LEE JONG RONG AND ANOTHER v. GREAT CHOICE CONSULTANTS LTD AND OTHERS

CAC V 152/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO 152 OF 2015

(ON APPEAL FROM HCCW NO 316 OF 2013)

____________

____________

____________

_______________________

J U D G M E N T

_______________________

Hon Lam VP:

1.  I have read the judgment of Yuen JA in draft. I agree with it and have nothing to add.

Hon Yuen JA:

2.  This is an appeal from a Decision of To, J given on 27 May 2015 in which he struck out and dismissed the petitioners’ petition.  He also made a consequential order (which I will refer to later in this Judgment¹) and ordered the petitioners to pay the 2^nd - 5^th respondents’ costs.

Introduction

3.  The petitioners and the 2^nd - 5^th respondents are the current shareholders (referred to in the petition as “the Present Shareholders”) of Great Choice Consultants Ltd (“the Company”), a company incorporated in 1995 in the BVI which has not been registered in Hong Kong. 

4.1.   Since 1995, the Company has been the registered shareholder of 29,999/30,000 shares in a Hong Kong company called     K & A International Co Ltd (“K&A”). 

4.2.   K&A had been incorporated earlier in 1994 with the petitioners and two of the respondents (the 2^nd and 4^th respondents) as shareholders.  It commenced trading in 1994 in gifts and home decoration items (referred to as “the Business” in the draft amended petition²).  A year later, according to the petitioners, in order to accommodate the participation of the other two respondents (the 3^rd and the 5^th respondents) and two other persons (who have since dropped out), the Company was incorporated and became the registered shareholder of 29,999/30,000 shares of K&A.  The 2^nd petitioner is the registered shareholder of the remaining share. 

5.  Apart from K&A, the Company is also the registered shareholder of shares in some other private Hong Kong companies.  Apart from Top Trend Investment Ltd (“Top Trend”), the other companies are dormant and do not matter for present purposes.  Since 2012, the Company has been the registered shareholder of 450,000/500,000 shares in Top Trend.  The petitioners allege that the 4^th respondent had used K&A’s funds to acquire properties in Top Trend’s name, and that those shares were allotted to the Company after the 4^th respondent’s conduct was discovered.

6.  The petitioners have made other allegations which are not material to the issues on this appeal.

Proceedings

7.  On 11 November 2013 the petitioners presented a petition – 

(1)   to wind up the Company under s.327(3)(c) of the Companies Ordinance Cap. 32 (“the Ordinance”);

alternatively,

(2)   for an order that the 2^nd- 5^th respondents purchase their shares in the Company under s.168A of the Ordinance.

Applications

8.1.   On 5 May 2014, the petitioners applied by summons to amend the petition (“the draft amended petition”).

8.2.   On 12 May 2014, the 2^nd- 5^th respondents applied by summons to strike out the petition.

Decision of To, J.

9.1.   Those applications were heard together by To, J.  At that time, the learned judge was bound by the judgment of the Court of Appeal in Re Yung Kee Holdings Ltd [2014] 2 HKLRD 313 which concerned the Hong Kong court’s jurisdiction to wind up, or make a s.168A order in respect of, a foreign unregistered company³.  So, eg, the judge emphasized certain features which were subsequently reviewed by the Court of Final Appeal (such as the requirement for more stringent connections in a shareholders’ petition as compared with a creditor’s petition, para. 13).

9.2.   On 27 May 2015, having considered the draft amended petition, the learned judge handed down a Decision striking out the petition which was then dismissed.  The amendment application was accordingly dismissed as well.

Appeal

10.  On 30 June 2015, the petitioners lodged a notice of appeal.

Yung Kee (CFA) Judgment

11.  On 11 November 2015 the Court of Final Appeal handed down judgment in the Yung Kee case: see Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501.  It is the principles set out in that judgment (“Yung Kee CFA”) that this court has applied in our considerations on this appeal.

Discussion

12.  I shall deal with the winding-up issue first, before dealing with the s.168A issue.

Section 327(3)(c)

13.  This section provides:

“(3) The circumstances in which an unregistered company may be wound up are as follows –

(c) if the court is of opinion that it is just and equitable that the Company should be wound up”.

