WINBLESS INC v. CENTRAL BILLION INC AND OTHERS

HCCW 371/2011

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING‑UP) NO 371 OF 2011

____________

______________

D E C I S I O N

______________

Introduction

1.  On 29 April 2013, Madam Justice Chan granted, by consent, validation orders under section 182 of the Companies Ordinance for Grand Textile Company, Limited (“Grand Textile”) in HCCW 371/2011 and International Textile Company, Limited (“International Textile”) in HCCW 373/2011 to dispose of certain very substantial properties held by the companies.  This hearing is consequential upon and pursuant to paragraph 2 of the respective validation orders to determine the disposal of the sale proceeds of those properties.  The petitioners seek equal

2.  distribution of the sale proceeds to the shareholders of the two companies.  The 2^nd to 4^th Respondents in HCCW 371/2011 and the 3^rd to 5^th Respondents in HCCW 373/2011, collectively the “relevant respondents”) do not object to the proposed distribution, but feel constrained to consent because of the impending winding‑up petitions of the two companies and their parent companies.

Background

3.  International Textile and Grand Textile were set up by the late Chang Nan Chong (“Father”) in 1950s and 1980s respectively.  In course of time, these companies became enormously asset rich companies holding properties in Hong Kong and abroad.  The Father had four sons, Albert, William, Charles and David and one daughter, Irene (collectively, “the siblings”).  As part of their estate planning, the Father and his wife (“Mother”) respectively set up Central Billion Inc (“Central Billion”) and Welljoy Inc (“Welljoy”), which are British Virgin Islands (“BVI”) companies, for the purpose of holding assets under two trusts for the siblings.  Each of the siblings has a 20% interest in Central Billion and Welljoy.  With the abolition of estate duty, the trusts were dissolved.

4.  The authorized share capital of International Textile is $10,096,700 divided into 10,000 ordinary and 90,967 non‑voting deferred shares of $100 each.  There are five corporate directors in the company, Welljoy and four other BVI companies each of which is exclusively owned by one of the sons.  Each of these BVI companies holds 400 ordinary shares in International Textile.  The remaining 8,003 ordinary shares are held by Central Billion Inc and Fako International Corporation (“Fako”) set up by the Father.  Each of the siblings has a 20% interest in Central Billion.  Thus, the shareholding of International Textile, as far as the ordinary shares are concerned, is as follows:

Shareholder	Owner	No of shares	Percentage
Fako	common	7,435	74.33%
Central Billion	common	568	5.67%
Bright Star	Albert	400	4.00%
Fancymind	William	400	4.00%
Topedge	Charles	400	4.00%
Amazing	David	400	4.00%
Welljoy	common	400	4.00%

Fako is a Cook Islands company equally owned by Central Billion and Welljoy.  It is Albert’s case that another 66,898 non‑voting deferred shares were held by Fako.  This divergence is unlikely to be a point capable of substantive dispute and for reasons as will become obvious such shares are unlikely to be of any significance in the proposed distribution of the sale proceeds.

5.  Grand Textile is held under a similar shareholding structure.  The authorized share capital of Grand Textile is $20,006,000 divided into 100 ordinary and 199,960 non‑voting deferred shares of $100 each.  There are six corporate directors in the company, including Welljoy and five BVI companies each of which is exclusively owned by one of the siblings.  The shareholding of Grand Textile, as far as the ordinary shares are concerned, is as follows:

Shareholder	Owner	No of shares	Percentage
Central Billion	common	40	40%
Bright Star	Albert	10	10%
Fancymind	William	10	10%
Topedge	Charles	10	10%
Amazing	David	10	10%
Winbless	Irene	10	10%
Welljoy	common	10	10%

100,000 non‑voting deferred shares were held by the Father and Mother.

6.  The Father died in 1998.  In 1999, the siblings in the presence of the Mother, agreed to distribute the assets of Central Billion, Welljoy, Fako and their subsidiaries (collectively, the “Group Companies”) in accordance with their respective shareholdings in each of the Group Companies with Albert in charge of the sale of the assets and distribution (“Shareholders’ Agreement”).  Now the siblings allege that in breach of that agreement, Albert exploited the assets of the Group Companies to the detriment of the other siblings.  Through their BVI companies, the siblings presented winding‑up petitions against International Textile, Grand Textile, Central Billion and Welljoy.

