RE WAH YING CHEONG CO LTD

HCCW 225/1996

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 225 OF 1996

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D E C I S I O N

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1. This is an application for a validation order by Wah Ying Cheong Company Ltd ("the Company") by a Notice of Motion dated 7 November 2002. There was a first hearing on 6 December 2002 when I made a validation order as to the amounts not in dispute being HK$66,228.61 and HK$8,500.00. I adjourned the rest of the application in respect of the amount in dispute which is HK$2,269,633.19. There are seven items in all. They relate to legal expenses, fees of auditors and company secretary, reimbursement of rent, rates and utilities and miscellaneous charges paid on behalf of the Company, and future expenses.

The background

2. I will first set out the background matters relevant to this application. The Company was incorporated in 1936 as a private company, all the founding shareholders were surnamed Chan. Its source of profit was derived from the rental income of its investment properties. Since about July 1991, the Company has not undertaken any business. The present board of directors was appointed and took over the management of the Company in around July 1991.

3. On 6 January 1993, Liu Yuk Ying Lucy, the administratrix of the estate of Chan Kwok Chi, commenced proceedings in HCA No. 109 of 1993 against the Company, seeking a declaration in respect of the ownership of certain shareholdings in the Company and the dividends declared in respect of such shares.

4. On 10 November 1993, the Company commenced proceedings in HCA No. 10180 of 1993 against the previous board of directors and one Mr Francis Chan, in respect of an "illegal dividend" of HK$87,000.00 per share declared on 20 July 1991 and paid only to some of the shareholders. The Company further claimed for the recovery of a sum of HK$750,000.00 paid to Mr Chan as "gratuity" when he was acting as the management consultant of the Company.

5. On 29 April 1996, the defendants in HCA No. 10180 of 1993 brought a petition to wind up the Company on just and equitable grounds, alleging mis-management, breakdown of the relationship of trust and confidence, and conduct unfairly prejudicial to some of its members. This is HCCW No. 225 of 1996. The Company opposed the petition and evidence was filed in these proceedings.

6. On 7 July 1993, Rogers J (as he then was) made an order in HCCW No. 225 of 1996 staying the winding-up proceedings as well as HCA No. 10183 of 1993. The judge took the view that the application before him, which was for the appointment of a provisional liquidator for the Company, was not appropriate. The reason why the proceedings were stayed was to allow the Company to deal with its application for orders in respect of the disposal of a property at No. 64 Shanghai Street, Kowloon and certain trust monies held by the Company.

7. On 15 September 1997, the Company commenced HCMP No. 3059 of 1997 to seek the Court's determination and approval with regard to the sale of the property at Shanghai Street and the trust monies. Various orders were made in that action in 1997 and eventually it was ordered that the Company be at liberty to sell the property and distribute the trust monies.

8. On 21 August 1999, the Company further commenced HCMP No. 5093 of 1999 to seek the Court's determination and approval with regard to the distribution of all the residual trust monies. Applications in those proceedings were heard on 3 September 1999 and 11 April 2002. I understand from Ms Terry Chan, who appeared for the Company in this application, that there are still outstanding matters that the Company would have to deal with and for which the Company would need to seek the Court's direction and approval. They relate to the distribution of the proceeds of the property at Shanghai Street and the distribution of the residual trust monies held by the Company.

9. It could be seen from the above that the Company has been involved in a number of proceedings and that notwithstanding the stay of the winding up proceedings, the Company still has to seek the Court's direction and approval in a number of matters. I should mention that in these winding-up proceedings, the Court has, on past occasions, made three orders authorising the payment of legal expenses but in qualified terms. Much reliance has been placed by Miss Michelle Lam, who appeared for the petitioners in this hearing, on these previous orders in opposing the present application. The 1st order was made by Rogers J on 17 March 1997. He sanctioned a payment of HK$200,000.00 for audit and accounting fees and legal fees for advice relating to the ownership and collection of assets and provided specifically that no part of the amount as sanctioned may be spent on legal expenses in relation to the petition and HCA No. 10180 of 1993, other than in respect of making applications for the sanction of payments.

10. The next order was made by Rogers J on 7 July 1997. He sanctioned a payment not exceeding HK$300,000.00 for legal fees and other expenses in respect of the originating summons to be issued (i.e. HCMP No. 3059 of 1997) and any payments thereunder to be taxed.

11. The third order was made by Le Pichon J (as she then was) on 3 September 1999 in which she sanctioned a payment of HK$1.2 million in respect of legal fees, company accountants and company secretaries' fees outstanding since 1996 incurred by the Company and for a payment of HK$250,000.00 as future expenses of the Company, provided that the amount for future expenses is not to be used for HCA No. 10180 of 1993.

