MAI GOU v. MAK CHIK LUN

CACV 1125/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 1125 OF 2000

(ON APPEAL FROM HCCW 717 OF 2000)

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REASONS FOR JUDGMENT

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Hon Le Pichon JA:

1. This is an appeal from the order of Madam Chu J dated 11 December 2000 whereby she ordered that certain issues be tried as preliminary issues in the winding-up petition presented by Mai Gou (the petitioner) as one of two contributories on the just and equitable ground. The petition is opposed by the other contributory, Mak Chik Lun, who is the younger brother of the petitioner.

2. At the hearing of the appeal by the petitioner, the opposing contributory not objecting, the court allowed the appeal with reasons to be handed down later. My reasons for allowing the appeal appear below.

The Facts

3. Two of four issued shares in the capital of the company are registered in the names of each of the petitioner and the opposing contributory respectively. The petitioner, as one of two contributories, complains that:

(a) approximately $55 million constituting most of the company's working capital and reserves were withdrawn from the company's bank accounts without shareholder approval;

(b) the directors being the opposing contributory and his wife failed to report and provide satisfactory financial accounting information in relation to the company;

(c) the shareholders are deadlocked and the petitioner was unable at the EGM on 17 May 2000 to force the company to take any action relating to (a) and (b) above; and

(d) the former trust and confidence reposed by him in the opposing contributory was further eroded when after the EGM, the opposing contributory in anticipation of these proceedings issued a writ falsely alleging a beneficial interest in the petitioner's shares in the company upon the basis of a concocted story with no basis in fact.

4. By summons dated 16 October 2000, the opposing contributory applied for a stay of the petition pending the determination of the beneficial ownership of the petitioner's shareholding in the company which is the subject of HCA 4854 of 2000. That High Court action was brought by the opposing contributory. Although the writ was issued on 16 May 2000, it was not served until after the petition for the winding-up of the company had been presented in August. At the hearing of that summons, the judge declined to order a stay and adjourned the stay application for mention for hearing on 11 December 2000.

5. The opposing contributory caused another summons to be issued shortly before that further hearing and applied for an order for a preliminary issue on the question of the petitioner's locus.

6. At that hearing, the judge below ordered that:

"1. the issues of

a. whether the Opposing Contributory and Mai Gou, the Petitioner in the winding-up proceedings, had entered into the July Agreement as pleaded in the Statement of Claim filed in the High Court action (HCA 4854 of 2000); and

b. whether the Petitioner has the necessary locus standi to present the Petition in these proceedings

be tried as the preliminary issues in these proceedings;"

7. Directions were also given for the filing of evidence on the preliminary issues, for discovery and inspection, that there be a speedy trial of the preliminary issues with leave to the parties to set them down for trial with three days reserved.

Preliminary Issues - Applicable Principles

8. The annotation in the Supreme Court Practice 1999 is a useful starting point. At paragraph 33/4/10 it is stated that:

"An order for the separate trial of separate issues is a departure from the beneficial object of the law that all disputes should be tried together, and therefore, generally speaking, such an order should only be made in exceptional circumstances or on special grounds (per Jessel M.R. in Piercy v. Young (1880) 15 Ch.D. 475 at 479 and 480; per Scrutton L.J. in Bottomley v. Hurst and Blackett (1928) 44 T.L.R. 451 at 452."

9. This approach was echoed by Lord Wilberforce in his speech in Tilling v. Whiteman [1980] AC 1 at 17H-18A:

"I, with others of your Lordships, have often protested against the practice of allowing preliminary points to be taken, since this course frequently adds to the difficulties of courts of appeal and tends to increase the cost and time of legal proceedings. If this practice cannot be confined to cases where the facts are complicated and the legal issue short and easily decided, cases outside this guiding principle should at least be exceptional."

10. Indeed, as Lord Roskill observed in his speech in Allen v. Gulf Oil Refining Ltd (1981) AC 1001 at 1022 A:

"The preliminary point procedure can in certain classes of case be invoked to achieve the desirable aim both of economy and simplicity. But cases in which such invocation is desirable are few. Sometimes a single issue of law can be isolated from the other issues in a particular case whether of fact or of law, and its decision may be finally determinative of the case as a whole. Sometimes facts can be agreed and the sole issue is one of law."

Lord Roskill went on to urge those whose task it is to decide whether or not the trial of preliminary points should be ordered to be "extremely cautious" before acceding to pleas for the making of such orders as a result of attractively advanced submissions founded upon pleas of supposed economy.

11. It is sometimes said that trials of preliminary issues should only be ordered if, whichever way they are decided, they would be determinative of the case or at least part of the case. The good sense of that rule of thumb is apparent and it is a rule which I would readily endorse.

