MADAM CHUNG MUI TECK AND OTHERS v. HO KEUNG AND OTHERS

HCCW 796/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 796 OF 2001

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REASONS FOR DECISION

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1. On 21 January 2002, the three petitioners issued a summons against the 1st to 8th respondents (the 8th respondent being the company that is the subject of these proceedings for winding-up and relief under section 168A of the Companies Ordinance, Cap. 32, Hang Tak Buddhist Hall Association Ltd., hereinafter "the Association") and nine alleged members of the Association, seeking an order for appointment of provisional liquidator of the Association under section 193. The application came before me for a half-hour hearing on 1 February 2002 and as it was opposed and could not be heard within the time allocated, I ordered it to be adjourned for argument and gave directions for the filing of evidence. I turned down the application of the petitioners to treat this as an ex parte application for the appointment of a provisional liquidator in the interim, prior to the adjourned hearing of their summons. The application was made more than five months after the petition was presented and despite negotiations in correspondence between the parties for the appointment of a provisional liquidator since October 2001, the petitioners did not issue their summons until January 2002. There was clearly no urgency to justify the making of an interim order of the kind sought by the petitioners.

2. Further, as none of the respondents were legally represented, I explained to them the need to take out an application for a validation order under section 182 of Cap. 32 as the Association was carrying on with its operations and there might be day to day expenses that would need to be paid out of its bank accounts, which had been frozen. Further, they would need a validation order to ratify the expenses incurred and discharged by the Association since the presentation of the petition on 31 July 2001.

3. On 28 February 2002, the 1st to 5th respondents and the 7th respondent (the 6th respondent had passed away) duly issued a summons under section 182. On 18 March 2002, I made a validation order in respect of certain items of expenses in the summons that were not in dispute and adjourned the rest of the summons to be heard at the same time as the adjourned hearing for the appointment of provisional liquidator.

4. On 3 May 2002, I made another validation order on a summons issued by the aforesaid respondents on 17 April 2002 in respect of items of expenditure not covered by their earlier summons in February.

5. On 17 May 2002, I heard the application for appointment of provisional liquidator and the application for a validation order. The Official Receiver adopted a neutral stance regarding the appointment of provisional liquidator and did not oppose any of the items for which the aforesaid respondents sought a validation order. At the conclusion of the hearing, I dismissed the application for appointment of provisional liquidator and made a validation order in respect of the items sought by the aforesaid respondents and these are the reasons for my decision.

The background

6. I would first summarise the relevant facts leading to the applications.

7. The Association is a private company limited by guarantee without a share capital. It was incorporated on 7 January 1969 under Cap. 32. It is an approved religious charitable institution and is exempt from tax under section 88 of the Inland Revenue Ordinance, Cap. 112. The 1st petitioner is a permanent director and the chairman of the board of directors. The 2nd and 3rd petitioners are permanent executive directors. The petitioners are elderly ladies in their eighties and nineties. As they have been residing in Malaysia or Singapore for some time, they have not been involved in the day-to-day management of the Association affairs.

8. The 1st respondent is the only man and relatively young at 69. He is a permanent executive director. The 2nd respondent is also an elderly lady in her eighties and a permanent executive director. The 1st and 2nd respondents were and are in charge of the day-to-day management of the Association.

9. The 3rd, 4th and 5th respondents had been first members of the Association but they had all resigned. The 3rd respondent was subsequently appointed a director on 26 March 2001 but the validity of her appointment is challenged by the petitioners. The 7th respondent was appointed a director on 6 September 2000 to replace the 6th respondent who was of unsound mind and had since passed away. The validity of the 7th respondent's appointment is also challenged by the petitioners. The 3rd, 4th, 5th and 7th respondents were made parties to these proceedings because they had taken part in the affairs of the Association and the petitioners intended that these respondents should be affected by any order that the court may make.

10. It is the petitioners' case that the membership of the Association should be restricted to the permanent chairman, the permanent executive directors and the directors of the Association as the subscribers to the memorandum of association had all resigned their membership. Accordingly, the only members of the Association were and are the three petitioners and the 1st and 2nd respondents.

11. The respondents have contended that the membership of the Association had not been and should not be so restricted. The 1st respondent had caused annual returns to be filed with the Companies Registry in 1987 and 1999 in which it was stated that there were 210 members of the Association. There is a substantial dispute as to the membership. As some of the alleged members have filed a Notice of intention to appear and to oppose the petition, they have been ordered to file evidence in opposition and they have also taken part in the applications that I am concerned with.

The allegations in the petition

12. The most important allegation against the respondents arose out of a Deed of Joint Development that some of the respondents had caused the Association to enter into on 31 January 2000 with a developer, Goodmatch Ltd., to develop the land of the Association at Lots No. 221 R.P., 511, 500, 245, 514 and 513 R.P. in D.D. 187, Hin Tin, Shatin, New Territories ("the Shatin Land") and a Deed of Disclaimer entered into by the Association on the same day with its solicitors in the transaction.

