LEI ZI SHEN v.TAI-AO ALUMINIUM GROUP LTD AND OTHERS

HCCW 1116/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1116 OF 2004

_____________

____________________

______________

J U D G M E N T

______________

The application

1.  By his amended petition in these proceedings, Mr Lei Zi Shen (“Mr Lei”) seeks the winding up of Tai-Ao Aluminium Group Limited (“the Company”) on the just and equitable ground pursuant to section 177(1)(f) of the Companies Ordinance.  As an alternative, Mr Lei seeks various orders pursuant to section 168A of the Companies Ordinance, namely:-

(1)	an order that the Respondents deliver up to him for inspection all books and records of the Company;
(2)	an order that the 4th Respondent, Mr Ho Seong Peng (“Mr Ho”), be restrained from continuing to act as chief executive officer of the Company; and
(3)	an order that Mr Lei should purchase the shareholding of the 2nd Respondent, Right Global Developments Limited (“Right Global”) in the Company on such terms as the court thinks just.

2.  Right Global seeks orders that the amended petition be dismissed or struck out, or alternatively that the claims seeking winding up relief, the order for delivery up of books and records, and the injunction against Mr Ho be struck out.  The application to strike out is brought pursuant to RHC Order 18 rule 19(1)(a), (b) and (d) and the inherent jurisdiction of the court.

3.  Mr Chan, appearing for Right Global, rightly recognises that the burden of establishing that the petition, or the particular items of relief which it is sought to strike out, should be struck out is a high one, and that striking out will only be ordered where it is clear that the claim is unsustainable or that there is no real prospect of the relief sought being granted.  He says, however, that it is plain and obvious that the allegations in the petition are insufficient to justify the granting of any relief at all, and that even if that is not right, having regard in particular to the financial position of the Company, there can be no real prospect of winding up relief being granted.  In relation to the other two items of relief which it is sought to strike out, Mr Chan submits that in the light of the present factual situation, neither of them is relief which could arise for consideration in this case.

Claim for inspection and for injunction against Mr Ho

4.  I do not think that Mr Chow, who appears for Mr Lei, contended that the relief referred to in paragraph 1(1) and (2) should be retained, the claim for inspection having been overtaken by Mr Lei’s removal as a director of the Company, thus removing his right to inspection of its books and records, and the claim for an injunction against Mr Ho being rendered unnecessary as a result of his resignation from the position of chief executive officer of the Company.

Mr Lei’s arguments

5.  Mr Chow, contended, however, that these matters apart, the petition and the winding up relief should not be struck out.  He contended that there were three bases on which it was at least arguable that relief (including winding up relief) should be granted.  These were:-

(1)	that the underlying basis of the relationship between Mr Lei and Mr Ho (or more accurately, Right Global), as co-shareholders in the Company had failed, as a consequence of the rescission by Mr Lei of the agreement by which they became shareholders in the Company;
(2)	that there had been a justifiable loss of confidence on the part of Mr Lei in Mr Ho and Right Global; and
(3)	that Mr Lei had been improperly removed from office as a director of the Company.

Mr Chow submitted that if Mr Lei succeeded in establishing any of these grounds (all of which were, he said, at least arguable), it would be appropriate to grant either winding up relief under section 177(1)(f) or, alternatively, relief under section 168A of the Companies Ordinance, principally in the form of an order entitling Mr Lei to buy out Right Global’s shareholding in the Company.

Right Global’s position

6.  Mr Chan, however, contended that none of these points were arguable, but that even if they were, they were not adequately set out in the amended petition and would thus not be open to Mr Lei if the proceedings were permitted to continue.

The amended petition

7.  Given Mr Chan’s criticism of the manner in which Mr Lei’s case is set out in the amended petition, it will be convenient first to summarise the allegations that are there set out.  These allegations are supported by Mr Lei’s three affirmations in these proceedings.  Although Right Global has indicated, in an affirmation filed on its behalf by one of its directors, a Mr Ho Siu Kau (“Mr SK Ho”), that it disputes many of the allegations made by Mr Lei, it has not dealt with many of them at this stage, reserving its right to do so in the event that the amended petition is not struck out.  Thus, most of the following summary is (at any rate, for present purposes) not in dispute.

