PARALLEL MEDIA GROUP PLC AND ANOTHER v. WORLD SPORT GROUP (ASIA) LTD

HCA3405/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

ACTION NO.3405 OF 2003

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REASONS FOR DECISION

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1. On 6 November 2003, after hearing summonses brought by the petitioners/plaintiffs in these parallel proceedings, I made an order for the appointment of a manager of the 4th respondent/defendant, with limited powers, pending trial. I now give reasons for my decision.

2. The proceedings are concerned with a dispute between the shareholders in the 4th petitioner/defendant, Asian PGA Tour Limited ("ATL"). It was incorporated in Hong Kong in 1993 as a private company limited by shares. It is involved in the promotion and organisation of professional golf tournaments and the exploitation of commercial rights associated with them, including tour sponsorship rights.

3. The authorised share capital of ATL is 1,005 $1 shares, divided into 500 A shares, 500 B shares and five non-voting deferred shares. The shares are held beneficially as follows. The 1st petitioner/plaintiff ("PMG"), a company registered in the United Kingdom, holds 499 A shares. The 2nd petitioner/plaintiff ("Ciclitira") holds one A share. The 1st respondent/defendant ("WSGA"), a BVI company, holds 499 B shares. The 2nd respondent/defendant ("O'Brien"), who beneficially owns and controls WSGA, owns one B share. PMG and WSGA each hold two non-voting shares.

4. The various interests in ATL have a long and rather complicated history, which it is not necessary to examine here. Their relationship is now governed by a joint venture agreement dated 22 January 2003 (the "JVA"). Each class of shareholders enjoys the right to appoint two directors to the Board of ATL. The class A directors are Ciclitira and one Keld Kristiansen ("Kristiansen"). The class B directors are O'Brien and the 3rd respondent/defendant ("Morgan"). Pursuant to the agreement PMG appointed the company's Financial Controller and WSGA appointed its Chief Operations Officer, which position is now held by Morgan since 28 September 2003. The JVA provides that the Chief Operating Officer shall have all responsibility for the day-to-day management of ATL within the annual budget which is to be agreed by the Board.

5. Basically the function of PMG's side of the business was to find the funds, in the form of commercial sponsorship, for the golf tournaments, and the function of the WSGA side of the business was to run those tournaments. The single most important asset of ATL was its right to exploit the Asian professional Golfers Association Tour, under a Master Rights Agreement with the owner of that right, a Malaysian company called Asian PGA Berhad ("APGA").

6. The joint venture was so constituted that the two sides have pretty much equal powers and therefore the potential for deadlock. Clause 9 of the JVA sets out a number of matters requiring consent of the A and B directors. So consent is required, inter alia, before the company can enter into any contract. As indicated, there is an annual budget. Clause 8 provides, inter alia, that any payment which exceeds the amount budgeted for it by more 10% or US$10,000 requires the signature of one A director and one B director.

7. After the JVA came into force, ATL's business was not good. It seems that the cause of this was largely the effect of the SARS epidemic on travel within Asia. ATL began the year with the directors believing, at a board meeting in February, that it "had a reasonable prospect of being able to pay its debts when they fell due or within a reasonable time thereafter, and could therefore continue to trade". However, according to a balance sheet produced at a board meeting on 29 August 2003, its liabilities apparently exceeded its assets by about US$2.6 million. The A directors say that this is not the true position and it is able to pay its debts as they fall due. Also according to them, ATL was, in May 2003, owing PMG $1.1 million in respect of a loan, and unpaid commissions of approximately US$750,000.00, as well as US$500,000.00 to WSG in respect of a loan.

8. The first main complaint of the A directors is that the B directors obstructed the funding of ATL by refusing to ratify a sponsorship agreement with Carlsberg dated 5 July 2003 which would provide a total income of some US$12.15 million between that date and 1 December 2007. The B directors' position is that while the annual budget required a sponsorship income of US$2.05 million for 2003, in fact the contract would only produce net income of $800,000.00 for that year, and in any event was reviewable annually; there was no guarantee that it would continue. Further they say that the company is insolvent and as a matter of prudence should not enter into further contracts.

9. The second main area of complaint is that according to the A directors, the B directors have been sitting on funds and refusing to pay the company's debts, both in respect of PMG's commissions and to third party creditors. In particular they point to a statutory demand made by one creditor for HK$367,538.99 on 29 August 2003, which was apparently ultimately paid by PMG itself. The B directors' position is, however, that the only cash which the company has in its accounts was received from sponsors of tournaments which are to be staged in the future. It would be imprudent for the board, in the company's present financial position, to approve payment of monies received for a particular golf event to be paid out for anything but debts incurred in connection with that event; what has been called in argument "ring-fencing" of funds.

10. The third main area of complaint relates to the purported termination by AGPA of the Master Rights Agreement on 22 August 2003. This was done following correspondence which seems to indicate that AGPA had become increasingly frustrated by the two factions' attempts to involve it in their disputes, and was based on an allegation of ATL's inability to pay its debts when they fall due. The A directors blame the B directors for this turn of events. Following disagreement of the board as to what steps to take, the A directors have commenced a derivative action in the Malaysian courts and obtained an interlocutory injunction against the purported termination but apparently the B directors take the view that the proper course, which they have attempted to take, is to seek to rebuild the relationship between ATL and AGPA without resorting to litigation.

