RE RATONAL INDUSTRIAL LTD

HCCW 1193/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1193 OF 2002

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REASONS FOR DECISION

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The application

1. This is an application to strike out or dismiss a petition for winding up and for relief under section 168A of the Companies Ordinance, Cap. 32, alternatively, for stay of all proceedings pending the determination of other related proceedings being HCA No. 3705 of 2002, HCCW No. 727 of 2002, and/or HCCW No. 1097 of 2002. The company concerned is Ratonal Industrial Limited ("Ratonal"). The petitioner is a company known as Ciba International Limited ("Ciba"), which is wholly owned and controlled by Mr Chow Chung Man Eros ("Eros Chow"). The 1st and 2nd respondents are Mr Tung Ka Hung ("Tung") and Mr Wong Chi Sang Navis ("Navis Wong"). Ratonal is the 3rd respondent.

2. The application for striking out or dismissal was made by Tung and Navis Wong under Order 18 rule 19 of the Rules of the High Court. A number of grounds were set out in the summons. I do not intend to refer to most of them as Mr Tommy Lo, who appeared for the applicants, has sensibly confined his grounds for striking out to two matters. Firstly, it is said that Ciba has no locus to bring a petition for relief under section 168A as it was not a member of Ratonal when the petition was presented on 29 October 2002. Mr Lo has confirmed to me that he does not challenge the locus to Ciba to petition for winding up, as this is governed by a different provision, namely section 179(1)(a). Secondly, it is alleged that there was lack of good faith of Ciba in presenting the petition and that it had acted with an ulterior motive.

3. I should mention that the application for a stay of proceedings in this petition pending the determination of other proceedings was hardly pursued by Mr Lo at the hearing.

4. At the conclusion of the hearing, I dismissed the application and these are the reasons for my decision.

The background

5. The background matters relevant to this application, which for present purpose are taken from the evidence filed by Eros Chow and do not constitute findings as such, may be briefly stated as follows.

6. Ratonal was incorporated in 1990. In 1999, there was an agreement reached between Eros Chow, Tung, Navis Wong and others, who were all engaged in the manufacturing and trading of printed circuit boards, to merge their companies into a group. The ultimate holding company was to be Grand Sky Holdings Ltd ("Grand Sky", the subject company in HCCW No. 1097 of 2002). The shareholding interest in the group was to be distributed among the parties with reference to the value of their interests in the companies they contributed to the group in the merger. Ratonal (in which Tung and Navis Wong held shares), Bondway Industrial Ltd ("Bondway", in which Tung and Navis Wong held shares) and Rockent Electronics Ltd ("Rockent"; in which Eros Chow held shares) were three of the companies to be merged with other companies to form the group.

7. The following transactions were carried out as part of the measures required to implement the merger agreement.

8. On 29 July 1999, Eros Chow and the other shareholders in Rockent transferred their shares to Grand Sky. On 30 September 1999, the directors of Ratonal passed a resolution to issue 3 million new shares, followed by a resolution of the shareholders of Ratonal on 5 October 1999 to the same effect. On 4 November 1999, an agreement was signed by Tung, Navis Wong, Eros Chow and others whereby it was agreed, inter alia, that Rockent was to merge with Ratonal and Bondway, and Eros Chow was to acquire 28.8% of the shares in the merger.

9. On 5 November 1999, the directors of Ratonal resolved that the proposal dated 4 November 1999 to acquire 50% of the shares in Rockent by approved and that the consideration for such acquisition is "to issue and allot 606,600 new ordinary shares of [Ratonal] at HK$1.00 each to [Ciba], the nominee of [Eros Chow] who is currently the 100% beneficial owner of [Rockent]". It was further noted in the minutes that after the completion of the allotment, the shareholding of Ciba in Ratonal would represent 28.8% of the paid up capital of Ratonal and that "the share capital of HK$606,600 allotted for cash will be considered to have been received by [Ratonal] by offsetting in full with the amount payable in the acquisition of the 50% share ownership of [Rockent] from [Eros Chow] or his nominee." The minutes of this meeting were signed by Tung as chairman.

10. On 6 November 1999, Ratonal filed a return of allotment with the Companies Registry stating that on 5 November 1999, 606,600 shares were allotted for cash to Ciba and that the price had been paid in respect of such shares. The Companies Registry was notified that with effect from 5 November 1999, Eros Chow was appointed a director of Ratonal.

