KIRPALANI ARJAN MANGHARAM v. M KIRPALANI (HK) LTD AND ANOTHER

HCCW 618/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 618 OF 2009

____________

____________

BETWEEN

____________

______________

J U D G M E N T

______________

1.  By these proceedings, the Petitioner, Mr Arjan Kirpalani, seeks the winding up of M R Kirpalani (HK) Limited (“the Company”) pursuant to section 177(1)(f) of the Companies Ordinance, or alternatively, an order pursuant to section 168A of the Ordinance requiring the 2^nd and 3^rd Respondents, Mr Prakash Kirpalani and Mr Vinod Kirpalani to purchase his shares in the Company at a value to be determined by the court. There are now before the court an application by the Petitioner for leave to amend the petition to introduce a number of further allegations, and an application by the 2^nd and 3^rd Respondents to strike out the winding up relief from the petition.

2.  As will be apparent from its name and those of the Petitioner and 2^nd and 3^rd Respondents, the Company is a family business.  The Petitioner, 2^nd and 3^rd Respondents (to whom I shall hereafter refer by their first names) are brothers.  Each of them has an approximately equal share in the Company, which was established by their father, Mr Mangharam Kirpalani, in 1962.  At present the Company has five shareholders. Arjan and Prakash each hold 208,000 shares, Vinod holds 207,990 shares, a sister, Ms Sarojini Kirpalani (“Sarojini”), holds 10 shares, and their mother, Mrs Radhika Kirpalani (“Mrs Kirpalani”) holds 1,000 shares.  All the shareholders were also directors of the Company at the time that the petition was issued, although Arjan has ceased to be a director since then.  It seems that although Mrs Kirpalani and Sarojini were directors of the Company, neither took an active role in its affairs.  Another brother, Surendar, was also at one time a shareholder in the Company, but had not been a shareholder for some time prior to the events leading up to these proceedings.

3.  The Company’s main business is trading in door locks, metal building materials and some other products.  These are sourced in China, and sold to the Company’s customers, most of which are based in West African countries.

4.  It is common ground that, having been established by their father, the Company was run by the father and all the brothers, each of whom began working for the Company after he had completed his education.  Initially, only the father, Mrs. Kirpalani, Surendar and Arjan (who were the eldest and second-eldest of the brothers) were directors, but after the father’s death in 1995, Prakash and Vinod also became directors of the Company.  Sarojini became a director of the Company very recently, in circumstances that underlie one of the complaints now made by Arjan.

5.  According to Arjan, it was the common understanding that each of the shareholders would be entitled to participate in the business of the company, and in the making of all major decisions relating to it.  Arjan further contends that having regard to the relationship between the shareholders, they reposed mutual trust and confidence in each other in respect of the running of the company, which accordingly was in the nature of a quasi-partnership.  Neither of these propositions appears to be disputed by Prakash or Vinod.

6.  Arjan says that from about 2005 or 2006 onwards, the relationship between him and his two younger brothers deteriorated, resulting in his bringing these proceedings.

7.  Before the first hearing of the petition, an application was made for a validation order to enable the Company to carry on trading.  On 26 November 2009, Poon J made such a validation order, subject to the provision on a monthly basis of information to Arjan to enable him to monitor the Company’s receipts and payments.  On 29 December 2009, Prakash and Vinod applied to strike out the winding up relief claimed.  Evidence was filed on both sides in relation to the application.  In Arjan’s affirmations, a number of allegations were made which did not appear in the petition, and on 12 March 2010, shortly before the hearing, Arjan applied for leave to amend his petition to bring it into line with the matters mentioned in his various affirmations.

8.  The application to amend was opposed by Prakash and Vinod.  Mr Remedios, who appeared for them at this hearing, submitted that the amendments as a whole should be disallowed on the grounds of delay, or alternatively, that the proposed amendments in paragraphs 38, 40, 42, 45, 49, 50 and 53 of the draft amended petition should be disallowed as they were so lacking in detail as to be embarrassing.

