SHIH-HUA INVESTMENT CO., LTD v. ZHANG AIDONG AND OTHERS

HCCW 198/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 198 OF 2016

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D E C I S I O N

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1.  There are 4 interlocutory applications before the court (there was another one by the 1^st and 2^nd Respondents for adducing further evidence, which was declined with reasons given at the start of this hearing) :

(1) An application by the Petitioner (Shih-Hua) to reconstitute the Board of Directors (Board) of the 3^rd Respondent (Company) by replacing the existing 2 directors (the 1^st Respondent (Zhang) and Shih-Hua) with 2 suitably qualified independent professionals;

(2) Shih-Hua’s 2 Summonses for appointment of provisional liquidators (PL);

(3) Shih-Hua’s application to continue the Injunction Order dated 20 July 2016 until the determination of the PL Application;

(4) An application by the 1^st and 2^nd Respondents[1] to strike out the winding up relief in para 104 and prayer (5) of Shih-Hua’s Petition.

2.  The primary position of Shih-Hua, represented by Mr Chua SC and Ms Lee, is that the Reconstitution Application should be granted, with a fall-back position seeking the appointment of PL.  If either relief is granted, there is no need to continue the Injunction.

3.  Appearing on behalf of the Respondents with Mr Ho, Mr Joffe maintains that if the winding up relief is struck out, the PL Application and the Injunction Summons would be unsustainable.  It is also argued that the Reconstitution Application is misconceived. 

4.  There are 2 Opposing Creditors before the court, represented by Mr Sussex SC.  Their position is that the Company is more valuable if it continues to carry on its business, and therefore they disagree with the PL Application.  They say that in the circumstances before the court, the best option is to grant the Reconstitution Application. 

Issues

5.  The main disputes before the court concern the Reconstitution Application and the Strike out.  In respect of the former, the 2 issues are: (a) whether the court has the jurisdiction to make such an order on an interim basis; and (b) if there is such jurisdiction, whether in exercise of its discretion the court should grant the relief in this case.  The exercise of discretion would depend upon an evaluation of all the relevant circumstances before the court. 

6.  In respect of the Strike Out, there are many arguments advanced by the Respondents, some of them technical in nature.  However, the main plank of the Respondents’ case is that there is no genuine intention on the part of Shih-Hua to pursue the winding up relief.  Ultimately, the question for the court is whether a plain and obvious case for Strike Out has been made out by the Respondents. 

Background

7.  Shih-Hua and the 2^nd Respondent (Motivi), Zhang’s alter ego or nominee, are the only shareholders of the Company, each owning 50% of its shares (all fully paid).  Shih-Hua, which is the alter ego or nominee of Mr Zhong Jie (Zhong), and Zhang are the Company’s only directors.

8.  The Company’s principal business is trading in LPG[2]. It obtains LPG from suppliers, including Shell International Eastern Trading Company (SIETC) (1 of the Opposing Creditors), and re-sells to buyers like Oriental Energy Co Ltd (Oriental Energy) and Bohua Petrochemical Co Ltd (Bohua) (which are the main buyers of the Company).  

9.  The Company does not own any real property.  Its major assets are bill receivables and cash generated from its trading.  According to its Audited Accounts, as at 31 December 2013, the Company’s trade and bill receivables stood at HK$275,095,320, with cash of HK$3,170,352.  According to those Accounts, the Company had a thriving business and substantial turnover.  The turnover for the period from 31 August 2012 (the date of incorporation) to 31 December 2013 amounted to HK$3,610,812,411, and profits before tax for the same period was HK$101,583,312.

10.  According to the 2014 Audited Accounts, which is alleged by Shih-Hua to bear a forged chop which purported to belong to it, the Company had substantially increased turnover of HK$8,644,862,663. The trade and bill receivables were at HK$1,344,750,873, with cash and bank balances totalling HK$169,371,839.

