XCHRX WONG TIN CHEE TINLY AND OTHERS v. WONG TO YICK AND ANOTHER

HCCW 668/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO. 668 OF 2000

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DECISION

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1. This is an application by the 1st Respondent to strike out one paragraph in the Petition and one relief in the prayer relating to the Petitioners' claim for the winding-up of the 2nd Respondent ("the Company").

2. The paragraph in question is paragraph 51, which reads "in the premises, the Company is liable to be wound up under s.177(1)(f) of the Company [sic] Ordinance". The relief is paragraph (1) in the prayer, which reads "that the 2nd Respondent be wound up under the Companies Ordinance, cap. 32".

3. If these paragraphs are struck out, that would leave the Petitioners with only a claim that their shares be purchased by the Respondents or "any" (presumably meaning "either") of them under s.168A of the Companies Ordinance.

The Amended Petition

4. It is first necessary to consider the Amended Petition, the contents of which I have assumed to be true for the purposes of this application.

Shareholding structure

5. The Company is a private company, whose twelve shareholders are all members of the family of which the 1st Respondent is the head.

6. The Petitioners are three of the 1st Respondent's eight children. The 1st Petitioner holds 12% of the shares in the Company. The 2nd and 3rd Petitioners hold 4% each, so that the Petitioners hold a total of 20% of the shares in the Company.

7. The 1st Respondent holds 45% of the shares in the Company. He is the single largest shareholder.

8. The rest of the shares (i.e. 35%) are held by other family members, viz. the 1st Respondent's wife who holds 11%, five other children who hold 4% each and two other members of the family who hold 2% each. None of these other shareholders has been joined as Respondents to the Petition.

The Company

9. The Company was incorporated in 1988. The objects for which the Company was formed was to promote and engage in the production, marketing and distribution of a medicated product bearing the 1st Respondent's name, viz. Wong To Yick Wood Lock Ointment.

10. This product had started as a medicated balm which was first manufactured by the 1st Respondent and his wife in the 1960's. By the 1980's the 1st Respondent and his wife were running two firms, and had a factory manufacturing the product. At some stage prior to 1985, all the children had left Hong Kong to live abroad.

11. It is alleged in the Petition that even though the 1st Petitioner lived abroad, he gave advice to the 1st Respondent to improve some aspects of the business. In 1985, he returned to Hong Kong to help in the family business. Thereafter the 1st Respondent left the running of the business to him.

12. It is alleged that after the Company was incorporated in 1988, the 1st Petitioner was responsible for the running of the business, the 2nd Petitioner (since her return to Hong Kong in 1992) looked after administration and the 3rd Petitioner (since her return to Hong Kong in 1991) looked after the accounting side of the business. The three of them together with the 1st Respondent and his wife were the directors of the Company.

Allegations in the Petition

13. The allegations in the Amended Petition on which the claims for winding-up and/or an order for the purchase of shares under s.168A are based can be summarized as follows.

14. First, the Petitioners allege that following a domestic dispute, in mid-1999 the 1st Respondent asked three other children to return to Hong Kong, and disclosed to them and the spouse of one of them the production line and formula for the ointment. The Petitioners allege that this was in breach of a longstanding policy and agreement of the Company that the production line and formula should not be disclosed to persons who were not members of the family.

15. At the same time, the 1st Respondent asked the children who had newly returned to Hong Kong to look into the accounts of the Company, and instructed them to take away accounting and other business documents of the Company. The 1st Petitioner was excluded from one of the Company's premises and goods were delivered without his knowledge.

16. At a general meeting of the shareholders held in December 1999 which the Petitioners allege was held without the knowledge, consent or permission of the board, the Petitioners were replaced as directors by the children who had newly returned to Hong Kong. A report was also made to the police and the Customs and Excise Department concerning the Petitioners' activities.

17. The Petitioners claim that they have not had access to various documents and that information has been withheld from them such that they are unable to assess the value of the Company, and that the 1st Respondent and the new directors have conducted the affairs of the Company such that it is unjust and inequitable to require the Petitioners either to continue as members or to leave on unjust terms.

