RE GAIN SEMICONDUCTOR LTD

HCCW 194/2018 & HCMP 1753/2018
(HEARD TOGETHER)
[2020] HKCFI 596

HCCW 194/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 194 OF 2018

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AND

HCMP 1753/2018

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1753 OF 2018

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(HEARD TOGETHER)

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REASONS FOR DECISION

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1.  On 24 May 2019 I entered judgment to bring these two sets of proceedings to an end by consent shortly after their trial had commenced.

2.  In this short decision I address one issue that arose prior to me giving judgment, namely, in what circumstances other than after trial can the court properly enter a judgment, which determines that a party is entitled to relief pursuant to s725 of the Companies Ordinance, Cap 622 (“Ordinance”).  The relevant parts of ss724 and 725 read as follows:

“724. When Court may order remedies

(1)  The Court may exercise the power under section 725(1)(a)  and (2)  if, on a petition by a member of a company, it considers that—

(a)  the company’s affairs are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of one or more members (including the member); or

(b)  an actual or proposed act or omission of the company (including one done or made on behalf of the company)  is or would be so prejudicial.

725. Remedies that Court may order

(1)  The Court may—

(a)  for the purposes of section 724(1), make any order that it thinks fit for giving relief in respect of the matter mentioned in section 724(1)(a)  or (b).”

3.  In my experience it is not uncommon for parties to an unfair prejudice petition to agree in principle for an order that one buys the other party’s shares at a valuation to be determined by the court on terms encapsulated in an order made by consent pursuant to s725(1)(a). However, s724(1) states that the Court may make an order under s725(1)(a) if it considers that the company’s affairs are or have been conducted in a manner which prejudices one party qua member or a group of members have been unfairly prejudiced.  This suggests that regardless of what the parties agree the Court cannot make an order for a remedy pursuant to s725(1)(a) without having first determined that unfair prejudice has taken place.  G Lam J explained the issue in Lai Chi Keung v Wang Zhihua [1]:

“72.  The first question on relief is, what is the status of the Consent Orders?

73.  As found by G Lam J, the court does not have the jurisdiction to make a buy-out order under section 168A:

‘until it is satisfied that there has been unfairly prejudicial conduct’ [emphasis added].

74.  This is borne out by the words of section 168A(2):

‘If on any petition under subsection (1)  the court is of opinion that the specified corporation’s affairs 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 the member who presented the petition), whether or not such conduct consists of an isolated act or a series of acts—

(a)  the court may, with a view to bringing to an end the matters complained of—

   …’ [emphasis added]

75.  Thus, a finding of unfair prejudice is a necessary condition precedent to the arising of jurisdiction in the court. Unless and until it does so find, there is no jurisdiction.  In the premises, I find the Consent Orders to be have been made without jurisdiction and are of no effect, and I should exercise my own discretion as to what relief I should grant.  If and in so far as it is necessary, I set them aside.”

4.  I note that the observations of Oliver LJ in re Bird Precision Bellows Limited, which are alluded to in the passage I have just quoted, are obiter and not made with reference to the question I am here concerned with, namely, whether the court can make an order pursuant to s725(1)(a) by consent.  However, I agree that the court cannot simply endorse a consent summons for an order granting relief pursuant to s725(1)(a) and  I am not aware of the Hong Kong Companies Court every doing this.  However, for the reasons I am about to explain it does not seem to me that the court is prevented by the language of s724(1) from making any order for relief unless it has heard a trial of liability and produced a reasoned judgment.

5.  In the present case the trial had already commenced and I had read the witness statements before I was informed by counsel that the Parties were close to settling their differences subject to the court being satisfied that it could make an order in the terms they envisaged agreeing.  The 1^st to 3^rd Respondents, who were to be the subject of the intended order, took the position that they did not wish to oppose the Petitioners’ allegations that they had conducted the affairs of the Company in a manner unfairly prejudicial to Petitioners, although they were not prepared to concede them.  It seems to me that it is open to the Court in these circumstances to decide whether having read the evidence and counsels’ submissions, to use the language of s725(1), “it considers that …” the company’s affairs have been conducted in a manner unfairly prejudicial to its members.  If, as in the present case, the Court decides there had been unfairly prejudicial conduct the Court has the power to make an order pursuant to s724(1)(a).

6.  It follows from this analysis that it will only be possible for the court to make an order if evidence had been put before the court in order that it can reach the necessary decision. In practice I would expect it also to be necessary for the respondents to take at least a neutral position in respect of the allegations against them as the Respondents were prepared to do in the present case.  If they insist on disputing the allegations I anticipate that a trial will be unavoidable.

7.  In the present case it proved possible to reach the conclusion that the Court had power to make an order without requiring a full trial, because the trial had already been commenced, witness statements filed and counsel had opened the case.  Unfortunately, it is not a technique that is likely to be available early in the proceedings.  What the parties can do is to agree to an ad hoc arbitration in which an arbitrator decides the valuation, which would otherwise be conducted by the court.