LEE TING LUN TIMOTHY v. OCEAN PALANCE RESTAURANT AND NIGHTCLUB LTD. AND OTHERS

HCCW 351/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO.351 OF 1999

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D E C I S I O N

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1. This is an application by the Respondents to strike out the petition of Lee Ting Lun, Timothy ("the Petitioner") seeking minority shareholder's relief and alternatively, for a winding-up order on the just and equitable ground.

The facts

2. Ocean Palace Restaurant and Nightclub Limited ("the Company") is a wholly owned subsidiary of the 8th Respondent, Smartgain Trading Company Limited ("Smartgain"). 5,499,998 of 5,500,000 issued shares in the Company are registered in the name of Smartgain. Of the remaining two shares, one is registered in the name of the Petitioner and the other in the name of the 2nd Respondent, Cheung Yiu Wing.

3. In 1985, Smartgain acquired 5.4 million of the 5.5 million issued shares in the Company. The remaining 100,000 were registered in the name of a Dr Wang. In 1988, Dr Wang transferred 99,998 of the shares in the Company to Smartgain and his remaining two shares, one each to the 2nd Respondent and to Tommy Yu Yang Cheung ("Mr T. Cheung"). At that time, Smartgain was owned as to 50% each by Mr T Cheung and Yiu Wing Construction Company Limited ("Yiu Wing"), a company owned by the 2nd Respondent.

4. In early 1989, the Petitioner incorporated Surplus Gain Development Limited ("Surplus Gain") as a vehicle to acquire a 50% interest in Smartgain. On 31 January 1989, the Petitioner entered into a Memorandum of Agreement with Mr T. Cheung to acquire his one share in Smartgain for $11 million.

5. At the latest, by 10 April 1989, the Petitioner became the registered holder of one share in the Company. On 10 April 1989, he executed a Declaration of Trust in respect of the one share registered in his name declaring that it was held in trust exclusively for Smartgain. It is the Petitioner's case that at the time of the Memorandum of Agreement in January 1989, it was orally agreed between him and the 2nd Respondent, inter alia, that each of them would hold their one share in the Company in trust for Smartgain.

6. Prior to 10 September 1991, the shareholding structure can be summarized by the following diagram :

7. On 10 September 1991, Yiu Wing and Surplus Gain entered into a Share and Subscription Agreement ("the Share Agreement"). In broad terms, Surplus Gain agreed to further shares being allotted to Yiu Wing to give it a 75% interest in Smartgain in return for being allotted shares in Yiu Wing International Holdings Limited which was about to be listed on the Stock Exchange of Hong Kong Limited. The Share Agreement was to terminate in the event that Yiu Wing International did not proceed to a listing on or before 31 December 1991 or the underwriting agreement to be entered into between, inter alia, Yiu Wing International, the 2nd Respondent and Peregrine Capital Limited not being entered into on or before that date. Clause 8 of the Share Agreement provided as follows :

"8.1 This Agreement shall supercede all and any previous agreements or arrangements (if any) between the parties hereto or any of them relating to Smartgain or any other matter referred to in this Agreement and all or any such previous agreements or arrangements (if any) shall cease and determine with effect from the date hereof."

8. The Share Agreement also provided for a Management Agreement to be entered into between the Company, Quiteem Investments Limited ("Quiteem") and the Petitioner in the form attached as Exhibit B to the Share Agreement. The Company was to be managed by Quiteem, a company controlled by the Petitioner, who was to act as managing director of the Company.

The Issues

9. The Respondents sought to strike out the petition on the basis that it discloses no reasonable cause of action and/or it is scandalous, frivolous or vexatious and/or it is otherwise an abuse of the process of the court. At the hearing, various grounds were canvassed in support of the Respondents' application. Two of these which were ultimately abandoned will be mentioned briefly before considering the only real issue in this application.

Locus standi

10. It was contended that because the Petitioner had executed the Declaration of Trust, he was a mere trustee for Smartgain and in view of the Court of Final Appeal's decision in Max Share Limited v. Ng Yat Chi [1998] 2 HKC 251 at 260 A-B, he should only act in accordance with the direction of Smartgain. The correctness of that proposition is not questioned but it hardly follows that the Petitioner who is a registered shareholder of the Company has no locus standi to present a petition. This was eventually conceded by the Respondents.

Quasi partnership

11. It was also submitted that the Petitioner has failed to make out a case of quasi partnership in that there was never any agreement for parity of control and no case of deadlock can ever arise. This, of course, would involve the determination of disputed facts which is not appropriate in a striking out application. See Re Ringtower Holdings PLC (1989) 5 BCC 82 at 84G. Accordingly, the submission was not pursued.