18. The Petitioners therefore claim that the Company is liable to be wound-up under s.177(1)(f) , alternatively that the affairs of the Company are being conducted in a manner unfairly prejudicial to them and that the Respondents (i.e. the 1st Respondent and/or the Company) should be ordered to purchase their shares at a fair market value.

19. For the purposes of this application, I must assume that all the matters alleged in the Amended Petition are true. Nevertheless, the 1st Respondent submits, the Court should exercise its discretion to strike out the winding-up claim because (i) by far the most likely form of relief that would be granted on those facts would not be a winding-up order, but an order for the purchase of the Petitioners' shares under s.168A and (ii) it is unreasonable for the Petitioners to hold the Company in terrorem in the meantime when there is no real possibility or prospect of a winding-up order being made at the hearing of the petition. The Company is a going concern, it is profitable and it has been carrying on business under a validation order granted by the Court after the presentation of the Petition.

The Law

20. I shall set out briefly the law to be applied. First, a contributory petitioner's claim for a winding-up order is not doomed to fail by reason only that alternative relief has been sought in the petition. However, the Court would at the hearing (a) take into account the fact that there is alternative relief, and (b) assess the reasonableness or otherwise of the petitioner's action in seeking an order for winding-up instead of the alternative remedy.

21. This approach is prescribed by statute. In Hong Kong, s.180(1A) of the Companies Ordinance provides:-

"where the petition is presented by members of the company as contributories on the ground that it is just and equitable that the company should be wound up, the court shall not refuse to make a winding-up order on the ground only that some other remedy is available to the petitioners unless it is also of opinion that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy".

The wording of that section (enacted in Hong Kong in 1978) is slightly different from s.125(2) of the 1986 Insolvency Act (formerly s.225(2) of the Companies Act 1948), which provides:-

"If the petition is presented by members of the company as contributories on the ground that it is just and equitable that the company should be wound up, the court, if it is of opinion - (a) that the petitioners are entitled to relief either by winding-up the company or by some other means, and (b) that in the absence of any other remedy, it would be just and equitable that the company should be wound up, shall make a winding-up order; but this does not apply if the court is also of the opinion both that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy".

22. Notwithstanding the difference in wording, the principle behind both sections is the same - i.e. that the remedy of winding-up on a contributory's petition is a remedy of last resort (Re San Imperial Corp Ltd (No.2) [1980] HKC 463, 466; Re a Company (No.004415, 4416 and 4413 of 1996) [1997] 1 BCLC 479, 487) and would not be granted if the petitioner was acting unreasonably in insisting upon it instead of pursuing an available alternative remedy.

23. The onus is however on the parties opposing the petition to show that there was an available alternative remedy and that the petitioner was acting unreasonably in not pursuing it.

24. That is the position at the hearing of the petition. However, there is a Practice Direction in England [No.1 of 1990] ([1990] 1 WLR 490) reminding practitioners of the undesirability of including as a matter of course a prayer for winding up as an alternative to an order under s.459 of the Companies Act 1985 (equivalent to s.168A of the Companies Ordinance) and that "it should be included only if that is the relief that the Petitioner prefers or if it is considered that it may be the only relief to which he is entitled".

25. The question in the application before me is whether even at the present stage, assuming that the Petitioners prove all the facts in the Amended Petition, there is no real possibility or prospect of a winding-up order being made such that the Court should exercise its discretion to strike out the claim for a winding-up order.

26. As with all applications to strike out, this application must be approached with the greatest circumspection. 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 to a full hearing. Further, in the present case, the same facts are relied upon by the Petitioners to justify the claim for a winding-up order and for the relief under s168A, so there will be little saving in costs or time should the application succeed.

27. Having said that, if it is clear that there is no real possibility or prospect of a winding-up order being made at the hearing by a court applying s.180(1A), it cannot be just for a company to have the threat of a winding-up order hanging over its head like the Sword of Damocles.