11. It was subsequently alleged by Eros Chow and others that Tung and Navis Wong had made misrepresentations in that they had inflated the value and financial position of the companies they contributed to the group. As a result, the parties agreed to "de-merge" and split up the businesses in the group. According to the minutes of Grand Sky dated 19 October 2001, which were signed by Tung and Navis Wong, the directors of Grand Sky resolved that the group's business would be separated into two independent lines immediately under the name of "Grand Bond" and "Ratonal" and that the board of directors for each line would maintain independent operation and be responsible for the payments and liabilities of their separate line. It was further recorded that each line was to have "clear-cut financial status" within three months. Pursuant to the agreement to de-merge, Eros Chow resigned as a director of Ratonal on 12 November 2001.

12. The agreement to de-merge did not work out. Eros Chow and others alleged that Tung and Navis Wong had reneged on the agreement and refused to sign necessary documents to implement the de-merger. Tung and Navis Wong countered with allegations that there was fraud and misappropriation of funds of the other camp. As at present, seven proceedings have been brought in the High Court, four by Tung, Navis Wong and/or Ratonal (HCCW No. 727 of 2002, HCA No. 2455 of 2002, HCA No. 2456 of 2002 and HCA No. 3705 of 2002), one by the wife of Tung (HCCW No. 1138 of 2002) and two by Eros Chow and others in his camp (HCCW No. 1097 of 2002 and the present proceedings HCCW No. 1193 of 2002).

The allegations in the petition

13. The same matters are relied on in this petition to found relief for winding up on the just and equitable ground and under section 168A. The principal allegation in the petition is that Tung and Navis Wong had on 3 August 2002 wrongfully passed a resolution of the board of directors of Ratonal purporting to forfeit and cancel the 606,600 shares registered in the name of Ciba. The resolution stated that the shares of Ciba were "forfeited/cancelled for being fictitious issue and obtained by deceptive means". Ciba was informed about this by a letter of Ratonal dated 3 August 2002. No particulars were provided as to the allegation that the shares issued to Ciba were a fictitious issue or that the shares were obtained by deceptive means.

14. It is alleged by Ciba that it was not given any opportunity to make representation to the board of directors of Ratonal prior to the purported forfeiture, that the unsubstantiated allegations of fictitious issue and obtaining by deceptive means were groundless, that the forfeiture was made in contravention of and outside the power given by the articles of association, and that after the wrongful purported forfeiture, Tung and Navis Wong have seized control and excluded Ciba from the management of Ratonal.

15. The other allegation in the petition relates to wrongful diversion of the business of Ratonal to Ratonal Electronics Ltd, which was under the control of Tung.

16. As a result of the aforesaid complaints, it is pleaded that Ciba has lost all trust and confidence in Tung and Navis Wong in the management of Ratonal.

The alleged forfeiture of shares

17. Mr Lo submitted that the petition for relief under section 168A should be struck out for want of locus on the part of Ciba, as Ciba's shares had been validly forfeited by Ratonal before the petition was presented. Mr Lo has taken me to various provisions in Table A of the 1984 edition of the Companies Ordinance, which were adopted in the articles of association, being regulations 34 to 40, and submitted that the forfeiture was substantially in compliance with the procedural requirements in that:

(1) A letter dated 27 March 2002 was sent by Ratonal by registered post to Ciba stating that no proper consideration has been received by Ratonal in respect of the 606,600 shares allotted to Ciba, coupled with a demand that Ciba should pay HK$606,600.00 to Ratonal being the price of the shares within 14 days from the date of the letter. It was stated that if no payment was made as demanded, the board of directors would forfeit the shares of Ciba without further notice. The letter constituted notice requiring payment of a call on the shares under regulation 34.

(2) The requirements of the notice of payment were not complied with in that no payment was made by Ciba within 14 days of 27 March 2002 or at all. Here, Mr Lo accepted that the notice issued was not a strict adherence with regulation 35 for reasons that I do not propose to go into.

(3) A resolution was passed by the board of directors on 3 August 2002 to forfeit the shares of Ciba when the notice of payment was not complied with, pursuant to regulation 36.

(4) By regulation 38, a person whose shares have been forfeited shall cease to be a member in respect of the forfeited shares.

