RE POWER POINT ENGINEERING LTD.

HCCW555/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO.555 OF 1999

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J U D G M E N T

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1. This is a contributories' petition to wind up Power Point Engineering Limited ("the Company") on the just and equitable ground (section 177(1)(f) of Cap.32), alternatively, on the ground that the Company failed to commence its business within a year from its incorporation or has suspended its business for a whole year (section 177(1)(b)).

Background facts

2. The petitioners Chan Ping Choi ("the 1st petitioner") and Chan Wan Ching ("the 2nd petitioner") each hold one-third of the issued share capital of the Company. The petition is opposed by So Chi Wah ("the opposing contributory") who holds the remaining one-third of the issued capital.

3. The 1st and 2nd petitioners carried on business under the names of Fu Wah Engineering Company ("Fu Wah") and Tat Kai Construction Company ("Tat Kai") respectively. The opposing contributory is a manager and his brother So Chi Cheong ("So") is a director and shareholder of Chun Tat Engineering and Trading Company ("Chun Tat"). Each of the businesses carried out fire service installation and maintenance. They were among a number of subcontractors used by Cerberus Hong Kong Limited ("Cerberus") a division of Siemens. In Fu Wah's case, as much as 90% of its business came from Cerberus. Cerberus was a main contractor appointed by the Architectural Services Department ("ASD") for a number of Government projects. A Mr Alex Chu ("Chu") was and is the manager of its service department and, it would appear, responsible for appointing subcontractors.

4. In about February 1998, Cerberus tendered for, inter alia, two ASD projects. These related to the maintenance, supply and installation of fire service equipment in all Government buildings in Kowloon and the New Territories and were known as Contract Nos.67/ASD and 68/ASD of 1997 respectively. Each contract was for a period of three years. These were massive projects involving, as they did, in excess of 300 Government buildings all told. Because of the financial resources involved and manpower required, Chu suggested that the petitioners and the opposing contributory form a joint venture for those projects. This suggestion was implemented and the Company which was incorporated on 13 March 1998 was acquired by the petitioners and the opposing contributory on 31 March 1998. On the same day, the petitioners and the opposing contributory were appointed directors.

5. Between 1 and 14 April, the Company performed work for Cerberus in relation to the projects but on 14 April, the Company was told to stop all work. The Company has not engaged in any business since that date. The petitioners' case is that the Company should be wound-up because its substratum has gone, the Company never having been awarded the projects; alternatively, because it has not carried on business for over a year.

6. The opposing contributory's case was that the Company was formed for the purpose of performing or carrying out rather than bidding for the projects as subcontractor; that it had already commenced work on the projects and in breach of fiduciary duty the petitioners stole the projects from the Company which was the reason why the Company could no longer work on the projects. This was to be inferred from the fact that Chu had no valid reason to withdraw the projects from the Company on 14 April, that the petitioners effectively carried on as before though under a different guise but excluding the opposing contributory and So ("collectively the So brothers") and therefore the Company from continuing with the projects after 14 April. It was submitted that the petitioners are not in a position to ask the court to exercise its discretion to wind up the Company when they do not come to the court with clean hands.

Chronology of events

7. It is necessary to consider in some detail the events between February and April 1998.

Events between February and 13 April

8. At the request of Chu of Cerberus, Chun Tat submitted its tender on 6 February 1998 for 68/ASD of 1997 which covered the New Territories. A week later, it submitted its tender for 67/ASD which covered Kowloon. Each of the tenders was in two parts : the first, covering 65 items, dealt with maintenance and the second, covering 286 items, dealt with specified unit rates for supplying and installing equipment. Each tender ran to over 30 pages. Cerberus submitted its own tender to ASD as main contractor for the projects, using information contained in the tender documents submitted by Chun Tat to compile its own quotes or unit prices. The opposing contributory explained that because Cerberus had adopted ISO standards, it had to obtain support from subcontractors before it could submit its own tender. Further, he understood from Chu that the tenders had to come from a limited company rather than from an unincorporated business and that at that time, amongst the subcontractors used by Cerberus, Chun Tat was the only one that was a limited company. It would appear that neither Fu Wah nor Tat Kai submitted any tenders; in any event, none was in evidence. The tenders submitted by Chun Tat were "less 15%". That meant that Cerberus as main contractor stood to receive 15% of the contract sums as the main contractor's fee.