8.  The Company’s shares are now held as to 33.7% by Mr Lei, 65.6% by Right Global, and 0.7% by a company called Asia Management Group Limited, and its directors consisted of Mr Lei (until his removal), Lai Chang Hung (“Mr Lai”), Wu Fulin (“Mr FL Wu”), Wu Zidian (“Mr ZD Wu”), Chen Yixin (“Mr Chen”), Mr SK Ho and Right Global.

9.  The background to the formation of the Company was that in about October 2000, Mr Lei, Mr Lai, Mr FL Wu and Mr ZD Wu set up a Chinese company called Tai-Ao Aluminium (Taishan) Company Limited (“the Taishan Company”) to manufacture aluminium materials and products in China for export overseas.  Their interests in the Taishan Company were held through an Australian company called A&T Aluminium (Aust) Pty Limited (“A&T”).  It is said that all four participated in the management of the Taishan Company.  Mr Lei met Mr Ho in early 2002, and was given to understand that Mr Ho had good relationships with officials of the PRC central and municipal governments.  Shortly afterwards, Mr Ho introduced Mr Chen to Mr Lei, telling Mr Lei that Chen also had good connections with such officials.  Mr Ho and Mr Chen expressed keen interest in cooperating with Mr Lei and his colleagues in the aluminium business.  An initial joint venture involving a company in Zhuhai was set up.  However, before this became operational, Mr Ho proposed a closer relationship, involving the setting up of a holding company which would hold the Taishan Company as the manufacturing arm of the new group, with other overseas offices and subsidiaries to promote sales of its products.  It was envisaged that the holding company to be formed would in due course seek listings on major stockmarkets overseas.

10.  This resulted in the making of a written agreement between Mr Lei, Mr Lai, Mr FL Wu, Mr ZD Wu, Mr Ho and Mr Chen on 23 August 2002 (“the Agreement”).  According to the amended petition, the Agreement contained the following terms:-

(1)	that a Hong Kong holding company would be established to hold the Taishan Company and various overseas sales offices or branches;
(2)	Mr Ho and Mr Chen would be given a 26% interest in the Hong Kong holding company in consideration of:-
	(a)	their guarantee that all future working capital requirements of the Hong Kong holding company would be met, and their undertaking responsibility for liaising with PRC government departments to ensure that the Taishan Company’s business operated smoothly; and
	(b)	their agreeing to be responsible for the repayment of a bank loan of RMB 40 million to be obtained by the Taishan Company, this being treated as their capital contribution for the 26% interest that they were to obtain in the Hong Kong holding company, it being agreed that they would repay such loan out of future dividends which it was envisaged that the Hong Kong holding company would pay to them.

11.  Although not referred to in the amended petition, the Agreement contained a recital whereby the parties agreed that “they would jointly co-operate to operate [the Taishan Company] and to sign [the Agreement]”.  The Agreement also provided for the basis on which the respective contributions of the parties to the intended Hong Kong holding company were to be valued, and indicated that if Mr Ho and Mr Chen did not repay the RMB 40 million loan in full at the end of one year, they should ensure that the outstanding balance of the loan should remain available to the Taishan Company, failing which their shareholding should be reduced so that they would only be entitled to a shareholding proportionate to the amount of the loan repaid by them.

12.  The amended petition then goes on to refer to:-

(1)	the setting up of the Company, in which Right Global held 26% of the issued shares for Mr Ho and Mr Chen, with the remaining shareholding being held by Mr Lei, Mr FL Wu, Mr ZD Wu and Mr Lai in proportions very similar to those of their interests in the Taishan Company (it appears that, subsequently, in about March 2004, the individual shareholders other than Mr Lei transferred their shareholdings to Right Global);
(2)	the transfer of the ownership of the Taishan Company and a number of other companies incorporated in various jurisdictions to the Company as its subsidiaries.

