XCHRX LAM SUM PO v. KAM FAI ELECTROPLATING FACTORY LTD. AND ANOTHER

HCCW 534/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 534 OF 2000

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D E C I S I O N

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1. This is an application by the 2nd to 5th Respondents for a validation order under Section 182 of the Companies Ordinance Cap. 32. An earlier validation order was made by me by consent on 14 September 2000. As difficulties were encountered in the implementation of that order, the Respondents issued a summons on 15 December 2000 for further relief under Section 182. A part of the reliefs sought was granted by Yuen J on 22 December 2000. The other parts of the summons were not dealt with due to the constraint of time. On 22 January 2001, the 2nd to 5th Respondents issued a new summons for such relief which is the application I am now concerned with.

2. The background of the proceedings may be given as follows.

3. The Petitioner presented a petition on 19 June 2000 seeking relief under Section 168A of the Companies Ordinance that his shares in the 1st Respondent, Kam Fai Electroplating Factory Limited ("the Company") are to be bought out by the 2nd to 5th Respondents. Alternatively, he seeks to wind up the Company on just and equitable grounds. The company has been run as a family business. An important part of its operation is an electroplating factory in Dongguan, Guangdong Province ("the Mainland factory"). It was alleged by the Petitioner he had been solely responsible for the running and management of the Mainland factory until he was wrongfully expelled from it in May 2000. There was no allegation of insolvency or misappropriation of funds by the other shareholders or directors in the petition or in any of the affidavits placed before me today.

4. On 19 June 2000, the date the petition was presented, an injunction was granted by Le Pichon J on the ex parte application of the Petitioner. By this injunction, the 2nd to 5th Respondents were restrained from (a) expelling the Petitioner from the Mainland factory; (b) excluding the Petitioner from the management of the Mainland factory; (c) authorising any other company to take over the management of the Mainland factory; and (d) convening an extraordinary general meeting to remove the Petitioner as a director of the Company.

5. On 14 July 2000, the 2nd to 5th Respondents issued a summons to discharge the injunction. This was heard by Burrell J on 7 September 2000. By an order made by consent, the injunction to restrain the Respondents from doing the acts in (a) to (c) was discharged and the injunction to restrain the Respondents from doing the act in (d) was continued until the further order of the court. It was also provided in the order that the Petitioner had given his consent to a summons to be taken out by the Respondents for a validation order and a copy of the summons for that purpose was annexed to the order made on 7 September 2000.

6. On the basis of that consent, I made a validation order on 14 September 2000 as mentioned earlier. The 2nd to 5th Respondents are willing to purchase the Petitioner's shares. An open offer was made to the Petitioner on 23 February 2001 and the Petitioner made a counter-offer on 8 March 2001. Indeed, in the order of Burrell J made by consent on 7 September 2000, provision was made for the parties to appoint a firm of accountants jointly as expert to value the Company as a going concern as at 14 May 2000, the date when the Petitioner was expelled wrongfully from the management of the Mainland factory on the Petitioner's allegation.

7. In the meantime, the Company has carried on with its operations through the Respondents. It is fully solvent. This being a solvent and trading company, the court will normally sanction a disposition of the Company in the ordinary course of business notwithstanding the presentation of a winding-up petition unless the opposing party has compelling evidence to show that the disposition is likely to injure the Company.

8. In the present summons, the Respondents basically ask for two reliefs. Firstly, permission is sought for the Company to withdraw HK$6 million from its bank account for expenses incurred by the Company for the months of May to August 2000 in the ordinary course of business. Secondly, permission is sought to withdraw a total sum not exceeding HK$2.2 million from the bank account in the course of a month for the expenses in the ordinary course of business.

