XCHRX WONG WAN HUEN FREDERICK AND OTHERS v. W HAKING ENTERPRISES LTD. AND OTHERS

HCCW 1166/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 1166 OF 2000

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REASONS FOR DECISION

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Introduction

1. The 1st Respondent ("the Company") applied for a validation order pursuant to s 182 of the Companies Ordinance Cap. 32 that:

(1) dispositions of its properties in the ordinary course of business for proper value between the date of presentation of the Petition herein and the date of judgment or further order shall not be void by virtue of s. 182 above;

(2) payments made into or out of its bank accounts in the ordinary course of business during the said period shall not be void by virtue of the said section;

(3) disposition of 5 of its capital assets (being 5 pieces of real property) referred to in the application during the said period shall not be void by virtue of that section.

2. The Petitioners argued at the hearing on 26 February 2001 that:-

(a) the order asked for at sub-paragraph (2) above should only be made on condition that the net sale proceeds be deposited into an escrow account in the joint-names of the parties' respective solicitors;

(b) alternatively, the order asked for at sub-paragraph (3) above should be refused.

3. At the end of the hearing on 26 February 2001, I made the orders sought by the Company (without any condition) indicating that the reasons for doing so would be given later. Those reasons are as follows.

4. The Petitioners (as the Company's contributories) present this Petition alleging in essence that they have been wrongfully excluded from the management of the Company by the 2nd to 8th Respondents: see para. 16, 17 and 31 of the Petition. Further, the Petition avers that although the Petitioners have offered to sell their shares at a fair market value and the 2nd Respondent has offered a price for buying the same, the offer to buy was based on a "break up price" and at a gross undervalue. The Petitioners also contend that the manufacturing operations should be sold as a going concern. They ask the Court to order the Company or the other Respondents to purchase their shares at a fair price. A winding up order is asked for in the Petition but only as an alternative remedy. The Petition does not allege that there was any bad faith, or wrong-doing, vis-a-vis the Company's assets.

5. In the affidavit of Azedo dated 7 February 2001 filed in support of this application, Mr Azedo (the Company's chief executive) deposed that the Company is fully able to pay debts as and when such debts fall due. This part of the Company's evidence is not disputed by the affirmations filed by the Petitioners.

6. Further, in a letter dated 14 February 2001 (after the summons herein and the said affidavit of Azedo were served), the Petitioners' solicitors indicated that:-

"... in order not to prejudice the Company's trading activities or the ongoing sales of specific assets, [the Petitioners are] prepared to give their consent to validations order being made, subject only to the condition that the surplus proceeds arising from the sale ... [of the capital assets] being placed into an ... escrow account ... Since you have expressed some doubt ... about our clients' position regarding that, we write to confirm that our clients agree (as they have from inception) to give their consent to the validation orders in the terms aforesaid, and will not withdraw such consent or otherwise seek to re-open the whole matter of validation even if at the end ... the court should rule against us on the escrow account issue".

7. In view of the above statements, I share the surprise of Mr. Huggins for the Company that Mr. Graham for the Petitioners saw fit to raise the argument summarized at sub-paragraph (b) above. Be that as it may, that was the stance taken by the Petitioners through counsel.

8. Under these circumstances, I agree with Mr. Huggins that there was (or, at least, there should be) no dispute that the Company is solvent (despite Mr. Graham's submissions attempting to cast doubt on this point). Moreover, it must have been part of the Petitioners' own case that it would be more desirable for the Company's business to be continued rather than for it to be wound up.

9. Mr Huggins referred to In re Burton & Deakin Ltd. [1977] 1 WLR 390 especially the following passages therein:-

"... On this state of the evidence, I think I would inevitably have to dismiss this motion as regards those heads of relief which are opposed by the petitioners if, as a matter of law, the onus of proof falls on the company affirmatively to show that the particular proposed transactions objected to ... are beneficial and advantageous to the company ...

However, the weight that should be attached to the opposition of a contributory to an application under section [182] in the case of an admittedly solvent company is my judgment a different matter ...

If on an application under 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 ... unless the contributory adduces compelling evidence proving that the disposition is in fact likely to injure the company ... " (at pp. 395G-H, 396G and 397E-H, per Slade J)."

10. He invited me to adopt the same approach in this application.

11. Mr Azedo deposed that the Company's board of directors resolved that the proposed sale of properties which forms part of the subject-matter of this application is expedient and in the best interest of the Company. In addition, he deposed that the dispositions were required to discharge the Company's bank borrowings and to restore its working capital.

12. Despite the Petitioners' reservations/objections to this application (by way of the affirmations of Wong Wan Cham and counsel's submissions) which relate to matters including the following:-

(1) whether the sale of the real properties is for the purposes stated;

(2) whether the Company is solvent;

(3) the present board/management of the Company has no definite future business plan;

(4) there are doubts as to some parts of the Company's accounts,

13. I conclude that I should adopt the approach set out in In re Burton and Deakin Ltd. (above) and that an order should be granted in terms of the relief sought in this summons.

14. Even if the Company is somehow to be treated as insolvent, by reason of the circumstances set out above, I consider my discretion should be exercised in granting the order sought.