No minority shareholder

12. It is common ground that the Company is a wholly owned subsidiary of Smartgain. It was submitted that as both the Petitioner and the 2nd Respondent hold the one share in the Company registered in their respective names as nominee for Smartgain who is the sole beneficial owner of the Company, a minority shareholder's petition could never succeed because there is no minority shareholding in the Company. In so far as there is a shareholders' dispute, it can only arise at the level of the parent, i.e. Smartgain. As trustee, the Petitioner cannot complain of oppression as a shareholder of the Company since he does not own the share beneficially.

13. The point raised does not appear to be covered by any relevant case law.

14. The Petitioner, relying on clause 8.1 of the Share Agreement, submitted that the Declaration of Trust had been superceded by the arrangements embodied in the Share Agreement. The difficulty with this submission is that the parties to the Share Agreement were Yiu Wing and Surplus Gain. The Petitioner who made the Declaration of Trust was not a party to the Share Agreement although he executed it as the duly authorized representative of Surplus Gain.

Section 168A(1) provides as follows :

" (1) Any member of a company who complains that the affairs of the company are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of some part of the members (including himself)..."

15. To come within section 168A, the person presenting the petition must be a "member" of the company and the conduct complained of must relate to the conduct of the affairs of the company of which the petitioner is a member. So far as the requirement of unfair prejudice is concerned, the conduct complained of must be prejudicial in the sense of causing prejudice or harm to the relevant interest of the members or some part of the members and also unfairly so. Such interests are not necessarily limited to strict legal rights under the company's constitution : the court may take into account wider equitable considerations. See Re Ringtower Holdings PLC (1989) 5 BCC 82, followed in Re Forecast Nominee Limited [1996] 4 HKC 12.

16. The Respondents are inviting the court to take notice of the Declaration of Trust. The first difficulty is section 101 of Cap.32 : the court ought not to look behind the register of members. The second difficulty is that if it were proper for the court to have regard to the question of beneficial interest, it is far from obvious that the Petitioner has no beneficial interest in the Company.

17. At this stage, for the purposes of a striking out application, the allegations appearing in the petition and the supporting affidavits must be assumed to be true. See Re Forecast Nominee Limited [1996] 4 HKC 12 at 17C; Virdi v. Abbey Leisure Ltd. [1990] BCLC 342 at 346d and 351a. The Petitioner alleges a beneficial interest through other entities in Surplus Gain. As at the date of the petition, whilst not the sole owner of Surplus Gain, the Petitioner's interest in Surplus Gain was about 70%. This would translate into a beneficial interest of about 17.5% in Smartgain. So, whilst the registered holder of one out of 5.5 million issued shares in Smartgain, ostensibly held on trust for Smartgain, it has to be assumed that, in fact, the Petitioner has a beneficial interest in the Company that, in any event, is not adequately reflected by the single share registered in his name.

18. Even if the Respondents are right that in order for a petition under section 168A to be sustainable, the petitioner must not only be a registered shareholder but also have a beneficial interest in the Company, there does not appear to be any requirement that his legal and beneficial interests must be coterminous. The relevant question is whether or not the Petitioner has an interest as a member that could be prejudiced by the conduct complained of. Is that beneficial interest an interest qua member of the Company for the purposes of section 168A? Having regard to Re Ringtower Holdings PLC (supra), the answer must be in the affirmative.

Exercise of the court's discretion

19. For the court to exercise its discretion to strike out a petition or to stay it in limine as an abuse of process, it has to be a clear case. As Buckley LJ observed in Bryanston Finance Ltd. v. De Vries (No.2) [1976] 1 Ch 63 at 78D, it "is a jurisdiction to be exercised with great circumspection". It "will only be exercised in plain and obvious cases" : see per Peter Gibson J in Re Ringtower Holdings (supra) at 84F-G.

20. I am far from persuaded, in the absence of authority, that the petition must be struck out because the petition is bound to fail or that it is an abuse of process on the basis that there is no minority shareholding. Even if my conclusions on the minority shareholder part of the petition were wrong, that still leaves the claim to wind up the Company on the just and equitable ground. As contributory, the Petitioner indisputably has locus to present a winding-up petition. Indeed, the alternative relief sought is a winding-up order.

21. For the reasons set out above, the Respondents' application is dismissed and I make an order nisi for costs in favour of the Petitioner. The Petitioner's application for the appointment of provisional liquidators is to be restored for further directions.