13.  There is then reference to two supplemental agreements of 9 October 2002 and 20 February 2003.  The first of these provided that Right Global, Mr Ho and Mr Chen agreed to be responsible for the repayment of the RMB 40 million bank loan obtained by the Taishan Company within 2 years from 1 October 2002, failing which the Company could forfeit part of Right Global’s shareholding in the proportion that the outstanding debt of the Taishan Company bore to the amount of the original loan.  The second provided that the capital contribution of Messrs Ho and Chen to the Company should be reduced to RMB 11 million, but that they should remain entitled to a 26% interest in the Company.  This agreement also provided that they were to be treated as having already injected the amount of RMB 11 million, and contained a confirmation from them that they were indebted to the Company for RMB 11 million, which they would repay out of expected future dividends from the Company.

14.  The amended petition goes on to allege that the Company and the Taishan Company are under the management and control of Mr Ho, who is said to have adopted an alias, He Shang An, for the purposes of his involvement in the affairs of the Company.  The principal matter relied upon in support of this allegation would appear to be a decision of the Company’s board of directors on 17 December 2003, appointing Mr Ho as the chief executive officer of the Company, with extensive responsibilities in respect of the Company and its subsidiaries.

15.  It is alleged that the parties to the Agreement and supplemental agreements regarded each other as partners and reposed trust and confidence in one another, and that Mr Lei proceeded, in entering into such agreements, on the basis that it was lawful for Mr Ho and Mr Chen to enter into them.

16.  Reference is then made to a deterioration in the relationship of Mr Lei with his fellow directors in about May 2004, as a result of disagreements over the level of indebtedness which the Taishan Company was being caused to incur.  This apparently led Mr Lei to resign as the legal representative of the Taishan Company on 24 May 2004.  In his evidence, Mr Lei explains that this was because of his concerns as to his potential personal liability for the Taishan Company’s obligations arising from his holding this position.

17.  Mr Lei says that in August 2004, he discovered that Mr Ho was in fact an undischarged bankrupt in Hong Kong.  Mr Lei alleges that in consequence of his status as an undischarged bankrupt, Mr Ho has been guilty of breaches of a number of provisions of the Bankruptcy Ordinance (Cap. 6), namely:-

(1)     a breach of section 131(a) of that Ordinance by entering into the Agreement and supplemental agreements;

(2)     breaches of sections 131(b) and (c) of that Ordinance by using the alias He Shang An in “carrying on the business or trade and signing documents for and on behalf of the Company and the Taishan Company” without complying with the notification requirements imposed by those sections; and

(3)     a breach of section 156(1) of the Companies Ordinance by virtue of his actions as chief executive officer of the Company.

It is alleged that despite Mr Lei having brought these matters up, nothing has been done about Mr Ho’s position in the Company.

18.  At this point, it is relevant to mention that there is evidence to indicate that Mr Ho has now resigned as such chief executive officer.

19.  The next complaint is as to attempts by Mr Lei to inspect the books and records of the Company, it being alleged that it was initially suggested that the books and records of the Company were unavailable, and that when they were made available, Mr Lei was denied the assistance of his solicitor during the inspection.  This aspect of the matter is of less relevance following Mr Lei’s removal as a director, but it may still, I think, be relied on in support of the allegation as to removal from management if that allegation is otherwise a good one, and is sufficiently raised by the amended petition.

20.  It is finally alleged that Mr Lei was removed as a director of the Company at an Extraordinary General Meeting of the Company on 15 November 2004, without any valid ground or reason being given.

21.  The amended petition concludes by asserting that in the circumstances, it is just and equitable that the Company should be wound up, or alternatively, that it should be found that the affairs of the Company have been conducted in a manner unfairly prejudicial to the interests of Mr Lei, and seeks the various items of relief that I have mentioned in paragraph 1 above.

Approach to whether or not the amended petition should be struck out

22.  Against this summary of the allegations in the amended petition, I turn to consider in relation to each of the bases for relief identified by Mr Chow in his submissions:-

(1)     whether such basis is plainly and obviously unsustainable; and

(2)     if not, whether such basis is open to Mr Lei in these proceedings, having regard to the manner in which the amended petition is framed.

