CHENG ERIC TAK KWONG v. EMAGIST GROUP LTD AND OTHERS

HCCW 306/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 306 OF 2012

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D E C I S I O N

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1. On 21 August 2012 the Petitioner issued a petition pursuant to sections 168A and 177(1)(f) of the Companies Ordinance, in respect of the Company, which is the 3^rd Respondent, and its current shareholder. The Company is involved in the online games business. There is no dispute that the Company is solvent and has an active ongoing business. The issues raised by the Petition are the type of conventional shareholders’ disputes which commonly come before the Companies Court.

2. On 7 September 2012 the Company issued a summons for a validation order in respect of its ordinary business expenses and 2 other particular items.  The first is the costs of legal proceedings in HCA 1659 of 2012.  The 4^th Defendant in the High Court Action is the Petitioner in the present proceedings.  Secondly there was an application in respect of the Company’s costs of the present proceedings.

3. When the matter came on before me today, there was no difficulty in agreeing the terms of an appropriate order, which I set out at the end of this extemporary judgment.  However, given the way the application and the Petitioner’s response to it was originally framed, it is appropriate for me to record comments I made during the course of the hearing about the way applications of this sort should be dealt with.

4. As Kwan J (as she then was) explains in paragraph 15 of her judgment in Wah Ying Cheong Company Ltd HCCW 225 of 1996, unreported, 14 March 2003, the weight to be attached to the opposition of a contributory to an application for validation order in the case of a solvent company is very different from the situation where a petition is presented on the ground of insolvency.  Kwan J set out the following commonly quoted passages from Slade J’s judgment in Re Burton and Deakin Limited:

“15. The weight to be attached to the opposition of a contributory to an application for a validation order in the case of a solvent company is very different from the situation where a petition is presented on grounds of insolvency. As stated by Slade J in Re Burton and Deakin Ltd [1977] 1 All ER 631 at 636 g-j:

‘…the responsibility of managing the business of the company is entrusted by its articles of association to its directors. At least so long as a winding-up petition has not been presented, the court will not generally, save in the case of proven bad faith or other exceptional circumstances, interfere with the exercise of the discretion conferred on the directors by a company’s articles of association at the instance of a shareholder. Thus, if before the presentation of a petition a shareholder were to come to the court in an attempt to restrain a particular disposition of the company’s property contemplated by the board of directors and falling within their powers, he would not generally succeed, unless he could prove bad faith or other exceptional circumstances. He would not be able, merely by adducing prima facie grounds for criticising the wisdom or beneficial nature of a particular transaction, to place on the company or its board of directors the onus of justifying the proposed disposition by detailed evidence.’

The broad guidelines were stated at 637 d-e:

‘Taking all these considerations into account and in the absence of any authority demonstrating the contrary, I thus reach these conclusions on the question of principle raised by the present application: If on an application under section 227 [equivalent to our section 182] relating to a solvent company, (a) evidence is placed before the court showing that the directors consider that a particular disposition falling within their powers under the company’s constitution is necessary or expedient in the interests of the company; and (b) the reasons given for this opinion are reasons which the court considers that an intelligent and honest man could reasonably hold, it will, in the exercise of its discretion normally sanction the disposition notwithstanding the opposition of a contributory, unless the contributory adduces compelling evidence proving that the disposition is in fact likely to injure the company.’ ”

5. It seems to me to be implicit in Slade J’s judgment that where the court is faced with a shareholder’s petition in respect of a solvent company which has a valuable ongoing business that the directors should be allowed to continue to operate that business normally and without close supervision by the Companies Court.  In practice this means that one would normally expect a company to obtain without any difficulty a validation order in respect of “payment of expenses made in the ordinary course of business”.  Such an order I would expect normally to be readily made once the court is satisfied of the solvency of the company and the fact that it has an active and ongoing business.

6. The Companies Court would not be concerned to check with precision the nature and the amount of the expenses.  There may be, however, particular items of expense which those in control of a company considers to be sufficiently exceptional that there may be some question as to whether or not they are incurred in the ordinary course of business and in such circumstances I would expect prudent lawyers to advise that a validation order be sought in respect of those specific items of expense.

7. In my view a petitioning contributory should not approach an application for a validation order on the basis that there is an adversarial application before the court.  I would expect normally for a petitioning contributory to be advised that it is not only normal but necessary for a company to obtain a validation order and that it would only be if the shareholder has specific concerns which he can support by credible evidence that he should actively contest any part of the application.  I appreciate that in practice where the relationship between shareholders has reached such a stage that a petition has been issued it is likely that there will be suspicions on the part of a petitioner about way in which those in charge of the company are conducting its affairs, but such a shareholder needs to be advised that this in itself does not justify trying to turn what should be a straight forward application into something more adversarial and complicated than is necessary.  A practical way of alleviating the concerns of a petitioning shareholder may be by doing, as the Company has agreed in the present case, to provide a regular summary to the petitioning shareholder of the expenses that are being paid by the Company. 

8. The order that I have made in the present proceedings is as follows:

(1)  Notwithstanding the Presentation of the Petition dated 21 August 2012 unless otherwise ordered by the court any payment or other disposition of property made on or after 21 August 2012 in the ordinary course of the business of the Company shall not be void by virtue of section 182 of the Companies Ordinance.

(2)  Payments of all reasonable legal expenses incurred by the Company in HCA 1659 of 2012 shall not be void by virtue of section 182 of the Companies Ordinance.

(3)  The Company shall provide to the Petitioner within 14 days of the end of each calendar month a statement of account in substantially the form of that in exhibit LYSB-8 to the affirmation of the 2^nd Respondent affirmed on 7 September 2012 summarising the expenses and payments of the Company for the relevant calendar month.

(4)  There be liberty to apply.

(5)  The Company’s cost of the application be paid out of the assets of the Company.