TSOI KWONG SHI v. ASIA FORTUNE MEDIA GROUP LTD

CACV 248/2015

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

CIVIL APPEAL NO. 248 OF 2015

(ON APPEAL FROM HCCW NO. 227 OF 2015)

________________________

________________________

________________________

________________________

REASONS FOR JUDGMENT

________________________

Hon Cheung JA :

I. The appeal

1.1  The petitioner appealed against the judgment of Anthony Chan J in which he refused to appoint provisional liquidators to manage the affairs of the 2^nd respondent (‘the company’) and he also refused to allow the petitioner to adduce two affirmations filed in support of the petitioner’s application for the appointment of the provisional liquidators.

1.2  The appeal was initially opposed by the 1^st respondent but after we heard submissions from the parties in the morning of the hearing, when the matter resumed in the afternoon, Mr Lam, counsel for the 1^st respondent (who only appeared in this appeal), informed this Court that he would concede the appeal and also concede the appointment of the provisional liquidators.  Accordingly, this Court made an order in terms of the draft order which was agreed by the parties save on the question of costs.  In respect of the costs below, the costs of the application before the Judge was agreed to come out from the assets of the company.  In respect of the costs of the appeal, Mr Wong for the petitioner had asked the 1^st respondent to pay the costs of the appeal while Mr Lam had argued that the costs should also come out from the company.  At the end, this Court ordered the petitioner’s costs of the appeal be in the cause of the petition.

1.3  Although the 1^st respondent conceded the appeal, this Court would, in any event, have allowed the appeal. I now give the reasons.

II.  Background

2.1  The petitioner presented a petition for the winding up of the company under section 177(1)(d) and (f) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (‘C(WU)O’), Cap 32. The petitioner alleged the company is insolvent and unable to pay its debts.  He also alleged that he has been unfairly prejudiced as a minority shareholder.

2.2  The company was founded in 2012 by the 1^st respondent with the aim of developing it into a multimedia group.  The 1^st respondent is currently one of the directors of the company and is responsible for the operation and management of that company which is engaged in the business of publishing a magazine called Asia Fortune.

2.3  In 2014, the petitioner was interested in getting involved with the company.  In due course, he became a shareholder of that company, having acquired 40% of the shares in it from the 1^st respondent.  After the acquisition, the 1^st respondent has been holding 60% of the shares in the company.  In addition to becoming a shareholder, the petitioner became a director of the company.

2.4  It is common ground that the petitioner had transferred a total sum of HK$10.2 million to the company when he became its shareholder and director.  However, the parties are in dispute whether this money was a loan (as alleged by the petitioner) or an injection of capital by the petitioner as a condition for becoming a shareholder and director of the company (as contended by the respondents).  After the relationship between the petitioner and the 1^st respondent turned sour in the middle of last year, the petitioner demanded the repayment of the money, followed by the petition which was filed on 13 July 2015.

III.  Basis for appointment

1)  The twin requirement

3.1  An application for the appointment of provisional liquidators is made under section 193 of the C(WU)O.  The petitioner must satisfy two requirements.  First, there is a prima facie case for a winding up order.  Second, the appointment is appropriate.

2)  The prima facie ground

(1)  Inability to pay debt

3.2  In respect of the prima facie aspect, one of the petitioner’s grounds in the petition is that he had injected over $10 million into the company as a loan and despite demands by him to the company to repay the loan, the company had failed to do so.  As a result, the petitioner alleged the company is insolvent and unable to pay its debts. 

3.3  The Judge held that the petitioner had not satisfied the prima facie ground because he had failed to demonstrate that the money he put into the company was a loan and not an injection of capital for acquiring the shares of the company as contended by the 1^st respondent.

3.4  The basis for the Judge’s holding is that according to the minutes of meetings there was no indication that the money injected by the petitioner into the company was in the nature of a loan.  It is of note that the contents of the minutes were challenged by the petitioner and he did not sign the minutes.  However, the nature of the money and its implication on the company’s ability to repay it, were only in respect of one of the two grounds of the petition to wind up the company.