9.  So far as alleged delay is concerned, Mr Remedios points to the fact that the application was not made until just a week before the hearing of his clients’ application to strike out the winding up relief.  He also noted that notice of intention to make (at that point unspecified) amendments had been given as early as 4 December 2009, in a letter from Arjan’s solicitors to the solicitors acting for Prakash and Vinod.  He pointed out that although the amendments largely track allegations made in Arjan’s third affirmation, which had been filed on 1 February 2010, the summons was not taken out until some six weeks later, with no explanation for the delay.

10.  In my view, although it may have been possible for the application to have been made somewhat earlier, the failure to do so does not prejudice Prakash and Vinod.  The allegations made in the amended petition have not taken them by surprise, since they are all contained in Arjan’s third affirmation, which was filed in opposition to the striking out application.  Prakash and Vinod have in fact filed evidence responding to the allegations in some detail.  The amendments therefore do no more than bring the petition into line with the complaints that Arjan wishes to advance.

11.  Insofar as the allegations result in the striking out application having a different result to that which it would have had if the new allegations had not been made, this is a matter that can be dealt with by making an appropriate costs order in respect of that application.  It does not provide a reason for denying Arjan the opportunity to put forward his complaints for eventual adjudication at trial.

12.  I therefore do not think that leave to amend should be refused on the ground of delay alone, and go on to consider each of the specific amendments that have been objected to on the ground of lack of particularity.

13.  Paragraph 38 of the draft amended petition alleges that on one occasion prior to 28 September 2009, Prakash and Vinod made threats to Arjan and his family, which caused Arjan to feel that his and his wife’s lives had been threatened.  No details are given of the allegation.  Nor are any details to be found in Arjan’s third affirmation.  Having regard to the nature of the allegation, this is both surprising, as the nature of the alleged threat and the circumstances in which it was made must be within Arjan’s knowledge, and unsatisfactory, as without further details being provided, it would be difficult for Prakash and Vinod to make any response to it beyond a bare denial.  Mr Maurellet, who appeared for Arjan, was unable to take matters further.  I am satisfied that the allegation in its present form is one that would embarrass Prakash and Vinod in having to deal with it, and I would therefore refuse leave to make this proposed amendment.

14.  Paragraph 40 refers to Arjan’s refusal to sign the Company’s accounts for the financial year 2007-2008, and explains this as being due to his having been excluded from participation in the Company’s affairs, as a result of which he had no confidence in the accuracy of the accounts.  Although this paragraph does not contain details of the alleged exclusion, particular instances of conduct which are said to amount to exclusion are given earlier in the petition, in particular from paragraphs 27 to 32.  These are therefore matters to which Prakash and Vinod can respond.  Moreover, Arjan will be limited to the complaints of which details have been given, and will not be permitted to go beyond them if this would result in unfairness to the Respondents.  I would not, therefore, regard the allegation as being one which Prakash and Vinod would be embarrassed in having to deal with.

15.  Paragraph 42 complains that the books of the Company have not been properly kept.  Reference is made to a number of transactions of which specific complaint is made in paragraphs 19 to 26 of the amended petition.  There is, however, a reservation to the effect that Arjan reserves the right to make further complaints and provide further examples of misuse of the Company’s funds after he has been given access to the Company’s books and records, which he says he has been denied in the period leading up to the presentation of the petition.  Again, it seems to me that Prakash and Vinod are in a position to deal with the specific allegations made (and have in fact already done so in their own affirmations filed in relation to the striking out application).  Although Arjan has sought to keep open the possibility of adding to these allegations, it will remain necessary for him to formulate any further allegations that he wishes to make and apply for leave to further amend the petition when he is in a position to do so, so as not to take Prakash and Vinod unfairly by surprise.

16.  Paragraph 45 alleges that the Company’s latest accounts show that it is in a precarious financial position and is insolvent and paragraph 49 alleges that the gross profit figure contained in such accounts is misleading, as the accounts have not been kept properly.  Although this paragraph provides no further explanation of the allegation, the basis of the complaint appears from paragraphs 46 and 47, and paragraph 51.  These allegations track complaints made in Arjan’s third affirmation, which Prakash and Vinod have already dealt with.  Again, Arjan will be limited in these proceedings to such allegations, unless and until leave is sought and obtained for further amendments to be made, and in these circumstances, I do not see that there is likely to be any embarrassment or difficulty on Prakash and Vinod’s part in dealing with the allegation.