9. Sometime around mid-March 1998, the opposing contributory was informed by Chu that Cerberus had succeeded in its tender for the ASD contracts. Since Cerberus' tenders were based on Chun Tat's tender documents, he understood that Chun Tat in turn had succeeded in its bid. Because of the size of the projects which required considerable financial resources and manpower, Chu asked Chun Tat to get partners and suggested the petitioners. The So brothers agreed.

10. This version of events is supported by the 2nd petitioner's account of how he came to be involved. He said that he was approached by Chu in late March as to whether he would be interested in the projects and that Chu considered that because of the size of the projects, Tat Kai, Fu Wah and Chun Tat who had also been working as subcontractors for Cerberus should work together. Following this approach, the 2nd petitioner met with the 1st petitioner as well as the So brothers. Equally the 1st petitioner's account does not detract from the opposing contributory's version. Although the 1st petitioner said he was approached by Chu in February or March who said that he (Chu) needed quotations, there was no evidence that the 1st petitioner provided any. It was Chu's idea that a joint venture with the 2nd petitioner and the So brothers was required because of the financial resources and manpower involved.

11. A number of meetings took place between the petitioners and the So brothers in late March, some of which were in the presence of Chu. At one such meeting which, according to the 2nd petitioner, took place on or about 26 March, Chu set out some calculations relating to the maintenance part of the projects. It is to be noted that the contract amount for maintenance used by Chu for the purposes of that discussion was identical to the sum stated in the tender for 67/ASD submitted by Chun Tat. The calculations showed that not only would the maintenance part of the contracts not produce a profit, it would result in an annual loss of about $280,000 per project. It would appear that this did not come as a surprise to the 2nd petitioner who said it was general knowledge that the maintenance part would not yield any profit but that the supply part would, and according to the opposing contributory, handsomely.

12. Whilst the petitioners' evidence was that no firm decision had been made at that meeting as to whether they would take on the projects, a decision to do so must have followed rapidly. In any event, on 26 March 1998, Cerberus caused to be distributed to relevant Government offices "Organization Charts" relating to "Fire Service Installation and Equipment for 67/ASD and 68/ASD" showing the names and contact numbers of relevant personnel. These included the petitioners and the So brothers. Further, Cerberus also caused two further documents to be issued to Government offices for emergency fire service for the same projects. The So brothers were amongst the persons listed as responsible persons for emergencies after office hours. In the light of this, the meeting must have taken place not on 26 March but before and that by 26 March the petitioners and the So brothers had agreed to take on the projects by way of joint venture notwithstanding that the corporate vehicle had not then been acquired.

13. At meetings between the petitioners and the So brothers in late March, there was a discussion as to contribution of working capital, salaries and division of labour. Each shareholder contributed $50,000. The total amount of $150,000 was held by the opposing contributory. The salaries were agreed at $10,000 for each of the petitioners and the opposing contributory, and $15,000 per month for So. The 1st petitioner was to be responsible for purchasing two Mazda vans, the 2nd petitioner for partitioning the warehouse belonging to Cerberus as an office for the Company, but there was a conflict of evidence as to who was to be responsible for furnishing the office and purchasing the computer and telephone. The So brothers were to be responsible for emergency calls ("e-calls") although according to the 2nd petitioner he also answered e-calls during the day but not after hours. This part of the 2nd petitioner's evidence was inconsistent with that of the 1st petitioner who maintained that the petitioners did not carry out e-calls. Shortly before 31 March, the parties selected the name of a shelf company they wished to acquire and the Company came to be acquired on 31 March. On that day, the first directors' meeting was also held.