Shih-Hua’s complaints

11.  Shih-Hua says that since mid-2014 the Respondents have wrongfully excluded it from participation in the management of the Company and deprived it of proper access to the Company’s books and records.  The Company has since been in the sole control of Zhang.  It appears that the discord between the parties might have, as suggested by Mr Chua[3], precipitated in an agreement embodied in the minutes of the 1^st shareholders’ and 1^st directors’ meeting on 29 January 2015 where the parties agreed that the Company would confine its business to fulfilling the existing contracts and “ancillary business incidental” thereto (January 2015 Agreement). 

12.  In May 2016, Shih-Hua discovered that the Company had, behind its back, entered into several contracts which were allegedly not authorised under the January 2015 Agreement. 

13.  On 19 May 2016, Shih-Hua was able to obtain the 2014 Audited Accounts and discovered that they were forged because it had never approved them, nor affixed its chop thereon. The resolutions purportedly approving the Accounts were also forged, says Shih-Hua.

14.  In June 2016, Shih-Hua discovered that the Respondents had been diverting and dissipating the Company’s assets by way of, inter alia, unauthorized “shareholders’ loans” and transfers to 3^rd parties, including Everglory Petrochemical Ltd (EPL) and Decen International Ltd (Decen) which were and are corporate vehicles of Zhang.

15.  Also in June 2016, Shih-Hua discovered that the Company had without proper approval, nominated other companies, including EPL and Decen, to execute supplemental agreements with Oriental Energy to capture the Company’s profits.

16.  The Respondents failed to address these serious concerns of Shih-Hua.  Instead, Shih-Hua was repeatedly stonewalled and its efforts to gain access to the Company’s books were frustrated.  Further, Shih-Hua’s offer to sell its shares in the Company to Motivi received no constructive reply.

Petition and subsequent developments

17.  On 20 June 2016, Shih-Hua presented a Petition seeking a buy-out order, or to wind up the Company on the just and equitable ground in the alternative.

18.  On 20 July 2016, this court granted a validation order based on Zhang’s evidence, which included the draft Financial Statements of the Company for the year ended 31 December 2015, that the Company was solvent and profitable, had an on-going business, and total cash of nearly US$26 million.

19.  On the same day, Shih-Hua made an ex parte (on notice) application before Mr Justice Harris for PL to be appointed.  The learned Judge directed that the application be heard inter partes but granted the Injunction Order restraining the Respondents from making payments out of the Company’s bank accounts other than payments in accordance with a cash flow projection and in the ordinary course of business not exceeding HK$2 million per month.

20.  On 13 August 2016, to the surprise of Shih-Hua, the Respondents informed it that: (a) Oriental Energy and Bohua had respectively served and intended to serve a notice to terminate its long term contract with the Company[4]; and (b) the Company’s solvency was “in serious doubt” and the Respondents would not contest the winding up of the Company.

21.  On 19 August 2016, the Respondents wrote again to Shih-Hua agreeing to the appointment of PL, and indicated that they themselves were prepared to make an ex parte application for such an order on 22 August 2016.  On 23 August 2016, Shih-Hua restored its application for PL which was returnable on 29 August 2016.

22.  On 25 August 2016, SIETC and SK Gas International Pte Ltd, the Opposing Creditors, indicated their opposition to an immediate winding up of the Company, and proposed that PL be appointed with a view to, inter alia, maintaining the Company as a going concern.  At that stage, all concerned parties, including the Official Receiver, were in agreement over the appointment of PL.

23.  On 28 August 2016, the Opposing Creditors informed Shih-Hua that an appointment of PL might give rise to an event of default under the Company’s contracts with Oriental Energy and Bohua.  Therefore, they invited Shih-Hua to consent to the appointment of consultants to manage the Company.

24.  In response, Shih-Hua: (a) wrote to Oriental Energy and Bohua to negotiate with them on the termination of contracts; (b) invited the Respondents to consider its, as well as BESM Holding Co Ltd’s, offer to buy Motivi’s shares in the Company; and (c) proposed that both itself and Zhang resign as directors, and they each nominate an independent professional as replacement.