14.1.   In Yung Kee (CFA), it was held that this section gave the Hong Kong court a discretionary jurisdiction to wind up a foreign unregistered company.  However since the most appropriate jurisdiction in which to wind up a company is the one where it was incorporated (which in our case, as in Yung Kee, is the BVI), the courts had adopted some “self-imposed constraints” (para. 20) in dealing with such petitions. 

14.2.   These “so-called core requirements” (para. 20), first developed in England and subsequently adopted by the Hong Kong courts, do not go to jurisdiction but to the exercise of discretion by a Hong Kong court to wind up a foreign unregistered company (para. 21).  They have been summarized as follows⁴:

“(1) there had to be a sufficient connection with Hong Kong, but this did not necessarily have to consist in the presence of assets within the jurisdiction;

(2) there must be a reasonable possibility that the winding-up order would benefit those applying for it; and

(3) the court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets”.

14.3.   In the present case it is not necessary for us to discuss whether these are stand-alone “requirements” or whether there may be some overlapping of one or more “requirements”. The only issue raised in our case was whether there was a sufficient connection with Hong Kong.

Sufficient connection between the Company and Hong Kong?

15.1.   Counsel for the petitioners relied on Yung Kee CFA to contend that the Company was, like Yung Kee Holdings Ltd, “merely a holding company, directly or indirectly holding subsidiary companies including K&A and Top Trend” (para.32.1, Skeleton Submissions).  The CFA had held in that case that since the holding company’s underlying assets were situated in Hong Kong,  its income was derived from business carried on by subsidiaries in Hong Kong, the holding company’s shareholders and directors were resident in Hong Kong, all board meetings of the holding company and its subsidiaries were held in Hong Kong and the holding company was incorporated in the BVI for estate duty avoidance only, there was a sufficient connection with Hong Kong such that the court here should exercise its discretion to make a winding-up order in respect of the holding company, even though it was incorporated in the BVI and was not registered in Hong Kong.

15.2.   Counsel for the 2^nd- 5^th respondents however pointed to an interesting pleading in the draft amended petition in our case, which alleged that the Company held the shares of K&A (and possibly some other companies in Hong Kong) on trust for the individuals who were the shareholders of the Company (para. 10E).  As such, the Company was a mere holder of the legal title in the shares of these Hong Kong companies, those companies were not in substance the Company’s assets, and the Company would not derive any income from businesses carried on by K&A and those other Hong Kong companies.  

16.  I have to say, with respect to the draftsman, that the draft amended petition appears to contain some inconsistencies. 

16.1.   At para. 10C.3, it was pleaded that the Present Shareholders agreed that a company incorporated under the laws of the BVI should be acquired as the “holding company” of K&A, a term which normally indicates a company holding the shares in a subsidiary and controlling it.

16.2.   However at para. 10E.1, it was pleaded that it was agreed and/or was the “common intention” of the shareholders that the shares in K&A “should begin to be held on trust” for the Present Shareholders and those who later dropped out, and indeed in paras. 15A, 17A, 18A and 20A, it was pleaded that by reason of the above, the Company held and holds K&A’s shares on trust for the shareholders.            

16.3.   Having said that, it was pleaded at para.12 that the Business, K&A and the Company had been operating as a “quasi-partnership”.  It is difficult to understand how a mere trustee of shares could operate as a quasi-partnership. 

16.4.   When this court asked counsel for the petitioners about these apparent inconsistencies, he confirmed that indeed it was their case that the Company holds K&A’s shares on trust for the Present Shareholders.  However it seems to me that the consequence is that if the Company is only a trustee of the shares in K&A, the shares in K&A are not the Company’s assets cf. Yung Kee (CFA).

17.1.   This is where Top Trend comes into the picture.  At para. 33 of the draft amended petition, K&A and Top Trend are referred to in the same breath (“following the incorporation of Top Trend ..., the Company became and remains whether directly or indirectly the holding company of K&A, Top Trend ..., through which the Business was and is carried out”).  However it was not pleaded anywhere that the shares of Top Trend were held on trust by the Company for the shareholders. 

