YEUNG BUN v. BRIO TECHNOLOGY INTERNATIONAL LTD. AND ANOTHER

HCCW 962/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO.962 OF 1999

-------------------

------------------------

J U D G M E N T

------------------------

1. There are two applications before the court. The first is a notice of motion to strike out the petition. Whilst it is unclear whether it was filed by both or only one of the respondents, it would appear from the supporting affidavit that it is the 2nd respondent's motion. The other application is a summons by the petitioner for leave to set the petition down for hearing.

THE PETITION

2. In summary, the facts as alleged in the petition are as follows. The Company was incorporated in 1996 as a 50/50 joint venture between Lam Tsang Tsang ("Lam") and Eldon Yeung ("Yeung") to provide consultancy services in information technology to clients. The two directors and shareholders of the Company were Lam's mother Chan Nuen Heung and Yeung's father, the petitioner being respectively the nominees of Lam and Yeung. At all material times, the Company was run and managed by Lam and Yeung. Its operations were financed by Lam and Yeung who injected funds into the Company either directly or through their respective nominees. To all intents and purposes, the Company was operated as a quasi partnership between Lam and Yeung who reposed trust and confidence in each other.

3. In about July 1999, differences arose between Lam and Yeung. According to Yeung, he discovered that Lam had misappropriated Company funds to pay off his personal expenses. When asked to repay the drawings to the Company, Lam refused. A deadlock resulted and since about August 1999, neither Lam nor his mother, the 2nd respondent, has reappeared at the office. Four of the Company's staff representing 50% of its workforce also left to join Lam's companies Topbest Technology Ltd and Lawgicware International Limited.

4. In mid-August 1999, there were negotiations for the purchase of Lam's interest in the Company by the Yeung family but no agreement was reached. Since August, the Company has been funded by the Yeung family alone. As at 30 September 1999, according to the latest management accounts, the outstanding amount due from the Company to the 2nd respondent was approximately $700,000 whilst Lam owed the Company over $950,000.

5. On 23 September 1999, solicitors for the 2nd respondent demanded that the Company repay the 2nd respondent the shareholder's loan and on 4 October 1999, a writ was issued against the Company for some $700,000. The petitioner's defence is that there was a mutual understanding that shareholders' loans would only be repaid if the Company had sufficient funds and a section 114B application was made by the petitioner at his own expense to defend the action.

6. There was a further attempt by the Yeung family to negotiate a buy-out in mid-October 1999 but it was unsuccessful. The petition was presented on 27 October 2000 and the relief sought is the winding-up of the Company on the just and equitable ground.

7. It is relevant to mention that on 4 December 1999, the 2nd respondent commenced misfeasance proceedings in the High Court against, inter alia, the petitioner.

THE STRIKING OUT APPLICATION

8. It was submitted that the petition should be struck out on the basis that its presentation was an abuse of the court's process. It was contended that the petitioner has not come to court with clean hands in that he failed to disclose to the court at the outset that he had diverted the Company's business to Brio Electronic Commerce Ltd ("BECL"), a company which the petitioner set up only two weeks prior to the presentation of the petition, that he never came clean about this until April 2000, some six months after the presentation of the petition and that he had unreasonable refused a viable alternative to a winding-up, namely a buy-out by the 2nd respondent at a valuation. The underlying premise was that clean hands was a pre-requisite, the absence of which is fatal to the petitioner's claim to relief. The issues are therefore :

(1) whether there was an absence of clean hands on the petitioner's part; and

(2) whether as a matter of law, clean hands are a pre-requisite to relief under the just and equitable ground.

Clean hands

10. The 2nd respondent's case is that the petition was not presented in good faith in that it was all part of a strategy on the part of the petitioner first to strip the Company of its valuable assets and then to wind it up. Central to this contention were the following matters :

(i) the diversion by Yeung of the Company's contracts with Tradelink and EDS to BECL;

(ii) the unreasonable rejection by the petitioner of the 2nd respondent's offer to purchase the petitioner's shares which was a viable alternative to a winding-up.

Diversion of business

12. It is common ground that Tradelink and EDS were two major clients of the Company. The contract with Tradelink was meant to continue until December 2001. The 2nd respondent placed reliance on a computer generated quotation dated 13 October 1999 allegedly sent by Yeung on behalf of BECL to Tradelink as uncontroverted evidence of an attempt to divert the Company's business. But the authenticity of that document is disputed. According to Yeung, it was generated by a former staff member now in the employ of Lam's companies. There is in evidence a quotation dated 4 November 1999 from BECL to Tradelink which Tradelink has confirmed was the quotation accepted by it. Although the covering letter to that quotation referred to it as being a "revised quotation", it is unclear on the evidence whether the 13 October quotation was the 'earlier' quotation referred to. Counsel for the 2nd respondent sought to suggest that given the date of the revised quotation and the fact that the petition was presented on 27 October 1999, even if the earlier quotation was not the one dated 13 October 1999, it was reasonable to infer that the earlier quotation would have been generated at about the same time as the petition. But the petitioner's version of events is that Tradelink was not approached until 4 November 1999, which was after the presentation of the petition.

