WONG YEE CHUK v. HARSEN (CHINA) LTD AND OTHERS

HCCW 133/2022

[2022] HKCFI 3806

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 133 OF 2022

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D E C I S I O N

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1.  There are before the court 2 summonses issued by the 3^rd respondent (“R3”) and the 2^nd respondent (“R2”) on 28 June and 29 June 2022 respectively seeking an order to strike out the winding-up petition (“WU Petition”) presented by the petitioner (“P”) under s.177(1)(f) of the Companies (Winding up and Miscellaneous Provisions) Ordinance (Cap. 32) on the grounds that the petition discloses no reasonable cause of action; is scandalous, frivolous or vexatious; and may prejudice or embarrass the process of the court.

2.  P’s case for seeking a winding up order against the Company is encapsulated in §10 of the Petition, which states:

“Having regard to the recent events surrounding NHEL, which unavoidably have profound implications on the business future of the Company, [P] has deemed it desirable to present this Petition for the just and equitable winding-up of the Company as a separate and alternative remedy. (This remedy is particularly important from [P’s] point of view if, which is denied, his claim for unfair prejudice relief is unsuccessful.) These recent events are described in detail hereinbelow.”

3.  It does not appear to this Court, and no authority has been cited by Mr Albert Yau (appearing with Ms Man Yin Ting), counsel for P, that where as here P has presented a petition to seek relief under ss.723-724 of the Companies Ordinance (Cap. 622) (“CO”), he should be allowed to present another petition to seek a winding up order against the Company on the basis that his claim in the unfair prejudice petition is unsuccessful. In any event, as will be seen further below, the so-called “recent events provoking this Petition”[1] are no more than continuation of the same matters complained of in the unfair prejudice petition presented by P in respect of the Company or is the result of P’s own conduct.

A.  Background

4.  The Company is incorporated in Hong Kong on 13 October 2000. Its shares are held by P, R2 and R3 as to 40%, 40% and 20% respectively who are its only directors[2].

5.  The Company’s only asset is and has since 2007 been 100% equity interest in Foshan Nanhai Harsen Electric Co Ltd (“NHEL”), a company established in the Mainland in December 2002 which engaged in the business of manufacturing electrical products. NHEL owns a piece of land in Nanhai District, Foshan city in the Mainland (“Land”) together with the factory built thereon (“Factory”). Until 6 April 2022, P was the legal representative and the Chairman of the board of directors of NHEL while R2 and R3 have been its directors[3].

6.  The articles of association of NHEL (“AA”) provides, inter alia, as follows[4]:

(1)  NHEL shall operate for 20 years from the date of the issue of business licence (article 53);

(2)  If the Company wishes to extend the operating period, it shall apply to the relevant authority for extension no later than 6 months before the end of the period, after NHEL’s board passed a resolution to approve the extension (article 54); and

(3)  Any amendment of the AA must be approved by all the directors and the relevant authority (article 59).

7.  The business licence of NHEL was granted on 6 January 2002 and expired on 6 January 2022.

8.  The parties also hold shares in 2 related companies:

(1)  Harsen Industries Ltd (“HIL”) incorporated in Hong Kong on 30 July 1997. Its shares are held by P, R2, R3 and Cheng Wai King Pat (“Cheng”) as to 40%, 40%, 10% and 10% respectively. P and R2 are its only directors; and

(2)  Harsen Engineering Ltd (“HEL”) incorporated in Hong Kong on 4 January 1999. Its shares are held by P, R2 and R3 as to 40%, 40% and 20% respectively and they are its only directors.