If any particular basis is plainly or obviously unsustainable, that will be the end of the matter.  However, if it is arguable, but not open to Mr Lei on the amended petition as presently framed, it may be appropriate to afford Mr Lei an opportunity to further amend the amended petition.

23.  In considering the latter question, I bear in mind the observations of Chu J in Re Tourmaline Ltd [2000] 4 HKC 348 at 354B-D (with which I agree), where she said:-

“Although a petition does not constitute a formal pleading, it serves to define the scope of the matters in issue and the disputes that the court has to resolve.  Accordingly, a petition must set out with precision and sufficient particulars the matters complained of or relied on by a petitioner in justifying a winding-up order on just and equitable ground, and the court will not travel beyond the allegations contained in the petition in adjudicating the matter: Re Fildes Bros Ltd [1970] 1 WLR 592 at 597G-598C.  It follows that a sufficient case must be stated on the petition and defects or omissions in the petition cannot be cured by the supporting affidavit: see Derek French, Applications to Wind Up Companies, pp 86-88; Re Wear Engine Works Co (1875) 10 Ch App 188 at 191.”

Failure of underlying basis of cooperation - rescission of the Agreement

24.  So far as the first ground for relief relied upon by Mr Chow is concerned, this is that that the underlying basis of the relationship between Mr Lei and Mr Ho (or more accurately, Right Global), as co-shareholders in the Company had failed, as a consequence of the rescission by Mr Lei of the agreement by which they became shareholders in the Company.

25.  This argument runs along the following lines:-

(1)     In entering into the Agreement (and the supplemental agreements), Mr Ho was, in substance, obtaining credit from Mr Lei, Mr FL Wu, Mr ZD Wu and Mr Lai.

(2)     At the time that the Agreement (and the supplemental agreements) were entered into, Mr Ho was an undischarged bankrupt, and had not informed Mr Lei (at least) of that fact.

(3)     The Agreement (and the supplemental agreements) were governed by Hong Kong law, as they involved an agreement by the prospective shareholders of the Company to set up, and allot shares in, a Hong Kong company, and to cooperate in the operation of the Hong Kong company.

(4)     Accordingly, in entering into the Agreement and supplemental agreements, Mr Ho was guilty of a breach of section 131(a) of the Bankruptcy Ordinance, which provides that an undischarged bankrupt shall be guilty of an offence:-

“if either alone or jointly with any other person he obtains credit to the extent of $100 or upwards from any person without first informing that person that he is an undischarged bankrupt”

(5)     The consequence of Mr Ho’s breach of section 131(a) of the Bankruptcy Ordinance is that the Agreement is capable of being rescinded by the innocent party (see De Choisy v Hynes [1937] 4 AER 54.

(6)     Mr Lei has rescinded the Agreement.

(7)     Accordingly, the basis of the relationship between Mr Ho or Right Global and (among others) Mr Lei no longer exists, such that it should be brought to an end by the winding up of the Company.

26.  In my view, this argument breaks down at the first stage, and does so in a way that renders it unarguable or doomed to failure.  I am quite unable to agree that in entering into the Agreement, Mr Ho could be said to be obtaining credit from Mr Lei or his then fellow shareholders in the Australian holding company of the Taishan Company.  I say this because under the agreement, Mr Ho did not undertake any obligation to make any payment to Mr Lei or the others which could be said to be deferred.  The agreement was not an agreement for the sale or purchase of their interests in the Taishan company (or more accurately, its holding company), for a consideration which was deferred.  Rather, it was an agreement between the parties to it to set up an entirely new company.  The consideration on the part of Mr Lei and the others was the injection into the new company of the Taishan Company.  The consideration on the part of Mr Ho and Mr Chen was to guarantee the sufficiency of the new company’s cash flow, to be responsible for the external affairs and relations with the PRC Government of the new company and its subsidiaries, to obtain a loan of RMB 40 million for the Taishan company, to be responsible for the repayment of that loan, and to ensure that that loan remained available until they had fully repaid it.  At best, it might be said that there was an element of credit extended by the Company to Right Global, to whom it issued 26% of its shares without receiving cash for them.  But this was not, in my view, credit given to Mr Ho.  Still less was it credit given to Mr Ho by Mr Lei.