No real prospect of Court making winding-up order

28. Having considered the allegations in the Amended Petition and the affirmations, it is clear to me that in the particular circumstances of this case, it is plain and obvious that a court would not make a winding-up order but would grant the alternative relief sought, and that the court would hold the Petitioners to be unreasonable should they insist on the winding-up order.

29. First of all, there is the fact that this Company is solvent and indeed from the accounts exhibited, has been very profitable. The audited accounts for the year ended 1999 show fixed assets worth nearly $24m and net current assets of more than $51m. Even after payment of a dividend of $7m., retained profits carried forward amounted to more than $51m. The Company's accounts for the year 1999-2000 (which have not been audited yet) show a net profit of more than $38m. It was on the basis of these accounts that a validation order was made by the Court in September 2000, from which there was no appeal, and no evidence has been adduced by the Petitioners in this application to dispute the 1st Respondent's evidence that the Company is in a sound financial position.

30. There was a late attempt by counsel for the Petitioners to challenge that position, by saying that there is a dispute as to proprietorship of trademarks. However the value of the trademarks had not been included in the Company's audited accounts in any event, and there was no evidence as to how, and by how much, the Company's solvent position would be affected by the trademarks dispute.

31. It would be unlikely in the extreme for such a successful company to be ordered to be wound-up by the Court when there was an available alternative remedy being sought at the same time by the Petitioners.

32. A winding-up of a solvent company is not in the interests of any of its members. It may result in the sale of the assets at break-up value, without regard to goodwill and the "know-how" of the company.

33. This would particularly be detrimental when the company is producing and promoting a unique product, as in this case, a Chinese medicinal product developed by the 1st Respondent, with the know-how of a small number of individuals, as in this case, a family. It would in the present case be apposite to compare a winding-up order to killing the goose that lay the golden eggs for the entire family.

34. There are also innocent shareholders who would be adversely affected by a winding-up order. In the present case, shareholders who are neither Petitioners nor Respondents together hold 35% of the Company. Even if one were to regard the three children who have been appointed directors in the Petitioners' place as in the 1st Respondent's "camp", there would still be five other innocent shareholders who would be adversely affected by a winding-up order of a very successful and profitable family company.

35. There would be no real prejudice to the Petitioners by a striking-out of the claim for a winding-up order. Counsel for the Petitioners accepts that on their case as disclosed in the Amended Petition, there is no ground or basis which would entitle them to a winding-up order only, but not an order under s.168A.

36. Further there is no substantive benefit they would gain from a winding-up order which they would not from a buy-out order. There is no evidence that a winding-up order is the preferred remedy for any of the Petitioners, and no reasons given for any preference.

37. As to the submission of counsel for the Petitioners that in the absence of an offer for purchase, it could not be said that it would be unreasonable for the Petitioners to seek a winding-up order, the answer is that s.168A provides that a fair value would be assessed under Court order. This is different from the situation in Virdi v Abbey Leisure Ltd and others [1990] BCLC 342, relied upon by counsel for the Petitioners, where the entire petition was dismissed at first instance, the judge holding that the petitioner could be left to his remedy for a buy-out, not under statute, but under the articles only. The decision was overturned on appeal, the Court of Appeal holding that under the articles, the accountant who was to perform the valuation might value the petitioner's shares at a discount, and the petitioner was not acting unreasonably in going to Court to avoid that risk. In the present case, the buy-out order would be pursuant to the provisions of s.168A.

38. In these circumstances, it is clear in my view that there is only a real detriment to the Company and its neutral shareholders, and no proper benefit to the Petitioners, from the continued maintenance in the Amended Petition of a claim for a winding-up order. There is no reason why a successful and profitable company should be subject to a claim for a winding-up order when there is an available alternative remedy being sought by the Petitioners and when there is no real prospect that a winding-up order would be made at the hearing.

Order

39. Accordingly, I would give an order in terms of paragraph 1 of the Summons filed on 27 October 2000.

40. There will also be an order nisi that the Petitioners bear the 1st Respondent's costs of the application.