9.  In 2016, P[5] presented 3 petitions in HCMP 3363/2016, HCMP 3365/2016 and HCMP 3366/2016 (collectively “Petitions”) on the ground that the affairs of HIL, HEL and the Company (collectively “Companies”) had been conducted by R2-R3 in an unfairly prejudicial manner and seeks various relief under ss.723-724 of the CO[6]. P’s case and R2-R3’s case, as summarised in the WU Petition, are as follows:

(1)  the Companies were formed on the basis of personal relationship between P and R2-R3 and they reposed trust and confidence upon each other[7];

(2)  there was a common understanding between P and R2-R3 that the Companies would operate as a group and that the business of trading and manufacturing of electrical products would be carried out in the manner contended by P, alongside with a number of sales companies established in the Mainland (“Mainland Sales Companies”)[8];

(3)  R2 was the vice chairman of NHEL and was based in the Mainland while R3, a Mainland resident, was in charge of the manufacturing operation of the Factory and together they had de facto control over NHEL[9];

(4)  without his knowledge or consent, in 2015, R2-R3 decided to stop the manufacturing operation of NHEL despite the expansion of the Factory in 2011 and the profits made in the past. This was followed by R3’s wife and a number of former senior employees of NHEL setting up various companies to engage in manufacturing and selling products similar to those manufactured by the Factory[10]; and

(5)  R2-R3 deny the existence of the alleged common understanding and contend that each company should be regarded as a separate entity carrying business on its own account[11].

10.  By order dated 2 July 2020, Harris J ordered the Petitions to be “consolidated” and directed the parties to file consolidated pleadings. In the consolidated Points of Claims (“POC”), P (and Cheng in respect of HIL) seeks, inter alia, the following relief[12]:

(1)  An order that P and Cheng do purchase R2-R3’s shares in HIL at a fair value;

(2)  An order that P do purchase R2-R3’s shares in HEL at a fair value; and

(3)  An order that R2-R3 do purchase P’s shares in the Company at a fair value.

11.  It does not appear that P is keen in pursuing the Petitions. In the meantime, R2-R3 caused HIL to commence a claim in HCA 193/2018 against P for breach of fiduciary duties (“Action”). It was only until February 2022 that the parties applied for leave to set down the Petitions and the Action for trial, which was granted by Harris J on 1 March 2022. The trial will be heard before this Court on 10 January 2024 with 8 days reserved.

12.  On 26 April 2022, P presented the WU Petition to seek a winding- up order against the Company, relying on (1) “Recent events provoking this Petition”[13] (“Recent Events Ground”); (2) “Loss of substratum of the Company and loss of mutual trust and confidence”[14] (“Loss of Substratum Ground”); and (3) the absence of a reasonable offer to buy out P’s shares (“No Reasonable Offer Ground”)[15].

13.  So far as the Recent Events Ground is concerned, P relies on the following matters:

(1)  “Exclusion of [P] from the management of NHEL and hence that of the Company”: since 2015, R2-R3 have run NHEL as if it were their own company and P has not been informed of the decisions of NHEL to stop production, dispose of its inventory and machinery, and offer the Factory for lease in 2018[16];

(2)  “Lack of confidence in the management of the Company as reflected by the way [R2-R3] handled the affairs of NHEL”: for the years 2018 – 2020, NHEL’s auditors gave disclaimer of opinion on the accounts owing to inability to verify the accuracy of the amounts stated in the accounts[17];

(3)  “The unethical business move against one of the Mainland Sales Companies”: NHEL sued Guangzhou Yibao Electrical Equipment Co Ltd (“Yibao”) for outstanding price of the products sold and retained other products which gone missing and resulted in NHEL owing RMB656,678 to Yibao. R2-R3’s decision to sue Yibao was contrary to proper business morality, if not also in the interests of the Company and the Group[18]; and

(4)  “Most recent events”: at the shareholders’ and directors’ meeting of the Company held on 4 January 2022 and the directors’ meeting of NHEL held on 6 April 2022, it was resolved that P be removed as the legal representative of NHEL and to amend the AA so as to extend its business licence despite P’s objections[19].

14.  As for the Loss of Substratum Ground, P says that the operating period of NHEL has come to an end and the cooperation between P and R2-R3 should also end. There is no business reason for the Company to continue, and the mutual trust and confidence between P and R2-R3 has ceased to exist[20].

15.  In respect of the No Reasonable Offer Ground, P relies on the draft WU Petition and the invitation sent to R2-R3 inviting them to make a reasonable offer for his shares, and the lack of any reasonable offer made by R2-R3[21].

