RE SAINT POWER INDUSTRIAL LTD

HCCW 1309/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 1309 OF 2002

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J U D G M E N T

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1. I have before me an application for the appointment of provisional liquidators in respect of Saint Power Industrial Limited. The petition was presented on 28 November 2002. It is a creditor's petition based on loans which the Petitioner says he extended to the Company during a period of some ten years between 1992 and 2002.

2. The Petitioner is also a shareholder of the Company holding some 49% of its issued shares. The other 51% is held by a Madam Shum Siu Han. Apart from being the only two shareholders, the Petitioner and Madam Shum are the only directors of the Company.

3. The Petition first came on for hearing on 10 February 2003 when Kwan J ordered the Company to file and serve its evidence in opposition to the petition within three weeks, by 3 March 2003. The Company on that occasion was represented by the same solicitors and counsel who appeared before me today.

4. On 20 February 2003, the Petitioner took out the summons which is before me today, seeking the appointment of provisional liquidators. At the same time, its solicitors wrote to the Company's solicitors suggesting that any evidence in opposition to the application for appointment of provisional liquidators be filed by 3 March (the same as the date that had been fixed or directed for the filing of the evidence in opposition to the winding-up petition) so that the Petitioner could then file a response by the end of the week in order to enable the hearing fixed for today to be effective.

5. The Petitioner's affirmation in support of the application refers to a number of matters which he says cause him to be concerned as to the preservation of the Company's assets. The Company's main assets appear to be two subsidiary companies, both of which are mainland companies incorporated on the Mainland as wholly foreign-owned enterprises ("WFOE"s). On of them is in Panyu and the other in Shanghai. The Shanghai WFOE appears to be the more important on the two subsidiaries.

6. The Petitioner claims that he has been excluded from the management of the Shanghai WFOE; that a third director, believed to be Madam Shum's mother, has apparently been appointed to the Shanghai WFOE without his knowledge or involvement; that there were minutes of a board meeting which he said he did not attend, to the business of which he did not agree and in respect of which his signature is said to have been forged. There was also reference to a loan which had, it was said, been taken without board approval and of denial of access to financial information in respect of the Shanghai WFOE.

7. No response was made by the Company to this affirmation, or indeed to the letter of the Petitioner's solicitors suggesting the timetable for filing of evidence, until 7 March 2003, following a reminder from the Plaintiff's solicitors on 4 March 2003, in which they observed that no evidence had been filed and put down a marker suggesting that they would take it that no opposition would be forthcoming.

8. On 7 March 2003, those representing the Company today said, in a letter to the Petitioner's solicitors, that they were preparing the Company's evidence. Nor was there any evidence filed in opposition to the winding-up petition by 3 March as had been directed by Kwan J. In fact, evidence was not filed until either late on Tuesday or perhaps some time yesterday. That evidence suggests that the loans which are relied upon are disputed. It is suggested that the contributions for funds by Mr Hsu were more in the form of investments rather than loans notwithstanding that they were booked in the Company's books as loans, and that the reason for this was that it was more convenient to use the Company as the intermediate vehicle for holding the interests of Mr Hsu and Madam Shum in the WFOEs which were intended to be the true investment vehicles.

9. It is said that it was agreed that these loans although booked as shareholder's loans would not, in fact, be repayable and represented capital contributions. The affirmation also seeks to refute the allegations which the Petitioner has made and relied on as showing jeopardy to the assets of the Company.

10. This morning, a further complication arose. On 10 March 2002, this Monday, the solicitors for the Petitioner enquired of those acting for the Company whether they had, in fact, authority to do so. In the course of yesterday, a supplemental skeleton argument from the Petitioner's representatives indicated that the question of authority would be raised as a preliminary point at today's hearing.

11. This morning, Ms Ismail submitted on behalf of the Petitioner that there could not be any proper authorization for those purporting to act on behalf of the Company, in fact, to act for the Company, as there could not have been any proper resolution instructing the solicitors to act for the Company. This was so because Mr Hsu, being one of the only two directors, had not participated in any board meeting at which such authority was conferred.

12. Although there was initially a suggestion that there might be some form of estoppel arising from the fact that the point had not been taken when the same solicitors and counsel appeared before Kwan J on 10 February 2002, I did not understand this point to be seriously pursued nor in my view could it have been, since the question of authority is one which cannot be waived and is a matter which the court could raise on its own initiative.

13. It appears that those appearing for the Company now effectively concede that there is not yet authority entitling them to act for the Company. But it is suggested that they could get it by a general meeting of shareholders since the board is deadlocked. Mr Wong, appearing ostensibly on behalf of the Company, asked me to order that a meeting of the shareholders of the Company be held pursuant to s. 114B of the Companies Ordinance. That provision gives the court power to order the holding of a general meeting of the Company where it is impractical for the Company to convene one.

14. Ms Ismail objected to this course on the basis that no notice had been given of such an application, which was not supported by summons or affidavit. She also submitted that it could not be considered that the outcome of such meeting or the outcome of any attempts to convene such a meeting would be a foregone conclusion. She referred me to certain passages in the evidence indicating that there might have been some agreement for the adjustment of the shareholdings in the Company. The validity or binding nature of this agreement appears, however, to be disputed.

