WONG YAU KWAN AND OTHERS v. ZHANG HONGJIE AND OTHERS

HCCW574/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

Companies winding-up proceedings NO. 574 OF 2009

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D E C I S I O N

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1. This is the 1^st respondent’s application’, supported by the 2^nd respondent, to strike out the winding up relief in the amended petition.  The background circumstances may be summarized as follows. 

Background circumstances

2. The 2^nd respondent was incorporated in Hong Kong on 13 February 2007 with an initial capital of HK$10,000 divided into 10,000 ordinary shares of HK$1 each.  The shares were distributed among the 1^st respondent, the 1^st petitioner, the 2^nd petitioner and the 3^rd petitioner as to 34.67%, 13.34%, 10.66% and 2.67% respectively.  The remaining shares were held by 3 other shareholders, who were business partners of the 1^st respondent, and an investor at different percentages. 

3. The 2^nd respondent was formed with the object of pooling together 3 PRC companies, namely LiHeng Weaving Printing and Dyeing Co. Ltd (“LiHeng”), Wenzhou Aochang Synthetic Leather Co. Ltd (“WASL”) and Fujian Huayuan Fibre Co. Ltd (“FHFC”) under a plan to list the 2^nd respondent in the Korean Stock Exchange after its acquisition of the 3 companies. 

4. Prior to the said acquisition, LiHeng was beneficially owned by the 1^st and 2^nd petitioners.  The 1^st respondent was the majority shareholder of WASL and FHFC. 

5. Pursuant to a share transfer agreement dated 15 February 2007, the 2^nd respondent acquired all the shares and equity interest in LiHeng for HK$55 million.  It also acquired all the equity interests in WASL and FHFC for US$3 million and HK$60 million respectively. 

6. On 4 December 2008, the 2^nd respondent was listed on the Korean Stock Exchange with an issued share capital of HK$100 million divided into 2 million shares of a nominal value of HK$5 per share.  The original shareholders hold 70% of the issued share capital : the 1^st respondent owns 24.269%, the 1^st to 3^rd respondents, 9.338%, 7.462% and 1.869% respectively.  The remaining 30% is floated and now held by some 1,700 public and independent shareholders. 

7. It is the 1^st respondent’s case that after the acquisition of LiHeng, the petitioners remain as directors.  It soon transpired that LiHeng had serious financial difficulties.  As at February 2009, its debts amounted to RMB296 million.  Subsequent investigations revealed that the petitioners had committed malpractices against LiHeng, which caused the substantial losses.  The petitioners had further refused to allow the 2^nd respondent access to the books and accounts of LiHeng.  Since it no longer served any purpose to salvage LiHeng, the 2^nd respondent decided to dispose of it. 

8. By an agreement dated 3 August 2009, the 2^nd respondent agreed to sell LiHeng to a third party.  Under a supplemental agreement dated 5 August 2009, the sale had to be approved in a shareholders’ meeting of the 2^nd respondent before 1 October 2009.  Under the sale agreements, the purchaser would take up all the debts of LiHeng and would be entitled to initiate claims for LiHeng against their directors, that is, the petitioners.  Also on 3 August 2009, the 2^nd respondent gave notice to convene the shareholders’ meeting on 25 September 2009. 

9. On 23 September 2009, the petitioners presented this petition.  They alleged that the 1^st respondent had committed various wrongful acts, which were unfairly prejudicial to their interests as shareholders of the 2^nd respondent.  Such wrongful acts included the disposal of LiHeng without their prior consent.  They sought an order for winding up of the 2^nd respondent or alternatively buying out of their shares and damages. 

Discussion

10. The applicable principles are well established.  In Wong Tin Chee & Others v Wong To Yick & Another [2001] 2 HKLRD, Yuen J (as she then was) said :

“The law

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. 

       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 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. 

       That is the position at the hearing of the petition.  However, there is a Practice Direction in England ([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’. 

       The question in the application before me is whether even at the present stage [i.e. the striking out 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. 

       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 s.168A, so there will be little saving in cost or time should the application succeed. 

       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.”

See also Re Four Twenty Co. Ltd, HCCW278/2004, 6 January 2005, [2005] HKEC 115, per Kwan J (as she then was) at para. 5; Re The New China Hong Kong Highway Ltd, HCCW550/2009, 23 February 2010, per Harris J at para. 21. 

11. Further, where the financial position of a company is precarious and questionable, the court would dismiss an application to strike out the winding up relief.  There must be cogent evidence before the court in support of the company’s solvency so as to persuade the court to conclude that there is no real possibility of winding up a solvent company.  See Re Charter View Development Ltd, HCCW45/2006, unreported, 21 December 2006, per Kwan J at paras. 4-12; Re Super Deluxe International Ltd, HCCW186/2001, unreported, 3 June 2003, per Kwan J at paras. 33-39. 