12. As no detailed reasons in writing were given by the judges in any of the previous instances when validation orders were made, I do not know the precise reasons why, for instance, it was provided in the previous orders that the amount authorised to be withdrawn was not to be spent on HCA No. 10180 of 1993.

13. I note also that in the application before Le Pichon J on 3 September 1999, the Company had sought payment of HK$2.4 million odd to pay legal fees and auditor's fees and that the petitioners had filed an affirmation opposing this on the basis that the Court should reject the application in total. The judge, however, had authorised payment of HK$1.2 million in this regard, which was about half of the amount sought and had only restricted the use of future expenses which were authorised.

14. I was told by Ms Chan who had appeared at that hearing that the matter was not fully argued before the judge and that the petitioners had indicated to the judge at the hearing that they would not object to authorise payment of HK$1.2 million. Nevertheless, that order was not made by consent. I consider that I have a fresh discretion to exercise and that my discretion on this application is not fettered by the previous orders.

The broad principles

15. The weight to be attached to the opposition of a contributory to an application for a validation order in the case of a solvent company is very different from the situation where a petition is presented on grounds of insolvency. As stated by Slade J in Re Burton and Deakin Ltd [1977] 1 All ER 631 at 636 g-j:

"...the responsibility of managing the business of the company is entrusted by its articles of association to its directors. At least so long as a winding-up petition has not been presented, the court will not generally, save in the case of proven bad faith or other exceptional circumstances, interfere with the exercise of the discretion conferred on the directors by a company's articles of association at the instance of a shareholder. Thus, if before the presentation of a petition a shareholder were to come to the court in an attempt to restrain a particular disposition of the company's property contemplated by the board of directors and falling within their powers, he would not generally succeed, unless he could prove bad faith or other exceptional circumstances. He would not be able, merely by adducing prima facie grounds for criticising the wisdom or beneficial nature of a particular transaction, to place on the company or its board of directors the onus of justifying the proposed disposition by detailed evidence."

The board guidelines were stated at 637 d-e:

"Taking all these considerations into account and in the absence of any authority demonstrating the contrary, I thus reach these conclusions on the question of principle raised by the present application: If on an application under section 227 [equivalent to our section 182] relating to a solvent company, (a) evidence is placed before the court showing that the directors consider that a particular disposition falling within their powers under the company's constitution is necessary or expedient in the interests of the company; and (b) the reasons given for this opinion are reasons which the court considers that an intelligent and honest man could reasonably hold, it will, in the exercise of its discretion normally sanction the disposition notwithstanding the opposition of a contributory, unless the contributory adduces compelling evidence proving that the disposition is in fact likely to injure the company."

16. The other principle I have to bear in mind is that where a company is a nominal party to a petition but in substance the proceedings involve a dispute between shareholders, the company's money should not be spent on disputes between shareholders save for proper costs incurred, for example, on giving discovery, on an application for a validation order, and such further costs as may be expedient and necessary in the interest of the Company as a whole (Re Crossmore Electrical and Civil Engineering Limited (1989) 5 BCC 37; Re CG & L Investment Ltd v. Wyatt Estates Ltd [1992] 1 HKC 78.)

The financial position of the Company

17. I have considered the latest audited accounts of the Company, which is for the year ended 31 December 2001. The current assets of the Company stood at HK$30 million with bank balances of HK$28.6 million. Current liabilities amounted to HK$15 million, including dividends payable of HK$4.3 million. Thus, the net current assets are HK$15 million, with retained profits of HK$14.8 million.

18. There are no substantial external creditors other than those who have rendered professional services to the Company being the lawyers and auditors. The fees owing to the legal advisers have been unpaid for some time. I note in the evidence that one counsel had threatened to refer his complaint against the solicitors for failing to settle his fees to the Law Society and it was in those circumstances that Madam Yu Shuk Mei felt she had to settle the counsel's fees on behalf of the Company and look to the Company for reimbursement.

The Company's allegations

19. It is alleged by the Company that a substantial proportion of the costs incurred was due to the unreasonable behaviour of the petitioners during previous shareholders' meetings and in the course of various legal proceedings. Also, costs were incurred to meet unsubstantiated allegations of the petitioners that the Company had wasted its funds on legal and other expenses. It is asserted that problems were faced by the present board when they took over in July 1991 and that such problems were complicated. Hence, the management had to rely heavily on legal advice. The problem was exacerbated by the loss of records and documents and the declaration of the "illegal dividends" by the previous management. It is claimed that the legal fees were reasonable and necessarily incurred.