27.  In these circumstances, I cannot see that there was any arguable basis on which Mr Lei could claim to be entitled to rescind the Agreement.  That being so, the suggestion that the underlying basis on which Mr Lei and Mr Ho entered into their relationship has disappeared cannot succeed.

28.  In the light of my conclusions as to this aspect of this contention, the question of whether or not it is adequately put forward in the amended petition does not arise for consideration.

Justifiable lack of confidence in the management of the Company

29.  The second basis for relief put forward by Mr Chow was the submission that there was a justifiable lack of confidence by Mr Lei in the management of the Company, in particular in respect of Mr Ho.  In this respect, Mr Chow submitted that such lack of confidence was entirely justified having regard to:-

(1)	Mr Ho’s failure to disclose the fact of his bankruptcy prior to the making of the Agreement, since this was obviously a material fact that would influence anyone contemplating entering into a business venture with him.
(2)	Mr Ho’s control  (through Right Global) of the Company.
(3)	Mr Ho remaining a director of the Taishan Company.
(4)	Mr Ho having been a director of the Company, and having accepted the position of chief executive officer of the Company, notwithstanding his bankruptcy - of which he must have been well aware - thus breaching section 156(1) of the Companies Ordinance, which provides:-

“If any person being an undischarged bankrupt acts as director, or directly or indirectly takes part in or is concerned in the management of, any company except with the leave of the court by which he was adjudged bankrupt, he shall be guilty of an offence and liable to imprisonment and a fine ...”

(5)	Mr Ho’s engaging in the trade or business of the Company and its subsidiaries through his position as the Company’s chief executive officer, contrary to section 131(c) of the Bankruptcy Ordinance, which provides that an undischarged bankrupt shall be guilty of an offence:-

“if he engages in any trade or business under a name or names other than that or those under which he was adjudicated bankrupt without first publishing, once in the Gazette, and in 3 successive issues of 2 local newspapers of which one shall be Chinese, a notice containing the following particulars –

(i)     the name or name under which he was adjudicated bankrupt;

(ii)     the last address at which he carried on any trade or business prior to the adjudication;

(iii)     the name or names under which he intends to carry on the trade or business;

(iv)     the nature of the trade or business which he intends to carry on; and

(v)     the address or addresses at which he intends to carry it on.”

30.  As to the first of these points, Mr Chan submitted that nowhere in the petition or the evidence in support was it said that this non-disclosure of Mr Ho’s status as a bankrupt had caused Mr Lei to lose confidence in him.  He stressed that the allegations as to bankruptcy were included simply in the context of allegations of breaches of the section 131 of the Bankruptcy Ordinance and section 156 of the Companies Ordinance.  It was therefore not open to Mr Lei to rely on this point.

31.  As to Mr Ho’s alleged control of the Company and the Taishan Company, and the alleged breach of section 156 of the Companies Ordinance, Mr Chan submitted that these matters were of historical interest only, given that Mr Ho had now given up his position as a director and chief executive officer of the Company.  He also suggested that Mr Ho, despite these positions, had not in fact involved himself in any significant way in its operations or affairs.

32.  Finally, Mr Chan submitted that there had been no breach by Mr Ho of section 131(c) of the Bankruptcy Ordinance, as that provision did not and was not intended to catch employees or directors of companies, and was only concerned with the position of persons carrying on business under another name than that under which they were adjudged bankrupt, whether an alias, or a trade or firm name under which they carried on business.

33.  So far as the last of these submissions is concerned, I am inclined to think that Mr Chan is right.  It seems clear from the terms of section 131(c) and the nature of the particulars it requires to be given that it is concerned with the situation where an individual who has been adjudged bankrupt intends to carry on or engage in business himself, and not where he is concerned in the business of another.  Where that other is a company, however, and the bankrupt is concerned in its management, this will be caught by section 156 of the Companies Ordinance.