15. Ms Ismail also pointed out that quite apart from this court having to be satisfied that it was impracticable to convene a meeting, it was also necessary for the court to exercise its discretion as to whether or not a meeting should be convened. It seems to me that in a situation such this, where, although the petition appears on the face of it to be a creditor's petition, there are matters that indicate that there is some discussion between the shareholders, and that the Company is in a situation of deadlock, it may be open to argument whether it would be appropriate in that situation to order a shareholders' meeting to be convened for the purpose of authorizing the Company to defend the petition. It may be, although I make no final ruling on the matter, and would not wish to fetter the hands of any judge who may subsequently hear the matter, that having regard to the fact that there seems to be a serious dispute between the two shareholders, that it might be thought inappropriate for the Company's funds, which would appear in any event to be fairly limited, to be expended in defence of such a petition. It may be that an analogy might be more closely drawn with the situation in a just and equitable winding-up, or s. 168A petition in which the normal course is for the Company to be joined as a nominal Defendant and where the funding of the litigation is left to the two camps of shareholders.

16. Mr Wong urged me to have regard to what he was described as the practical realities of the situation. But it seems to me that, on the material which I have seen so far, the position is far from clear and it would be desirable to have the issue of whether or not a meeting of the Company should be convened under s. 114B to be properly dealt with if it is to be pursued.

17. In relation to the question of deadlock I have just mentioned, Ms Ismail relied on Art. 15(11) of the Company's Articles of Association, which appear to be apt to cover the appointment of legal representatives, and suggested that the power to do so lies with the board. Mr Wong submitted that on the basis of Art. 82 of Table A, it was clear that the Company in general meeting could override the board if necessary in this respect. It was submitted that the terms of Art. 82 of Table A were clear and that there could be no reasonable interpretation to the contrary. With respect, I do not agree.

18. In the most recent edition of GoreBrowne on Companies, at paragraph 26.4, the comment is made that the old former English article under the English Companies Act 1948 that is equivalent to Art. 82 of our Table A (Art. 80 of the English Table A) is in fairly obscure terms. However, one thing that appears to be settled is that where the word 'regulations' appears in that Article it means it has been treated as meaning 'articles'. So interpreted, it would appear that Art. 82 of Table simply provides that the shareholders' functions are as given to them by the articles, or as they may change the articles to provide. That said however, it also appears from Gore-Browne that, where the board is deadlocked cannot or will not act, the shareholders may step in to take decisions which otherwise would properly be within the province of the board.

19. For these reasons, it seems to me that it may be possible if those on the Company's side think it appropriate to do so, to seek a direction from the court that a general meeting be convened pursuant to

s. 114B of the Ordinance. However, for the reasons which I have given, I do not think that it would be appropriate for me to give such a direction today, without a proper application and evidence going first, to the practicability of convening a meeting, and secondly, to the manner in which the court should exercise its discretion in that regard.

20. I would also point out that one should not overlook the fact that it may well be possible for Madam Shum to oppose the petition in her own capacity, either as a creditor or perhaps as a contributory. If she were to do so, it would no doubt be equally open to her to oppose the appointment of provisional liquidators. I therefore conclude, as things stand, that it does not appear that those claiming to act for the Company today have the authority to do so.

21. The question then arises as to what to do with the application for the appointment of provisional liquidators. I have been urged by Ms Ismail to go ahead with it, and to ignore the evidence filed, whether on behalf of Madam Shum or the Company, as the case may be, and to make a determination on the basis of the uncontradicted evidence of the Petitioner.

22. However, I do not think it would be right to do that. It is clear that there are points to be put forward against the appointment of the provisional liquidator, whether by the Company or by Madam Shum. I do not think it would be appropriate at this stage for me to pass judgment on any of these points, other than to say that there are clearly matters that need to be dealt with.

23. I also bear in mind that, although the application for a provisional liquidator to be appointed is something that should ordinarily be dealt with expeditiously, it is fair to say in this case that the matters that have been relied upon by the Petitioner seem to have been known to the Petitioner at about the time that the Petition was presented, nearly some two months before the application was actually taken out. It was not clear whether these matters were known to the Petitioner earlier than the filing of the Petition but in any case it seems that they were aware of these matters or substantially all of these matters by that point. So far as I can see, no explanation for the delay in making the application for the appointment of a provisional liquidator has been put forward in the evidence.

24. In those circumstances, it seems to me that it would not be inappropriate to adjourn the matter for further consideration at a later date. It seems also that it would, in any event, have been necessary to have an adjournment for some period (whether substantial or short) because of the recent filing of evidence in opposition to the application, to which I understand that the Petitioner would wish to reply.

25. For those reasons, it seems to me that it would be inappropriate to seek to dispose of the application today without giving those who oppose the appointment of a provisional liquidator a chance to put their house in order. I would, therefore, propose to adjourn today's hearing to a date to be fixed. In the meantime, those currently on the record for the Company can take such steps as they think appropriate to rectify their position, and I shall hear submissions as to the costs of today.