NG SHUI LAN v. HONG CHUNG SING

HCCW398/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS

NO. 398 OF 2006

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D E C I S I O N

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1. I have before me two applications in relation to Aileen Industrial Company Limited (“the Company”).  The first is an application to withdraw an earlier summons seeking the appointment of provisional liquidators in respect of the Company.  The second is an application for the appointment of receivers in respect of the Company, which Mr Liang, who appeared for the Petitioner (the applicant in both applications) sought to amend at the hearing so as to limit the appointment so as to be not in respect of the Company as a whole, but only in respect of certain specific properties of the company which are described in the summons which was issued on 8 November 2006. 

2. The background to these applications is that these proceedings involve shareholders’ dispute in relation to the Company.  The Petitioner and the 1st Respondent are the only shareholders of the Company.  When the Company was first set up, it was set up as the incorporation of a partnership of which the Petitioner and 1st Respondent were partners.  At the time that the Company was incorporated, the Petitioner held some 40 per cent of the shares of the company and the 1st respondent 60 per cent.  However, at the time of the presentation of the petition, the shareholdings were equal, each holding 50 per cent.  That, at least, was the position on the Companies Register and as appears from documents filed with the Companies Registry. 

3. The transfer of the 10 per cent which made the shareholdings equal was registered in about November 2005.  The Petitioner says that she was in fact given blank instruments of transfer and bought and sold notes in respect of the 10 per cent shareholding many years ago, sometime in the early 1990s, but she did not see the need to implement the transfer until much more recently. 

4. The 1st Respondent denies that there has been any valid transfer and suggests that the instruments of transfer and bought and sold notes may be forgeries, at least so far as his signature on them is concerned, but that is not an issue that needs to, or could, be determined today.  It suffices to say that, at this stage, Mr Dawes, who appears for the 1st Respondent, accepts that for present purposes there is at least an arguable or serious question to be tried as to this and that therefore, I should proceed, for today's purposes, on the basis that the parties each hold 50 per cent of the Company. 

5. It appears that the Company was incorporated in about 1987 and, since then, the Petitioner and 1st Respondent have been its only directors.  It carried on the business of trading in plastic products which it manufactured from manufacturing facilities in Dongguan in China.  In the middle of this year, the relationship between the Petitioner and the 1st Respondent broke down.  It is perhaps pertinent to add that, in addition to being business partners, the Petitioner and the 1st Respondent also appeared to have been cohabiting for many years together.  However, according to the Petitioner, in about July this year, she was excluded from the Company's premises when the locks to its main premises were changed and she was not given a new set of keys.  She alleges also that she was told by the 1st Respondent that she was dismissed as a director and was no longer required to return to the Company to carry out any duties.  She says that, at the same time, another senior employee of the Company, a Mr Stephen Ho, was also dismissed. 

6. The 1st Respondent's case is that he did not dismiss the Petitioner, although he accepts that the locks at the Company’s premises were changed.  He says that this was because he had discovered that the Petitioner had been in breach of her duties towards the Company by diverting business opportunities that should have gone to the Company to herself and to a company which she had set up.  Again, these are matters that will have to be determined in due course, in the course of hearing the petition in these proceedings, and it is not possible or appropriate at this stage to try to come to any view as to who is right and who is wrong.  It is sufficient to note for present purposes, in the context of the receivership application, that Mr Dawes accepted that there was a serious question to be tried in relation to the Petitioner's claim so that that initial hurdle was overcome so far as the Petitioner's application for the appointment of receivers was concerned.

7. Following the breakdown in the relationship, there appears to have been an offer by the 1st Respondent to buy out the Petitioner's shareholding in the Company.  The Petitioner then sought, through her solicitors, information as to the Company's financial position and sight of the Company’s accounting books and records to enable her to come to a view as to the value of her shareholding in the Company for the purpose of negotiating a buyout.  Thereafter, it is quite clear that there was some delay on the part of the 1st Respondent in providing the information requested.  It appears that he backtracked on his offer to buy out the Petitioner to some extent, and he certainly took a considerable time before he eventually provided information as to the Company's financial position.  It was first said that documentation was with the Company's accountants and eventually, after several reminders, the Petitioner took out an application seeking the appointment of provisional liquidators in respect of the Company.  The basis of the application was that she was concerned that the Company's assets were in jeopardy and that they were at risk of being mismanaged or dissipated by the 1st Respondent and the foundation of that concern was said to be the suspicions which had been engendered by the 1st Respondent's failure to provide information as to the financial position of the Company on a prompt basis. 