17.  Paragraph 50 alleges that Arjan had queried the financial statements and asked Prakash and Vinod to verify them, but that they failed to do so.  Although details of when the request was made are not given, I do not see that this is a matter that should cause Prakash and Vinod any real difficulty in dealing with it.

18.  Finally, paragraph 53 refers to the need for investigation of the Company’s affairs by an independent third party in the light of the complaints which Arjan has made.  Although the complaints are stated in broad and general terms, it seems clear that this paragraph simply identifies the main strands of the complaints made in the earlier parts of the petition, where details of the allegations are given.  Thus, I do not regard this paragraph as one which is embarrassing or which cannot be properly dealt with.

19.  Thus, I shall give Arjan leave to amend the petition as applied for, save that leave will not be given to make the amendment proposed in paragraph 38 of the draft amended petition.

20.  Turning to the application by Prakash and Vinod to strike out the winding up relief, it is necessary to have regard to the complaints made by Arjan.  These (as they appear in the amended petition, with the exception of paragraph 38) are as follows:-

(1)	Prakash and Vinod’s insistence on declaring substantial dividends and paying them out of the Company’s retained profits, despite Arjan’s objections, each year from 2005 to 2007, when the Company was trading at a loss or making a very small profit.  It is said that dividends totalling some HK$33 million were declared in the course of these three years, when the Company’s trading results overall resulted in a loss of somewhat in excess of HK$2 million (paragraphs 14 to 18 of the draft amended petition.
(2)	The alleged misuse by Prakash of company monies by:-
	(a) purchasing an airline ticket to China for his son for HK$4,000; (b) purchasing other, unspecified, airline tickets to China for himself for alleged business travel; (c) paying HK$59,020 for renovations to his home; (d) paying HK$42,950 in respect of building renovation levy which is said to have been an expense of a personal nature; (e) paying HK$2,300 for a personal subscription to the South China Morning Post newspaper; (f) paying $4,151.50 in respect of medical expenses for Sarojini; and (g) paying HK$10,000 to solicitors who had acted for the 2nd and 3rd Respondents at an early stage in the dispute.
(3)	The exclusion of Arjan from involvement in the Company’s business, and decisions affecting the Company, reference being made to:-
	(a) the transfer of 10 shares in the Company from Vinod to Sarojini, and her appointment as a director of the Company in September 2009, which was said to have been done in breach of the Company’s articles of association and without notice to Arjan; (b) the holding of a directors’ meeting in April 2007 to decide upon the extension of the lease of the Company’s office premises, without notice to Arjan; and (c) the signing by Prakash of minutes of a board meeting dated April 2008 relating to certain banking facilities – again, Arjan says that he was not given notice of this meeting.
(4)	The physical exclusion of Arjan from the Company’s premises, by changing the locks on the entrance to such premises in mid-September 2009, followed by a threat to report him to the police for trespassing when he subsequently managed to enter the premises on 28 September 2009.
(5)	Purporting to “summarily dismiss” Arjan as a director of the Company on 28 September 2009 without any resolution of the Company as required by the provisions of the Ordinance, and without giving him an opportunity to be heard in relation to the matter, and refusing to allow him to inspect the Company’s books and records as he was then seeking to do.
(6)	Arjan also alleges that the books and accounts of the Company have not been properly kept, and that the financial position of the Company is not strong.  He contends that the apparent profit margins shown in the Company’s latest financial statements are inconsistent with those which had been earned over most of its history, and that certain liabilities and potential expenses appeared to have been omitted from the accounts.
(7)	In the light of these complaints, it is said that there is a need for an independent third party to investigate the affairs of the Company, so that its true financial position and value can be ascertained.
(8)	Finally, Arjan complains that despite having offered to sell his shares in the Company to Prakash and Vinod, they had (at least up to the date of presentation of the petition) refused to do so.

21.  It is against this background that Arjan seeks the winding up of the Company, or alternatively, an order requiring Prakash and Vinod to buy his shares in the Company at a price to be determined by the court or an independent valuer on a basis that excludes any improper withdrawals or expenses incurred at the instance of Prakash and Vinod.