14. Even the 2nd petitioner accepted that a lot of work was done by the Company during the period from 1 to 14 April (inclusive). The Company performed e-calls, paid visits to ASD officials and inspectors, inspected and took over sites comprised in the projects. Potential workers were interviewed but no staff had been engaged because of a failure to reach agreement on wages. Orders for vans were placed, pagers acquired and the warehouse partitioned although the office had not yet been equipped with computers, telephone or furniture.

The 14 April meeting

15. At the end of the working day on 14 April 1998, a meeting took place between Chu, the petitioners and the So brothers. At that meeting, Chu told the Company to cease all work in relation to the projects : the projects were effectively withdrawn from the Company. There are differing accounts as to what transpired at that meeting.

16. According to the 1st petitioner, Chu just said that he was very dissatisfied with the Company's performance. He complained about the lack of standby e-call service, insufficient manpower and insufficient progress at the setting up of the office but did not go into specifics. The 1st petitioner stated that he felt there was some truth in the allegation that the Company's performance was not good enough. So far as his own performance was concerned, he considered that perhaps he did not spend enough time on site visits or with the inspectors. He accepted that the Company had not performed well and therefore did not ask Chu for another chance.

17. The 2nd petitioner's evidence was that Chu was very angry at that meeting because there was no visible progress as to the formation of the Company and e-calls were badly performed. Chu apparently also criticized the So brothers. He said that Chu told them to cease working as "day workers" and to disband the Company. The 2nd petitioner stated that he felt ashamed and responsible and had nothing to say.

18. The opposing contributory did not agree that any complaint was made about e-calls not being properly performed or about there being a lack of progress on the setting up the Company. He maintained that Chu simply complained that the Company's performance was unsatisfactory and that the arrangement (i.e. the choice of parties to the joint venture) was wrong. Although the opposing contributory complained to Chu that it was unfair to withdraw the projects from the Company, Chu intimated that if there was further argument, Chun Tat might find it difficult to obtain payment of what was still outstanding from Cerberus for other projects which was in excess of $1 million.

19. The petitioners maintained that prior to 14 April Chu had complained about the Company's performance regarding its lack of manpower and progress in setting up the office and e-calls. According to the 1st petitioner, this took place on 8 or 9 April and, according to the 2nd petitioner, 7 April. Be that as it may, it is unclear that the So brothers were present : the opposing contributory was not aware of any complaints during the period between 1 and 14 April regarding any unsatisfactory performance of e-calls.

20. During cross-examination, the 2nd petitioner brought up an incident that had not featured in the evidence filed by the petitioners. This involved an e-call from the duty manager of the Civil Aviation Authority at Kai Tak at about 11 p.m. on 9 April which was the eve of the Easter weekend and the call was answered by So. The alarm on a control panel went off due to a loose contact. So could not replace the panel as requested because the original manufacturer no longer produced that model and Chu had given express instructions that only products of his company should be used. So was able to deal with the problem, albeit on a temporary basis and intended to return after the holiday weekend with the necessary spare part. The manager was dissatisfied and notwithstanding that by then it was 1 a.m. or 2 a.m. in the morning, he insisted on speaking to the man at the top who was Chu. After a long conversation with Chu, the manager told So that the problem had been resolved. The first working day after that weekend was 14 April.

21. The suggestion was that So's unsatisfactory performance precipitated the withdrawal of the projects from the Company. Pausing here, the incident relied on does not establish that So's performance of the e-call was unsatisfactory. That Chu might have felt aggrieved at being woken up by the duty manager's call is understandable but So cannot be blamed for it. Nor could it remotely justify the withdrawal of the projects from the Company. As to the unsatisfactory performance of e-calls generally, there was no evidence to substantiate that this was so.

Events between 15 and 27 April 1998

On the day following, i.e. 15 April, Chu contacted the petitioners separately and asked them to be day workers for Cerberus. They performed e-calls for the projects during the period between 15 and 27 April. The 2nd petitioner's evidence was that at the meeting on 14 April Chu did not indicate that he would give the projects to another subcontractor. Then on 15 April, Chu told the petitioners that they could get new partners for the projects and suggested former subcontractors such as Frankie Ching and Chan Pak Ling. It is the petitioners' case that Chun Tat was also invited to put in a bid with other partners.