(2)  The unfair and prejudicial ground

(a)  Exclusion from management

3.5  On the unfair and prejudicial ground, the petitioner also relied on the fact that he was excluded from the management of the company.  The minutes indicated that the petitioner was quite prepared not to take part in the management of the company.  Again exclusion from management is also only one of the many aspects relied upon in support of the unfair and prejudicial ground. 

(b)  Inspection of records

3.6  The petitioner had also relied on the fact that despite his request, the 1^st respondent refused to give inspection of the company’s accounting records.  

3.7  Under section 373 of the Companies Ordinance, Cap 622 and article 124 of the company’s articles, a company is required to keep proper books and accounts.  Further, under section 375 of Cap 622 and article 125 of the company’s articles, a director is entitled to inspect and obtain copies of the company’s accounting records.  

3.8  The petitioner is clearly entitled to receive full particulars of all receipts and payments made by the company and it was incumbent upon the company to provide full particulars of payments made together with supporting vouchers.  It can hardly be disputed that breach of the statutory requirements to keep proper accounts in these circumstances constitutes unfair prejudice to the minority shareholder.  

3.9  There was no dispute that while the petitioner was given some records of the company such as the management account of the company, he had been refused sight of the documents that he had asked for. 

3.10  At the hearing before the Judge, counsel for the two respondents (the company was then also represented by the same firm of lawyers) informed the Court that he was unable to defend the obstruction to inspection and only sought to explain that the requests for inspection were declined due to the belief that the inspection was to serve an ulterior motive.  On that, the judge held :

‘ 14. ….However, it has to be said that lack of transparency as a result of the refusal to allow inspection gives rise to scepticism. On the other hand, I am not satisfied that the inspection point can by itself carry [the petitioner]’s case on unfair prejudice.’

3.11  The Judge had certainly not explained why this would not cause the petitioner unfair prejudice.  It seems that the Judge was influenced by the respondents’ indication that they would give inspection on the following day of the hearing.  In my view, this cannot be a proper basis for holding that the petitioner had not made out a prima facie case of unfair prejudice.  As events turned out, the respondents refused to allow the petitioner to inspect the documents on the following day and thereafter the petitioner had to pursue his application for inspection which had already been commenced by then and later obtained from Godfrey Lam J an order for inspection.  The respondents, however, still refused to comply with the order which caused Godfrey Lam J to make a further order for inspection.  

3.12  The relevant time for considering whether the petitioner had made out a case for the appointment of provisional liquidator is, of course, at the time of the hearing before the Judge.  The evidence clearly showed a prima faciecase of unfair prejudice in refusing the petitioner’s inspection of company documents.  Moreover, the subsequent events clearly revealed that the Judge had made light of the respondents’ refusal to allow inspection and had taken at face value their concession to allow inspection.  Mr Lam in the course of the submissions informed the Court that the documents were recently supplied to the petitioner.  This only confirmed the tardiness of the respondents in complying with the Court orders.  In any event, this does not detract from the position that the petitioner had before the Judge established a prima faciecase of unfair and prejudicial conduct.

(c)  Wastage of assets

3.13  In any event, the refusal to allow inspection is only one of the matters relied upon by the petitioner on the unfair and prejudicial ground.  Another factor he relied upon is the wastage of the assets of the company.  The evidence showed that the 1^st respondent had withdrawn large sums of money for his personal use.  As of March 2015, the balance of the 1^stor 2^nd respondent’s bank account was approximately $7 million.  While the monthly income of the 2^nd respondent was not more than $200,000, the monthly expenses had increased to $700,000 and $800,000.  

3.14  Where the Court is satisfied that a company has incurred significant losses such that there is no reasonable hope that the object of the company of trading at a profit could be attained, winding up of the same on the just and equitable ground would be justified : Davis & Co Ltd v Brunswick (Australia) Ltd [1936] 1 All ER 299 at 309.  If the directors of a company continue to trade when the company is making losses and when it should have been apparent that there was no real prospect that the company would return to profitability, the Court may draw the inference that the directors’ decision was improperly influenced by their desire to continue in office and in control of the company and to draw remuneration and other benefits for themselves and others connected with them.  If that inference is drawn, the Court may conclude that the affairs of the company are being conducted in a way which is unfairly prejudicial to the members or to members other than the directors and those who obtain such benefit : Re Ching Hing Construction Company Ltd, HCCW 889/1999, unreported, 23 November 2001 at paragraph 47.