34.  That said, however, it does seem to me that the other complaints could (if established) at least arguably give rise to a justifiable loss of confidence such as would entitle Mr Lei to seek to bring the relationship to an end, particularly having regard to the allegation in the amended petition that the cooperation between himself, his then fellow investors in the Taishan Company, and Messrs Ho and Chen was based on mutual trust and confidence in one another.

35.  Whether or not Mr Ho was involved in the management of the affairs of the Company and the Taishan Company is in dispute.  This is not a matter that can be resolved at this stage.  While it would seem that Mr Ho is no longer acting as chief executive officer of the Company, it is not clear whether he has completely removed himself from its affairs, or those of its operating subsidiaries.  Further, I do not think that such involvement as he may have had in the past can be dismissed as being purely a matter of historical interest.  It is, I think, at least arguable that such involvement, given his status as an undischarged bankrupt, and the apparent willingness of the other parties (other than Mr Lei) to leave him in that position until he tendered his resignation, could justify Mr Lei in losing confidence in him and the others.  Similarly, the failure on Mr Ho’s part to disclose his bankruptcy to Mr Lei could arguably have a similar effect.  I therefore think that this aspect of the case is arguable, and should be permitted to proceed, if it is sufficiently set out in the amended petition.

36.  But is it so sufficiently set out?  I am afraid that I do not think that it is.  Nowhere in the petition is loss of confidence mentioned as a basis for granting relief.  Nor can one find in the petition any statement of the factors which are relied upon as justifying a loss of confidence on the part of Mr Lei.  It seems to me that it is not sufficient to simply allege a series of facts and then invite the court to grant various forms of relief under section 168A or 177(1)(f) of the Companies Ordinance.  It is, I think, incumbent on a petitioner to state the grounds on which such relief is sought, and to state in relation to each ground relied on, the facts and matters which are said to give rise to that ground.  As the amended petition stands, therefore, I am satisfied that it does not contain a sufficient case for granting relief on the basis of justifiable lack of confidence, and is therefore susceptible to being struck out.

37.  However, as I am of the view, for the reasons which I have given above, that there is an arguable case (and in saying this I do not express any views on whether it is likely to succeed or fail at the end of the day), I think that it would be appropriate to afford Mr Lei a final opportunity to put that case forward by formulating appropriate re-amendments to the amended petition.

Removal of Mr Lei from office as a director of the Company

38.  I turn next to Mr Chow’s final ground for relief - removal of Mr Lei from management of the Company.  Mr Chow submitted that it was an express agreement of the parties, stated in the Agreement, that they should jointly cooperate in the operation of the Company based on principles of fairness, reasonableness and mutual benefit.  He pointed out that prior to the Agreement being entered into, Mr Lei had been involved in the management of the Taishan Company, and that after the Agreement was put into effect, he continued to be involved in the management of the Taishan Company (as its legal representative and Chairman) and became involved in the management of the Company (as a Director).  Mr Chow submitted that this clearly demonstrated that it was the understanding of all the parties to the Agreement that they should be involved in the management of the Company.  In those circumstances, he said, the removal of Mr Lei as a director of the Company gave rise to a basis for the relief sought.

39.  As with the previous ground, I think on balance that this ground is sufficiently arguable that it cannot be struck out if it is adequately formulated in the amended petition.  In my view, the matters identified by Mr Chow could arguably, depending on such evidence as may be forthcoming at trial as to the intention of the parties, justify a finding that there was an understanding or agreement of the nature contended for.

40.  In saying this, I recognise that each of the matters relied on does not necessarily compel such a finding.  The relevance of the previous manner of operation of the affairs of the Taishan Company might be said to be a matter of history, in relation to which there is no reason to suppose that it was intended to continue after Mr Ho’s and Mr Chen’s participation in the venture.  As to the Agreement, the reference in the recital is not to the Company, but to the Taishan Company.  However, given that the structure adopted was one in which the Taishan Company was the principal operating company, I think it arguable that the apparent agreement to jointly operate its operations could be regarded as an indication of the parties’ understandings and intentions as to the way in which the Company itself should be run.  Finally, although it might be argued that the way in which the Company was in fact run after the venture was put into effect postdates any agreement or understanding, and is thus of no assistance in determining whether such an agreement existed in the first place, it seems to me that the way in which the parties in fact conducted themselves could throw some light on what their intentions were.