22. The opposing contributory denied that there was any further communication from Chu after the meeting on 14 April except in relation to the Lok Wah Tsuen project referred to below. Neither he nor Chun Tat was approached by Chu after 14 April to bid again for the ASD projects.

23. The opposing contributory stated that on 22 April, Chu told him that the profits from the Lok Wah Tsuen project which had been awarded to the 2nd petitioner would be applied to compensate the Company for the loss of the projects and that the petitioners had agreed to this proposal. This was acceptable to the opposing contributory. The 2nd petitioner took issue with this.

24. On 24 April 1998, a board meeting was held attended by the 1st petitioner and the opposing contributory. There are draft board minutes to the effect that all business activities of the Company should cease as from that date and a proposed resolution that the Company, Chun Tat, Tat Kai and Fu Wah should cease to negotiate or undertake all ASD contracts. The 1st petitioner did not sign the minutes stating that he needed to seek legal advice.

Honour Faith Far East Limited ("Honour Faith")

25. On 28 April 1998, Chim Yuen Kiu and Wong Mei Ping, respectively the girlfriend and wife of the 1st and 2nd petitioners acquired Honour Faith and became its sole shareholders and directors. The circumstances in which this came to pass is set out in the second affirmation of the petitioners (at para.17) :

"... given the financial resources and manpower of Fu Wah and Tat Kai, there was no way either company could take up the Projects on its own. Therefore we decided to form a joint venture company to bid for the Projects. Our wives knew about our plan and were interested to invest into the joint venture company. Honour Faith Far East Limited ('Honour Faith') was acquired on 28th April 1998. Our wives wanted to keep track of the accounts and we had our own companies to look after. We therefore agreed to let our wives to be the shareholders and directors."

The petitioners became "consultants" to Honour Faith and attended to the technical side of the business. In fact, they ran the day to day operations. Neither Miss Chim nor Madam Wong had any experience or expertise in the business of fire service installation and maintenance and the petitioners acknowledged that they came to the office infrequently, only about once a month.

26. On 4 May 1998, Honour Faith issued two quotations. The first under reference HF/0001/98 related to Project No.68/ASD of 1997 and the other, under reference HF/0002/98, related to project No.67/ASD of 1997. The first quotation reads :

"HONOUR FAITH FAR EAST LIMITED
信立遠東有限公司

Ref: HF/0001/98

QUOTATION

Project:

Architectural Services Department Contract No.68/ASD of 1997

1. To provide labour and equipment tools for the maintenance and repairs of, A&A works to Fire Service Installation in Properties for ASD in the NT.

(From 01/04/98 to 31/03/99)

Total : HK$398,000.00

(Company chop)

Room 203, 2/F, Laford Centre, 838 Lai Chi Kok Road, Kowloon, Hong Kong
香港九龍荔枝角道838號勵豐中心2樓203室
TEL 電話：2370 2287 FAX 傳真：2371 0767 "

The second is in similar terms save for the amount.

27. There are some curious features about these quotations : first, the recipient of the quotations was not identified; second, the services to be provided, i.e. labour, equipment and tools were to commence from 1 April 1998, four weeks before Honour Faith was acquired by Ms Chim and Madam Wong; third, the period covered by the quotation was 12 months when the projects were for a three-year period; fourth, Honour Faith's address appears to be the same as that of Cerberus shown in the purchase orders which Cerberus issued on 15 July 1998 in respect of those two quotations; and fifth, Honour Faith's quotations, unsupported as they are by any other documents, have every appearance of having been concocted to enable purchase orders to be issued. Alongside the tenders submitted by Chun Tat, they can hardly pretend to be "real" quotations.

The period after 28 April until these proceedings

28. On 12 August 1998, an attempt was made to settle the accounts but the parties failed to reach an agreement. At the EGM held on 31 May 1999, the opposing contributory refused to agree that the Company should go into voluntary liquidation. The parties also failed to reach any agreement to settle the accounts. Shortly thereafter, the petition was presented.

The issues

Was the Company on probation during 1 to 14 April?

