YEUNG TAK WAI v. G & G TRADING LTD

HCCW 8/2016

[2018] HKCFI 192

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 8 OF 2016

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D E C I S I O N

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1.  I have before me a petition issued on 13 January 2016 to wind up the Company on the grounds of insolvency. The petitioner is the registered holder of 20% of the Company’s shares (“Shares”). In order to prove insolvency, the petitioner relies on a statutory demand dated 21 April 2015 for payment of dividends for the following years:

“Particulars for the amount due by the Respondent is set out in the auditor’s confirmations sent to the Petitioner whereby the Petitioner has acknowledged from time to time, are summarized as follows:-

2006	$43,133,640.03 x 20%	$ 8,626,728.60
	Less: Payment	(5,530,000.00)
		$ 3,096,728.60
2008	$55,000,000 x 20%	11,000,000.00
2009	$22,000,000 x 20%	4,400,000.00
		$ 18,496,728.60	” [1]

2.  The petition is opposed by Mr Aihara Toshiyuki, who is a director of the Company and a director and shareholder in its largest shareholder, TME Co Ltd (“TME”).  TME contends among other things that the petitioner holds shares on trust for Mr Aihara.  In order to defeat the petition it is necessary for TME to show that the Company has a bona fide defence on substantial grounds: see Re Desheli Cosmetics (HK) Ltd,[2] [10].

3.  TME advances 4 defences:

(1) The claim is time-barred.

(2) The dividends may exceed the distributable profits of the Company at the relevant times.

(3) The ownership of the shares is in issue.

(4) The underlying transfers recorded in the audited financial statements for the relevant three years are largely fictitious.

4.  I do not understand it to be in dispute that the limitation period begins to run for an action to recover the dividends from the date the relevant final dividend is declared: Re Compania de Electricidad de la Provincia de Buenos Aires Ltd,[3] p 189C.  The only issue that arises for consideration is whether any action is founded on a simple contract and that the limitation period is six years (Limitation Ordinance, Cap 347, (“Ordinance”) (sections 4(1) and (2)), or upon a speciality in which case it is 12 years (section 4(3)).

5.  Mr CT Lee, who appeared for the petitioner, relied on a passage in Vanessa Stott’s book Hong Kong Company Law [4] in support of a submission that the limitation period is 12 years. The passage in Ms Stott’s book reads as follows:

“It should be noted that once a dividend has been declared by the general meeting, a debt is created and the company may be sued for up to 12 years from the date of the declaration.” [5]

This, as a general statement is, with respect, wrong.  As Slade J explains in In re Compania de Electricidad [6] at 186 B–C:

“[S]hareholders’ claims to unpaid dividends and returns of capital arise out of the company’s articles of association; if the share certificates relating to the relevant shares refer to the articles of association and are under the seal of the company, then it may correctly be claimed that relevant claims are claims ‘upon a specialty’ so as to render 20 years, rather than six, the relevant period.”

Slade J goes on to hold that in a case where the share certificates are not under seal, the applicable period for a claim to unpaid dividends is six years because the claim is an action founded on simple contract: at 188 D–E.

6.  The share certificates in the present case are not in evidence, and no grounds have been advanced for thinking that they have been issued under seal.  The position is, therefore, that the limitation period is six years.

7.  The declarations of dividends were all made well in excess of six years before the petition was issued.  The claims for payment of the dividends are therefore, time-barred, unless the petitioner can demonstrate that the claims have been acknowledged within the limitation period: section 23(3) of the Ordinance.  Time stops running as regards the petitioner’s claim when the petition was presented: In re Cases of Taffs Well Ltd [1992] Ch 179 at 188–189.

8.  The audited financial statements for the year ending 31 March 2014, which were signed by Mr Aihara on 25 October 2014, refer in the statement of financial position to an amount due to shareholders of HK$68,888,907.20. I did not understand TME to dispute that this figure included the dividends, and it seems to me apparent from the evidence that has been filed including a schedule in exhibit YTW‑54 prepared by the Company, that it did.

9.  Mr Robert Chan, who appeared for the Company, argued that doubts over the lawfulness of the declared dividends prevented it constituting an acknowledgment of the dividend for the purposes of section 23(3) of the Ordinance.  In my view, this is wrong.  Even assuming that there are reasons to question the lawfulness of the amounts declared (and I consider that issue in the following paragraphs), it does not seem to me to prevent the financial statement constituting an acknowledgement by the Company of the dividend it has, as a matter of fact, declared.

10.  The audit reports contain qualifications in respect of the sufficiency of evidence provided to the auditors to substantiate amounts due from the Company’s subsidiary in the Mainland, “同朋金屬製品（東莞）有限公司” (“Doho China”), including dividends.  The qualification that Mr Chan principally relied on is contained in the audited financial statement for the year ending 31 March 2008.  Para (4) and the subsequent paragraph read as follows:

“(4) During the year, dividend income from the company’s subsidiary of HK$42,533,279 was taken to the income statement. The amount receivable is in excess of the amount of dividend declared payable, by approximately HK$2,000,000, by a board resolution of the subsidiary passed on 21^st November, 2008. We have been unable to obtain sufficient information and explanations we considered necessary to satisfy ourselves as to the fairness of the amount of HK$42,533,279 stated as dividend income from a subsidiary for the year ended 31^st March, 2008. There were no other satisfactory auditing procedures that we could adopt to confirm the amount of dividend income from the subsidiary for the year ended 31^st March, 2008. Any adjustments found to be necessary to the amount of dividend income would have a consequential impact on the net assets position of the company as at 31^st March, 2008 and the result, cash flow and the amount of distributable profit for the year ended 31^st March, 2008 available for the distribution of dividend of HK$55,000,000 in respect of which the company is prohibited under S.79B of the Hong Kong Companies Ordinance from making a distribution otherwise then out of distributable profit.