41.  That said, however, as with the previous ground, I do not think that this complaint is at present adequately formulated in the amended petition.  Nowhere in the amended petition is it alleged that it was the agreement or understanding of the parties to the Agreement that they should each be entrenched in the management of the Company once formed.  While I would accept that this might be inferred at the end of the day, depending on the evidence at trial, it remains necessary, in my view, for it to be alleged that such an agreement or understanding existed, with sufficient particulars of it, or the matters from which it is to be inferred, being given.  Absent such an agreement or understanding, the removal from management of a director of the Company in accordance with the articles of association cannot of itself justify relief under section 168A or 177(1)(f) of the Companies Ordinance.

42.  I therefore think that in this respect, too, the amended petition is inadequate.  However, as it would seem to be possible for the amended petition to be re-amended to remedy this deficiency, I think that the right course would be to afford Mr Lei the opportunity to formulate an appropriate re-amendment, if he is able to do so.

Should the prayer for winding up relief be permitted to remain?

43.  I turn finally to the question of whether or not the prayer for winding up relief should be permitted to remain as part of these proceedings.  Mr Chan submitted that it should not, on the authority of Re Wong To Yick Wood Lock Ointment Ltd [2001] 2 HKLRD 683 and [2003] 1 HKC 484.  In that case, it was held by the Court of Appeal that:-

(1)	The correct approach was to follow the approach prescribed in section 180(1A) of the Companies Ordinance by considering (assuming the allegations made in the petition to be true) whether there was any real possibility or prospect of a winding up order being made.
(2)	The principle behind section 180(1A) is that winding up by a contributory is a remedy of last resort, and will not be granted on a contributory’s petition if the petitioner is acting unreasonably in insisting upon it where there exists an alternative remedy.
(3)	In an application to strike out a prayer seeking winding up relief, it is incumbent on a petitioner to file evidence stating (with reasons) why a winding up order was the preferred remedy, failing which the court is entitled to conclude that the petitioner is not opposed to a buy-out order.
(4)	Having regard to the financial health of the company, which was clearly solvent, the existence of shareholders who were not involved in the alleged wrongdoing, and the absence of any apparent prejudice to the petitioner in striking out the winding up relief claimed, it was appropriate to strike out that claim for relief.

44.  In this case, Mr Chan submits that the Company is clearly solvent and in excellent financial health, by reference to its latest audited accounts, which show profits (on a consolidated basis) of about HK$30 million for each of the financial years ended 31 December 2002 and 31 December 2003.  In addition, the evidence filed on behalf of the Company indicated that the profits for the full year ending 31 December 2004 were likely to be in the region of HK$58 million.  The Taishan Company employed over 2000 workers, and the business of the Company was continuing to expand.  That being so, he submits, there is no basis for winding it up if alternative relief is available to Mr Lei.

45.  As to that, Mr Chan points to the fact that Mr Lei does in fact seek, as an alternative to a winding up order, an order that he be permitted to buy out Right Global’s shares in the Company as a strong indication that he does not truly wish to wind up the Company.

46.  Mr Chan also suggests that it is relevant to take account of the existence of innocent shareholders (Messrs. Lai, FL Wu and ZD Wu in particular).

47.  Mr Chow, however, contended that it would not be appropriate to strike out the winding up relief.  He submitted that:-

(1)	Given that the complaint was that the whole basis for cooperation had gone (as the Agreement was capable of being, and had been, rescinded by Mr Lei), it would be inappropriate to permit the Company to continue and have one party buy out the other.
(2)	It could not be said that Mr Lei should be restricted to a section 168A claim, since it was his fall back position that he should be able to buy out Right Global.  He did not wish to be bought out, and given that he was involved in the Taishan Company in the first instance, it would be inappropriate that he should have his shareholding bought out by Right Global, particularly having regard to the fact that Mr Ho was responsible for the breakdown in the relationship.  However, recognising that it was relatively uncommon that a minority should be permitted to buy out a majority, it was reasonable to seek to retain the winding up relief.
(3)	It was reasonable to press for winding up relief, since that would enable Mr Lei to bid for the business of the Company, which would most likely be sold by a liquidator as a going concern (see Re Copeland & Craddock Ltd [1997] BCC 294 at 299-300.