7.  There are three special features in these petitions.  First, the companies are hugely solvent.  As at 31 March 2012, Grand Textile has accumulated unappropriated profits in the sum of $293,556,890 with net assets in the sum of $322,562,923 including cash and cash equivalents in the sum of $22,609,301.  Its total current liability is only in the sum of $1,318,130.  International Textile has accumulated unappropriated profits in the sum of $205,823,668 with net assets in the sum of $231,421,654 including cash and cash equivalents in the sum of $2,032,237.  Its total current liability is only in the sum of $862,972.  The combined unappropriated profits of the two companies is almost $500 million.  Second, these are contributories petitions.  It is shareholders’ interests that looms large.  Third, these are passive companies holding assets and not in active trading.

The legal principles

8.  In a winding‑up petition, the primary concern is the interest of the creditors.  As a contributory’s petition for winding‑up is not grounded on insolvency, the court does not generally interfere with the directors’ exercise of discretion in the operation of the company.  Directors are agents of the company entrusted with its operation.  The court will not readily substitute its opinion for that of the directors or interfere with their exercise of discretion in the operation of the company.  The principle has therefore developed that if the directors consider a particular disposition falling within their powers as directors is necessary or expedient in the interests of the company, and if the court considers that the reasons given are such that an intelligent and honest person could hold that view, the court would normally sanction that disposition notwithstanding that it may be opposed by a contributory unless there is very clear and compelling evidence to suggest that the disposition is likely to be injurious to the interests of the company. This is all the more so where the company is solvent and the court does not have to be burdened with the interest of the creditors.  In Re Mi Fung Beads Company Limited[1], Barma J, as he then was, held at paragraph 22:

“22. In these circumstances, where the company is solvent, it seems to me that the appropriate approach to take to the question of whether or not a validation order should be granted is that described by Madam Justice Yuen as she then was in Re Taipat Resins Ltd (unreported, CFI, 26 August 1999), in which she applied the principles laid down in Re Burton and Deakin Ltd [1997] 1 WLR 390 that is, where a company is solvent and a validation order is sought if the directors consider that a particular disposition falling within their powers as directors is necessary or expedient in the interests of the company, and if the court considers that the reasons given are such that an intelligent and honest person could hold that view, the court would normally sanction that that disposition notwithstanding that it may be opposed by a contributory unless there is very clear and compelling evidence to suggest that the disposition is likely to be injurious to the interests of the company.”

(My emphasis added).

9.  The principle in Re Burton and Deakin Ltd[2] was adopted by Kwan J, as she then was, in Re Wah Ying Cheong Co Ltd[3].  She said at paragraph 7:

“ The applicable legal principles in this situation, where I am concerned with a solvent company, are stated in Re Burton and Deakin Limited [1977] 1 All ER 631 at 636 g to j, and 637 d to e. In short, the court will not interfere with the exercise of discretion conferred on a board of directors unless in the case of proven bad faith or other exceptional circumstances. The court will in the exercise of the discretion normally sanction the disposition, if the board considers it necessary or expedient in the interests of the company and an intelligent and honest man could reasonably hold this view, unless there is compelling evidence from the opposing shareholder that the disposition is in fact likely to injure the company.”

10.  This principle was invariably followed by companies judges: see, for example, Re Surplus Trade Ltd & Another[4].  The approach of the court is therefore to consider: (1) whether a particular disposition is within the powers of the directors under the company’s constitution; (2) whether the directors consider the disposition necessary or expedient in the interest of the company; (3) whether their reasons for the opinion are ones which the court considers that an intelligent and honest man could reasonably hold; and (4) whether any contributory has adduced compelling evidence proving that the disposition is in fact likely to injure the company.