13. The joint venture as provided for in the Deed of Joint Development stipulated that the Shatin Land was to be carved up and assigned by the Association to indigenous villagers against execution by the latter of security documents and that applications were to be made by the villagers as owners of the sections assigned for Small House Grants under the Small House Policy administered by the Government in the New Territories, by which indigenous villagers would enjoy special concessions and privileges in building small houses for their own habitation. The security documents to be executed by the villagers were to ensure that the small houses when built would not belong to themselves but to the Association or the developer.

14. By the Deed of Disclaimer, the Association acknowledged that it was advised by its solicitors that the joint venture was a very risky project and the legal validity and enforceability of the joint venture documents supplied were in doubt. Nevertheless, the Association agreed that its solicitors would not be held liable, by reason of accepting instructions from the Association, for any loss and damage which might be suffered by the Association as a result of entering into the joint venture.

15. The petitioners were opposed to the joint venture. They allege that they were not kept informed or fully informed of the negotiations with the developer or of the draft joint venture development agreement and that they were misinformed by some of the respondents that the Shatin Land was at risk of resumption by the Government and the joint venture was entered into to avoid that risk. As the respondents had not responded satisfactorily to the petitioners' complaints about the joint venture, the petitioners commenced High Court Action No. 4127 of 2000 against the Association and the developer in April 2000 for a declaration that the Deed of Joint Development was unlawful and unenforceable and an injunction to restrain the Association and the developer from implementing its terms. The petitioners' application for summary judgment was unsuccessful at first instance. On appeal to the Court of Appeal in May 2001, it was held that the Deed of Joint Development was unenforceable on public policy grounds because performance according to its terms would necessarily involve the swearing of false declarations and the making of misrepresentations to the Government. Judgment was entered against the Association with costs.

16. In these proceedings, the petitioners have alleged that the 1st and 2nd respondents had acted in breach of their duties as directors in causing the Association to enter into the Deed of Joint Development and the Deed of Disclaimer and in causing the Association to defend the High Court action. This, coupled with other matters described below, caused the petitioners to lose all confidence and trust in the respondents in the management of the Association as the respondents' management of the Association's affairs was "reckless, negligent, grossly incompetent and inefficient".

17. The other matters complained of by the petitioners being misconduct of the respondents and relied on in particular by the petitioners for the purpose of this application as set out in the written submissions of counsel may be briefly stated as follows:

(1) stating in a subsequent letter of the solicitors for the Association that the title deeds of the Shatin Land had all along been kept in the custody of the Association, contrary to an earlier statement by a different firm of solicitors acting for the Association that the Association had sent the title deeds to the solicitors for the developer;

(2) failing to supply to the petitioners the supporting documents in some of the items of expenditure in the draft financial statements for the year ended 29 February 2000, all the bank statements of the Association from October 1999 to November 2000, all the cheques issued for the past two years and refusing to allow the inspection of the books and accounts by any person other than the directors or alternate directors;

(3) causing the books of account to be kept at the office of its solicitors and not at its registered office for four months; and

(4) failing to disclose if the funds of the Association had been used to pay the legal fees of the 1st, 2nd and 3rd respondents for legal advice rendered to them in the management of the Association, the membership dispute, and the dispute regarding the appointment of the 7th respondent as a director.

18. I should mention that there were other allegations made against the respondents in the petition of conduct unfairly prejudicial to the petitioners although not mentioned in the submissions of Mr Ismail, who appeared for the petitioners. I have also taken them into account insofar as they may have any bearing to the exercise of the court's discretion in the appointment of a provisional liquidator.

Good prima facie case for a winding-up order

19. The first requirement that must be met by the petitioners is to show that they have a good prima facie case for a winding-up order. I have no difficulty in concluding that they have met this requirement. On the face of it, the 1st and 2nd respondents had caused the Association to enter into an agreement with a developer involving illegality and making false representation to the Government. They had also caused the Association to execute the Deed of Disclaimer forfeiting the right of the Association to sue its legal advisers in the transaction. In resisting the High Court action brought by the petitioners to restrain the implementation of the joint venture agreement, they had caused the Association to suffer loss in incurring liability for legal costs. There would appear to be a case of serious mismanagement and this may have justifiably caused a total breakdown of mutual trust and confidence and a state of deadlock.

20. The respondents have filed evidence to rebut the allegation of serious mismanagement of the Association's affairs. It is unnecessary to resolve the dispute at this stage. I am satisfied that the petitioners have shown, by believable evidence, facts which if eventually proved at the hearing of the petition would entitle them to a winding-up order and the contrary has not been proved at the present time (see Re Five Lakes Investment Co. Ltd. and Multiford Co. Ltd. [1985] HKLR 273 at 284D to E).

