HAW PAR PHARMACEUTICAL HOLDINGS PTE. LTD.v. HUA HAN HEALTH INDUSTRY HOLDINGS LTD (“the Company”)

CAMP 182/2019

[2019] HKCA 906

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 182 OF 2019

(ON AN INTENDED APPEAL FROM HCCW NO 110 OF 2019)

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REASONS FOR JUDGMENT

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Hon Kwan VP (handing down the Reasons for Judgment of the Court):

1.  On 2August 2019, we heard an urgent application for stay of execution of an order made by Coleman J on 18 July for the substitution of Haw Par Pharmaceutical Holdings Pte Ltd (“Haw Par”) as the petitioner in a petition to wind up Hua Han Health Industry Holdings Ltd (“the Company”) and the appointment of provisional liquidators for the Company.  Coleman J had refused leave to appeal against his orders at a hearing on 26 July but granted the Company an interim stay until 2 August for it to renew its leave application to the Court of Appeal.  Regrettably, and notwithstanding that the grounds of appeal in the draft notice of appeal placed before us are the same as two of the three grounds argued before the judge on 26 July, the papers for the present application were lodged only in the late afternoon of 1 August.  There is much to be said for Haw Par’s stance that this dilatoriness would appear to be intentional.

2.  As it is material to the application for stay of execution to establish there are reasonable prospects of success in obtaining leave to appeal, we found it convenient to deal with the renewed application for leave to appeal at the same time.  Having considered the written submissions on both sides and having heard the oral submissions of Mr Christopher Chain[1] for the Company, we are not satisfied that the threshold requirement for granting leave to appeal is met. We do not think either ground of appeal is reasonably arguable, nor do these grounds raise properly any issue of general principle that ought to be considered by the Court of Appeal.  We therefore dismissed the summons for leave to appeal and for stay pending appeal, and ordered the Company to pay costs to Haw Par assessed summarily at $27,608.  These are the reasons for our judgment.

3.  In his ruling of 18 July 2019 (“the Ruling”), the judge has set out in considerable detail the background leading to the orders he made.  It will not be necessary to repeat them.  Suffice it to say that the Company is a listed company and trading of its shares on the Stock Exchange of Hong Kong has been suspended since September 2016 at its own request in light of numerous concerns and rumours surrounding its business and assets.  In November 2018, the Securities and Futures Commission directed the Stock Exchange to suspend all dealings in the trading of the shares of the Company.

4.  The winding-up petition was presented by a creditor in April 2019. On 27 May 2019, a consent summons was filed to withdraw the petition upon satisfaction of the petitioner’s debt by a substantial shareholder of the Company. On 3 June, Haw Par, a 10% shareholder of the Company, issued a summons to be substituted as the petitioner.  Prior to that, Haw Par had already applied for provisional liquidators to be appointed.

5.  In the draft amendments to the petition placed before the judge, Haw Par has sought to wind up the Company on just and equitable grounds, pursuant to section 327(3)(c) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 and alternatively, on the ground that the Company is unable to pay its debts, pursuant to section 327(3)(b).

6.  It is not necessary to go into the details concerning the affairs of the Company and Haw Par’s concerns and complaints, because the Company has not sought to impugn the judge’s exercise of discretion on a factual basis in making the orders for substitution and for the appointment of provisional liquidators. The two grounds of appeal in the intended appeal concern only points of law. However, neither point was taken at the hearing before the judge on 18 July.

Ground 1

7.  The first ground of appeal took issue with the following parts of the Ruling:

“58. Being a contributory as a minority shareholder is no bar to an application to be substituted as petitioner. Nor is it an answer to an application for substitution that a contributory has no tangible interest in the company being wound up on just and equitable grounds. It is sufficient for the contributory to demonstrate the need for an investigation into the affairs of the company, as that is itself a sufficient advantage to justify the making of a winding up order.”

“77. … It is settled law that it is sufficient for the contributory to demonstrate the need for an investigation into the affairs of the company, as that is itself a sufficient advantage to justify the making of a winding up order.” (Emphasis supplied)

8.  It was contended that the judge has erred in law in holding that a need for investigation alone is sufficient to justify winding up, even on a contributory’s petition.  Although no authority was mentioned by the judge for this holding, the leading case cited by Haw Par before him in support of this was Re Comtowell Ltd [1998] 2 HKLRD 463, where Le Pichon J (as she then was) held that on a company’s own petition to wind up, the need for investigation itself was per se a sufficient basis to justify a winding-up order (at 471J to 472F).

9.  It was submitted that Comtowell was incorrectly decided in that it had wrongly elided the distinction between creditors’ and contributories’ petitions[2] and had failed to consider the reasoning of Buckley J in Re Othery Construction Ltd [1966] 1 WLR 69, which followed the rule in Re Rica Gold Washing Co (1879) 11 Ch D 36 at 43 that where a fully paid-up shareholder petitioned for winding up, he must show, on the face of the petition, a “tangible interest” in the assets to entitle him to ask for the winding up of the company, and the mere allegation of a surplus or of a probable surplus will not be sufficient.  Buckley J said at 74E that when the circumstances are such that it is clear on the facts alleged in the petition there will be nothing available for distribution among the shareholders, or that the petitioning shareholder has got no interest in the relief sought, he cannot “act as an amicus curiae and present the petition merely with a view to bringing to the court’s attention some state of affairs which he considers to be open to criticism in the way in which the company’s business is being conducted.”  And at 75B: “Nevertheless it remains the rule that, before a contributory can petition successfully for the winding up of the company, he must show either that there will be a surplus of assets available for distribution amongst the shareholders or that the affairs of the company require investigation in respects which are likely to produce such a surplus.”