Discussion

11.  As already noted, these companies are hugely solvent companies with unappropriated profits amounting to nearly $500 million, but liabilities in the amount of about $3 million.  Even if the sales proceeds are distributed, there will still be huge reserve left in the sum of $381 million. By any stretch of imagination, the reserve will be more than enough to cover any potential claims of any known creditors and liquidation expenses.  There is no dispute that in the past distributions were made to the directors in the form of “directors’ loan”.  Grand Textile distributed $60 million in the year ending 31 March 2011, and $26.4 million in the year ending 31 March 2012.  On the face, the similar disposition now sought is within the powers of the directors under the company’s constitution.  The relevant respondents did not argue otherwise.

12.  There is no dispute that the siblings are in agreement that the Group Companies should be liquidated with assets distributed to them in accordance with their respective shareholdings in the Group Companies.  On 25 March 2003, Albert wrote to his siblings:

“ Our companies are now in the business of passive investments. There are no movements of assets and no new projects to undertake. I shall manage the companies, as it has been managed, in a fair to all manner taking care of the interest of all. When the time is ripe. I shall slowly and painlessly dismantle our Dad’s empire and distribute the money to you all. I am over 60 years old and I have no desire to perpetuate the companies.”

Albert’s intent as expressed in the above quotation is consistent with the Shareholders’ Agreement.  In the case of a passive company destined to be wound up with its assets distributed to its contributories, it is clearly open to the directors to consider a disposition to its shareholders necessary or expedient in the interest of the company.  This court can hardly consider that an intelligent and honest man could reasonably hold otherwise.

13.  There are two concerns raised by Albert.  First, there are pending winding‑up petitions against the Group Companies and the Official Receiver may not agree to the distribution of the sale proceeds before the conclusion of the winding‑up proceedings.  The Official Receiver, by his letter dated 30 August 2013, indicated that he is neutral to the proposed distribution.  He reminded the court of the relevant legal principles involved and raised the issue of whether the disposition may have the effect of reducing the assets available so that expenses incurred in the winding‑up process may not be paid in full if a winding‑up order is made.  These are passive companies holding properties and collecting rental income.  As already noted, these are hugely solvent companies with assets far exceeding their liabilities.  Other than the known liabilities, there are no external creditors involved.  It is inconceivable that by making the distribution, the companies will be at risk of not being able to pay their winding‑up expenses.

14.  Second, Albert is concerned that there are other shareholders holding ordinary and non‑voting deferred shares whose interest would be affected by the distribution.  Under the articles of association of the two companies, the non‑voting deferred shares held by the Father and Mother would not be entitled to any distribution of dividend unless the companies’ profits exceed $1,000,000,000 million.  By no stretch of the Father’s and Mother’s imagination at the time they allotted those shares to themselves would they have thought that a real possibility.  Nor do I today think that likely to happen in the present days.  The interest of the Father and Mother could be safely put aside.  As for the other shareholders, Fako, Central Billion and Welljoy, their dividend bearing ordinary shares are owned by the siblings in equal shares.  Distribution to them is in effect distribution to the siblings.  As there is no question that the directors have to make distribution according to the shareholding structure, I am unable to see how such a distribution could be objectionable.

15.  Albert contended that Central Billion and Welljoy are subject to winding‑up proceedings here and in BVI to which a jurisdictional challenge is mounted and distribution by those companies to the siblings would require validation orders.  He is concerned what orders the Hong Kong court and BVI court will make in respect of the distribution.  He is also worried that the liquidators of Central Billion and Welljoy might take the view that the distribution is unlawful or unfair preference to associated persons and provoke litigation.  Albert’s worry is misconceived because it is only the disposition of assets by a company subject to winding‑up proceedings which requires the sanction of the court under section 182 of the Companies Ordinance.  Their receipt of dividends or income does not.  Indeed, if distributions should be made to Central Billion and Welljoy, it would save the liquidators of those companies, if appointed, the time and additional costs of claiming against the companies in its asset realization process.  Once distributions are made to those companies, any payment out by them to their shareholders will be subject to the supervision and sanction of the court.  In my opinion, the concerns and worries of Albert are unreal and inapprehensible.

16.  I therefore conclude that no compelling evidence has been adduced showing that the disposition sought is in fact likely to injure the company.

Conclusion

17.  Accordingly, I order distribution of the sales proceeds in accordance with the shareholding structure of the respective companies and that the costs of the applications shall be paid out of the assets of the respective companies.  Such costs are to be taxed if not agreed.