29. There is a conflict of evidence as to whether the company was formed for the purpose of bidding for the projects rather than carrying out the projects as subcontractors. Associated with the notion of "bidding" for the projects is the petitioners' contention that the Company was to be on probation during the month of April and that it was only upon satisfactory performance that they would be awarded the contracts. But in cross-examination, the 1st petitioner admitted that the practice at Cerberus was that normally only oral instructions would be issued to the subcontractor and later on, that would be confirmed by a written purchase order. That appears to have been borne out by the purchase orders issued to Honour Faith which were, in part, retrospective but where, certainly, no probationary period was involved.

30. On the question of the existence or otherwise of a probationary period, there is the evidence of Roger Leung Chi Wai who is a foreman involved in engineering work since 1979. He was an ex-employee of Cerberus, working there from 1988 till the end of 1999 as supervisor. He was subpoenaed to give evidence by the opposing contributory. In 1998, he was involved in the ASD projects. During the month of April, he was instructed to go to ASD to follow up the projects and to deal with any delays, complaints, etc. Mr Leung's understanding all along was that the Company was the subcontractor for the projects and it was on that basis that he dealt with the petitioners and the So brothers. His evidence was that a probationary period for subcontractors was unheard of in the engineering trade and did not exist. Mr Leung was an independent witness and I have no reason to doubt his evidence.

31. If the Company was not on probation, in what capacity did it perform services for Cerberus between 1 and 14 April?

32. Although the 2nd petitioner sought to suggest that the Company performed services as a day worker, it simply does not make sense for a company to be formed for that purpose. That evidence must be rejected. Given the fact that Cerberus' tender was based on Chun Tat's quotations, and having regard to the circumstances in which the Company came to be acquired by the petitioners and the opposing contributory, the practice of issuing retrospective purchase orders, the dissemination of Organization Charts to Government departments showing the names of the petitioners and the So brothers as supervisors or contact persons for emergencies and the taking over of sites by the Company, the only rational explanation is that the Company performed those services as subcontractor and I so find.

In what capacity did the petitioners perform services after 14 April 1998?

33. It is common ground that the projects were withdrawn from the Company on 14 April and that thereafter the Company ceased to perform further services in relation to the projects.

34. The petitioners' contention is that during the period from 15 to 27 April ("the interim period") they were day workers for Cerberus, meaning that they were paid a daily rate. Thereafter, it would appear that they accept that they rendered their services on behalf of Honour Faith. The evidence of the petitioners was that the services provided during the interim period were similar to those that they had been providing during the first two weeks of April.

35. As noted above, the petitioners featured on the Organization Charts dated 26 March. These were revised on 22 April 1998 but they continued to show the 1st petitioner as supervisor in relation to 67/ASD and the 2nd petitioner as supervisor in relation to 68/ASD. This fact is of significance since implicit in the arrangement represented in the charts is a notion of continuity and permanence. Moreover, the role of a supervisor involves a degree of responsibility and technical knowledge. Mr Leung stated in evidence that in the engineering trade, where duties involved responsibility and technical knowledge, no day worker would be employed. Day workers would be engaged to perform menial tasks such as cleaning work. Mr Leung's explanation accords with common sense. A day worker connotes casual labour or, at a minimum, impermanence. The notion that a day worker would be named in Organization Charts distributed to Government departments stretches one's credulity. In the absence of evidence from Cerberus, Mr Leung's evidence stands uncontradicted. I therefore reject the petitioners' evidence that they rendered services as day workers during the interim period. The inference is irresistible that it was all part of an arrangement between them and Chu that the subcontracts would go to them to the exclusion of the So brothers.

Was Honour Faith the petitioners' alter ego?

36. At first blush, it appears inexplicable why Cerberus would have dealt with a brand new company (viz. Honour Faith) as subcontractor given its previous concerns regarding financial resources and manpower. Honour Faith had no track record and its directors had no experience in the business. Given those facts, it is inconceivable that Cerberus would have had anything to do with Honour Faith unless it was the alter ego of the petitioners. The inexorable conclusion is that Honour Faith was nothing but a front for the petitioners and given his role and power over the projects, none of this could have taken place without the concurrence of Chu. The more likely scenario is that Chu orchestrated it all : the petitioners who rely heavily on him for work are hardly in a position to do anything but his bidding.