8. That application was taken out on 4 October 2006 and was due to be heard on 18 October 2006.  The day before the hearing of the application, the 1st Respondent filed an affirmation taking issue with the application, but also providing a substantial amount of information as to the Company's financial position in the form of its accounts and various accounting books and records.  On that being done, the matter was adjourned for further argument.  The adjourned hearing was to have taken place today, but in the light of the information that was provided, the Petitioner decided that it was no longer necessary to seek the appointment of provisional liquidators but was content to apply instead for the appointment of receivers over the Company's property.  With that in mind, she took out the two summonses which are now before me, the first seeking the withdrawal of the application for appointment of provisional liquidators and the second seeking the appointment of receivers and managers. 

9. So far as the summons for withdrawal of the application for appointment of provisional liquidators is concerned, the parties are agreed that the summons should be withdrawn and an order should therefore be made giving leave to withdraw the application for the appointment of provisional liquidators.  The issue that divides the parties, however, is the question of who should bear the costs of the application for the appointment of provisional liquidators.  Mr Liang contends that the appropriate order in the circumstances would be that the costs of that application should be in the cause of the proceedings.  Mr Dawes disagrees and suggests that the appropriate order for costs should be that the petitioner should bear the costs of the application for the appointment of provisional liquidators.  Mr Dawes says that this is because that application was one which could not possibly have succeeded.  He suggests first that the Petitioner, although he accepts she has shown a serious tried to be tried, has not, in fact, shown a good prima facie case for the making of a winding-up order in the light of the fact that the breakdown in the relationship between the parties, which is common ground, was due not to any fault on the part of the 1st Respondent but was due to the wrongful acts of the Petitioner.  He went on to suggest that, in any event, the fact that there was delay in providing the financial information which was sought, did not justify the making of the application for appointment of provisional liquidators in that it was not possible for the court to infer, on the basis only of the delay in provision of documents, that there existed any real jeopardy or risk to the Company's assets such as would justify the appointment of provisional liquidators to the Company.

10. Mr Liang's position was that the circumstances in which the application came to be made were such that the Petitioner was well justified in harbouring concerns as to the integrity of the Company's assets and as to the way in which it was being managed.  He also pointed out that the Petitioner could be said, in a sense, to have achieved something from the application for the appointment of provisional liquidators in that the financial information that had been sought was in fact provided on the eve of the hearing of the application. 

11. In my view, the appropriate course for the petitioner to have adopted if she were concerned to obtain financial information in respect of the company, would have been to apply under section 121 of the Companies Ordinance (Cap. 32).  That provides a means for a director to obtain information from a company as to its financial position if he needs to do so.  It seems to me that the fact that there was delay - and there was undoubted delay in the provision of the information that was requested - would not of itself suffice to justify the inference that the Company's assets were in jeopardy being drawn, so as to justify the appointment of a provisional liquidator.  It also seems to me that the fact that, at the end of the day, the information having been provided, the Petitioner decided not to pursue further the question of the appointment of a provisional liquidator, suggests that the Petitioner is in fact not particularly concerned about the risk to the Company's assets while they are left in the hands of its present management.  If there were really a concern as to this, I would have expected the application to have been proceeded with regardless of the fact that some information was provided.  It seems to me also to be relevant to take into account the fact that the Company is now, by common consent, no longer operational. 

12. In all of the circumstances, therefore, it seems to me that the application to appoint provisional liquidators was one which would not have succeeded and even though some information was obtained, that information could have been obtained just as well without the application for provisional liquidators having been made.  In the circumstances, I am satisfied that the appropriate order for costs as to the application for provisional liquidators, including the Official Receiver's costs which I will assess in the sum of $4,900, is that these should be paid by the Petitioner to the 1st Respondent in any event. 

13. I turn now to the question of the appointment of receivers.  Mr Dawes opposes the appointment of receivers principally on the grounds that the Petitioner had not, in fact, intimated to the 1^st Respondent that she wished to have receivers appointed for the purpose of managing and letting out the Company's properties.  He also suggested that the cost of appointing receivers would be such that it would eat into any return that might be provided from the properties by way of rental and that, given the nature of the Company, it was probably more sensible for the parties to try to agree the basis on which they could let the properties out.  He pointed out that the 1st Respondent had indicated quite clearly that he was not opposed to letting out the properties in question, with perhaps the exception of one of the workshop units which he was suggesting should be retained for the purpose of providing a storage area for the company's documents, records and some of its remaining property. 