3.15  The petitioner had put forward evidence which was refused to be admitted by the Judge and which formed the subject matter of the other appeal before us.  This evidence indicated that the 1^st respondent had withdrawn money from the company for his personal use and the way the company was run.

(1)  The magazine business has been running at a loss since its first issue in December 2014.

(2)  Prior to May 2015, all the advertisements appearing in the magazine were published upon gratuitous orders.

(3)  As from May 2015, there is only one or two purchased advertisement pages whilst the rest remain upon gratuitous orders.

(4)  There is not even one single advisement display in the magazine’s website.

3.16  As I will discuss later, the Judge had erred in refusing to admit the new evidence.  The totality of the evidence showed that there is clearly a serious risk that the assets of the company were being wasted and dissipated. It is not in the Mareva sense of simply deliberately making away with the assets but rather the serious risk that the assets may not continue to be available to the company : In Re a company (No 003102 of 1991), ex parte Nyckeln Finance Co Ltd [1991] BCLC 539 at 542c-d; In Re Max Sunny Limited, HCCW  84/2014, unreported, 27 June 2014 at paragraph 11; In Re Five Lakes Investment Co Ltd and Multiford Co Ltd [1985] HKLR 273, per Clough  J at p. 387F-H; Re Club Mediterranean Pty Ltd (1975) 11 SASR 481, per Bright J at p. 36; Zemplian v. JN Taylor [1990] 3 ACSR 518, per King CJ at p. 522 and Re Astrotech International Holdings Limited, HCCW 816/2002, unreported, 21 February 2003 at paragraphs 101-105 per Poon J (now Poon JA).

3.17  The Judge had earlier on 27 August 2015 granted a validation order under section 182 of the C(WU)O to the 2^nd respondent.  The cash in the bank then was about $6 million which has since been reduced to about $3 million. A second validation application was made on 7 January 2016 when the 2^nd respondent was seeking a validation order of $1.9 million which was refused by the Judge. 

3.18  Mr Lam had argued that the petitioner’s investment is safe because the 1^st respondent had provided a personal guarantee for his investment and the remaining cash of $3 million in the 2^nd respondent’s bank account is frozen by the bank because the Judge had refused to grant a validation order on 7 January 2016. 

3.19  The provision of a personal guarantee does not answer the risk of wastage.  Likewise, a validation order is not a substitute for the appointment of provisional liquidators.  AsKwan J(nowKwanJA)held inRe Hang Tak Buddhist Hall Association Limited HCCW 796/2001, unreported, 23 May 2002, at paragraph 32 :

‘ 32. …I am mindful of the fact that an application for a validation order to authorise a company to pay outgoings pending the hearing of a petition would only serve a limited purpose and is not a substitute for the appointment of a provisional liquidator. If there are wider issues involved in the management of the company or its assets that must be resolved in the interim, these matters cannot be resolved by a validation order…’ (emphasis added)

3.20  The fact that the remaining $3 million cash in the bank is now frozen does not mean that there is no wastage of the company’s assets.  There would be continued expenditure in terms of rental and wages. 

3.21  As is apparent from the judgment in the second validation application, the respondents had continued to refuse to provide any evidence on the income of the 2^nd respondent.  This is what the Judge said :

‘ 10. The lack of any evidence on the revenue received by AFM (‘the company’), and any evidence on how the publication business is doing compared to what was projected, lend considerable weight to Tsoi’s case that this company has no viable business and those in control is aiming to run down its cash.

11. In addition, this court is troubled by the “undertaking” offered by AFM that there will be no further application of this type, and consequently there will be at least HK$1.1 million left of the case (after deducting the HK$1.9 million applied for under this application).  It has been said that the undertaking is offered to answer a concern expressed by this court previously that the company appears to be in the course of exhausting its assets.  However, such a stance seems to suggest that AFM will not be able to, or will not, continue its business after January 2016.’  