25.  There was no constructive response from the Respondents to the suggestions of the Opposing Creditors or Shih-Hua.  By a letter dated 6 September 2016, they proposed that the winding up relief and the PL Summonses be withdrawn with costs to them.  On 10 September 2016, the Respondents proposed that Shih-Hua should buy out Motivi on the basis that all claims which the Company might have against them be waived.

Respondents’ case

26.  In summary, the Respondents say that an extraordinary number of applications have been launched by Shih-Hau against them, eg, there are 2 applications for the appointment of PL and 2 ex parte Mareva Injunctions have been obtained by Shih-Hua against the Respondents and related entities.  Some of the applications are inconsistent with one another, and Shih-Hua’s conduct constitutes an abuse of the process of the court. 

27.  Further, the winding up relief is only maintained to extract the best settlement in Shih-Hua’s favour. Shih-Hua’s applications before the court are devoid of merit, and its evidence is incomplete and misleading. 

Reconstitution application: jurisdiction

28.  Mr Chua relies on 3 bases as giving rise to the jurisdiction in question, namely, s. 21L of the High Court Ordinance, Cap 4, s.180 of Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 and the inherent jurisdiction of the court. 

29.  Section 21L(1) contains the provisions giving rise to the power of the court to grant injunction, whether interlocutory or final, and to appoint a receiver in “all cases” in which it appears to the court to be “just and convenient to do so”. 

30.  Undoubtedly, the power of the court under s.21L is expressed in very wide terms.  The argument which Mr Joffe has advanced against the reliance of these provisions is, with respect, a technical one in that the relief sought in the Reconstitution Summons is not one of injunctive relief.  I agree with Mr Chua that the court normally looks to matter of substance.  In fact, it is perfectly feasible to formulate the relief in question as one of an injunction, but I see no reason to be enslaved by technicalities. 

31.  I have been referred by Mr Chua to the recent case of Komal Patel & Ors v Chris Au & Ors [2015] 6 HKC 389, where Mr Justice Zervos granted a mandatory interlocutory injunction for the reconstitution of the board of directors of a company.

32.  In addition, Mr Chua relies on the Court of Appeal decision in Re Chime Corp Ltd [2003] 2 HKLRD 905, where, in the context of a petition based on s.168A of Cap 32 (unfair and prejudicial conduct)[5], interim relief were granted based on the American Cyanamid principles ([1975] AC 396).  There were dicta by the CA on the application for appointment of directors in §§25 to 26 :

“… The Judge refused the order on the basis that he did not consider that a successor-in-title to Mr Wang would have a right to be appointed as a director. He also considered that the appointment of the administrators to the board would be far more intrusive and was inappropriate for interlocutory relief.

26. Whilst not disagreeing with the Judge in this respect, I, for my part, also consider that it would be inappropriate for an order of that nature to be made. Although it is possible that the court could make an order which would have the effect of determining the composition of a board of directors as a matter of final relief on a s.168A petition, I consider that it probably would only do so in very special circumstances. A company is a trading entity and those appointed to the board are there to supervise the company. The court would be in a difficult position to select those who were appropriate to conduct the commercial affairs of a company. A court should only interfere in the current management of a company if it is absolutely essential to do so. At the moment, the petitioners have shown a need to be given information. They have not, as yet, shown any need to interfere. The appointment to the boards is put largely on the basis of the need to have information. In my view, it is unnecessary at the moment for the administrators to be appointed to the board and I would not be disposed to grant any order in this respect.”

33.  The above dicta are the subject matter of rival interpretations by Mr Chua and Mr Joffe.  However, it is clear to me that the CA did not rule out the possibility of granting an interim relief with the effect of reconstituting a board of directors.  Mr Joffe is right that the issue of jurisdiction was not argued in that case.  On the other hand, the CA was constituted by 2 ex-Companies Judges, and therefore the authority deserves weight notwithstanding Mr Joffe’s point.

