LI WEI JIAN v. HUA FA (HUA SHENG) INDUSTRY LTD AND OTHERS

HCCW 145/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 145 OF 2006

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D E C I S I O N

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1. I have before me two applications.  The first is an application by the Respondents to these proceedings seeking to strike out the petition on the grounds that it is frivolous, vexatious and embarrassing or discloses no reasonable cause of action and/or is an abuse of the process.  There is also before me an application by the Petitioner for leave to amend the petition in the form of a draft petition which has been placed before me.

2. It is necessary to set out, first of all, some of the procedural background to these proceedings.  The petition was presented in March this year, apparently without any prior warning on the part of the Petitioner, there having been no correspondence or other letters before action before the petition was presented.  It seeks a winding-up of the Company on the just and equitable ground and also seeks in the alternative, orders under section 168A of the Companies Ordinance (Cap. 32). 

3. The petition, when first presented, contained two broad complaints.  The first was an allegation as to the wrongful payment of monies by the 1st and 2nd Respondents to themselves from the assets of the Company without the approval of the Petitioner.  The problem with this allegation was that it was wholly unparticularised.  The allegation, as it stood in the original petition, was in the following terms: 

"In prejudice to the Petitioner, the 1st and 2nd Respondents caused the Company to pay amounts of money belonging to the Company to themselves without the prior knowledge of the Petitioner." 

4. A more completely unparticularised allegation is difficult to imagine.  The allegation, as it was framed, gave no notice whatsoever to the 1st and 2nd Respondents as to what the actual complaint was against them beyond that they had, on some unspecified date at some unspecified time in some unspecified manner, caused the Company to pay unspecified amounts of money, belonging to the Company, to them.  Not surprisingly, objection was taken to the terms of this allegation. 

5. The other substantial allegation was that the Petitioner had been excluded from participation in the Company's business and had been prevented from inspecting the Company's accounts and accounting records.  What is said as to this was that despite a number of requests for access to and inspection of the accounts and records made orally by the Petitioner to the 1st Respondent between October 2005 and January 2006 and in a letter from the Petitioner to the Company dated 10 February 2006, no access to the accounts had been provided.

6. It was submitted that these two matters amounted to unfairly prejudicial conduct on the part of the 1st and 2nd Respondents as against the Petitioner which would justify the court in making the orders or one of the orders sought. 

7. It is perhaps not surprising that the Respondents sought to strike out the petition as so formulated.  In relation to the allegation of misapplication of monies, the allegation was wholly unparticularised and left the respondents in no position to deal with the allegation against them.  In respect of the allegations of prevention or refusal of access to documents, while it is fair to say that the particulars did not give any great detail, they did at least indicate the timeframe within which a request was said to have been made by the Petitioner to the 1st Respondent, the manner in which those requests were made and also there was reference to what was apparently the only written request which was a letter from the Petitioner to the company in February 2006.

8. That said, however, it would be extremely unusual for the court to make an order winding up the company simply on the grounds of refusal of access to documents.  There are other remedies provided by the Companies Ordinance that are available to a director of a company who claims that he had been prevented from having access to the company's documents, which give him a right to inspect the company's books and records. 

9. Given the availability of that remedy, it would rarely, I think, be possible for the court to conclude on the basis of wrongful refusal of access to documents alone that it would be just and equitable for the company to be wound up and it may indeed be difficult for the court to conclude that a buyout order ought to be made in those circumstances. 

10. When the matter first came before the Master in May this year, it was apparently indicated by the Petitioner that he was minded to withdraw the petition.  On realising that that could not be done because the petition had already been advertised, it was indicated that an application would be made for the petition to be dismissed in open court in due course. 

11. That application came on for hearing before me on 15 May 2006, when the Petitioner had a change of heart and indicated that on reflection, he wished to consider whether, instead of applying for the dismissal of his petition,he should seek leave to amend it instead.  On that occasion, I allowed a two-week adjournment of the petition to enable the Petitioner to take advice as to the appropriate course for him to follow and, if it was thought appropriate to seek to amend the petition, to take steps to do that. 

