case of default by the directors.”

Thus, the two authorities cited by Mr So do not really assist the Petitioner.  In fact, the case of Cheung Kwan,in which the petition was dismissed, is on all fours with the present case.  The Petitioner’s lack of locus standi is beyond argument.

Abuse of process

16.  Having come to the conclusion that the Petitioner has no locus standi to present this petition, there is no need to consider the second ground for striking out.  Indeed, to commence proceedings which are bound to fail is in itself an abuse of process.  I do not intend to consider the grounds of the petition.  Even if the Petitioner has an arguable case, he is bound to fail as he has no locus standi.  I cannot help thinking that his motive for presenting the petition was to put pressure on the 2^nd Respondentto settle his contractual claim under the Agreement.  Even if he is a victim of breach of the Agreement, his remedy should lie in contract against the 2^nd and 3^rd Respondents. Maybe he has other difficulties in bringing an action in contract.  That is not a reason to present a petition for winding up the companies.

Conclusion

17.  For the above reasons, I find that the Petitioner has no locus standi to present this petition.  Accordingly, the petition is struck out with costs against the Petitioner.  Such costs are to be taxed, if not agreed.