22.  The court’s approach to an application to strike out a claim for winding up relief where it is part of proceedings in which relief is also sought under section 168A of the Ordinance has been considered in a number of authorities (see e.g. Re Wong To Yick Wood Lock Ointment Ltd [2001] 2 HKC 618, at 623H-624B (CFI) and [2003] 1 HKC 484 at 487H (CA); Re Kinong Group Ltd [1999] 4 HKC 100; Re Four Twenty Company Ltd (unreported, CFI, HCCW 278 of 2004); Re Tai-Ao Aluminium Group Ltd (unreported), CA, CACV 391 of 2005 Re Ranson Motor Manufacturing Co Ltd [2007] 1 HKLRD 751; Re Mahr China Ltd [2008] 4 HKLRD 141; Re New China Hong Kong Highway Ltd (unreported) CFI, HCCW 550 of 2009).

23.  In Re Four Twenty Company Ltd (supra), Kwan J (as she then was) summarised the approach as follows (at paragraph 5 of her judgment):-

“(1)	It is assumed that the particulars and allegations in the petition and the supporting affidavits of the petitioner would be established and the conflicts resolved in favour of the petitioner.
(2)	The application should be approached with the greatest circumspection and it is only in a plain and obvious case that the court should exercise its discretion to strike out the petition for winding up or the parts complained of.
(3)	The burden is on the applicant to show that it is plain and obvious that the petition for winding up would fail on the ground there is an alternative remedy available to the petitioner and that the petitioner is acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy (section 180(1A) of Cap. 32).
(4)	Where proposed amendments are put forward in an application to strike out, the court should have regard not only to the allegations in the existing petition, but also to matters in the proposed amendments.”

24.  It must also be borne in mind that the power to strike out should be exercised sparingly, and its use to strike out winding up relief should be confined to cases where the court is satisfied that the petitioner is acting unreasonably in pursuing such relief, having regard to the alternative remedies available.  In a number of cases, the courts have indicated that some reason should be put forward to explain why winding up relief is sought, whether as the primary relief sought, or as an alternative to a buyout order – where such a reason can be given, this may well mean that it may not be unreasonable for the petitioner to seek a winding up order in respect of the company concerned.  Examples of cases in which such a reason was put forward are Re Tai Ao Aluminium Group Ltd, where the fact that the company concerned was a holding company in whose liquidation the petitioner might be able to purchase the operating company subsidiary from the liquidator, was recognised as a factor that meant that there was a possibility of winding up relief being granted, and Re New China Hong Kong Highway Company Ltd, in which evidence was put forward to suggest that a sale of the company’s business by a liquidator might result in a better ultimate return being obtained for the petitioner.

25.  In the present case, Mr Remedios submitted that there was no possibility of a winding up order being made, having regard to the following matters:-

(1)	The allegations made by Arjan as to misappropriations or misuse of company funds were unfounded and had been answered by Prakash and Vinod in the evidence that they had filed.
(2)	In any event, Arjan himself had initially sought to be bought out, and it was therefore unreasonable for him now to insist on retaining the winding up relief claimed.
(3)	Prakash and Vinod had, after presentation of the petition, offered to buy out Arjan, but their offers to do so at Arjan’s own valuation of the company, or alternatively in accordance with a valuation to be conducted by an accountant, had been unreasonably refused.
(4)	There was no reason to wind up the Company, which was continuing to carry on business and was profitable, and had substantial net assets, especially having regard to the fact that its main assets were properties (an apartment occupied by Mrs Kirpalani, an industrial unit and two car parking spaces), whose book value was less than their actual market value.
(5)	To make a winding up order would be unfair to the Company’s only other shareholder, Mrs Kirpalani, since she was living in the Company’s property and was covered by a directors’ medical insurance which it had obtained, and which could not be easily replaced on similar terms, as she was in poor health.

26.  Mr Remedios went on to submit that in these circumstances, it would be right to strike out the claim for winding up relief, as it was undesirable to leave a winding up petition hanging over the company, when there was no prospect of a winding up order being made, as this would cause difficulties for the company in maintaining and renewing its banking facilities, as attested to by Prakash and Vinod.