34.  I have to say that the experience from dealing with company cases suggests that reconstituting a board of directors thereby removing the harm to the company by a rogue director would be an invaluable and effective interim remedy.  For the reasons alluded to by the CA, such power must of course be exercised sparingly.  However, the court does have the power to grant interim relief where the justice of the case demands.  Hence, the wide terms of s.21L.  I am satisfied that those provisions give rise to the power to grant the interim relief in question. 

35.  Section 180(1) of Cap 32 provides that “On hearing a winding up petition the court may dismiss it, or adjourn the hearing conditionally or unconditionally, or make any interim order, or any other order it thinks fit, …” [emphasis added].  Mr Joffe submitted that the power under these provisions can only be invoked at the trial of the petition. I am inclined to agree with Mr Chua that such restriction is not justified by a proper understanding of the provisions.  For instance, petitions are often adjourned before trial. 

36.  Mr Joffe also relies on 2 English authorities. Firstly, Re a company (No 004175 of 1986) [1987] BCLC 574 was a case of unfair prejudice petition, and the petitioner applied for an interim order for the payment to him of part of the value of his shares in the company.  It was held by Mr Justice Scott that the court had no jurisdiction to grant the relief in anticipation of a buy-out order.  The ratio was based on: (a) the construction of the relief provisions for unfair prejudice under which the court could only order a buy-out if the merits of the case were established; and (b) s.520 of the Companies Act 1985 (the equivalent provisions of s.180 of Cap 32) provided no basis for the interim order for payment on account of the purchase price of the petitioner’s shares. 

37.  With respect, there is a distinction between the application in the above case and the present.  The interim relief in question is to stop the infringement of Shih-Hua’s rights and the harm being done to the Company. 

38.  Secondly, Partizan Ltd v O J Kilkenny & Co Ltd [1998] BCC 912 was a case where after the dismissal of a winding up petition, the company asked the court and was given the directions to make a claim against the petitioner for damages for malicious presentation of the petition.  The company’s reliance on, inter alia, the equivalent provisions of s.180 which empowered the court to make “any other order that it thinks fit” was rejected by Rimer J. 

39.  With respect, I am unable to see how Partizan assists the Respondents.  The arguments there concerned a procedural question. 

40.  In the premises, and in light of the wide terms of s.180, I agree that the court has the jurisdiction (under both s.21L and s.180) to make an interim order to reconstitute the Board pending the resolution of the Petition.  It is unnecessary to address the issue of inherent jurisdiction, which was not dealt with in Shih-Hua’s written submissions, and no authority or analysis has been presented to the court. 

Discretion

Conduct of Respondents

41.  In cases involving the winding up of a company, the court can expect to be informed whether the company is solvent because it is an important consideration.  This is not so in the present case.  Shih-Hua cannot be blamed for the situation because it has been shut out from the Company.  Mr Joffe did not seek to defend this allegation (I shall deal with below the Respondents’ allegation that Shih-Hua has no entitlement to participate in the management of the Company). 

42.  Given that Zhang is in control of the Company, it would be a simple task for him to inform the court what is the financial situation of the Company.  Regrettably, he has chosen to keep everyone in the dark.  All that Mr Joffe has been able to tell the court is that the Company maintains some trading with the minor buyers.  Mr Joffe also suggested that the Company may negotiate with Oriental Energy and Bohua about the termination of their contracts, but he was unable to inform the court why there is nothing done in that regard. 

43.  Despite the Respondents’ serious doubt over the solvency of the Company (see para 20 above), Mr Joffe submitted that he was entitled to argue these applications on the basis of Shih-Hua’s case, ie, the Company is solvent.  Such a stance, considered in light of the fact that the Respondents are keeping the court in the dark on the affairs of the Company, is not unacceptable.