17.2.   Top Trend is a Hong Kong company whose business is the holding of properties including office premises in Hong Kong. Unlike K&A (and the other now dormant companies) therefore, Top Trend was not acquired for the purpose of the trading Business (para. 10C) so as to be caught by the alleged agreement of a trust. 

17.3.   Although the judge referred to the fact that the Company was only a majority shareholder of Top Trend (para. 31), the shareholding of the other two persons (a consultant and an employee of K&A) was of only 5% each, and it is alleged in the draft amended petition that they were given their shares on the understanding that they would not have any rights, privileges or powers in the management of Top Trend (para. 27).

17.4.   Accordingly, on the facts as pleaded in the draft amended petition (on which basis an application to strike-out must proceed), it is arguable that the Company was, on the pleadings, to all intents and purposes the holding company of Top Trend, a Hong Kong company with underlying assets in Hong Kong from which rental income is derived in Hong Kong.  The 4^th respondent, who is accused of misconduct including but not limited to the affairs relating to the acquisition of properties in the name of Top Trend, is a Hong Kong resident. 

17.5.   In my view there is a sufficient connection between the Company and Hong Kong that would enable the Hong Kong court to wind up the Company if deemed appropriate.  Whether the court would do so in the exercise of its discretionary jurisdiction would have to be determined at a later stage of the proceedings. 

18.  Accordingly, I would allow this part of the petitioners’ appeal from To, J’s order.

19.  I now come to the petitioners’ application for a s.168A order.

Section 168A

20.1.   Section 168A provides (where material):

“(1) Any member of a specified corporation who complains that the affairs of the specified corporation are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of some part of the members (including himself) ... may make an application to the court by petition for an order under this section.

(2) If on any petition under subsection (1) the court is of opinion that the specified corporation’s affairs are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of some part of the members (including the member who presented the petition), whether or not such conduct consists of an isolated act or a series of acts –

(a) the court may, with a view to bringing to an end the matters complained of –

(iv) make such other order as it thinks fit ... for the purchase of the shares of any members of the specified corporation by other members of the specified corporation ...”.

20.2.   A “specified corporation” means a Hong Kong company or a non-Hong Kong company: see s.2 (1) of the Ordinance. A “non-Hong Kong company” has the meaning assigned to it by s.332: see s.2(1) of the Ordinance. Section 332 then defines “non-Hong Kong companies” to mean companies which “establish(ed) a place of business in Hong Kong”.

21.  In Yung Kee (CFA), it was held that this required a place in Hong Kong where the subject company carried on business with some degree of regularity and permanence of location, such business not covering purely internal activities or internal organizational changes in the governance of the company (paras.12-15). 

22.  The criteria at paras. 41-43 of To J’s Decision remain unsatisfied by the Company in this case, even if the connection criterion in para. 44 may now be satisfied.  Applying those criteria (a permanent recognizable location, where business activities are carried out, not just mere internal administration), it is clear that the petitioners have failed to make out a case in the draft amended petition that the Company has an established place of business in Hong Kong.

23.  I would dismiss this part of the appeal from To, J’s order.

Order

24.1.   As the draft amended petition contains matters which relate to the application to wind-up (on which the petitioners have succeeded) and to the application for a s.168A order (on which they have failed), I would direct that a revised amended petition be prepared by the petitioners’ counsel in which matters relating solely to the application for a s.168A order should be deleted.  A draft of this revised amended petition should be provided to the 2^nd - 5^th respondents’ counsel for their agreement within 14 days.  Should the parties fail to agree on the revision, either party is at liberty to apply to the companies court within 28 days after the draft is provided to the 2^nd - 5^th respondents.

24.2.   As for the costs below and of the appeal, given the partial success of the petitioners and in all the circumstances, I would make an order nisi that they be costs in the cause of the petition.

Hon G. Lam J:

25.  I agree with the judgment of Yuen JA.