48.  I do not think that these reasons are adequate.  I note first that although Mr Chow submitted that Mr Lei’s preference was for a winding up order to be made, Mr Lei has not himself said this anywhere in his evidence filed in these proceedings.  This is so, despite it being clear that it would be sought to strike out the winding up relief claimed, and the observations of the Court of Appeal in the Wong To Yick case.  Still less has he put forward any evidence containing his reasons for seeking such relief in preference to a buy out.  That being so, it seems to me that on the evidence, Mr Lei is not apparently opposed to a buy out (his preference being that he should buy out Right Global rather than the other way around), so that it would in my view be unreasonable for him to insist instead on a winding up of the Company.

49.  Moreover, it does appear on the basis of the Company’s audited financial statements that it is highly profitable.  That being so, I can see little justification for putting it into liquidation.  Even if it were supposed that a liquidator would seek to sell its business or operations as a going concern, there must be a significant risk that a sale by a liquidator would produce a less satisfactory price.  Provided that the Company is fairly valued, a buy out order (depending on which way it went) would either enable Mr Lei to acquire control of the Company at a fair price, or would result in his being bought out at a fair price.  In either case, the price (and thus the return to whoever was bought out) would seem likely to be likely than any recovery that might be achieved by a liquidator.

50.  Further, I do not think that the suggestion that Mr Lei should be permitted to maintain the winding up prayer on the footing that the buy out relief claimed (which involves him buying out Right Global) is ambitious is one that holds water.  It does not follow from the fact that his preferred form of buy out relief is not one which he would necessarily be awarded that he should be permitted to insist on a winding up of the Company.  On the contrary, if it should be inappropriate to permit him to buy out Right Global (as to which I express no view one way or the other, even assuming that his complaints are made out), it would seem, having regard to the Company’s financial position, that the appropriate course would be for him to be bought out at a fair price.

51.  It therefore seems to me to be clear on the material before me that it would not be reasonable for Mr Lei to insist on obtaining a winding up order, and that being so, there does not appear to me to be any real prospect of his obtaining one, so that it would be appropriate to strike out the winding up relief sought.

52.  In coming to this conclusion, I have not placed any weight on the suggestion that there are “innocent” shareholders involved.  This is because it seems that at present, the only other significant shareholder in the Company is Right Global, and the evidence before me does not make it clear, one way or another, whether Messrs Lai, FL Wu and ZD Wu, are in fact interested in Right Global, and thus, indirectly, in the Company.  Although it seems that they remain directors of the Company, I have been provided with no information as to the terms on which their shares in it were transferred to Right Global, in particular, whether they have sold their shares to Right Global outright, or whether they have acquired an interest in Right Global in consideration of such transfer.  However, even absent this factor, I am satisfied that it would be appropriate to strike out the winding up relief.

53.  I would therefore be prepared to make an order striking out the relief specified in paragraph (2) of the Notice of Motion.

Disposition and costs

54.  However, given that I have concluded that the amended petition does not adequately set out the grounds for relief advanced by Mr Chow which I have held to be arguable, I think that the appropriate course would be to strike out the amended petition but to leave it open to Mr Lei to apply for leave to re-amend it, if he wishes to do so (leaving out those parts which I have concluded are unarguable, and the relief which I have concluded should be struck out), within a reasonable time.  I shall therefore make an order that, unless within 42 days or such further time as may be agreed between the parties or allowed by the Court, the Petitioner takes out a summons seeking leave to re-amend the petition, the petition shall stand dismissed.

55.  So far as costs are concerned, Right Global has been substantially successful in its application, and I shall therefore make a costs order nisi that Mr Lei should pay Right Global its costs of this application, to be taxed on the party and party basis if not agreed, with certificate for two counsel.