10.  Mr Chain submitted that Haw Par simply had no locus standi to petition for the winding up of the Company and seek the appointment of provisional liquidators, as it has no tangible interest in the winding up.  It is a mere contributory that has failed to sufficiently plead and prove the likelihood of surplus on winding up.  Reference was made to the draft re-amended petition at §42, which stated that “a winding up order of the Company will place the assets and bank accounts of the Company under the control of its liquidators, serving to preserve the assets of the Company for its general body of creditors as a whole, and to increase the surplus for distribution of assets for its shareholders, including the Petitioner.”  It was said this is merely a “hollow incantation” and “bare assertion”.  Mr Chain also pointed to §46 of the draft petition dealing with the alternative case for winding up, which squarely alleged that the Company is “insolvent as it is unable to pay its debts as they come due.”  It was contended that the petition and verifying affirmation are “fatally defective”.

11.  We do not accept the Company’s submissions.

12.  We do not agree with counsel that §42 of the draft re-amended petition is merely a “hollow incantation” and “bare assertion” insufficient to satisfy the rule in Re Rica Gold Washing Co.  It must be borne in mind that the Company is a listed company and its listed status is a valuable asset that could be realized for the benefit of the shareholders through a ‘backdoor’ listing by the interested purchaser, as has happened to not a few of the listed companies that have gone into liquidation.  In Ng Yat Chi v Max Share Ltd & Anr [2001] 1 HKLRD 561 at 577I to J and 578F to G, Rogers VP drew attention to the judgment of Hoffmann J (as he then was) in Re Commercial and Industrial Insulations Ltd [1986] BCLC 191, the effect of which was that “although at the preliminary stages a petitioner might not be able to show with any clarity the tangible interest which gave rise to his right to present a petition, once the matter came to trial, it was necessary for him to do so”, and that “although the tangible interest will usually mean surplus for distribution of assets that is not the only instance of a tangible interest”.

13.  This is just the very preliminary stage of the winding-up proceedings sought to be brought by Haw Par.  We have no reason to think that Haw Par would not be able to show clearly its tangible interest by the time the matter comes to trial.  The point about the inadequacy of the allegation in the draft amended petition of a tangible interest was not taken at the hearing of Haw Par’s summonses before the judge.  Had this point been taken at the time, Haw Par would have been able to point to the listed status of the Company as a valuable asset that could be realized upon liquidation.  As for the averment that the Company is “insolvent as it is unable to pay its debts as they come due”, the fact that the Company has no liquid funds to pay its debts does not mean there will not be a surplus of assets for distribution amongst the shareholders, or that there will be no substantive benefit accruing to the shareholders upon liquidation.

14.  Furthermore, the general rule in Re Rica Gold Washing Co is subject to the implied qualification at common law that where it is by reason of the company’s own default that a petitioning contributory is unable to tell whether or not there will be a surplus available to contributories, a petitioner’s failure to verify that fact on oath should not constitute a bar to the relief sought (Re Newman & Howard Ltd [1962] Ch 257 at 262; Re Wessex Computer [1992] BCLC 366 at 370a to g; Re China International Business Development (Hong Kong) Ltd, CACV 94/2005, 18 November 2005, at §§18 to 23, 45 to 47).  As stated by Stone J in the last mentioned case at §47, the rule in Re Rica Gold Washing Co “is not to be slavishly applied so that, in effect, it constitutes a straitjacket for the exercise of judicial discretion”.

15.  As found by the judge, the whole circumstances in the present case cry out for an independent process of investigation.  Before the judge, the Company resisted the applications of Haw Par on the basis it was plainly insolvent.  Even as late as the public announcement on 31 July 2019, the executive directors considered that “the Group is still operating normally and is solvent”.  The present situation is plainly not one that the court should insist on the petitioner producing sufficient evidence at the preliminary stage that the investigation of the Company’s affairs is likely to produce a surplus for distribution.

16.  Notwithstanding the statements in §§58 and 77 of the Ruling, the present case is not an instance in which the petitioning contributory has failed to demonstrate a tangible interest and can only rely on the need to investigate the company’s affairs to justify the presentation of the petition.  And to be fair to the judge, he was not dealing with the point now sought to be raised by the Company.  As asserted in §§41 to 43 of the draft amended petition, the petitioner’s position is as stated at 75B in Re Othery Construction Ltd, “that the affairs of the company require investigation in respects which are likely to produce such a surplus”.

17.  For the above reasons, the first ground of appeal is not reasonably arguable.

Ground 2

18.  The other ground of appeal is based on the contention the judge wrongly took into account public interest factors (such as the investing public, market confidence, the integrity of the market) at §§64, 106, 109 and 110 of the Ruling in that the petition here is to be presented by a contributory and is not a public interest petition by the Securities and Futures Commission.  It was submitted that the statements of Deputy High Court Judge Le Pichon in Re Aeso Holdings Ltd [2018] HKCFI 1195 at §§39 to 40 are inconsistent with an earlier English authority being In re Millennium Advanced Technology Ltd [2004] 1 WLR 2177 at §§36 to 38.

19.  This may be dealt with shortly.

20.  It was decided in In re Millennium Advanced Technology Ltd at §§40 to 42 that a private petitioner, whether a creditor or a contributory, cannot rely on public interest grounds as the sole basis for winding up. The petition presented by Haw Par is not advanced on public interest grounds.  Nor did the judge determine the applications for substitution of the petitioner and the appointment of provisional liquidators on public interest grounds, on a proper reading of §§64, 106, 109 and 110 of the Ruling.  There is no reason to doubt the correctness of the statements in Re Aeso Holdings Ltd as to the relevance of the public interest in a petition presented by a private litigant.  There is no inconsistency with In re Millennium Advanced Technology Ltd, properly understood.

21.  This is not a viable ground of appeal.