3.22  Again, the focus of the appeal must be on the evidence before the Judge for the appointment of the provisional liquidators but the judgment on the second validation application further affirmed that the assets of the 2^nd respondent had been wasted.  

3) Appropriate to appoint provisional liquidators

3.23  An appointment will be appropriate where the assets of the company are in danger : Re Union Accident Insurance Co. Ltd [1972] 1 All ER 1105.  In this case, it is clearly necessary to appoint a provisional liquidator to prevent further wastage of the assets of the company.  The provisional liquidator, if necessary, will have to stop the company from incurring further debts and liabilities or to close its business so as to prevent the company’s assets from being completely depleted before its winding up.

4)  Discretionary appeal

3.24  There is no doubt that the Court has a wide and unfettered discretion whether or not to appoint a provisional liquidator.  In respect of the exercise of the discretion, the appellate Court would only interfere if the judge exercised the discretion upon a wrong principle or the discretion was wrongly exercised in the sense that the decision was plainly wrong, see G v G [1985] 1 WLR 647 at 652 and Re S Y Engineering Co Ltd, CACV 1896/2001, unreported, 27 February 2002.  In this case, the discretion was plainly wrongly exercised by reason of the matters that I have indicated.  

IV.  Admission of evidence

4.1  The petitioner also appealed against the refusal by the Judge to admit two affirmations, one by the petitioner and the other by Mr Kei, the former editor in charge of the magazine, which addressed the question of the 2^nd respondent withdrawing large sums of money from the company and the way the business of the 2^nd respondent was being operated.

4.2  The two affirmations were served on Thursday, 17 September 2015 for the hearing on Wednesday, 23 September 2015.  The only complaint raised by the respondents at the hearing below was that the affirmations were not filed according to the Court directions. However, they did not rely on any prejudice in the late filing of the affirmations.  As explained by the petitioner, the reason for the delay in serving the affirmation of Mr Kei was that he only agreed to give evidence for the petitioner very late.  Mr Kei had been dismissed by the 1^st respondent for about one month.  The Judge held that Mr Kei’s evidence only adds to the dispute and is of little assistance to the Court.  As to the affirmation from the petitioner, the Judge held that there was no reason to allow him another opportunity to reply to matters which were within his knowledge for some time.

4.3  The decision whether or not to admit the two affirmations is a matter of case management and there is no doubt case management is pre-eminently within the province of the trial judge and it is only in exceptional circumstances that an appellate Court would interfere with such a decision : Cheung Yee Mong v. So Kwok Yan and Another [1996] 2 HKLR 48 at 51 per Bokhary JA (as he then was).  This is more so after the civil justice reforms.

4.4  However, the decision whether to admit the new evidence or not cannot be a mechanistic approach based on the failure to company with directions on evidence.  The petitioner’s affirmation detailed, among other things, the refusal by the respondents to allow inspection of company’s documents which the respondents readily conceded to be indefensible.  Even though part of the affirmation of Mr Kei deals with the purpose and arrangement for the advancement of the $10 million which may not be helpful to resolve the dispute between the parties, he was able, in his position as the former editor-in-chief, to address the prospect of the business of the magazine.  This clearly was a relevant matter in terms of the wastage of the assets of the company.  As the Judge himself observed in paragraph 6 of his second validation judgment :

‘ 6. …It is apparent that [the company] is reluctant to make such disclosure because it would lend weight to [the petitioner]’s case that it has no viable business.’

4.5  The evidence revealed that the company was incurring expenses in the sum of $700,000 to $800,000 per month, while at the same time, the respondents steadfastly refused to reveal the revenue position of the company.  This is most alarming and does not bode well for the respondents.  The evidence was most relevant.  In my view, the present case is one of the rare occasions in which the Judge had erred in his decision not to admit the evidence. 

V.  Conclusion

5.  For these reasons, the appeal would have been allowed in any event.

Hon Yuen JA :

6.  I agree.