37. I should mention briefly that the petitioners sought to bolster the impression that Cerberus was seriously inviting quotations from subcontractors for the projects after the 14 April meeting by relying on a written invitation dated 16 April 1998 ("the invitation") issued by Cerberus to Hang Cheong which is the trade name of Yeung Siu Fai ("Yeung"). Hang Cheong was invited to indicate if it would be interested in pricing for the projects by the end of April. Yeung allegedly indicated his interest on 30 April 1998 by signing, dating and returning the invitation to Cerberus. The opposing contributory contended that the invitation was signed by Yeung only about a week or so before the trial and was brought into existence to assist the petitioners' case. The invitation was exhibited to the petitioners' third affirmation dated 16 June 2000. Yeung was cross-examined. Suffice to say that I was not impressed by Yeung as a witness. It is unnecessary for me to make findings as to the authenticity of the invitation or whether in a recent conversation with the opposing contributory (which was taped and adduced in evidence) Yeung admitted that the document was signed very recently. Even if it were genuine, it does not assist the petitioners. It does not displace the conclusion I have reached concerning the petitioners, Honour Faith and Chu. The invitation was but a preliminary solicitation of interest in providing quotations. No quotations for the projects have been adduced in evidence save and except those of Chun Tat and Honour Faith although for reasons already stated, I have considerable difficulty in accepting Honour Faith's quotations as serious. What is more remarkable is that no invitation to Honour Faith was produced.

38. The petitioners were extremely coy when cross-examined as to the profit made by Honour Faith during the first year. They pretended that Honour Faith had nothing to do with them and they had no information regarding its affairs. As consultants, they receive modest 'salaries' from Honour Faith. I do not accept for one moment that they had no knowledge of those matters given the identity of the directors and shareholders who have little involvement with the business. The petitioners were not truthful witnesses.

Were the petitioners in breach of fiduciary duty?

39. Chu was a crucial witness in this saga, in particular as to the reasons for the withdrawal of the projects from the Company. He was allegedly reluctant to be involved in this dispute and the petitioners chose not to subpoena him, no doubt for fear of upsetting Chu to whom they are indebted for subcontracting work. So the issues have to be determined without the benefit of the evidence of this central figure in the dispute.

40. On the evidence before the court, seemingly, Chu's actions were whimsical, capricious and irrational. His alleged dissatisfaction with the Company's performance did not appear to have been based on any valid grounds. And to do a volte-face the following day by inviting the petitioners and allegedly also the opposing contributory to bid for the projects under a different business formation when he had expressed total dissatisfaction with their performance was irrational in the extreme and defies belief.

41. For reasons already explained, I do not accept that the petitioners were employed by Cerberus as day workers during the interim period. Their involvement in the projects did not cease when Honour Faith came upon the scene. Given the identity of the shareholders and directors of Honour Faith, the role of the petitioners in the business carried on by Honour Faith, the circumstances in which Honour Faith was acquired, the issuance of quotations which had remarkably odd features about it within a week Honour Faith's acquisition point to one conclusion : Honour Faith is nothing but a front for the petitioners and the irresistible inference from all the relevant facts is that the petitioners in concert with Chu ousted the So brothers from the projects.

Should a winding-up order be made?

42. It is trite law that the court's power under section 177(1) to make a winding-up order is discretionary. In Re Metropolitan Railway Warehousing Company Limited (1867) 36 LJ Ch 827 Cairns LJ held (at 829) :

"...the scheme of the act is ...to assign under heads certain acts or certain sets of circumstances which are to be taken as a test, or as evidence of the corporation being in a state in which the winding-up order ought to be made. These sets of circumstances are not laid down as absolutely leading to the winding-up of the company, but they are given as matters of evidence, upon which the Court, if it thinks the evidence is sufficient, and is not in any way negatived, may act."