44.  Such conduct of the Respondents tends to lend weight to the allegation of Shih-Hua that, inter alia, they are doing everything to shield the Company from any independent investigation.  Further, the conduct of the Respondents calls for an examination of their evidence with a healthy degree of scepticism. 

45.  It must be added that the Respondents have refused to comply (in any meaningful manner) with the Inspection Order made by the court on 14 December 2016 pursuant to ss.373 to 375 of the Companies Ordinance, Cap 622.  Again, such conduct is not defended.  The lack of probity of the Respondents cannot be ignored by the court. 

Formation of the Company

46.  The Respondents allege that Zhong has no say in the Company at all.  The cooperation between Zhang and Zhong which led to the formation of the Company was that the latter was to become the full-time general manager of the business with Zhang retaining all control over the management of the Company, and Zhong was allotted 20% of the shares in the Company due to his limited resources.  The other 30% shares are held on trust for Zhang.  These alleged arrangements were all premised upon representations made by Zhong.   

47.  I agree with Mr Chua that, given Zhang’s own evidence that he did not know Zhong prior to their cooperation in the Company, it is highly surprisingly that there was not a single document which evidenced the arrangements alleged by the Respondents, especially the trust over 30% of the shares in the Company. 

48.  For the present purpose, it is not the task of court to make findings based on the paper evidence.  However, the court does have the unenviable responsibility to make an assessment of the quality of the case before it.  I do not accept for the present purpose that Shih-Hua, notwithstanding being a director of the Company, is not entitled to participate in the management of it.

49.  I should add that there is no directors’ nor shareholders’ meeting of the Company after the 29 January 2015. 

Diversion of business

50.  I turn to the allegations of wrongdoings made by Shih-Hua.  Firstly, in respect of the diversion of business, it is not in dispute that there were at least 2 transactions involving a “sleeve” arrangement whereby another entity in the Everglory Group controlled by Zhang, namely EPL, was used to act as a conduit for the Company in delivering cargoes to Bohua under the long term contract between those companies.  In the course of so doing, a sleeving fee was charged by EPL. 

51.  In the 2 transactions admitted by the Respondents, such fees amounted to US$175,441.85 and US$137,334.57.  It was said by the Respondents that the fees were to compensate EPL for the finance costs involved in the sale.  However, the court has not been informed as to what those finance costs were.

52.  On any view, the amount of money is quite substantial.  Apart from the lack of any explanation on the alleged finance costs, and the conflict of interest in which Zhang had acted, the alleged reason for the sleeving arrangement is quite nebulous.  It is alleged that Mr Zhang and Mr Hua (the Company’s deputy general manager and a witness for the Respondents) had heard “from reliable sources in the market that Mr Zhong was planning to take action to affect the operation of the Company”.  The arrangement was therefore put in place as “protective measures” to ensure “timely delivery of cargoes under [the contract with Bohua]”.  There is considerable weight in Mr Chua’s criticism that the evidence of the Respondents is contrived.   

53.  There are also allegations in relation to another entity called Proud Union International Ltd (PUIL).  Save for the fact that this is a BVI company, little is known about it.  Shih-Hua said that, similar to the EPL transactions, PUIL was apparently put in place between the Company and Oriental Energy to intercept the Company’s profits.  In response, the Respondents said that PUIL was merely a nominee of Oriental Energy and the Company had received full payment for the cargo in question.

54.  There are reports from forensic accountants instructed by both sides on, inter alia, the PUIL transaction, which was referred to in the reports as the “1^st Transaction”.  It suffices to say that the forensic evidence is inconclusive.  The Respondents’ expert (BW) said that RSM, Shih-Hua’s expert, was acting on incomplete information.  The latter countered in its draft reply report that the former’s evidence is unsatisfactory despite the fact that it should have the benefit of full access to the Company’s documents and cooperation from its management. 