13.The matter came back before the court on 29 May 2006, when a further adjournment was granted in order to enable the Petitioner to formulate amendments to his petition.  The matter then came before the court on 12 July 2006, when the Petitioner had formulated certain proposed amendments to the petition.  However, these were objected to by the Respondents, who contended that the amendments did not go far enough to curing the defects in the petition.  At that time, it appeared that there was at least substantial doubt as to whether or not the proposed amendments were adequate and, in the circumstances, directions were given for the matter to be fixed for a substantive hearing when the Petitioner could seek to persuade the court that the amendments were adequate and that he ought to be allowed to amend the petition in the manner suggested.  Observations were, I think, made on that occasion as to the possible desirability of considering further improvements to the amendments and the result was that, at the hearing today, a further amended version of the petition was produced for consideration and leave was sought for the petition to be amended in that way. 

14.Notwithstanding the second attempt at producing an amended petition, Miss Fong, who appears for the 1st and 2nd Respondents, contends that there are still significant respects in which the petition is deficient and lacking in particularity.  In my view, she is right.  There are clearly several respects in which the petition is still inadequately particularised and is embarrassing in that it does not inform the 1st and 2nd Respondents of the case that they have to meet.  In other respects, while the petition may not have as much particularity as the 1st and 2nd Respondents would like, it seems to me that, although perhaps not pleaded as fully or as clearly as they might have been, there are some matters as to which there seems to be a possible basis for complaint by the Petitioner. 

15.For present purposes, I think it will suffice if I go briefly through the various allegations and indicate my view on the arguments in relation to them.  The first matter that was complained of was the allegation in what is now paragraph 14 of the proposed amended petition in which allegations were made about misapplication of funds from the company's assets for the use of the 1st and 2nd Respondents.  What is now alleged is in the following terms:

"In prejudice to the Petitioner, who is also an existing creditor of the Company, the 1st and 2nd Respondents caused the Company to pay and/or loan amounts of money belonging to the Company to themselves without the approval and prior knowledge of the Petitioner instead of settling amounts due to the Petitioner in its capacity as a creditor and/or other creditors to reduce the outstanding liability of the Company.  One of the unauthorised withdrawals by the 2nd Respondent amounting to HK$378,625.00 was still outstanding 31 January 2006."

16.Miss Fong says that this is still entirely inadequate in that there is, apart from the one item mentioned in the last sentence, no indication at all of what amounts it is complained were paid by the Company or lent by the company to the 1st and 2nd Respondents without the Petitioner's approval and prior knowledge, nor is any indication given as to the amounts involved or the time at which the wrongful loans or payments were said to have taken place.  As far as the 1st Respondent is concerned, there is, it is said, no allegation at all in any particularised form against him.  The only particularised allegation relates to the alleged withdrawal by the 2nd Respondent which was said to be still outstanding as at January this year. 

17.It seems to me that there is much force in these complaints.  The allegation in relation to the 1st Respondent is wholly unparticularised and there is no way in which the 1st Respondent will be able to respond to the allegation other, perhaps, than by way of a bare denial.  The position is perhaps slightly different in relation to the allegation against the 2nd Respondent in that there is at least one item that is pleaded.  The examination of the documentation which underlies this allegation indicates that the figure comes from a set of management accounts of the company as at 31 January 2006 covering the period for January 2006.  That set of management accounts included a balance sheet which disclosed that there was apparently an outstanding amount due by the 2nd Respondent to the company of $378,625.00.  It does not follow that this was a single withdrawal but it seems to me that it might make the beginnings of a case for the Petitioner in that the Petitioner would be able to allege, if he felt he were able to do so, that that particular loan to the 2nd Respondent was made without proper authority.  If that allegation were made, it would then, I think, be possible for the 2nd Respondent to respond to it by denying it or by admitting the existence of the loan but denying that it was improper or unauthorised and explaining his position in relation to it. 