11. The petitioners claim that because of the conduct of the B directors of which they complain, the board of directors is unable to function and pursue the company's business activities in an orderly manner. This, they say, is conduct unfairly prejudicial to their interests.

12. By a petition dated 11 September 2003 the petitioners applied under section 168A of the Companies Ordinance, Cap.32 for such orders as the Court may deem just and appropriate including but not limited to an order that the 1st and 2nd respondents' interest be sold to the first and second petitioners at an appropriate price, an order for preservation of assets pending the hearing of the petition, and other ancillary reliefs. Parallel proceedings by Writ were commenced on 15 September 2003.

13. By summonses dated 16 September 2003 the petitioners sought an order for the appointment of a Mr Kennic Lai Hang Lui as Chairman with casting vote of a Management Committee, or alternatively that the parties appoint Mr Lui as an additional director with consequential suspension of the JVA and such provisions of the Articles of Association as are inconsistent with such appointment, and certain consequential amendments to the Articles. They also sought orders that the respondents be restrained from diverting or usurping the corporate rights of the 4th respondent, provision for the operation of bank accounts by Mr Lui and an order restraining the other respondents from prosecuting a winding up petition against the 4th respondent.

14. The summonses came before Reyes J ex parte on 15 September and ex parte on notice on 19 September 2003 but the interim reliefs sought were refused. By the time the matter came before me for hearing on 4 November 2003 the interim reliefs sought had changed. Now the petitioners were seeking the appointment of a manager :

(a)	to pay existing and future liabilities to creditors, that is to make such payments as arise in the normal course of ATL's business;
(b)	to agree that an event can be conducted by PMG, at its risk but for the benefit of ATL in circumstances where the class A and class B directors were unable to agree that ATL conduct it; and
(c)	to negotiate and enter into new sponsorship agreements.

15. The petitioners also sought an order relating to the consequently necessary change of bank mandates, as well as the orders sought by summons that the 1st, 2nd and 3rd respondents be restrained from diverting or usurping the 4th respondent's corporate rights, and restrained from presenting a winding-up petition.

16. In the course of the hearing the position changed again. Ultimately, the petitioners abandoned the idea of having the manager given the powers set out at (b) and (c) above. They undertook to make an open-ended interest-free loan, pending the determination of the petition or until 31 December 2004, whichever is the earlier, to cover the liabilities of ATL, in return for having Mr Lui appointed manager with powers to make payment of those liabilities. The respondents however continued to resist the making of such appointment; their position was that the petitioners should put up the money, to be administered in accordance with the JVA, but without the appointment of any manager.

17. Section 168A(2) of the Companies Ordinance provides

" (2) If on any petition under this section the court is of opinion that the company'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, whether or not such conduct consists of an isolated act or a series of acts, the court may, with a view to bringing to an end the matters complained of-

.....

(ba)	appoint a receiver or manager of the whole or a part of a company's property or business and may specify the powers and duties of the receiver or manager and fix his remuneration;

...."

18. For the purpose of interlocutory relief pending trial the petitioners must show that there is at least a serious issue to be tried as to whether the company's affairs are being conducted in a manner unfairly prejudicial to their interests. The court then has to consider whether, if the plaintiff succeeds at trial it would be adequately compensated by damages for any loss caused by the refusal to grant the interlocutory order, and if not, it must then consider whether the balance of convenience favours the making of the order sought.

19. Obviously at this stage I could not decide issues of fact, but having considered the evidence I was satisfied that there was a serious issue to be tried. It appears that over the past several months, the B directors have been failing to agree to pay creditors. Whether their "ring-fencing" approach is right as a matter of prudence will fall to be determined later but on the basis of the affirmation of Mr Andrews, PMG's Finance Director, it does not seem so to me. It is difficult to see how any company can operate if it does not pay its debts when they fall due. This may mean it is necessary to use funds obtained from operation to pay debts incurred for another operation; and so long as there is finance available so that at the end of the day everything is paid, there should be no problem. This no doubt will be seen as too simplistic, but it is difficult to avoid this conclusion especially given that the A directors have been for some time offering increased financial support (which the B directors did not believe they could provide) and have most recently given an undertaking of an open-ended credit facility pending trial. In the light of those offers I could not see the justification for "ring-fencing", and if there was any, it was removed by the petitioners' undertaking.

20. The obvious inference is that if the B directors continue on their present course, the company will fail. If the creditors are not paid, the company will probably have to go into liquidation. If the company does not operate, the Master Rights Agreement, which is its only real asset will obviously lose value; that is, assuming that the Agreement subsists and the Malaysian courts do not pronounce otherwise. There must therefore be a prima facie case of unfair prejudice not only to the petitioners but to the company itself.

21. It seemed to me that if provision was not made for ATL to pay its creditors there was a strong likelihood that by the time the Petition came to trial ATL would be completely defunct. The petitioners' undertaking as to a credit facility, it seemed to me, removes any objection that the balance of convenience does not favour making the order. The petitioners cannot be expected simply to put up money, in the hope that the B directors will join them in signing the cheques to pay off the creditors, in the light of the history of their relations over the past months. Obviously a manager with limited powers of payment is needed. Various objections were taken to the appointment of a manager on the basis that a manager is a sub-species of receiver. However given the restricted powers of the manager it seems to me that those objections should fall away. Certainly the perceived detriment to a company arising from the appointment of a receiver would not arise here. The balance of convenience must therefore favour the making of the order sought.

22. For these reasons, I made the order.