LIAO ZHIQIANG AND OTHERS v. CHINA NORTHERN NEWENERGY INVESTMENT LTD AND ANOTHER

HCCW 120/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 120 OF 2014

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R U L I N G

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1.  On 14 May 2014, the petitioners issued a petition seeking to wind up the 1st respondent, alternatively seeking an order that the 2nd respondent buys out their shares in the 1st respondent. The 2nd respondent is a company incorporated in the British Virgin Islands. When it was first incorporated, it had two shareholders: a Mrs Wu who owned 20 per cent of the company, and Ms Cheung, who owned 80 per cent. For reasons which are not directly relevant, Mrs Wu subsequently transferred her shares to Miss Cheung who is now the sole shareholder and director of the 2nd respondent.

2.  On 21 July 2014, Master Hui gave Miss Cheung leave to represent the company up to the stage of filing evidence in opposition to the petition.  The petition first came on before me on 18 August 2014.  I noted the restriction on the extent to which Ms Cheung could conduct the proceedings on behalf of the 2nd respondent and directed that a case management conference takes place at which the issue of the 2nd respondent having leave to be represented by her for the remainder of the proceedings could be considered further. 

3.  RHC Order 5 rule 6 provides that a body corporate may not carry on any proceedings in the High Court otherwise than by a solicitor unless leave is granted for it to be represented by one of its directors pursuant to sub-rule (2).  An application for such leave has to be made ex parte to a Registrar.  The authorities referred to in paragraph 5/6/2 to the Hong Kong Civil Procedure, Vol 1, 2014, explain that only the Registrar may grant such an order, although sub-rule (5) provides that the order may be revoked by the court at any time. 

4.  I cannot therefore grant an order allowing Ms Cheung to representthe 2nd respondent for the remainder of the proceedings.  However, I think it is useful for me to record some comments concerning my own views on the granting of leave. 

5.  The reason why the Judiciary considers that the restriction contained in Order 5 rule 6 is necessary is explained in paragraph 6 in a reply to a query raised by the Legislative Council Panel on Administration of Justice and Legislature(?) Services.10  Paragraph 6 says this: 

“The Judiciary considers that requiring corporations to obtain leave to be represented by one of its directors in High Court proceedings is justified. A limited company may not be able to compensate those who litigate with them as assets of a limited company’s shareholders and directors are not at risk as to the consequences of litigation. To permit a limited company to pursue proceedings without legal representation, at no financial risk to its shareholders and directors, is inherently unfair to the other parties to the litigation. This would put the other parties to the litigation at a considerable disadvantage because it is most unlikely that anybody will be able to recover costs against a company that cannot afford legal representation. At the root of the company law, insolvent companies should not be permitted and insolvency is the classic ground for a company to be wound up. It is therefore considered appropriate that limited companies should be required to obtain leave to be represented by one of its directors in proceedings in fairness to their potential creditors and other parties to the litigation. It is also highly undesirable for limited companies to act without legal advisors. Reference may be made to Collier v. Hick 109 ER 1290 at 1293; Radford v. Freeway Classics Ltd [1994] 1 BCLC 445 at 448; Silver City International (Holdings) Ltd v SinoLuck Investment Ltd & another CACV 103 or 2004.”

6.  The restrictions contained in Order 5 rule 6 have been the subjectof some criticism.  They are most fully and cogently set out in a Position Paper prepared by the Bar Association dated 20 May 2011.  Various reasons are given by the Bar for finding the Judiciary’s reasons unconvincing.  The second is directed to the position of corporate defendants where it says in paragraph 13:

“...the mere fact that it is impecunious plainly should not be a reason for depriving it of the chance to defend itself; otherwise an impecunious defendant would lose a lawsuit not on the ground of merits but by reason of its poor financial circumstances.”

7.  As a very general statement of principle, this sounds correct.  However, it overlooks the fact that a company is a vehicle created by shareholders, who have chosen to avail themselves of the advantages and protections provided by a company.  The fact that a company is impecunious does not mean that its shareholders are impecunious. 

8.  The present case provides an illustration of the unsatisfactory way in which companies can be used, or it might be more accurately said “misused”. 

9.  Ms Cheung told me that it was Mrs Wu’s husband who had originally proposed using a BVI company as a vehicle through which their proposed investment in the 1st respondent was to be made.  Be that as it may, the position is that the 2nd respondent apparently has no bank account and no accounts.  It is a company incorporated in a jurisdiction which in addition to providing the normal advantages to a business person of a corporate vehicle has the additional attraction, at least in the eyes of some business people, of being less transparent than using a Hong Kong company.

10.  It is clearly unsatisfactory for business people and investors to use such corporate vehicles in order to restrict their liabilities, and then when they find themselves the subject of litigation seek to, in a case like the present, defend a petition in a manner which reduces their potential liability for costs. 

11.  If lack of funds is said to be the reason why an order should be granted under order 5 rule 6(2), it would seem to follow that it should be necessary for the shareholders of the company to demonstrate that they cannot either inject new capital into the company or lend it sums necessary in order to cover its legal costs.

12.  It also seems to me that when dealing with a foreign incorporated company, the Registrar should be even more vigilant than normal to ensure that the shareholders are not unfairly taking advantage of the protection that corporate identity provides to restrict their potential liability for costs. 

13.  It also seems to me as a matter of general approach, that the court is entitled to expect persons who choose to use companies incorporated in jurisdictions such as the BVI to demonstrate that they have conducted the affairs of that company satisfactorily and not simply used it as a convenient way of restricting their liabilities.  To do otherwise would be to encourage the misuse of foreign companies. 

14.  As I said earlier, I am not the appropriate judicial officer to deal with the application that Miss Cheung needs to make.  That will have to be dealt with

by the Registrar who will need evidence addressing the points that I have mentioned and others that may be relevant.