Whether it is right to appoint a provisional liquidator in all the circumstances

21. Mr Ismail submitted to the court a total of 15 cases to support his submission that it is right in the circumstances to appoint a provisional liquidator for the Association. I shall not refer to each and every one of them. He started his submission with a close comparison of the facts in Re Five Lakes Investment, supra. with the facts of our case and contended that as the facts are similar, the considerations in favour of the appointment of a provisional liquidator in that case should also apply here. This exercise of eliciting comparable facts from other cases was done in respect of a few other cases cited. When I pointed out to counsel that it would not be of much assistance to look at the facts in other cases as how the power should be exercised would depend on the particular circumstances of each case, Mr Ismail then read to me extracts from various cases containing principles governing the exercise of the power and submitted that they should apply because they were governing principles in which there was a public interest element involved as in the present case, or because there was a similar situation of deadlock in management due to a total loss of confidence, or there was likewise a serious breach of fiduciary duty of the directors. This is not an approach that commends itself to me.

22. The power to appoint provisional liquidator is a general power and how it is to be exercised would depend very much on the particular circumstances of each case. It is not possible to lay down any hard and fast rule governing the exercise of the discretion in a particular category of cases or where certain factual situations are found. In this regard, various judges have only laid down broad guiding principles as to how the power should be exercised, and that this should be done on the basis of commercial realities, the degree of urgency and need established by the petitioner, the balance of convenience according to the particular circumstances, and where any other good cause is shown (see Re Five Lakes Investment, supra. at 283G to I, 284A to B; Re Club Mediterranean Pty. Ltd. [1975] 11 S.A.S.R. 481 at 484; Re Union Accident Insurance Co. Ltd. [1972] 1 All E.R. 1105 at 1109e to j). As stated by the Federal Court of Australia in Australian Securities Commission v. Solomon and Ors. (1996) 19 A.C.S.R 73 at 80: "The power is a broad one and circumstances will vary greatly. Commercial affairs are infinitely complex and various and it is inappropriate to limit the power by restricting its exercise to fixed categories or classes of circumstances or fact."

23. Mr Ismail has made much of the fact that the Association is an approved charitable body funded in part with public donations, so there is a public interest involved to ensure that its affairs are managed in a proper manner. He referred to a number of cases concerned with a "public interest" petition in which the courts stated that the public interest should be given "full weight" in considering whether provisional liquidator should be appointed (Re Union Accident Insurance Co. Ltd, supra. at 1109; In re Highfield Commodities Ltd. [1985] 1 WLR 149 at 159; Securities and Investments Board v. Lancashire and Yorkshire Portfolio Management Ltd. [1992] BCC 381; Securities and Futures Commission v. Mandarin Resources Corporation Ltd. & Anr. [1997] HKLRD 405 at 409), and submitted that the same consideration should apply in the present situation. Even in a "public interest" petition, the circumstances may vary greatly as to justify the appointment of a provisional liquidator. The present case is a far cry from the situation where the petition for winding-up was presented by a public authority, such as the Securities and Futures Commission or the Department of Trade and Industry in some of the English cases cited, where there was serious breach of the law and that it would be in the public interest to wind up the company. Public interest in the present case is a factor to be taken into consideration, but how much weight should be given to this in the weighing exercise is a question that should be answered by considering the particular circumstances of this case.

24. Similarly, other statements from the cases selected by Mr Ismail cannot be regarded as principles of general application. Rather, they are conclusions reached by the court with regard to the specific circumstances of the case. Whilst a particular feature may be of material importance to the exercise of the discretion in one case, it may not be of equal significance in another case because of the presence or absence of other features. How the discretion is to be exercised is by considering all relevant circumstances in the round and giving such weight to the factors as may be appropriate in the circumstances. With that, I turn to the particular circumstances of this case.

The particular circumstances of this case

25. The first thing I look at is the financial position of the Association and its business operations.

26. I have the financial statements of the Association for the years ended 29 February 2000 and 28 February 2001 prepared by certified public accountants and its financial condition is very healthy. The financial statements for 2001 have not been approved by the Association at its annual general meeting due to the present dispute, otherwise the auditors have stated in their draft report that save for the fact that they were unable to ascertain the consequences of the present proceedings on the Association, the financial statements do give a true and fair view of the Association's affairs.

27. As at 28 February 2001, the Association had total net assets of over HK$77 million, made up of fixed assets in the region of HK$24 million and current assets of over HK$54 million. The fixed assets are landed properties and they are all free from encumbrance. Some are for the own use of the Association and others are rented to tenants. Of the current assets, about HK$53 million was cash at bank. Its income for the year was about HK$5.4 million with expenditure of about HK$2.8 million. The main sources of annual income were donations received (over HK$900,000.00), rental income from investment properties (about HK$1.6 million) and bank interest (HK$2.8 million).