Thus the fact that one or more of the circumstances set out in paragraphs (a) to (f) of section 177(1) exists does not mean that a winding-up order will be made as a matter of course.

Section 177(1)(f)

43. The petitioners' case is that as the substratum of the Company has gone, it is just and equitable to wind-up the Company. The submission was that even if (as I have found) the Company was formed for the purpose of performing the projects, that purpose came to an end when Cerberus withdrew the projects from the Company on 14 April. Whilst at a superficial level that is true, it has to be viewed in context given the court's finding as to the petitioners' breach of fiduciary duty.

44. The requirement of 'clean hands' and winding-up on the just and equitable ground arose for consideration recently in In re Brio Technology International Limited, HCCW 962/1999 (unreported), 16 May 2000 where (at pages 9A-11L) the relevant authorities are set out. The absence of clean hands is not a bar to a winding-up order unless the misconduct was causative of circumstances relied on by the petitioners as giving rise to relief under the just and equitable ground. Where, as here, the petitioners' misconduct was causative of the loss of substratum relied on, the absence of 'clean hands' is a serious impediment to the relief sought.

Section 177(1)(b)

45. On the facts, it is plain that the Company has not carried on business since 15 April 1998. But again, one has to enquire into the reasons why it has had to cease business and one arrives at the same conclusion, namely, that it is attributable to the petitioners' misconduct.

Exercise of the discretion

46. Having reached the conclusion that circumstances do exist to bring into play the court's discretion to make a winding-up order, where the relevant misconduct was causative of the circumstances giving rise to the discretion, prima facie, the absence of clean hands would disentitle the petitioners to the relief sought. However, the discretion has to be exercised judicially and the court must have regard to all the circumstances. It was submitted that as the petitioners and the opposing contributory no longer repose trust and confidence in each other, that a state of deadlock exists and given that there is little likelihood of the Company recommencing business, from a practical point of view, there is no good reason to keep it alive.

47. I do not agree. If the Company were wound up, the opposing contributory would not be in a position to maintain any derivative action against the petitioners. Whilst no such action has yet been commenced, it is certainly not too late to do so given the findings of fact made in the present case. This is an additional reason why, 'clean hands' apart, the court's discretion ought not to be exercised in favour of the petitioners. The reality is that were I to wind up the Company, the liquidator will have no funds with which to pursue any misfeasance proceedings against the petitioners. For these reasons, the petition is dismissed.

Costs

Costs must follow the event. So much is common ground but counsel for the opposing contributory sought costs on an indemnity basis.

48. The applicable legal principles are set out in the Court of Appeal's decision in Sung Foo Kee Ltd v. Pak Lik Co. [1996] 3 HKC 570 at 575C-576H. Its holding was summarized in Re Chor Lau Heung Restaurant Co. Ltd, HCCW 63/1999 (unreported), 3 May 2000 (at 2B-2J) :

"(1) In Hong Kong, judges have a discretionary power to direct the taxation of the receiving party's costs on the basis which they consider to be appropriate to the case, including the indemnity basis.

(2) This is not a discretion limited by indications in previous cases as to the sort of special or unusual features (there does have to be some special or unusual features) which could justify an award of indemnity costs. The examples given by Godfrey JA in Overseas Trust Bank Ltd v. Coopers & Lybrand [1991] 1 HKLR 177 at 182J-183C are not to be taken as determinative of the sort of case in which indemnity costs may be ordered.

(3) When they consider it appropriate, judges should not be slow to make orders for the receiving party's costs to be taxed on that basis."

As stated in that case (at 3P-R), the question is whether the petition was nothing more than ordinary hostile litigation or whether there are special circumstances or unusual features that justify the making of an order for indemnity costs.

49. In the present case, not only have the petitioners not come to the court with clean hands, their own misconduct gave rise to the very circumstances relied on as justifying their claim for relief. Further, there is no readily apparent reason for presenting the petition. The opposing contributory should not be left to bear the shortfall in costs that is bound to arise if the usual costs order is made. In my judgment, this would be an appropriate case for costs to be ordered on an indemnity basis and I make an order nisi to that effect.