18.That said, however, the pleading in its present form, as far as paragraph 14 is concerned, is still clearly unsatisfactory and will require amendment to limit itself to the extent that I have indicated so that it can be addressed by the Respondents. 

19.In addition, there is complaint as to paragraph 16 in the present version in which it is pleaded that the 1st and 2nd Respondents allege that the amounts paid or caused to be paid to them were personal loans to them.  The Petitioner says that he contests that these withdrawals were agreed or authorised according to the governance of the company and the provisions of a shareholders’ agreement between the parties.  As to this, it is unclear as to when these allegations were made but it may be that this is not a particularly critical point since it seems to me that the actual allegation was intended, in the context of the original pleading, to set out what the Respondents' apparent response was when they were challenged as to payments which were made to them.

20.If the case is now put on the basis of an unauthorised loan, it does not seem to me that paragraph 16 actually adds a great deal to the allegation that a particular loan that was made to the 2nd Respondent was, in fact, unauthorised or otherwise improper, and I doubt whether paragraph 16 is, in fact, necessary or required.

21.There is then an allegation in paragraph 17 to the effect that the 1st and 2nd Respondents by virtue of their being the majority of the directors of the Company, failed to cause the Company to contest any of the payments that were made.  Again, given the nature of the case that it seems the Petitioner wishes to put forward in this respect, it is questionable whether this adds anything to the actual complaint. 

22.The next main area of complaint was in relation to the alleged exclusion of the Petitioner from participation in the Company's business.  As to that, the first complaint is that the Company is said to have stopped trading in what was apparently its principal product - coat-hangers - in October 2005 and the Petitioner's complaint is that this change of business or cessation of business was not the subject of discussion or approval between the three shareholders and directors of the company.  It is fair to say that, according to the Petitioner, a shareholder's agreement which was entered into between himself and the two respondents provided that changes in business direction and business plan of the Company should be subject to the approval of all the parties. 

23.It seems to me that although there is not a great deal of information as to this, the gist of the allegation, at least, is tolerably clear and it seems to me that, in this respect, the Respondents are in a position to respond to this particular allegation. 

24.The same cannot, however, be said in respect of paragraph 19 in which it is alleged that:

"Further, in breach of the agreement, the 1st and 2nd Respondents have not caused capital investment to be approved by the Petitioner."

25.Mr Yeung, who appeared for the Petitioner, frankly accepted that this was quite inadequately particularised and clearly this is not a matter that should be permitted to remain in the petition since there is, again, no realistic way in which the 1st and 2nd Respondents can be expected to respond to it. 

26.The next complaint is as to the access to and approval of the accounts.  There is then repeated the allegation concerning request for access to accounts and documents which were refused.  In respect of this, I have already indicated that this is, in my view, sufficiently particularised so as to enable the Respondents to respond to it if they are minded to do so.  While it would not, in my view, have been sufficient on its own to have justified the making of the orders sought, it may be that in combination with the other matters that the petitioner seeks to allege, it may be sufficient for that purpose.

27.That said, however, the following paragraph which effectively alleges that the Respondents have exercised their majority control so as to refuse to allow inspection or to resist inspection again is an allegation that does not add a great deal to the substantive allegation and consideration should be given by the Petitioner to whether or not it is appropriate to retain that allegation in the petition. 

28.There is then an allegation that in breach of the shareholders' agreement, monthly accounts were not provided to the Petitioner for approval either on a monthly basis or at all.  It seems to me that this allegation taken on its own is one that is adequately particularised.  Miss Fong submitted that it was not clear from the shareholders' agreement who had the responsibility for the preparation of these accounts and that it was not clear from the shareholders agreement that the responsibility lay with the 1st or 2nd Respondent, as distinct from some other party.  That may be so, but it seems to me that those are matters that go more in the way of an answer to the allegation rather than a complaint that the allegation itself is one that is either unparticularised or one which has no reasonable foundation.  There certainly is a provision in the account within the shareholders' agreements that suggests that monthly accounts should have been provided to all the parties, and it seems to me that it is at least arguable that the Petitioner has a case as to this complaint. 