28. All the cash in the bank accounts of the Association has been frozen (which has grown to HK$55 million when the 1st respondent made his affirmation in February 2002) since the petition was presented. The Association has been denied access to its safe deposit box in which the title deeds of the landed properties are kept. There is no risk of depletion of the assets of the Association pending the hearing of the petition.

29. As for the receipt of rental, the bulk of the receipts have been deposited by the tenants directly into the Association's bank account. Other tenants have tendered cash to the Association at the latter's registered office and there is no problem regarding them. For a third group of tenants of agricultural land, they pay rent on a yearly basis and the rent is collected by the 1st respondent.

30. The donations received in the six-month period from March to October 2001 were about HK$62,000.00 a month on average. Most of this has come from the "members" who performed religious rites and chanted prayers for the dead and they donated their fees to the Association. There is not much donation from members of the public in the form of "incense oil".

31. The average expenses at present are about HK$340,000.00 per quarter and I have been provided with a breakdown. The main business of the Association is to maintain about 70 elderly people residing in the homes of the Association. These elderly people are among the "members" of the Association as alleged by the respondents but disputed by the petitioners. Whether the elderly people are members or not is not important for present purpose as it is not disputed by the petitioners that it is within the charitable objects of the Association to maintain these elderly people in the homes of the Association. The other operation of the Association is to hold worshipping activities. The operations of the Association are handled by the 1st, 2nd, 3rd and 7th respondents, assisted by the younger "members". All the bank statements, receipts and documents evidencing expenditure for one month have been disclosed by the respondents. The petitioners have not pointed out in what respect the respondents have failed to give a true and accurate account of the operations of the Association.

32. Thus, the business and operations of the Association are very simple. I am not persuaded that the present management is inadequate or that there is need for the intervention of an independent person at the moment. Notwithstanding the present dispute, and the loss of confidence of the petitioners in the respondents, I think it is an exaggeration to say that there is a total deadlock or paralysis in management. 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. Under the common understanding as alleged by the petitioners, they have a right to be consulted on matters of policy whilst the 1st and 2nd respondents would be in charge of the day-to-day management. Mr Ismail was however unable to point to any wider issue in the management or the assets on which the petitioners should be consulted so that it would be appropriate to appoint a provisional liquidator to resolve the issue, I do not think there is any.

33. As for the alleged serious misconduct of the respondents in the transaction of the Shatin Land, it is unlikely that there would be any repetition of this kind of misconduct pending the hearing of the petition. In any event, the landed properties of the Association are not in jeopardy since the presentation of the petition. Further, it does not appear to me there is a need for a provisional liquidator to investigate into the affairs of the Association or any wrongdoings of the directors at this stage.

34. Looking at the entire picture, and taking the public interest in this charitable body into consideration in the particular circumstances, I am not persuaded that there is a need or positive reason to appoint a provisional liquidator. For the above reasons, I dismiss the petitioners' application.

Application for a validation order

35. I turn to the respondents' application for a validation order. Three kinds of payments are covered in the application. They are (1) the expenses of the Association being accrued charges up to 28 February 2002 as set out in Statement 3 annexed to the summons; (2) the usual operating expenses of the Association on a quarterly basis as set out in Statement 2 annexed to the summons; and (3) the payments already made by the Association from 1 August 2001 to 31 January 2002 as set out in Statement 1 annexed to the summons. As mentioned earlier, I have made a validation order in respect of some of these expenses not in dispute on 18 March 2002.

36. At the adjourned hearing, Mr Ismail informed me that the petitioners do not dispute the rest of the expenses in Statements 1 and 2. He made objection to four of the items in Statement 3, being items No. 5, 6, 7 and 8. These are payment of fees to solicitors and accountants. He objected to these items because there was no valid resolution of the board of directors authorising and approving the expenses and the fees for some items were excessive. I do not think these are valid objections. The Association had incurred legal liability for the professional services rendered. The outsiders were not concerned with the internal management of the Association to ascertain whether there was a valid board resolution approving the expenses.

Orders

37. I have dismissed the petitioners' application to appoint provisional liquidator and ordered them to pay the Official Receiver's costs of HK$7,000.00 and the respondents' costs in any event.

38. On the respondents' application, I have made an order in terms of paragraphs 1, 2 and 3 of their summons dated 28 February 2002 with these amendments: firstly, adjustments should be made to the figures in view of the validation order that I have already made on 18 March 2002; and secondly, the figure in item No. 5 in Statement 3 would be increased to HK$44,650.00. I ordered that the costs of the hearing of the summons on 18 March 2002 and on 17 May 2002 be in the cause of the petition.