The petitioners' allegations

20. It is alleged by the petitioners that the present management is using tactics of "dissipating the Company cash asset so as to frustrate the objective of winding up the Company by emptying the Company's kitty", and if the kitty is empty, the incoming liquidator "will find himself without any company funds to do his job". The petitioners have also queried the reasonableness of the charges. I should say right away that I am satisfied that the expenses were actually incurred and that there is no collusion between the professional advisers and the management to dissipate the Company's assets as alleged or at all.

Amounts in dispute.

21. I turn to each of the items of the amounts in dispute.

(a) HK$553,560.00

22. These are audit fees due to Messrs Hodgson Impey Cheng between July 1998 to November 2001. Of the above figure, it would appear from the written submission of Ms Lam served yesterday that the sum of HK$28,500.00 is not disputed. The petitioners have challenged the balance on the ground that this was for work done over a period of 41 months when the Company had no turnover. I was asked to compare the audit fees of the Company for five years from 1984 to 1989, which were in the total sum of HK$68,650.00. The fees charged by the auditors for the period from July 1998 to November 2001 represented an increase of eleven times. It was submitted that the fees charged were excessive. Further, one of the bills included work done for the purpose of opposing the winding-up petition and it was submitted that the Court should not sanction payment of expenses when the work was in respect of litigation that could be categorised as a dispute between shareholders.

23. The Company has filed evidence to explain the work provided by the auditors during the period in question. These services included preparing audited financial statements, tax computation, assisting the Company in writing up the accounting books, attending the meetings with the Company's solicitors and assisting the solicitors in various litigation by or against the Company.

24. As for one of the debit notes which included work done for opposing the petition for winding-up, it would seem from this debit note that only two out of the nine items in the bill bore this description of work. Further, I was given to understand by Ms Chan, who had personal knowledge of the work done by the auditors on the two occasions in question, that the bulk of the work done was not for opposing the petition for winding-up. I have no reason not to accept counsel's words.

25. It does not seem to me that in exercising my discretion whether to authorise payments, this Court should be acting as a "de facto financial controller" of the Company, as the petitioners have urged me to do. That indeed is not the approach that should be taken, as stated by Slade J in Re Burton and Deakin.

26. I am satisfied that it would be appropriate to sanction payment of this item.

(b) HK$241,810.00

27. This relates to secretary fees due to HLB Business and Management Services (HK) Limited for the period from January 1999 to January 2002. Of the above amount, the petitioners do not dispute HK$29,000.00. The petitioners have opposed payment of the balance on the ground that the fees charged are excessive for similar reasons as they have opposed payments to the auditors. Further, it is alleged that there was duplication of work done by the company secretary and the work done by the solicitors for arranging the annual general meeting in various years. I have dealt with the question of excessive fees. As for the alleged duplication of work, having considered the invoices of the company secretary and the bills rendered by the solicitors, I am satisfied that that is not the case. I would authorise payment of this item.

(c) HK$30,000.00

28. This relates to counsel fees due to Messrs Vincent T K Cheung, Yap & Co., the solicitors for the Company. The Company has filed evidence to explain that the fees charged by counsel did not in fact relate to HCA No. 10180 of 1993 but to various other matters including the unclaimed dividends under the name of Chan Kwong Yick, the property at Shanghai Street and the proposed declaration of dividends amidst the winding-up proceedings. It seems to me that this payment should also be authorised.

(d) HK$778,870.00

29. This relates to legal costs and expenses due to the Company's solicitors from February 1996 to January 2002 for professional services provided in HCA No. 109 of 1993, HCA 10180 of 1993 and consultations from 1996 to 2001. The petitioners have not disputed the sum of HK$79,000.00 which related to legal costs for HCA No. 109 of 1993. They have disputed the balance on the basis that the fees are excessive and should be taxed; that some of the fees related to HCA No. 10180 of 1993; and that there was duplication of charges of the company secretary relating to the work done for arranging annual general meetings. I have already dealt with the last objection. As for the allegation that the bills are excessive and should be taxed, it does not seem to me appropriate to make an order in the present application that the solicitors' bills should be taxed. Under section 67(2)(b)(i) of the Legal Petitioners Ordinance, Cap. 159, if twelve months have expired from the delivery of the bill, no order shall be made on the application of the party charged with the bill except in special circumstances. It is for the board of directors to consider if the Company should make such an application under section 67. I should make clear that in sanctioning any payment out of the Company's bank account towards legal expenses, I have not in fact ruled on the reasonableness of each and every item that made up the bill.

30. As stated earlier, the approach I adopt is as stated by Slade J in Re Burton and Deakin and I am guided by the board principles that I have mentioned earlier. I turn to consider the question whether payment in respect of any legal costs towards HCA No. 10180 of 1993 should not be authorised.