9. The first relief is necessary because of an ambiguity in the consent order dated 14 September 2000. Evidence was adduced by the Respondents of the common intention of the parties at the time when the Petitioner gave consent to the Respondents' summons for a validation order to the effect that the Company was to be permitted to withdraw HK$6 million for the expenses for the four months that had lapsed before the application was made in September 2000. This common intention or agreement was mentioned in the letter of the Respondents' solicitors to the Petitioner's solicitors dated 3 October 2000 and was not disputed by the Petitioner's solicitors in the many letters they had exchanged in October and November 2000. Although the order on 14 September 2000 had provided that the Company may withdraw from its bank account total payments not exceeding HK$1.5 million a month as from May 2000, the common intention was not clearly reflected in that the Company may be permitted to withdraw a lump sum of HK$6 million for the four months preceding the date of the order. This had led to difficulties with the previous bank of the Company and that difficulty was compounded by the attitude of the Petitioner who queried some of the items of expenditure incurred for May 2000 and the suggestion of the Petitioner's solicitors to the bank that it was incumbent on the Company to prove that the payments were in respect of liabilities incurred from May 2000 and not before that time in order for the bank to release funds to the Company under the consent order.

10. The second relief sought today is to raise the limit of withdrawal a month for the expenses in the ordinary course of business from HK$1.5 million as provided in the consent order to HK$2.2 million.

11. The Petitioner has opposed the reliefs sought on the following grounds. Firstly, it was submitted by Mr Hectar Pun on behalf of the Petitioner that as the order was made by consent on 14 September 2000, the jurisdiction of the court to make a further validation order has been ousted. Secondly, it was submitted that it would be unfair to the Petitioner to make a further validation order in this situation. The injunction order was discharged based on inter alia an agreement of the parties that a validation order was to be made on the basis that the Company could withdraw HK$1.5 million as its monthly operating expenses and no more. The Respondents should not have a second bite of the cherry. Thirdly, it was argued that the consent order could not be varied to allow the Company to withdraw a lump sum of HK$6 million for expenses incurred before the making of the order in September 2000 under the slip rule because the effect of the consent order was clear.

12. I have no doubt that I do have jurisdiction to grant the relief notwithstanding the consent order on 14 September 2000. The Respondents are not asking for that order to be set aside but a variation of that order. There is no provision in the consent order which prohibits the Respondents from seeking a further validation order. Thus there is no contractual foundation depriving the court of its jurisdiction to vary the earlier order. Further, the order is of an interlocutory nature and the very nature of a validation order is such that the parties may ask the court to vary it if the circumstances require.

13. I do not think the cases cited to me by Mr Pun being Tsang Iu Hung v. Tsang Tak Wah & Anor [1993] 2 HKC 471 and Purcell v. FC Trigell Limited [1971] 1 QB 358 have any bearing to the present situation. These cases were concerned with the setting aside of a consent order and the orders made by consent in these cases were very different from a validation order.

14. The Company has demonstrated by credible evidence the withdrawals sought to be made are in the ordinary course of business of the Company to discharge its normal operating expenses. Evidence has been adduced by the Respondents on the monthly expenses and such evidence supports the case that HK$2.2 million is required. Indeed, this seems to be the pattern of expenditure of the Company for a period of four years since July 1997. There is no challenge to these figures. Further, the documents in support of the figures for which the accounts were compiled have been disclosed by the Respondents.

15. The Respondents have explained why they had agreed to a limit of HK$1.5 million when the consent order was sought in September 2000. That was because they had expected this litigation to be resolved soon. They did not expect the Petitioner to raise difficulties on the valuation of the shares of the Company given that the mechanism for the appointment of a firm of accountants was provided for in the consent order on 7 September 2000. Had there been no consent order on 14 September 2000, it was accepted by Mr Pun that I would have jurisdiction and discretion to make a further validation order if circumstances require. I have ruled that the consent order does not take away my jurisdiction, nor does it affect my discretion in the circumstances to make a further order.

16. As for the last point taken regarding the application of the slip rule, I am satisfied that the Respondents could invoke the slip rule in this case. I accept the evidence adduced by the Respondents that there was an agreement or common intention between the parties in September 2000 that the Company would be allowed to withdraw a lump sum of HK$6 million to cover its operating expenses that had been incurred since May 2000. I disagree with the submissions of Mr Pun that the effect of the consent order was so clear that the lump sum could not be withdrawn.

17. For the above reasons, I propose to grant the reliefs as sought by the Respondents in their summons. I will hear counsel on the exact terms of the order to be made and on costs.