13. The petitioner further submitted that the Tradelink contract consisted of the sale of a product to Tradelink together with a maintenance contract. Due to the breakdown in relationship which occurred in August 1999, the Company was not in a position to perform the maintenance contract. What BECL sold to Tradelink was another and different product together with a maintenance contract. In each case, the product was acquired from a third party and resold to Tradelink. There are thus disputed factual issues as to whether the Tradelink contract was 'diverted'.

14. So far as the EDS contract is concerned, the Company was contractually obliged to complete stage 1 works by mid-August 1999 and stage 2 works by the end of September 1999. Given the breakdown in the relationship and the fact that by mid-August half the Company's employees had left the Company to join Lam's new companies, the petitioner submitted that the Company was simply not in a position to perform the contract. There was, in effect, a repudiatory breach on the part of the Company. EDS did not enter into a contract with BECL until 29 November 1999.

15. If, as I must assume for present purposes, the allegations in the petition are true, by mid-August 1999, the Company's operations had effectively ground to a halt. That is a material factor when considering the conduct of the petitioner in entering into contracts with the Company's customers after the date of the petition. That apart, as noted above, disputed factual issues do arise which cannot be resolved in a striking out application. Accordingly, in this summary application, I am unable to make a finding of fact that the petitioner had diverted the Company's business to BECL before the petition was presented on 27 October 1999. It would follow that he cannot be criticized for not disclosing the alleged diversion in his petition.

Rejection of the buy-out offer

16. As I understand it, the only other matter left relevant to 'clean hands' is that the petition was an abuse of process in that the petitioner unreasonably rejected Lam's buy-out offer at a valuation made in January 2000. The 2nd respondent's submission may be summarised as follows. The petitioner's rejection of the buy-out offer made by the 2nd respondent in January 2000 was unreasonable inasmuch as the only relief sought in the petition is a winding-up order. Ergo, the petitioner could not have been interested in the continued existence of the Company after the date of the petition. To reject the buy-out offer was in those circumstances unreasonable. It was further submitted that the petitioner's response to the buy-out offer from the 2nd respondent/Lam (which was that the petitioner should be the one to purchase the shares) was wholly inconsistent with the relief sought in the petition. Had he been genuine in seeking a buy-out prior to the presentation of the petition as is alleged, the primary relief sought would have been a buy-out order under section 168A. In fact, no such relief was sought. Accordingly, the response to the buy-out offer can only be explained as an attempt to get rid of the two High Court actions brought by the 2nd respondent, one against the Company for repayment of the loan and the other against the petitioner for misfeasance. If the petitioner were to take control of the Company, he would be in a position to put an end to those actions. The inference to be drawn was that the court's process was being used for ulterior purposes and that the petitioner either did not wish to have the relief he was seeking, i.e. a winding-up order or was simply using the petition to exert pressure on Lam.

17. Was the petitioner acting unreasonably in refusing the 2nd respondent's offer? That offer was on the basis of a valuation of the shares by an independent valuer. However, given the allegations made in the petition as to misappropriation, that is an issue that has an impact on the valuation but which cannot be resolved by a valuer. Rather, it is an issue that should either be tried so that, if appropriate, consequential directions given as to valuation or, if the Company were wound up, it would be a matter for the liquidator to pursue.

18. The petitioner also submitted that having regard to events as from August 1999, the Company's negative equity and inability to do business because of the deadlock, the departure of half the Company's staff to Lam's companies, the funding of the Company's outgoings solely by the petitioner since the deadlock, the refusal of the 2nd respondent to respond to the petitioner's offers to acquire his shares prior to the presentation of the petition, the genuineness of the 2nd respondent's offer is suspect. The 2nd respondent/Lam has had nothing to do with the Company since August 1999. The sudden resurrection of interest may not be unconnected with the two High Court actions commenced in October and December 1999 respectively which the 2nd respondent has made plain would be pursued with vigour if in control of the Company. It is clear that acceptance of the 2nd respondent's offer would neither resolve the misappropriation issue nor the misfeasance issue. In those circumstances, rejection of the offer by the petitioner cannot be said to be unreasonable.

19. For those reasons, I find that the 2nd respondent has failed to discharge the burden of proof upon her to show that there was an absence of 'clean hands' on the part of the petitioner. On this ground alone, the motion to strike out ought to be dismissed.

20. In deference to counsel who have made submissions on the legal issue, and in case I am wrong in my conclusion as to 'clean hands', I now turn to consider whether 'clean hands' is a pre-requisite to winding-up on the just and equitable ground.

