Re Hop Cheong Building Products Ltd. (In Liquidation)

HCCW 941/1998

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 941 OF 1998

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REASONS FOR DECISION

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1. This is an application taken out by the liquidators of Hop Cheong Building Products Limited ("the Company") for directions under s. 200(3) of the Companies Ordinance, Cap. 32. The liquidators seek an order that the costs of and occasioned by them in defending the proceedings brought against them and others by a shareholder of the Company in the Intermediate People's Court in Foshan City, Guangdong Province, China be costs of the liquidation and to be taxed and paid out of the Company's assets.

2. The summons, which was issued on 17 September 2002, was served on the 3 shareholders of the Company who also constitute the Committee of Inspection ("COI"). They are Mr So King Kay ("Mr So"), Mr Li Chin Pang Clement ("Mr Li") and Mr Chow Cheong Wai ("Mr Chow"). Mr Chow has, through his solicitors, written to the court to say that he does not oppose the application and does not propose to attend the hearing. Mr So and Mr Li oppose the application and Mr Li has attended the hearing and made submissions. Mr So has not attended the hearing but he has sent a letter to the court with enclosure setting out his reasons of opposition.

3. The application arose in this manner.

4. The Company was wound up by an order of the court on 10 May 1999. On 6 July 1999, Mr Dermot Agnew and Mr Joesph Kin Ching Lo, both of Deloitte Touche Tohmatsu ("Deloittes"), were appointed joint and several liquidators of the Company and Mr So, Mr Li and Mr Chow were appointed members of COI.

5. The Company owned a 90% interest ("the Interest") in a sino-foreign equity joint venture company incorporated in Sanshui, Guangdong Province, known as Sanshui Hupchong Decoration Ceiling Co. Ltd ("the JV Company"). The remaining 10% shareholding was owned by Sanshui Feng Xing Weaving Co. Ltd ("Sanshui Feng Xing"), a company incorporated in Sanshui.

6. In the course of administering the liquidation of the Company, the liquidators came to the view that it was in the best interests of the creditors to dispose of the Interest. The highest offer, in the sum of HK$4.5 million, was received from Fortune Mate (Hong Kong) Ltd ("Fortune Mate"). This offer to purchase the Interest was approved by a meeting of the COI held on 28 January 2000. The resolution passed at that meeting was signed by Mr So, Mr Li and Mr Chow.

7. Subsequent to the meeting of the COI, the solicitors for the liquidators wrote to Sanshui Feng Xing to notify it of the proposed transfer of the Interest to a third party, without identifying the third party, for the consideration of HK$4.5 million and invited Sanshui Feng Xing to exercise its pre-emption right to purchase the Interest under Article 5.2 of the joint venture agreement establishing the JV Company. Sanshui Feng Xing accepted the offer to purchase the Interest at the same price as that offered by Fortune Mate. The Company and Sanshui Feng Xing entered into a share transfer agreement in February 2000 for the sale of the Interest by the Company to Sanshui Feng Xing. One of the liquidators executed the agreement for and on behalf of the Company.

8. On 20 March 2000, a shareholders' meeting of the JV Company was convened ("the Shareholders' Meeting") at which the transfer of the Interest to Sanshui Feng Xing for HK$4.5 million was ratified and resolutions were also passed to remove Mr So as the legal representative and chairman of the board of the JV Company and Mr Li as a director of the JV Company. A representative of the liquidators attended the Shareholders' Meeting on behalf of the Company.

9. On 14 August 2002, the liquidators received a courier package containing a number of documents relating to proceedings brought by Mr So in the Intermediate People's Court in Foshan city ("the Foshan Action"). According to the statement of claim dated 8 March 2002 sent to the liquidators, there are four defendants in the Foshan Action. They are Sanshui Feng Xing, Deloittes, and two brothers of Mr Chow who were appointed in the Shareholders' Meeting to replace Mr So and Mr Li on the board of the JV Company.

10. Although Mr So has named Deloittes as a defendant, the statement of claim only contains allegations against the liquidators and not against Deloittes as a firm.

11. The Foshan Action relates to the sale of the Interest by the Company to Sanshui Feng Xing. Mr So's allegation is that the resolutions passed at the Shareholders' Meeting are invalid as they contravene the laws of the People's Republic of China and the Articles of Association of the JV Company. In short, it is alleged that the individuals who attended the Shareholders' Meeting on behalf of Sanshui Feng Xing and the Company had no right to do so in that the Shareholders' Meeting should have been convened by the board of directors of the JV Company, that the liquidators did not have power to attend and vote at the Shareholders' Meeting, and that it was the "actual investors" in the JV Company being Mr So, Mr Li and Mr Chow who should have the right to attend the Shareholders' Meeting.

12. It is not feasible for the liquidators to seek the approval of the COI in these circumstances that their costs of defending the Foshan Action be paid from the assets of the Company. Hence, an application was made to the court.

13. In the oral submissions of Mr Li and the written submissions of Mr So, they reiterated the grounds for challenging the validity of the resolutions passed at the Shareholders' Meeting, as set out in the statement of claim in the Foshan Action. Whether the resolutions at that meeting were validly passed is a matter to be adjudicated in the Foshan Action. I am not concerned with the merits or otherwise of that action.

14. What I need to decide is whether the liquidators should be allowed to recoup their costs for defending the Foshan Action out of the assets of the Company. The well established general rule is that a liquidator should be entitled to be recouped for his costs from the assets of the company unless it is shown that his conduct has been improper or he has brought an application which was totally misconceived and doomed to failure or it would be unjust to make such an order (De-Etco International Ltd (in liquidation) v Desirable Enterprise Co. Ltd and Ors [1993] 1 HKC 251 at 257 E-F). It is clear from the statement of claim in the Foshan Action that there are no allegations of misconduct, negligence or beach of duties made against the liquidators personally. The actions taken by the liquidators in relation to the sale of the Interest were taken for and on behalf of the Company in the course of the administration of the liquidation.

15. I am not persuaded there is anything in the materials before me to take this case out of the general rule that the liquidators should be permitted to recoup their costs out of the assets of the Company. I have therefore made an order that the costs of and occasioned by the liquidators in the Foshan Action be costs of the liquidation and to be taxed and paid out of the Company's assets, upon the undertaking of the liquidators to account to the estate of the Company for any amounts that may be recovered in the Foshan Action.