29.Finally, there is an allegation that there had been a failure to distribute any profits that the Company has made, notwithstanding that it has made substantial profits which it is said were envisaged would be distributed after provision was made for various other commitments which the Company should settle first.  Miss Fong suggests that this is not something that is actually provided for in the shareholders' agreement.  As to this, it seems to me that that is a matter that is arguable and it seems to me that the nature of the allegation is probably sufficiently clear, although it could perhaps be put more directly. 

31.Finally, there were complaints about the adequacy of two other allegations in the last two paragraphs of the petition, the first being an allegation that the assets of the company were tied up and not being used effectively for the benefit of the Company, and the second that prior to October 2005, the Company had been successful and if wound up, would produce a surplus for its shareholders.  It seems to me that these are allegations of a formal nature in that the allegation as to the assets of the Company being tied up is not intended to indicate that there are particular assets of the Company that should be distributed or used in some other way but is, in fact, an allegation that it is unfair to the Petitioner that his investment should remain locked in the Company at a time when it is not, in fact, carrying on any significant or real business. 

32.So far as the last paragraph of the petition is concerned, that is an allegation which is, in fact, required in shareholders' winding-up petitions because it is necessary for the shareholder or contributory seeking to wind up a company to show that he has a genuine interest in the obtaining of an order for winding-up.  This will ordinarily be shown by establishing that there is the likelihood of a surplus so as to provide for distribution to the shareholders on liquidation.

33.In the circumstances, it is clear that the petition in its present proposed amended form remains unsatisfactory in a number of serious respects.  Although there are some respects in which the allegations are either broadly adequate, even in these situations, it does seem to me that they might benefit from further consideration or particularisation where that is possible. 

34.In the circumstances, therefore, I think that it would be inappropriate for me to grant leave to amend the petition in the form of the amendment currently proposed, given the defects that remain.  The question that then arises is whether the petition should simply be dismissed, leaving it to the Petitioner to bring a fresh petition, a course which Miss Fong has accepted would be open to him if he were able to put forward a properly formulated petition, or whether the Petitioner should be given a further opportunity to seek to put forward an adequately formulated petition. 

35.Mr Yeung suggests that it would be more appropriate to allow the petitioner a further opportunity to proffer an amendment, which it is hoped would be adequate, at a date in the not too distant future. 

36.Having considered the history of the matter, it seems to me that in this case that would not be the appropriate course to follow.  The matter has now dragged on for some seven months since the petition was presented.  Notwithstanding the apparently early recognition of the deficiencies in the petition in May this year, the Petitioner has not to date been able to provide an adequately formulated petition for the court's consideration.  In the circumstances, it seems to me unsatisfactory that the petition should be allowed to remain hanging over the Company's head, as the effect of this is that transactions that may have been undertaken between the presentation of the petition and the eventual disposition of the petition will be at risk of being invalidated if a winding up order is ultimately made. 

37.Given that potential source of prejudice and the general prejudice arising from having a winding-up petition hanging over the Company, it seems to me that the more appropriate course would be to refuse leave to amend, to strike out the petition as it presently stands and dismiss the petition, but leaving it open to the Petitioner to seek to present a fresh petition if he is able to present one that is properly formulated.  It seems to me that this course will also have the advantage of enabling a costs order to be made at this stage which would have the effect of giving the 1st and 2nd Respondents their costs of the petition to date which is a course that I think is amply justified by the course of the proceedings so far. 

38.For those reasons, I would refuse leave to amend the petition and strike out the existing petition.  I therefore dismiss these proceedings with an order for costs in favour of the 1st and 2nd Respondents against the Petitioner to be taxed on the usual party-and-party basis if not agreed.  However, as I have also indicated, this is not intended to prevent the petitioner from mounting a properly-formulated application under either  or both of sections 168A and 177F of the Ordinance if he is able to do so.