12. The 1^st respondent argued that the 2^nd respondent is a healthy and solvent company.  It is most unreasonable and abusive for the petitioner to insist on a winding up order.  The disputes are between shareholders, which can be redressed by monetary relief.  The petitioner, a discontented shareholder, can always sell his shares in the market.  There is simply no real prospect that a winding up order would be made against the 2^nd respondent, a public listed company. 

13. In support of the 2^nd respondent’s solvency, the 1^st respondent relied heavily on an interim finance report prepared by Shinewing (HK) CPA Limited for the 6 months ended 30 June 2009.  For present purposes, I need not go into details of the report save to note the following points.  It is not an audited account.  The review conducted is based on the documents supplied by the 2^nd respondent’s directors, which are apparently incomplete.  It is recorded in the report that the 2^nd respondent had suffered losses up to nearly RMB73 million in the 1^st half of 2009.  FHFC suffered a net loss of RMB2.79 million for the first 6 months of 2009.  The 2^nd respondent had in breach of its statutory obligations under the Companies Ordinance failed to appoint a statutory auditor.  The accountant in the end heavily qualified the review.  In the circumstances, I do not think much reliance can be placed on that report to show that the 2^nd respondent is solvent. 

14. Further, the 2^nd respondent and its subsidiaries are currently facing no less than 50 lawsuits for money due and owing to third party creditors in the Mainland.  The outstanding amounts totaled some RMB120 million.  It is true that many of the lawsuits are against LiHeng which the 2^nd respondent had disposed of.  But according to a judgment in Hap Tong Ching Kei, Chuan Min Chu Zi No. 211/2009, the court in the Mainland held that under Article 64 of the PRC Companies Law, the 2^nd respondent was liable for the debts of its subsidiaries including LiHeng due to third party creditors.  The Mainland court’s view is confirmed by a legal opinion of a PRC lawyer engaged by the petitioner as PRC law expert but disputed by the expert engaged by the 1^st respondent.  It is of course wholly inappropriate for me to resolve the difference between the two experts at this stage of the proceedings.  I will proceed on the basis that the 2^nd respondent does face real and serious threats of substantial claims in the Mainland.  

15. Looking the matter in the round, I am not satisfied that the 1^st respondent has produced cogent evidence to show that the 2^nd respondent is solvent.

16. I also agree with the petitioners’ contention that the winding up relief is pursued for good reasons.  As noted, the 2^nd respondent has inexplicably failed to appoint a statutory auditor.  The petitioners have also pinpointed certain suspicious accounts and transactions of the 2^nd respondent, including the disposal of LiHeng.  They are of course disputed by the 1^st respondent.  But I think if the court is to find in favour of the petitioners after trial, those suspicious accounts and transactions do call for full proper investigation by the liquidators.  The court may well on that basis order a winding up of the 2^nd respondent. 

17. To complete the discussion, I need to deal with two additional reasons relied on by the petitioners.  They first argued that if the 2^nd respondent is ordered to be wound up, the sale of LiHeng can be avoided.  They would then have a chance of buying back LiHeng from the liquidators.  That is, however, no more than a wish on their part.  It is hardly sufficient to support the winding up relief.  They next argued that they could not dispose of their shares because under the relevant share agreement, there is a lock-up period up to 1 May 2010.  This is not a good reason either because the lock-up period will have definitely expired at the time when the present proceedings are concluded. 

18. The 1^st respondent heavily relied on the fact that the 2^nd respondent is a public listed company and contended that no winding up would be granted against a public listed company.  I fully accept that when considering whether to order a winding up, the court will have to take into account the interests of the public, independent shareholders.  Here, an announcement had already been made at the Korean Stock Exchange.  The independent shareholders are well aware of the current proceedings.  But none has chosen to take part in the proceedings so far.  So it would appear that they are not bothered by the proceedings or the possibility that the 2^nd respondent may be wound up.  Further, by way of the validation order dated 3 December 2009, all trading of the 2^nd respondent’s shares on the Korean Stock Exchange shall not be avoided in the event of a winding up order being made against the 2^nd respondent.  So I think the interests of the public independent shareholders are protected even if the winding up relief remains. 

19. For the above reasons, I do not think the 1^st respondent has made out the case for striking out the winding up relief. 

20. After the hearing and by way of further written submissions, the 1^st respondent argued that the court could “stand over” the prayer for winding up with liberty to apply.  I do not think that is an attractive approach.  If on the evidence before the court, it is not an appropriate case to strike out the winding up relief, there is no justification for such “standing over”. 

Conclusion

21. I will dismiss the 1^st respondent’s application.  I further direct the parties to lodge their submissions on costs within 28 days from today.  I will then dispose of the matters on costs on paper.