31. I have been taken by the parties to the pleadings in that action. I am not concerned with the merits or otherwise of the claim or of the defence. I am only concerned with the question whether this action should be categorised as in substance a dispute between two groups of shareholders. I note that this action was commenced before the winding-up proceedings.

32. The claim of the Company in that action fell under two heads. The first claim was for about HK$79 million for "illegal dividends" declared by the previous board of directors and paid only to certain shareholders. The second claim was for HK$750,000.00 against Mr Francis Chan being gratuity alleged to be improperly paid. It is asserted by the Company that but for the institution of this action, the petitioners would not have been prepared to admit in their amended defence in September 1995 that part of the dividends declared were ultra vires and illegal. Hence, the legal expenses were necessarily and properly incurred as the action was brought to protect the Company and the interests of shareholders and that this was done after legal advice was obtained and the proceedings were approved by shareholders at an extraordinary general meeting in June 1993. This action was stayed in July 1997 to enable the Company to make good the loss and fully compensate those shareholders who had not received the "illegal dividends". And that was what the present board had been doing between June 1993 and September 1999 when interim dividends were paid out. I agree with this submission. I do not think HCA No. 10180 of 1993 ought to be categorised as in substance a dispute between two groups of shareholders.

33. As for the costs incurred in the winding-up proceedings, I understand from Ms Chan that the major part of the costs incurred was not in opposition of the petition which had been stayed since July 1997. The bulk of the work done under the winding-up proceedings is in respect of applications for the declaration of special interim dividends, the applications for validation orders and applications for directions relating to the Company assets and trust monies and properties, and the work done was not really in respect of disputes between various groups of shareholders as such. I am satisfied in the circumstances that it would be right to authorise payment not exceeding the amount sought towards the legal expenses.

(e) HK$252,093.19

34. This represented the difference between HK$318,321.80 and HK$66,228.61, which was the subject of the validation order made on 6 December 2002. This relates to expenses of the Company settled by Madam Yu from 1996 to 2000. Of this amount, the petitioners have not disputed HK$163,500.00. I have considered the objections made by the petitioners set out in detail in the 7th affirmation of Mr Francis Chan and the Company's response set out in detail in the 8th affirmation of Madam Yu. I do not propose to set out the details here. Suffice it to say that I am satisfied that these expenses are properly and necessarily incurred and I propose to authorise payment.

(f) HK$113,300.00

35. This relates to counsel fees settled by Madam Yu on behalf of the Company in May 2002. Of this amount, HK$43,300.00 is for work done in HCA No. 10180 of 1993 which I have dealt with above. The balance is in respect of work done on various matters including application for validation order, declaration of dividends and distribution of the Company's monies. I am also satisfied that it would be proper to authorise payment of this amount sought.

(g) HK$300,000.00

36. This amount is sought to cover future expenses. Ms Chan has clarified to me that the payment sought is to cover work done by the legal advisers in respect of distribution of the sale proceeds of the property at Shanghai Street and distribution of the residual trust monies held by the Company as well as the auditors' fees. I understand that work has already been done, but the solicitors and the auditors have not sent in their bills and invoices, so the amount sought is to cover work done for which the Company has not been billed and also to cover future legal fees in the respects I have mentioned and future auditors' fees. I think it would be appropriate to authorise the payment sought in respect of such future expenses having obtained clarification from counsel as to how the amount is to be spent.

Order

37. I make the following order:

(1)	Notwithstanding the presentation of the petition, payments may be made out of the bank accounts of the Company with the Hang Seng Bank Limited
	(i)	in the total sum not exceeding HK$1,969,634.00 for the purpose of payment of legal costs, company accountants and company secretary fees outstanding since 1996 to date incurred by the Company and reimbursement of the Company's expenses paid by its director, Yu Shuk Mei, on the Company's behalf; and
	(ii)	in the sum of HK$300,000.00 for the purpose of
		(a)	legal expenses in respect of distribution of the sale proceeds of the property at No. 64 Shanghai Street, Kowloon and distribution of the residual trust monies held by the Company for which the Company has not been billed and such legal expenses to be incurred in future; and
		(b)	auditors' fees for which the Company has not been billed and such fees to be incurred in future
	and such payments shall not be avoided by the provision of section 182 of the Companies Ordinance in the event of an order for winding-up of the Company being made on the petition.
	(2)	Costs of the hearing on 6 December 2002 and costs of the Company in this application prior to 6 December 2002, be costs in the cause of the petition.
	(3)	Costs of the hearing for today and the costs of the Company subsequent to December 2002 in this application are to be paid by the petitioners in any event. 6