(5) On 6 August 2002, Navis Wong, who was and is a director of Ratonal, made a statutory declaration that the shares of Ciba have been duly forfeited and cancelled by a resolution of the directors on 3 August 2002. Pursuant to regulation 39, such statutory declaration shall be "conclusive evidence of the facts therein stated as against all persons claiming to be entitled to the share".

18. There is evidence before me that as of today, Ciba's name still remains on the register of members of Ratonal. Mr Lo submitted that the fact that Ciba's name has not been removed from the register of members is immaterial where the shares have been validly forfeited, citing In re Tavistock Ironworks Company 6 Eq. 233.

19. Assuming for present purpose that all the procedural requirements for the forfeiture of shares have been duly complied with by Ratonal (this is disputed by Ciba), it does not necessarily mean that the forfeiture of Ciba's shares was valid. It is contended by Ciba that the directors of Ratonal have initiated the process for forfeiture of Ciba's shares in bad faith. Mr Reyes, SC submitted on behalf of Ciba that the effect of the conclusive evidence provision in regulation 39 does not preclude a challenge of the validity of the forfeiture of shares if this was done by the directors in bad faith. I agree with this submission.

20. There is evidence before me to support Ciba's contention that the forfeiture of Ciba's shares was not done by Tung and Navis Wong in good faith. There is no need to go into the details here, suffice it to say that this is an issue that cannot be resolved summarily. There is also a serious dispute as to whether any consideration was provided in respect of Ciba's shares. I note Mr Lo's submission that even if one were to accept that the 606,600 shares in Ratonal issued to Ciba was in consideration of Ratonal's acquisition of 50% ownership in Rockent, it would appear from the share transfer forms of Rockent dated 29 July 1999 that all the shares of Rockent had already been transferred to Grand Sky by that date, so that no consideration was provided by Eros Chow or Ciba for the allotment of shares in Ratonal.

21. The position is not quite so simple and there would appear to be some confusion as to the transfer of shares in Rockent. Mr Reyes has drawn my attention to the subsequent transfers of shares in Rockent. On 6 November 1999, all the shares in Rockent were transferred from Grand Sky to Ciba and the next transfer, on the available evidence, was the transfer of all Rockent's shares by Ratonal to a company known as Grand World Technology Ltd on 31 October 2001, which was after the agreement to de-merge. It is not apparent when before October 2001 Rockent's shares were transferred from Ciba to Ratonal. If such transfer had taken place, it could be said that consideration was provided by Ciba for Ratonal's shares in that Ratonal did acquire Ciba's shares in Rockent.

22. For the above reasons, I have come to the view that there is a serious issue to be tried as to the validity of the forfeiture of the shares of Ciba in Ratonal.

Discretion on determination of Ciba's locus

23. It is common ground that the court has a discretion whether to require a petitioner to establish his locus to petition for relief under section 168A in proceedings outside the petition, or to determine the question of locus in the context of the petition (Alipour v. Ary [1997] 1 WLR 534; Re Kenly (HK) Ltd [2003] 6 HKCU 1).

24. Mr Reyes submitted that the discretion should be exercised against striking out the petition under section 168A and requiring Ciba to establish its locus in other proceedings first. I agree with his submissions. The same matters are relied on to seek winding up and relief under section 168A. The locus of Ciba to petition for winding up is not challenged. The principal complaint made by Ciba in support of its case for the reliefs sought is the forfeiture of its shares, and how this is to be determined would resolve the issue of Ciba's locus. Even if the petition under section 168A is struck out, the winding up petition will proceed. It would only lead to delay and unnecessary costs being incurred if I should require Ciba to establish its locus to petition for relief under section 168A in other proceedings.

Alleged ulterior motive in bringing the petition

25. Mr Lo submitted that from the conduct of Ciba in persistently resisting Ratonal's application for a validation order after the presentation of the petition, it could be inferred that Ciba had brought the petition to injure Ratonal in its business and it has not come to court with clean hands. Whether this is so, and whether the conduct of a petitioner after the presentation of the petition is relevant, are matters that should be determined at the hearing of the petition and do not provide support for striking out or dismissing the petition.

Orders

26. For the above reasons, I have dismissed the application to strike out the petition or to stay these proceedings. I have further ordered that the costs of the application are to the petitioner in any event, including the costs reserved at an earlier hearing for directions on 11 November 2002.