LEE SHUN CHUNG v. LI KAM CHUEN AND ANOTHER

HCCW 572/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 572 OF 2005

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REASONS   FOR   JUDGMENT

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Introduction

1.  At the end of the hearing of the 1^st respondent’s application to strike out the petition herein, I made an order in terms of that application.  The following are the reasons for the Judgment.

2.  The petition was presented on 26 July 2005.  It was said to have been presented pursuant to ss. 168A(1) and 177(1)(f), Companies Ordinance (Cap. 32).  Those provisions read:-

“Any member of a [company] who complains that the affairs of the [company] 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 himself) … may make an application to the court by petition for an order under this section”;

“A company may be wound up by the court if … the court is of opinion that it is just and equitable that the company should be wound up”.

3.  The petition was based on several grounds.  By the time of the hearing on 5 December 2005, it was in gist based on two:-

(a)	the affairs of the company have been conducted in a manner unfairly prejudicial to the petitioner’s interests in that the 1st respondent (“Li”) has failed or refused to pay rent to the petitioner (“Lee”) or the company;
(b)	further or alternatively, the foundation of cooperation between Lee and Li has totally failed in that it is highly likely Li would refuse to attend any meeting or agree to the company taking action for the said non-payment of rent; there was accordingly deadlock in the management of the company.

4.  The background facts leading to the petition are largely undisputed and can be summarised as follows.

5.  Lee and Li were the only 2 partners of a partnership business known as “Che Hing Paper Wares Factory” (“Che Hing”).  Whatever might have been the reason(s), the partnership was terminated on 28 August 2002.  Che Hing became Li’s sole proprietorship business since.

6.  The company was incorporated with the common intention on the part of Lee and Li for it to hold a unit in an industrial building which was to be occupied and used by Che Hing.  That took place when the company became the registered owner of such a unit (“the suit property”) on 28 December 1998 (some 4 years before the termination of the partnership).  Che Hing used to pay the company rent for occupying and using the suit property.  Similar to Che Hing, Lee and Li are the company’s only 2 shareholders and directors.

7.  According to Lee, the parties entered into an agreement at the same time as the termination of the partnership.  The petition stated that:-

“… [Li] agreed to pay a monthly sum of HK$10,500 to [Lee] in consideration of [Lee’s] consent to [Li’s] continued use and occupation of [the suit property] for [Che Hing] … ” (para. 11).

The above averment was in effect repeated in the affirmation in support of the petition.

8.  Hence, since 28 August 2002 (about 3 years before the date of the petition), Lee has been receiving HK$10,500 per month from Li whereas the company has received nothing.

9.  The petition alleged that Li ceased paying that monthly sum to Lee since August 2004 (about 1 year before the date of the petition).  Lee contended this act constituted the unfairly prejudicial conduct on which the petition is grounded.

10.  Li submitted at the hearing such conduct can only be actionable by Lee in his personal capacity because the conduct could not properly be regarded as conduct related to “the affairs of the [company]” as required by s. 168A(1), Cap. 32.

11.  Lee submitted otherwise.  In short, Lee argued that the consideration he has given in return for the monthly sum of HK$10,500 was related to his right as a shareholder, namely, he promised not to call for a general meeting or otherwise procure the company to take action against Li for occupying and using the suit property.  As such, Li’s conduct of not paying the said monthly sum can be regarded as related to “the affairs of the [company]”.

12.  I do not consider Lee’s argument to have substance.  The said monthly sum was never payable to the company under the agreement.  Lee’s promise to Li was related to his personal right as a shareholder.  How a shareholder of a company exercises his right founded upon the shares is something personal to him, and cannot normally be regarded as part of the company’s affairs.

13.  Lee then argued that the agreement between him and Li had effectively deprived the company of its rental income.  Lee said that he has thereby suffered loss because his chance of receiving dividends was reduced or even lost as a result.  However, even if this was true, it was brought about by an agreement in which Lee was a party; Lee has not come with clean hands and cannot complain: see for example Re Shiu Fook Co. Ltd. [1989] 2 HKC 342, 349; Ebrahimi v. Westbourne Galleries [1973] AC 360, 387.

14.  Since the last-mentioned argument has been rejected for the reason stated above, there is no need to consider the so-called “reflective loss principle”: see Re Landune International Ltd., unrep., HCCW 1178/2004 (14 July 2005), para. 36 to 37; Johnson v. Gore Wood & Co. [2002] 2 AC 1, 35-36 and 62-67.

15.  In relation to the other ground of petition which was still relied upon by Lee at the time of hearing (the deadlock in management ground), I have taken into account the following matters:-

(1)	it is undisputed Lee has not called for any meeting; nor has the question of non-payment of rent or re-possession of the suit property been discussed at any meeting or put to vote;
(2)	Li has deposed that he was willing and able to attend any meeting for such purpose.  There is no evidence to contradict this;
(3)	since August 2004, Li has paid the said monthly sum directly into the company’s bank account.

16.  In these circumstances, I agree with Li that:-

(a)	the winding-up of a company is a remedy of last resort; fair internal procedures must be gone through even though Lee suspects that he would not be treated fairly: Butterworths Hong Kong Company Law Handbook 2004 Edition, para. 177.11;
(b)	there is insufficient evidence of a deadlock.

17.  Lee has sensibly not relied on the other grounds set out in the petition.  Accordingly, there is no need to discuss them herein.