B.  Discussion

16.  The principles governing an application to strike out a petition have been stated in Re Four Twenty Co Ltd HCCW 278/2004, §5, per Kwan J (as she then was) as follows:

“(1) It is assumed that the particulars and allegations in the petition and the supporting affidavits of the petitioner would be established and the conflicts resolved in favour of the petitioner …

(2) The application should be approached with the greatest circumspection and it is only in a plain and obvious case that the court should exercise its discretion to strike out the petition for winding up or the parts complained of …

(3) The burden is on the applicant to show that it is plain and obvious that the petition for winding up would fail on the ground there is an alternative remedy available to the petitioner and that the petitioner is acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy …”

17.  Further, in considering whether to strike out a winding up petition presented by a shareholder, the court will be guided by the following principles:

(1)  Winding up on a contributory’s petition is a remedy of last resort and would not be granted if the petitioner was acting unreasonably in insisting upon it instead of pursuing an available alternative remedy (Re Wong To Yick Wood Lock Ointment Ltd [2001] 2 HKC 618, at 623D-E).

(2)  It is only in a plain and obvious case that the court should exercise its discretion to strike out a claim before it has gone on to a full hearing (Wong To Yick, 623H-I).

(3)  If it is clear that there is no real possibility or prospect of a winding-up order being made at trial, it cannot be just for a company to have the threat of a winding up order hanging over its head (Wong To Yick, 624A-B).

(4)  Winding up a solvent and profitable company is not in the interests of any its members. It may result in the sale of assets at break up value, without regard to goodwill and the “know-how” of the company (Wong To Yick, 624G-I).

(5)  There would be no real prejudice to the petitioner by striking out the claim for winding-up order if (a) there is no ground or basis which would entitle the petitioner to a winding-up order only, but not an order under s.724; and (b) no substantive benefit that a petitioner would gain from a winding-up order which he would not from a buy out order (Wong To Yick, 625C).

(6)  The court is nevertheless concerned that the petitioner is not left with a personal remedy only (such as a buy out order) (Re Kinong Group Ltd [1999] 4 HKC 100 at 104F-105G, applied by the Court of Appeal in Re Prudential Enterprise Ltd [2002] 1 HKLRD 267 at §14).

18.  Mr Kaiser Leung, counsel for R3, submits that the WU Petition should be struck out for the following reasons:

(1)  It is unreasonable for P to seek a winding-up order against the Company when (a) he has pursued the alternative remedy of a buy out order in the Petitions; and (b) as pleaded in §10 of the WU Petition, winding-up is not P’s preferred or the only relief to which he is entitled, but an alternative remedy he seeks in the event that his claim in the Petitions is unsuccessful;

(2)  The “recent events” in support of the WU Petition are at the highest continuation of the same issues raised in the Petitions. The issues will be investigated at the trial of the Petitions;

(3)  P will not be prejudiced if the WU Petition is struck out as R2-R3 will be able to comply with the buy out order to be made by the court including using (a) the amounts to be paid by P and Cheng from buying out R2-R3’s shares in HEL and HIL, and (b) the Land, the Factory and 100% equity in the Company can be used as security to obtain a loan to pay the purchase price, if necessary;

(4)  The Loss of Substratum Ground is bound to fail as (a) the Company’s memorandum of association does not contain any objects clause and, hence, there is no basis to allege that the Company is “the holding company of the corporate vehicle which pursued the object of manufacturing”[22]; and (b) although NHEL’s business licence became invalid on 1 January 2018 by reason of the local Government’s change in policy which required NHEL to apply for a combined licence by 1 January 2018, NHEL had obtained an order from the Foshan Intermediate People’s Court dated 27 December 2021 to compel P to apply for a new combined licence but P refused to comply with the order. It is still possible for NHEL to apply for the combined licence and continue to operate.

19.  Mr Bernard Lam, counsel for R2, advances similar arguments as Mr Leung save that he characterises P’s suggestion that R2-R3 have no means to buy out P’s shares in the Company as mere speculation, not supported by any evidence.

