ELECTRONIC CONTROL TECHNOLOGY LTD v. COBO ASIA LTD AND ANOTHER

HCCW 50/2022

[2022] HKCFI 1293

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 50 OF 2022

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D E C I S I O N

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1.  This is the first hearing before a judge of the Electronic Control Technology Limited’s petition to wind up the Company on the just and equitable ground. Unfortunately like far too many such petitions it has been drafted without any sensible regard to the principles that apply in determining whether or not matters have been established that would justify a winding up order being granted on this ground.

2.  The Petition refers to the Company being formed on the basis of a “quasi-partnership”.  As I have explained in various authorities the expression quasi-partnership is a convenient shorthand way of referring to the circumstances in which equitable considerations are engaged which may justify a winding up on the just and equitable ground, even if there has been no breach of contract or duty.  The relevant issue is whether or not the Company was formed in circumstances which impose on the shareholders’ obligations, or restrictions on the exercise of their legal rights, other than those that arise by virtue of the Articles of Association, the Companies Ordinance, or an express shareholders’ agreement.  Most companies must be assumed to be formed on the basis that the parties trust one another and discuss how the businesses is to be run.  Something more than an existing commercial relationship or assumptions about the integrity of other shareholders must be established for equitable considerations to be imported into their relationship qua shareholders.

3.  This petition would appear to have been drafted without any regard to the considerations and criteria explained, for example, in [51]–[54] of my decision in Re Asia Television Ltd[1]:

“51. Section 168A(1) of the Companies Ordinance, Cap. 32, provides:

‘(1) Any member of a specified corporation who complains that the affairs of the specified corporation are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of some part of the members (including himself) or, in a case falling within section 147(2)(b), the Financial Secretary, may make an application to the court by petition for an order under this section.’

52. The concept of unfair prejudice has recently been explained in the context of its English equivalent, section 994(1) of the Companies Act 2006, by Arden LJ in Re Tobian Properties Limited [2].

‘21. The key phrase in s 994(1), “unfairly prejudicial”, comprises two elements, unfairness and prejudice but both of these must be understood in the context of company law. The concept of fairness inherent in this phrase is flexible and open-textured but it is not unbounded. The courts must act on a principled basis even though the concept is to be approached flexibly. They cannot decide whether to grant or refuse relief from unfair prejudice on the basis of palm-tree justice. The impact of the context was explained by Lord Hoffmann in O'Neill v Phillips [1999] 2 All ER 961, [1999] 2 BCLC 1, [1999] 1 WLR 1092. The editors of Pettet’s Company Law: Company Law & Corporate Finance (Longman 4^th ed 2012) have described his speech as “a state-of-the-art account of the rationale of this area of law”. So far as material to this case, Lord Hoffmann held, at 1 WLR 1092 at pp 1098–1099:

“Although fairness is a notion which can be applied to all kinds of activities, its content will depend upon the context in which it is being used. Conduct which is perfectly fair between competing businessmen may not be fair between members of a family. In some sports it may require, at best, observance of the rules, in others (‘it’s not cricket’) it may be unfair in some circumstances to take advantage of them. All is said to be fair in love and war. So the context and background are very important.

In the case of s 459 [predecessor of section 994 in the Companies Act 1985], the background has the following two features. First, a company is an association of persons for an economic purpose, usually entered into with legal advice and some degree of formality. The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholders. Thus the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed. Secondly, company law has developed seamlessly from the law of partnership, which was treated by equity, like the Roman societas, as a contract of good faith. One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith. These principles have, with appropriate modification, been carried over into company law.

The first of these two features leads to the conclusion that a member of a company will not ordinarily be entitled to complain of unfairness unless there has been some breach of the terms on which he agreed that the affairs of the company should be conducted. But the second leads to the conclusion that there will be cases in which equitable considerations make it unfair for those conducting the affairs of the company to rely upon their strict legal powers.  Thus unfairness may consist in a breach of the rules or in using the rules in a manner which equity would regard as contrary to good faith.”

22. One of the most important matters to which the courts will have regard is thus the terms on which the parties agreed to do business together.  These are commonly found in the company’s articles. They also include any applicable rights conferred by statute.  In addition, the terms on which the parties agreed to do business together include by implication an agreement that any party who is a director will perform his duties as a director.  Primary among these duties are the seven duties now codified in ss 171 to 177 of the Companies Act 2006.  Under these duties, a director must act in the way which he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole.’

53.  Whether or not a particular act is unfair has in the first instance to be judged by reference to the agreements that the shareholders have reached and established duties that apply to the conduct of the affairs of a company.  Accordingly, the articles of the company and any shareholders agreement will form the criteria by reference to which unfairness is to be assessed as will a director’s failure to comply with his or her fiduciary duties.  Complaints that are of this type fall into the first of the 2 categories referred to Lord Hoffmann in the passage Arden LJ quotes from O’Neill v Phillips and do not give rise to the type of difficulties common to petitions that invoke more equitable considerations that are by their nature harder to delineate and apply.  The present case falls into the former category, although the way in which the complaints have, as unfortunately is common, been formulated in the Petition and the Points of the Claim is largely a chronological narrative of matters which are said to be unfairly prejudicial with only isolated incidences in which the matter is identified as giving rise to a breach of a particular provision in the articles or the Shareholders Agreement.

54.  I would note in passing that it has become my practice to require nearly all unfair prejudice petitions to be pleaded and parties told that this is to ensure so far as possible that proper consideration is given to what matters can properly be relied on and careful consideration given to the relief sought.  As Arden LJ observes in paragraph 27 of her judgment in Tobian Properties:

‘27. Unfair prejudice proceedings generally raise numerous factual issues entailing examination of events over a considerable period of time. Just as defended divorces used to raise numerous issues, making trials long and complex, so trials of section 994 petitions can be long and complex. Thus a high degree of case management is required if the case is not to get out of hand. Effective case management means that, where possible, the court prevents unnecessary court time being spent on issues that are not capable of giving rise to relief.’

This is a view I would strongly endorse.”

4.  In the present case originally a shareholders’ agreement was executed, and this is inconsistent with the shareholders’ rights being determined by anything other than the Articles of Association, the shareholders’ agreement and the Companies Ordinance.  The petition needs reconsideration. To the extent that a fact or matter is said to have caused a breach of the Articles of Association, the shareholders’ agreement or the Companies Ordinance this must be stated precisely.  The petition should not include, for example, this kind of thing “In breach of that quasi-partnership and fundamental understanding, the 2^nd respondent…..” [32].

5.  I will adjourn the petition for four weeks (i.e. 23 April 2022) before the Companies Judge in order that the Petitioner’s legal team can consider afresh the nature of their client’s complaints and how if at all they support a winding up order or, if on reflection it is considered it appropriate to do so, seek relief for unfair prejudice.

6.  So far as costs are concerned, I will order that the costs of today be paid by the Petitioner to the Respondents in any event.