27.  Against this, Mr Maurellet submitted that it was not plain and obvious that the petitioner was acting unreasonably in seeking a winding up order.  He submitted that:-

(1)	It was inappropriate to seek to assess the strength of Arjan’s case on the merits, and that the appropriate course was to assume for present purposes that he would be able to establish his complaints after trial.
(2)	Having regard to the allegations of misappropriation, which might (he suggested) be the “tip of the iceberg”, a buy out would not be appropriate, as a valuer would not be able to conduct a valuation without the court first making factual findings as to the allegations.
(3)	Although Arjan had initially sought to be bought out, Prakash and Vinod had refused to do so until after the commencement of these proceedings, and the offers which they had made thereafter to buy out Arjan were (having regard to their terms) not offers which it was unreasonable for Arjan to have rejected.
(4)	The Company’s financial position was not particularly strong, and it had not been operating particularly profitably in recent years.
(5)	It was not clear whether or not Prakash and Vinod would actually be able to buy out Arjan.
(6)	The existence of the validation order meant that the Company was operating normally, and was not seriously hindered in its operations, so there was less reason to strike out the winding up relief.

28.  I do not think that it would be right to accede to Mr Remedios’ invitation to try to form a view as to the relative strength of the parties’ cases.  The court’s approach in applications of this nature is well-established, and is to proceed on the basis that the petitioner will succeed in making out his allegations after trial.  Although there may be exceptional cases in which the court may be satisfied, on the basis of affidavit evidence alone, that the petitioner’s case is without foundation, I do not think that this is the position here.

29.  That said, however, it does not seem to me that the allegations in this case are such as would, even if fully made out, justify the making of a winding up order in respect of the Company.  The alleged misappropriations or misuse of the funds of the Company all involve fairly small amounts, and can readily be taken into account (if they are ultimately made out) when valuing Arjan’s shareholding in the Company.  Although Mr Maurellet suggested that the matters identified might be the “tip of the iceberg”, that would appear, at this stage to be speculative.  But even if further instances of misuse of the Company’s funds were to come to light in the course of the proceedings (for example, after discovery has been given of the Company’s financial records), these too, could be taken into account for in the process of valuing Arjan’s shareholding so as to enable him to be bought out at a fair value.

30.  Although Mr Maurellet suggested that the existence of such claims (and potential further claims) would mean that a valuer would have difficulty in arriving at a valuation of the Company, it does not seem to me that this would be the case.  If the matter proceeds to a trial, the court will have to consider the allegations and come to a view as to whether or not they are made out.  In doing so, it will be necessary for the court to make factual findings as to the various allegations.  Thereafter, the court would, if it were satisfied that a buy out order should be made, either take the matters into account in coming to a view as to the price at which Arjan should be bought out, or (if, as is more likely, a sale at a valuation to be conducted by a qualified valuer is ordered) include in its order directions to the valuer as to how to deal with these matters.

31.  The position is, I think, the same in relation to the allegations that the Company’s accounts have not been properly kept.  If the matter proceeds to trial, these will also be the subject of findings by the court which can and will be taken into account when valuing Arjan’s shareholding in the Company.

32.  So far as the other allegations of exclusion from participation in the Company’s affairs, or of physical exclusion from the Company’s premises, are concerned, these are not, in my view, matters that would call for the making of a winding up order.

33.  As to the argument arising from Arjan’s initial request to be bought out, and the subsequent offers by Prakash and Vinod to do so, it seems to me that while the failure on Prakash and Vinod’s part to agree to buy out Arjan from the outset might justify Arjan in bringing proceedings seeking to be bought out, it does not assist Arjan in relation to the question of whether the winding up relief should be allowed to stand.  Similarly, in relation to the offers that have been made to buy out Arjan at a stated price, or failing that, at a valuation to be conducted by a valuer, even if it were the case that it was reasonable for Arjan to reject the offers on the grounds that the offers did provide him with all that he could reasonably expect (whether in terms of the mechanics of the proposed valuation, or in terms of costs), this would not mean that it is reasonable for Arjan to insist on retaining the winding up relief.  The significance of an unreasonable refusal to accept an offer which provides everything that a petitioner could reasonably expect to achieve through litigation is that it will render it an abuse for him to insist on continuing to litigate at all, and thus make the entire proceedings susceptible to being struck out.  Here, however, Prakash and Vinod are not seeking to strike out the entire petition (as was attempted in Re Ranson Motor Manufacturing Co Ltd).Thus, the fact that the offers made may not provide Arjan with all that he could reasonably expect at the end of the day would mean only that it is proper for him to continue to seek a buy out, but not that it would be proper for him to seek a winding up order if it were plain and obvious that he would be acting unreasonably in doing so.