Disclaimer of opinion: disclaimer on view given by financial statements

Because of the significance of the matters described in the basis for disclaimer of opinion paragraph, we do not express an opinion on the financial statements as to whether they give a true and fair view of the state of the company’s affairs as at 31^st March, 2008 and of its profit for the year then ended in accordance with Hong Kong Financial Reporting Standards.  In all other respects, in our opinion the financial statements have been properly prepared in accordance with the Hong Kong Companies Ordinance.”

11.  Section 79B of the Companies Ordinance, Cap 32, the relevant edition of the Companies Ordinance, provides that:

“(1) A company shall not make a distribution except out of profits available for the purpose.

(2) For the purposes of this Part, a company’s profits available for distribution are its accumulated, realised profits, so far as not previously utilised by distribution or capitalisation, less its accumulated, realised losses, so far as not previously written off in a reduction or reorganisation of capital duly made.

…”

Section 79M governs the consequences of any unlawful distribution of dividends for the three relevant years, namely, 2006, 2008 and 2009.  Sub‑section (1) of that section provides:

“Where a distribution, or part of one, made by a company to one of its members is made in contravention of this Part and, at the time of the distribution, he knows or has reasonable grounds for believing that it is so made, he is liable to repay it (or that part of it, as the case may be) to the company or (in the case of a distribution made otherwise than in cash) to pay the company a sum equal to the value of the distribution (or part) at that time.”

In my view, it is apparent from the wording of section 79M that a declaration of dividends which exceeds the available profits is not void, but the amount of the excess, if identified before payment of the dividends is made, ceases to be payable to a member.

12.  Mr Chan submitted that if there was doubt about the precise amount of the available profits, and, therefore, the correctness of the declared dividend, a bona fide dispute on substantial grounds has been shown.  I disagree.  A dividend has been declared by the Company for each of the three years based on the audited financial statements Mr Aihara himself signed.  Querying so long after the event whether the precise figures in the audited financial statement are correct, without descending to state what it is suggested are the correct figures, in my view falls short of constituting a “substantial ground” of defence.

13.  Mr Chan argued that where there is a dispute about ownership of shares, the Companies Court requires the issue to be determined before allowing a petitioner to proceed.  He relied in support of this submission on my decision in Re Teh Feng Shing Co Ltd [7] at [9].  However, that case concerns an unfair prejudice petition and the practice is only germaine if the issue of ownership is relevant to the determination of the dispute in the petition.  It is not relevant, in my view, in the present case for the following reason.

14.  The petitioner is a member of the Company.  It is trite that a company is not concerned with beneficial ownership of its shares. A dispute concerning ownership of the shares is not a defence to a claim by a member to payment of a declared final dividend.

15.  TME’s final argument is that the audited financial statements are based on a fictitious interpretation of the dealings between the Company and its subsidiary.  I should say that I find this argument and Mr Aihara’s evidence hard to follow. 

16.  As I understand it, it is suggested that what the audited financial statements record as receivables due from a subsidiary were in fact advances made to it by the Company by way of loan.  However, the subsidiary was an active manufacturing business, and on TME’s own case, the Company was established to mask the relationship between the subsidiary and Doho Hong Kong Company Limited (“Doho HK”), and to act as a conduit between the two of them.  Doho HK sold products manufactured by Doho China.  Doho HK’s accounts are not in evidence, and Mr Chan was not able to explain to me how the suggestion that the accounting between the Company and its subsidiary was largely fictitious could be reconciled with the fact that the subsidiary and Doho HK were operating a profitable business.  It seems to me that this ground falls short of demonstrating a bona fide defence on substantial grounds. 

17.  It, therefore, follows that I am not satisfied that TME has demonstrated that the Company has a bona fide defence on substantial grounds to the claim for payment of the dividends, and the Company should be wound up unless it is prepared to make such a payment.

18.  Before hearing counsel on how this petition should proceed and the issue of costs, I would like to deal with one procedural issue.  The Companies Court has developed a standard order for the filing of submissions and hearing bundles.  The order, which is now well known to solicitors and counsel regularly practising in the Companies Court, goes into some detail about the way in which hearing bundles should be prepared.  It does this, first, because in my experience, far too many solicitors adopt a casual approach to the preparation of hearing bundles, and secondly, because the directions are specifically intended to ensure not only that the hearing bundles are put together in a sensible way, but more particularly that they include cross referencing which allows the court to locate items such as exhibits referred to in affirmations quickly.  This enables the court to familiarise itself with the papers promptly and in advance of the hearing.  As far too often happens, the solicitors in this case did not prepare the hearing bundles in accordance with those directions. 

19.  As I frequently make clear when making those directions, but unfortunately my exhortations seem too frequently to fall upon deaf ears, it is important for solicitors and counsel to read the order and to ensure that the directions have been complied with.

(Discussions)

20.  I will make the normal winding-up order.