55.  However, it is important to note RSM’s evidence that after reviewing all the available information, including those found in BW’s report, it appears that “PUIL and EPL may have made considerable profit [US$60/mt] at the costs of the Company”.  Further, BW’s report had failed to address important questions like “the commercial reason for the Company to reduce the unit price and deviate from the master agreement” and “what were the value added roles of EPL and PUIL in the transaction for them to earn such considerable profit in the transaction”.  In the premises, I do not agree with Mr Joffe that the allegations over the “1^st Transaction” are either totally devoid of merit or fail to meet the requisite thresholds. 

56.  I accept that the other allegations of business diversion are inconclusive on the material before the court.  However, 3 points should be made.  Firstly, Shih-Hua is hampered by the exclusion from the Company in respect of what it has managed to uncover.  Secondly, Shih-Hua’s complaints could have been easily addressed by the production of relevant incontrovertible evidence, eg, the finance costs documents or the bank statements of the Company to show that its assets are not being and have not been pilfered.  The Respondents have chosen not to do so.  Thirdly, RSM’s reply report, eg, para 85, suggests that the Respondents’ evidence cannot be accepted at face value (see also the observation made in para 44 above). 

Whereabouts of the Company’s assets

57.  In respect of Shih-Hua’s complaint over the whereabouts of very substantial liquid assets of the Company, it can be seen from the draft 2015 Financial Statements that the amount due from related companies was reduced from HK$129,778,063 in 2014 to HK$3,895,111 after 12 months.  There are two 1-page extracts relied upon by the Respondents which suggest that as at 30 June 2016 the only amount due from related company was a sum of US$304,673.12 from Hong Kong E G Investment Holdings Co Ltd.  These documents bear the chop of the Company’s bookkeeper with a confirmation from it that they were “extracted from and consistent with the accounting records of the Company”. 

58.  I do not believe that these extracts can address the real concern over the whereabouts of the Company’s assets.  What has happened to the repayments (in whatever form) of over HK$120 million by these entities controlled by Zhang?  The shroud of secrecy kept over the Company is indeed alarming. 

59.  Like the diversion of business, not all of Shih-Hua’s allegations can be accepted bearing in mind the counter evidence advanced by the Respondents.  In particular, Shih-Hua’s understanding about a loan by the Company to Motivi is erroneous due to a typographic error in the Company’s record.

Respondents’ counter allegations

60.  There are counter allegations of wrongdoings made by the Respondents against Zhong for: (a) charging the Company excessive commission and (b) setting up rival business.  The relevance of these allegations is questionable because, even if they are true, they cannot justify any wrong done to the Company or to Shih-Hua by Zhang or his agents. 

61.  Further, it is not in dispute that there is no free standing or overriding requirement that a petitioner must come to court with clean hand: see Yeung Bun v Brio Technology International Ltd [2000] 2 HKLRD 218, at 224C-D and Pham Thai Duc v PTS Australian Distributor Pty [2005] NSWSC 98, §17.

62.  On the quality of the Respondents’ allegations, as regards (a), it is not supported by any contemporaneous document, and there is force in Mr Chua’s submission that it is a contrived afterthought.  In respect of (b), the evidence suggests that the companies, which allegedly conducted the rival business, were in business before the Company was set up.

63.  There are also allegations by the Respondents that Shih-Hua had engaged in activities with the aim to disrupt the business of the Company, eg, by writing to the Company’s bankers making serious allegations against Zhang, which resulted in the freezing of some of the Company’s accounts.  I am not inclined to look too harshly at these actions because of the fact that Shih-Hua was excluded from the Company, and the Respondents had repeatedly stonewalled its attempts to have a dialogue.  In such circumstances, it is understandable that Shih-Hua was not content to accept the situation, but took actions to protect its interest in this cash rich company instead. 

64.  For the same reason, whilst Shih-Hua’s conduct in launching various litigations and applications against Zhang and related parties can be criticised as overzealous, for the present purpose I am not prepared to accept that it has abuse the process of the court. 