20.  In my view, the WU Petition should be struck out for the reasons set out below.

21.  First, it is indisputable that all the matters complained of under the Recent Events Ground have already been raised by P in the Petitions and will be determined by the court at the coming trial.

(1)  Even if the “recent events” took place after the dates of the Petitions, P is entitled to rely on such events on the basis that they relate to, or expand on, or form part of a course of conduct of an existing head of complaint raised in the Petitions (Cheung Hon Wah v. Cheung Kam Wah [2005] 2 HKLRD 599, §§40-42, per Barma J (as he then was)), or that such events are relevant to what relief should be granted at the hearing of the Petitions (In re Fildes Bros. Ltd [1970] 1 WLR 592, at 597E-G; The Securities and Futures Commission v Mandarin Resources Corporation Ltd CACV 84/1999, 1 April 1999, p.3).

(2)  Mr Yau has not articulated any reason or justification as to why P should be allowed to vex R2-R3 again with the same allegations raised in the Petitions, when R2-R3 have incurred significant time and costs in dealing with such allegations.

22.  Second, the Loss of Substratum Ground is demurrable and, in any event, cannot form the basis for seeking a winding-up order on the just and equitable ground:

(1)  P should not be allowed to approbate and reprobate by complaining about NHEL’s cessation of business and seeking a buy out order on the basis that the Company is a going concern in the Petitions and, at the same time, refusing to take the necessary step to apply for a combined licence so as to allow NHEL to continue to operate and remain as a going concern.

(2)  Putting it in another way, P does not come to the court with clean hands when the loss of substratum was caused by his refusal to comply with the order made by the Foshan court without any reason or justification (cf. Re Citrex Co Ltd [1987] 3 HKC 13 (CFI) [1987] 3 HKC 21 (CA); Yeung Bun v Brio Technology International Ltd [2000] 2 HKLRD 218).

23.  Third, the No Reasonable Offer Ground by itself is not a ground for seeking a winding-up order against the Company. It assumes that R2-R3 are liable to buy out P’s shares, which is the one of the issues to be determined by the court at the trial of the Petitions. In any event, P himself has not made any offer to sell his shares to R2-R3, still less a reasonable offer which meets the requirements expounded in O’Neill v Phillips [1999] 1 WLR 1092, at 1107C-1108C.

24.  Fourth, it is not open to P to assert that R2-R3 may not have the financial means to comply with the buy out order to be made by the court. No such assertion has been pleaded in the WU Petition, let alone as the basis for seeking a winding-up order against the Company. It is not permissible for P to rely on any new ground raised only in affirmations when the ground has not been pleaded in the WU Petition (In re Fildes Bros. Ltd, 597G-598C; Re Tourmaline Ltd [2000] 4 HKC 348, 354C-D). The same goes to the belated assertion made only in the affirmation of P’s wife[23] that P prefers winding up relief over that of the buy out order sought in the Petitions.

25.  In any event, P has not identified, let alone demonstrated by evidence, that it would be to his advantage or benefit for the Company to be wound up. This is unsurprising given that if P prevails in the Petitions, the Company will be valued on a going concern basis whereas if the Company is wound up, the asset owned by the Company (i.e. NHEL) will be realised and sold on a liquidation or break-up basis. Additionally, the assets realised by the liquidators will first be applied to pay the costs of liquidation including the remuneration and costs of the liquidators (which will be substantial) and the various fees payable under the Companies (Fees and Percentages) Order (Cap. 32C), and only the surplus will be distributed to the shareholders, quite apart from the fact that the distribution will only take place at a much later stage.

C.  Disposition and costs

26.  For the reasons set out above, the WU Petition should be struck out.

27.  As for costs, I make a costs order nisi that P shall pay the costs of and occasioned by the strike out summonses to R2 and R3 and the Official Receiver, to be assessed by way of gross sum assessment if not agreed. For this purpose, R2 and R3 shall within 3 days of this Decision lodge and serve a statement of costs for gross sum assessment, and P shall provide his comments on the statements, if any, within 3 days thereafter.