14. Mr Dawes suggested that although the parties' relationship on the business level in relation to the day-to-day running of the business had broken down, there was no reason why they could not co-operate over a relatively non-contentious matter such as the making of arrangements to let out the property.  In answer to this, Mr Liang suggested that it was quite unrealistic to expect the parties to be able to agree on anything, given the state of their relationship as it now stands.  In the light of that, he suggested, the Company was effectively in a state of deadlock so that it would be impossible for either the directors or the shareholders to come to any consensus such as how to deal with the properties or to co-operate in taking steps to let them out. 

15. In those circumstances, he suggested that given that there was a serious question to be tried as to the relief that was being sought, the balance of justice and convenience favoured the appointment of receivers so that at least the Company's assets could be turned to account so as to produce some income for the benefit of the Company and its creditors and/or shareholders rather than having them lie fallow without producing any return at all. 

16. In my view, Mr Liang is right.  The relationship between the Petitioner and 1st Respondent has clearly deteriorated to such an extent that they cannot reasonably be expected to co-operated with each other in relation to any of the Company's affairs.  In those circumstances, I think that it is desirable from the point of view of both parties that an independent person be entrusted with the task of managing the Company's properties so as to turn them to best account. 

17. The costs of the receivers proposed to be appointed have been addressed in a recent letter from the proposed appointees in which they indicate their likely charges for handling an assignment of this sort.  It results in about 20 per cent of the likely rental value of the property being expended on their fees and charges.  There will, of course, be certain further other expenses to be borne which will further reduce the net amount flowing into the coffers of the company, such as commissions to be paid to estate agents and no doubt some expenses in relation to the property in the meantime.  Be that as it may, it seems to me that in the situation which the parties are currently faced with in which they cannot realistically, I think, be expected to co-operate with each other, there appears to be little alternative but to have independent persons appointed to act as receivers and managers of the property in question so that it can be turned to account for the benefit of all concerned.  It is not presently known when the petition will eventually come on for hearing.  It is not unreasonable to suppose that that will be at least a year in the future and there seems to be no good reason why the Company's assets should not be put to good use in the meantime. 

18. I would therefore accede to the application for the appointment of receivers and managers.  There are two matters that need to be dealt with in the context.  The first is as to whether or not they should be appointed as receivers and managers of all of the properties in question, or whether their appointment should be limited so as to except from the scope of the appointment one of the workshop units to enable the Company to have some place to store its remaining equipment, stocks and documents. 

19. The second question is the question of costs of the application.  As far as the costs are concerned, Mr Dawes has submitted that the appropriate order is that costs should be in the cause on the basis that there was no prior warning of the application.  However, in my view, had the 1st Respondent been minded to agree to the appointment of receivers, there was nothing to prevent him indicating that at an early stage after the application was made.  The fact is that the 1st Respondent persisted in his opposition to the application with the result that it was necessary to have a contested hearing as to the appointment of receivers and, in the circumstances, I think the appropriate order as to costs of the receivership application is that the costs of that application should be paid by the 1st Respondent to the Petitioner in any event. 

20. The only reservation that I have relates to the first question, which is really a question for the parties to consider, whether or not the appointment of a receiver should extend to all three of the workshop units or whether it is more desirable to limit it to two units.  This is really a question of what is actually left of the Company’s property that needs to be kept or preserved. Rather than trying to deal with the matter immediately, I shall simply make an order appointing the receivers and managers, in terms of the summons and, as far as any question that may arise in the future as to the extent of the appointment is concerned, the parties, if they need to, can come back under the liberty to apply which will be given.

22. In relation to the withdrawal summons, the order will be an order in terms of paragraph 1 and, in respect of paragraph 2, costs of this summons and summons dated 4 October 2006 be paid by the petitioner to the 1st respondent in any event.  In relation to the other receivers summons, there will be an order in terms of paragraphs 1, 2 and 3 except that in paragraph 1, they will be appointed as receivers and managers.  As far as costs are concerned, the costs of that summons are to be paid by the 1st respondent to the petitioner, in any event.