High degree of assurance?

65.  Mr Joffe argued that the court has to be satisfied to a high degree of assurance that Shih-Hua has made out its case on unfair prejudice before it would allow the Reconstitution Application. 

66.  The modern approach for the grant of interlocutory injunction can be found in National Commercial Bank Jamaica v Olint Corpn [2009] 1 WLR 1405, PC.  The court should take whichever course seems likely to cause the least irremediable prejudice to one party or the other, whether the injunction is prohibitory or mandatory.  Where the injunction is likely to cause irremediable prejudice to the defendant, the court may require a high degree of assurance that at the trial it will appear that the injunction was rightly granted (at 1409H).

67.  Whilst I accept that an interim reconstitution order should only be granted in exceptional cases, and that Zhang is entitled to manage the Company, it has not been demonstrated that irremediable prejudice may be suffered by the Respondents if the Reconstitution Application is granted.  In particular, it appears the Company’s business has been severely curtailed.   

68.  On the above analysis of the evidence, I am satisfied that Shih-Hua has made out at least a good arguable case on unfair prejudice. 

Damages inadequate remedy

69.  There is force in Mr Joffe’s argument that a buy-out, with necessary adjustment on the price to reflect any wrong done to Shih-Hua or the Company, would normally be an adequate remedy on an unfair prejudice petition.  Mr Joffe relies upon Re Posgate & Denby (Agencies) Ltd [1987] BCLC 8 where the court held that the balance of convenience was heavily against the grant of injunctive relief when the petitioner could, on the hearing of the petition, be fully compensated by an order which enabled him to receive the value his shares would have had if the unfairly prejudicial conduct had not taken place. 

70.  However, I agree with Mr Chua that, firstly, there is no evidence on the ability on the part of Zhang or Motivi to buy-out Shih-Hua’s shares in the Company.  I note that the suggestions of buy-out have so far led to nothing of substance.  Secondly, there is evidence of stripping of the Company’s assets by Zhang (and his agents).  That must give rise to real doubt whether he is interested to buy-out Shih-Hua’s shares in the Company. Further, a buy-out order made against Zhang’s wish may be difficult to enforce against him (his roots are apparently in the Mainland[6]) or Motivi, which is a BVI entity. 

71.  I also agree with Mr Chua that Posgate can be distinguished in that there was no allegation of breach of fiduciary duty or impropriety made in that case.

72.  Finally, there is an injustice in having a substantial shareholder of a company helplessly witnessing the asset stripping of his company until the determination of his petition.  If the evidence demonstrates that the company is being wronged and the wrongdoer has little regard to the law, it is an affront to the court that nothing is to be done in the meantime.

Balance of convenience

73.  This application should be viewed in light of the fact that Shih-Hua is entitled to appoint a director to the Board.  In other words, it is entitled to appoint an independent professional to replace itself on the Board.

74.  I have already alluded to the fact that the Company’s business has been severely curtailed.  I take into account the submissions of the Opposing Creditors that the best option is to accede to the Reconstitution Application. 

75.  In response to the query from the court, Shih-Hua has agreed to fortify its undertaking as to damages.  The appropriate amount of fortification will be decided by the court.  

76.  I bear in mind the above analysis of the evidence before the court; the dramatic change of fortune of the Company (see para 20 above); PL might have been appointed with the consent of all interested parties but for the default clauses in the long term contracts; the black box kept over the Company by the Respondents; the negotiations over the buy-out have not been fruitful; the lack of respect on the part of the Respondents to the Inspection Order of the court; and the absence of a better alternative interim relief (in particular, the appointment of PL will likely jeopardise the long term contracts).

77.  I find the balance of convenience in favour of granting the Reconstitution Application, and it is just and convenient to do so. 