34.  So far as the Company’s financial position is concerned, although there may be room for debate as to whether or not it is operating particularly profitably, Arjan does not appear to dispute that if the Company’s assets (in particular its real properties) are valued at their current market value, the Company’s assets would comfortably exceed its liabilities.  I do not think, therefore, that the Company’s financial position is such as to justify the retention of winding up relief in the petition.

35.  Mr Maurellet did not, I think, really contend that it was necessary or might be desirable for liquidators to be appointed to investigate the conduct of the Company’s affairs.  In any event, having regard to the nature of the allegations that have been made, there is no reason to suppose that a fair valuation of Arjan’s interest in the Company, taking into account all such allegations, could not be arrived at.

36.  The position is, therefore, that unlike the situation in cases such as Re Tai-Ao Aluminium Co Ltd and Re New China Hong Kong Highway Co Ltd, no positive reason has been put forward as to why a winding up order might confer an advantage on Arjan that would not be available to him if a buy out order was made.

37.  The only other positive reason put forward by Mr Maurellet in support of retaining the winding up relief is that it is said to be uncertain whether or not Prakash and Vinod would be able to comply with a buy out order.  However, apart from some correspondence in which it was suggested that a buy out should be on terms that allowed for the payment of the price over a substantial period of time, there is no evidence to indicate that this might be the case.  On the contrary, Prakash and Vinod have indicated in their affirmations that if the valuation of Arjan’s shares is US$1.2 million or less, they would be willing to complete the purchase of his shares within 14 days, but that more time would be required to enable them to arrange their finances if the price were significantly higher.

38.  In my view, the evidence before me does not give any reason to think that a buy out order, if made, would not be complied with.

39.  I do not think that the fact that the Company is able to carry on business with the benefit of a general validation order provides a reason for allowing the winding up relief to remain in place if it would otherwise be appropriate to strike it out.  Even if the Company is able to trade, in the sense of being able to make and receive payments in the ordinary course of business, the continued existence of a winding up petition against it is clearly likely to cause it inconvenience and difficulty, in that customers and suppliers may be less willing to deal with it, and creditors and financiers may well be less ready to extend credit to it.

40.  Finally, Mr Maurellet suggested that rather than being struck out, the winding up relief should be stayed.  Although that is a course that has been adopted in some cases, I do not see that staying the winding up relief in this case would alleviate the inconvenience that would be caused to the Company by having a winding up petition outstanding against it.  The petition would remain in place, and any difficulties that might be caused in terms of problems in obtaining credit and banking facilities, or embarrassment in dealing with customers, would remain.

41.  In these circumstances, as I am satisfied that there is no real prospect of a winding up order being made on this petition, I think that it would be right to strike out the winding up relief that has been claimed.

42.  So far as costs are concerned, the usual order in relation to an application to amend is that the party seeking leave should pay the costs of the application and any costs occasioned by the amendment to the other party.  As for the striking out application, I see no reason why costs should not follow the event.  In this case, however, some time was taken up at the hearing dealing with the application to amend, aspects of which were opposed, largely unsuccessfully, by the Respondents.  Having regard to this, I think that it would be appropriate to reflect their lack of success in that respect by making a reduction to the costs of the hearing that are to be recovered by them.  I shall therefore make an order nisi that Prakash and Vinod are to have their costs of Arjan’s application for leave to amend, costs of and occasioned by the amendment, and their costs of their application to strike out the winding up relief, but that so far as the costs of the hearing before me are concerned, they should only be awarded 90% of such costs.  All such costs are to be payable in any event, and are to be taxed on the party and party basis if not agreed.