Reasons for the Order

12. Before turning to the test applied and its appropriateness, there are difficulties with what the judge perceived to be the locus standi issue. Of the two preliminary issues ordered to be tried, the second is a non-issue. The petitioner is a registered shareholder. Whether or not he holds those shares beneficially or upon trust would not affect his locus to present a contributory's petition. That is well-established. See Ng Yat Chi v. Max Share Ltd & Another [1998] 1 HKLRD 866, 870F; Re Greater Beijing Region Expressways Ltd [2000] 2 HKLRD 776, 780-782; Re Ocean Palace Restaurant & Nightclub Ltd [1999] 3 HKC 665, 668I-669B. Given the facts, there is no question but that the petitioner does have locus standi to present a contributory's petition. The preliminary issues therefore do not go to the question of the petitioner's locus as such. Rather, they go to the question of the beneficial ownership of his shares which turns on disputed facts. It must be rare, and certainly highly undesirable, to order preliminary issues of disputed facts.

13. I now turn to the test applied by the judge below. That appears at page 5 O-Q of her Reasons for Decision:

"In my view, the question of whether there ought to be a trial of the preliminary issue involves balancing the advantages to be achieved by such a course against the detriment or prejudice occasioned to the opposing party."

14. She then applied that test to the facts before her. She proceeded on the basis that the locus standi point was a separate and distinct issue not involving or hinging upon the merits of the petition. She considered that the advantage of avoiding a hearing on the merits was a real and probable one. Whilst recognising that the effect of deferring an adjudication on the merits of the petition would be some form of prejudice to the petitioner, she concluded that "prejudice ... has not been demonstrated to be very grave or irreparable." She based this on the fact that the company was not actively trading and that there was no indication of substantial damage or inconvenience to the company as a result. She further concluded that the petitioner and the company would be prevented from seeking a recovery of the $55 million alleged to have been channelled out of the company, she found that the evidence did not suggest that the delay would result in the company or its contributories losing the prospect of recovery or that the opposing contributory would be financially in no position to repay the sums to the company. So, applying the balancing test, she reached the conclusion that the locus standi point ought to be tried as a preliminary issue.

15. Counsel for the petitioner submitted that the judge had applied the wrong test. Having regard to the well-established principles as set out above, that submission appears to be correct. The test that was applied by the judge is akin to the test applied by the court in interlocutory-type applications. That is not the correct test to be applied in dealing with the question whether or not there should be a trial of preliminary issues. This should only be ordered in exceptional circumstances and the onus is upon the applicant to demonstrate and satisfy the court that such exceptional circumstances exist which justify such an order.

16. Moreover, the opposing contributory's claim to the beneficial ownership of the petitioner's shares is a matter of complaint in the petition itself. For my part, I do not see how it can be viewed as a distinct issue, not involving or hinging on the merits of the petition. It would follow that the conclusion that what the judge took to be the locus standi point was a separate and distinct issue not involving the merits of the petition was plainly wrong. This would have the further consequence that "the real and probable" advantage identified by the judge in fact did not exist.

17. The supposed savings in time and costs would appear to be an assumption without any factual basis. If at the trial of the preliminary issues it was found that the petitioner was and is the beneficial owner of the shares, the trial of the petition itself would involve calling the same witnesses. In fact, there would be precious little left of the petition to try once the beneficial ownership point is resolved. It is thus not readily apparent what additional time and costs the judge had in mind when ordering the trial of preliminary issues.

18. So far as prejudice to the petitioner is concerned, the judge recognised that the hearing of the petition would inevitably be deferred if there was to be a trial of preliminary issues. That in itself is prejudicial to the petitioner. Effectively, it would delay adjudication of the question whether $55 million of the company's assets have been channelled out of the company. This is not an insignificant amount. Whilst the opposing contributory may currently have assets of that value, by the nature of things, there can hardly be any assurance that the opposing contributory would continue to have assets of that value by the time the petition is finally determined. That may be some time off, given the possibility of appeals on the beneficial ownership issue if tried as a preliminary issue.

19. It would further appear that the judge approached the question on an incorrect premise: she considered that to order the trial of preliminary issues was not the same as ordering a stay of the petition. In substance, if not in form, that was the effect of the order made.

The order made on the appeal

20. At the hearing, counsel for the opposing contributory advised the court that pursuant to the order, dates had been obtained for the trial of the preliminary issues and three days commencing 28 May have been reserved. When asked whether there would be any practical difficulties if the whole of the petition were to be heard at the same time, he acknowledged that he could see none. Further, he had no objection to the appeal being allowed and for the petition to be heard during the three days originally allocated for the trial of the preliminary issues. Accordingly, the court allowed the appeal, ordered that the petition be heard on 29, 30 and 31 May 2001 and further directed that the matter be restored for directions before the trial judge as soon as practicable. I would finally observe that had an order for the trial of the preliminary issues been appropriate and not plainly wrong, the concessions which enabled the court to make the order on the appeal would not have been forthcoming.

Hon Rogers V-P:

21. I agree and have nothing to add.