'Clean hands' and winding-up on the just and equitable ground

21. The question of law which arises is whether the petition is doomed to fail because 'clean hands' is a pre-requisite to a just and equitable winding-up. Counsel for the 2nd respondent referred to the speech of Lord Cross in Ebrahimi v. Westbourne Galleries [1973] AC 360 at 387 where he said :

"A petitioner who relies on the 'just and equitable' clause must come to court with clean hands, and if the breakdown in confidence between him and the other parties to the dispute appears to have been due to his misconduct he cannot insist on the company being wound up if they wish it to continue." (emphasis added)

Pausing here, I do not see how this citation assists him since it would appear that the misconduct in question has to be causative of the breakdown. Counsel for the 2nd respondent also relied on the meaning Jones J ascribed to 'clean hands' in Re Cirtex Co. Ltd [1987] 3 HKC 13 at 20E :

"... 'clean hands' mean that a petitioner has been guilty of some misconduct or has failed to disclose to the court material facts or has attempted to deceive the court."

But when put in context, following as it does the citation from Westbourne Galleries, I do not read that definition as qualifying or departing from what was stated in Westbourne Galleries. This is reinforced by Jones J's later judgment in Re Shiu Fook Co. Ltd [1989] 2 HKC 342, where after referring to the principles stated in Westbourne Galleries cited above, he held that where a petitioner sought to rely on the just and equitable ground, he should come to the court with clean hands, and if the breakdown in confidence between him and the other parties to the dispute appeared to have been due to his misconduct, he could not insist on the company being wound up if they wished it to continue.

22. It is clear from both Cirtex and Shiu Fook that the clean hands requirement is not freestanding. Nor is it an overriding requirement : the clean hands doctrine applies only where the misconduct in question was causative of the breakdown in confidence and that involves a finding of fact that can only be made after a full hearing. It is to be noted that both Cirtex and Shiu Fook involved the hearing of the petitions themselves rather than striking out applications.

23. The English authorities also do not support the 2nd respondent's submissions in this regard. In Re London School of Electronics Ltd [1986] 1 Ch.211, Nourse J held (at 222C) that :

"... there is no independent or overriding requirement that it should be just and equitable to grant relief or that the petitioner should come to the court with clean hands."

Whilst that case concerned section 168A relief, in Vujnovich and another v. Vujnovich [1990] BCLC 227, the Privy Council held (at 231H-232A) that for a just and equitable winding-up, unless the misconduct was causative of the breakdown in confidence on which the petition was based, it was no bar to a winding-up order. This is also the view expressed in the leading textbooks. See for example Palmer's Company Law, Vol.2 at 8.1003 where it is stated that :

"... if the breakdown in confidence, which is the basis of the petition, is the result of the petitioner's misconduct, he will not be able to have the company wound up. However, the misconduct in question must be causative of the breakdown in confidence: the petitioner will not be excluded by all misconduct in relation to the conduct of the business, for example, where the misconduct occurred after the breakdown in confidence."

To similar effect is Gore-Browne on Companies at 28.16.1.

24. In Re Trocadero Ltd [1988] 2 HKLR 443 at 446E-F, it was stated that "a petitioner who relies on the just and equitable ground must come to the court with clean hands". But in that case, Jones J came to the view (at 446H) that "the breakdown in the relationship was at the instigation of the petitioner, not by the other directors." In other words, it was the petitioner's misconduct that caused the breakdown. The statement cited earlier is thus explicable. On my reading of that case, Jones J did not hold that 'clean hands' is an overriding requirement. If he did, it is contrary to the principles stated by the House of Lords and Privy Council in Westbourne Galleries and Vujnovich respectively as well as the later decisions of Jones J himself in Cirtex and Shiu Fook.

25. In my judgment, unless the misconduct in question was causative of the breakdown, the absence of clean hands is not necessarily a bar to a winding-up order under the just and equitable ground. Accordingly, the proposition of law advanced by the 2nd respondent has no sound basis and is to be rejected.

26. For these reasons, the application to strike out the petition falls to be dismissed.

SHOULD THE COMPANY BE WOUND UP?

27. In the event of the striking out application being dismissed, the 2nd respondent does not oppose a winding-up order on the basis that it is common ground between the parties that they are in deadlock. As an alternative, the 2nd respondent seeks a stay of the petition pending further negotiations between the parties for a buy-out. In that connection, the court was referred to the decision of Vinelott J in In re A Company [1983] 1 WLR 927, a case where it was held to be unreasonable for the petitioner to have rejected the alternative fair offers to purchase his shares. The petition was stood over to enable the parties to agree the terms of a submission to arbitration or to an expert. But in the present case, a stay would not be appropriate. The reason is that a buy-out cannot resolve the misappropriation and misfeasance issues.

28. The only question left is whether the petition should be tried as is the petitioner's stance or whether it should be wound up given the admitted deadlock. It is difficult to see what useful purpose would be served in having a trial since the relief sought is a winding-up order. The misappropriation allegation is a matter which the liquidator can investigate and pursue if appropriate. Equally, the liquidator will have to form a view as to the misfeasance allegations and take any necessary action. In all the circumstances, the appropriate order is that the Company be compulsorily wound up.

29. I also make an order nisi that the costs of the striking out application be to the petitioner and that there be no order as to costs on the petitioner's summons.