Conclusions on Reconstitution Application

78.  In the premises, I allow the Reconstitution Application.  Pending the determination of the Petition or further order, the existing members of the Board are to be replaced by Mr Bennett and Mr Tong as proposed by the Opposing Creditors in the letter of their solicitors to those of Shih-Hua dated 25 August 2016[7]. I agree with the Opposing Creditors that the replacement directors should be demonstrably independent. 

79.  Given Zhang’s attitude to the Inspection Order, an injunction to restrain him, whether acting by himself or his agent or servant or otherwise howsoever from exercising any director’s power under the articles of association of the Company is justified, and I so order.  Such an injunction will not inhibit Zhang from cooperating with the replacement directors.  Shih-Hua is to fortify its undertaking as to damages by way of a bank guarantee in the sum of HK$5 million, which is to be put in place within 10 working days (I take into account the Chinese New Year holidays).   

80.  I have not been addressed on any issue of directions consequential upon the grant of this application, except that Mr Chua has informed the court that the replacement directors may require an indemnity for their service.  Mr Chua accepted that such indemnity will have to be provided by Shih-Hua.  If there is any consequential direction required, the parties must endeavour to come to a reasonable agreement.  Unreasonableness may be reflected in an appropriate costs order.  I give liberty to apply. 

81.  I make an order nisi that the costs of this application be paid by Zhang and Motivi with a certificate for 2 counsel.  An appropriate draft order should be submitted for the approval of the court.

Strike out

82.  I am not satisfied that a plain and obvious case has been made out for striking out the winding up relief.  I propose to set out my reasons briefly. 

83.  Whilst there is some force in Mr Joffe’s criticism that Shih-Hua has been acting inconsistently on whether it wants to have the Company wound up, it must be balanced against: (a) the fact that Shih-Hua has been shut out from the Company, and therefore is not in possession of all the necessary information to make an informed decision; and (b) Mr Joffe accepted that a wish to have the affairs of the Company properly investigated is a valid ground for seeking a winding up order.  I do not agree that Shih-Hua has no genuine intention to have the Company wound up as an alternative relief.  I see no reason to deprive Shih-Hua of that choice at this stage.  I certainly see no abuse of process in maintaining the winding up relief in light of the evidence before the court. 

84.  I have dealt with the fact that the buy-out negotiations have got nowhere.  I have also mentioned the evidence of stripping of assets and the potential difficulty with enforcement against Zhang and Motivi (see para 70 above).  These are good reasons for maintaining the winding up relief. 

85.  Further, the circumstances of this case, especially the lack of information about the Company, render it unwise to take a decisive step without proper investigation on the hearing of the Petition: see Tseng Yueh Lee v Metrobilt Enterprise Ltd [1994] 2 HKC 684 at 690F-G and 691F-G. 

86.  Finally, there is merit in Mr Joffe’s submission that the Petition has failed to set out why Shih-Hua is seeking a winding up order in the alternative: see Re Sun Light Elastic Ltd [2013] 5 HKLRD 1, §§9-10.  Mr Chua accepted that the Petition is inadequate in this regard, but I agree with him that the requirement can be met in this case.   

87.  In the premises, I shall allow Shih-Hua an opportunity to put the Petition in order.  I make an order that unless the Petition is amended within 14 days to state the reason(s) why a winding up order is sought in the alternative, para 104 and prayer (5) thereof be struck out.  I make an order nisi that there be no order as to the costs of this application.

Remaining applications

88.  I give leave to Shih-Hua to withdraw the PL Summonses, and make an order nisi that the costs thereof be in the cause of the Petition. 

89.  The Injunction Order of Mr Justice Harris continues until the determination of the inter parte Summons for its continuation.  In that Summons, Shih-Hua seeks a continuation of the Injunction until the determination of the PL application.  Given the above results, the Injunction should come to an end upon the withdrawal of the PL Summonses.  I formally discharge that Injunction to put the matter beyond doubt.  I make an order nisi that the costs of and occasioned by the Injunction be in the cause of the Petition.