WINLOK INVESTMENT LTD v. NICELINE CO LTD AND OTHERS

HCCW 423/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS
No.423 of 2002

-----------------------------------------

-----------------------------------------

-----------------------------------

REASONS FOR DECISION

-----------------------------------

1. There was before me on 24 and 27 May 2002 an application by the 2nd Respondent for an order that paragraph 65 and the 1st prayer for relief in the Petition presented against the 1st Respondent ("the Company") be struck out. Paragraph 65 pleaded that "in all the circumstances, it is just and equitable that the Company be wound up". The 1st prayer for relief was that the Company be wound up by the Court.

2. At the end of the hearing, I gave an order striking out paragraph 65 and the 1st prayer for relief. That left the Petitioner with its application for a buy-out order against the 3rd and 4th Respondents under s.168A Companies Ordinance and an application for an injunction against the Company and the 2nd Respondent. The reasons for the order appear below.

The Company

3. The Company was originally in the sole control of the Petitioner, but is now held as to 30% by the Petitioner and as to 70% by the 2nd Respondent. The 2nd Respondent is itself owned equally by the 3rd and 4th Respondents through their respective subsidiaries.

4. The Company is interested in some joint venture companies on the mainland which have been developing land in Beijing ("the Project")

Shareholders Agreement

5. By a Shareholders Agreement dated 14 January 1994 and made between the Petitioner, the 2nd Respondent and the Company, it was agreed that:

- the Company would pay the Petitioner a total sum of $200 million as management fees, of which (a) $100 million was paid at the execution of the Shareholders Agreement (b) $50 million would be paid when consent from the relevant authorities for the sale or pre-sale of the first batch of properties is obtained and (c) $50 million would be paid 6 months thereafter;

- the Company would repay expenses previously incurred by the Petitioner;

- the 2nd Respondent would provide funding, by way of shareholders' loans, for the whole cost of the Project;

- the 2nd Respondent would take over the Petitioner's obligations to pay previous land users;

- the Petitioner would receive 30% of the net profits of the Company from the Project by way of dividends, i.e. after repayment by the Company of shareholders' loans, taxes, etc.

Petition

6. On 18 April 2002, the Petitioner presented a petition alleging that the affairs of the Company were being conducted in a manner unfairly prejudicial to it. The main relief sought was the winding- up of the Company on the just and equitable ground, alternatively an order that the 3rd and 4th Respondents be ordered to purchase the Petitioner's shares in the Company.

Unfairly prejudicial acts

7. As for the unfairly prejudicial acts, the Petitioner has alleged that "inordinate delay in carrying out the works of the Project, whether brought about deliberately, or through inefficiency or lack of diligence, has caused unfair prejudice to the interests of [the Petitioner] in that [it] has so far been unfairly denied the payment of the $100,000,000 management fee" (i.e. the 2nd and 3rd tranches of $50 million each).

8. Due to financial difficulties encountered by the Petitioner as a result, a loan in the sum of $20 million was extended to Utahloy (a shareholder of the Petitioner) by a company associated with the 4th Respondent. The loan was made on the security of the sums receivable under the Shareholders Agreement, and a Deed of Assignment was executed for this purpose.

9. However, subsequently the 2nd Respondent purported to give notice to terminate the Shareholders' Agreement on the ground of the assignment.

10. Further, the Company has taken steps to sell the Project. At an EGM on 22 February 2002 the Company passed a resolution to sell the Project by open tender.

11. At a board meeting on 9 April 2002, the Company's board also resolved to sell the Project.

12. The Petitioner alleges that these resolutions were invalid, as being in breach of a Memorandum of Agreement (which was later superceded by the Shareholders Agreement), the Shareholders Agreement and the Articles of Association.

13. Further, the Petitioner alleges that the terms of the proposed sale were detrimental to its interests, in that (a) the conditions of tender were such that genuine purchasers would not be able to meet them, and (b) the project was under-valued.

Relief

14. At paragraph 65 of the Petition, the Petitioner pleaded that in all the circumstances, it is just and equitable that the Company be wound up. The first relief sought in the prayer was for the winding-up of the Company.

15. The alternative relief sought was that the 3rd and 4th Respondents be ordered to purchase the Petitioner's shares. The third relief was for an injunction that the Company and the 2nd Respondent be restrained from disposing of the Company's interests in the Project. However in the action referred to below, the Petitioner had already withdrawn its attempts to restrain the sale of the Project.

High Court Action 1203/2002

16. The contents of the Petition are similar to those of the Statement of Claim filed on 11 May 2002 by the Petitioner as the plaintiff in High Court Action No. 1203/2002. There were originally 4 defendants in that action, but the only defendant now left is the 2nd Respondent.

17. In paragraph 59 of the Statement of Claim, it is pleaded by the Petitioner that the 2nd Respondent has by its conduct "evinced an intention no longer to be bound by the Shareholders Agreement and it has wrongfully repudiated the same, which repudiation the Plaintiff [the Petitioner] hereby accepts by the issue and service of this Statement of Claim". In the following paragraph, the Petitioner claimed loss and damages in the sum of $100 million management fee and 30% of the profit upon completion of the Project. The claim for specific performance was abandoned.

Application to strike out winding-up relief

18. The 2nd Respondent sought to strike out the remedy of winding-up on the grounds that the Petitioner had sought alternative relief, i.e. the buy-out order, it (the Petitioner) had not expressed a preference for winding-up, there was no legitimate advantage to the Petitioner to wind-up the Company and there was no real prospect of a winding-up order being made.

Evidence

19. There were a number of affirmations filed on behalf of the 2nd Respondent and the Petitioner respectively, including the 2nd affirmation of Wong Choi Ha Dorothy filed on 24 May 2002 and the 3rd affirmation of Chung Sun Keung filed the following day.

Principles

20. It is not disputed that the following principles apply in an application to strike out a prayer for winding-up where alternative buy-out relief is sought:-

(a) although a petition to wind-up is not doomed by alternative relief being sought at the same time, winding-up is a remedy of last resort - it has been likened to a death sentence for a company, compared with a buy-out order, which has been likened to a remedy applied by a doctor during the course of the continuing life of the company (Re a company, ex p Estate Acquisition Ltd [1991] BCLC 154, 161);

(b) a winding-up order would not be granted if the petitioner is acting unreasonably in insisting upon it, instead of pursuing the alternative relief;

(c) the burden of proving that the petitioner is acting unreasonably in pursuing winding-up is on the applicant to strike-out, and a striking-out order would only be made in a plain and obvious case;

(d) the question for the court is whether, assuming the petitioner proves all the allegations in the petition, there is a real possibility or prospect of a winding-up order being made.

21. Applying the above principles, it is plain and obvious that the court would not make a winding-up order in the present case, and the Petitioner would be acting unreasonably in insisting upon it.

22. In the present case, the same facts are relied upon for the application for winding-up as for the application for a buy-out. This provided strong support for the submission of counsel for the 2nd Respondent that since the extent of the court's jurisdiction to order these reliefs is the same, if the court is to order one relief, it would be the buy-out, as winding-up is only the remedy of last resort (Re Guidezone Ltd [2000] 2 BCLC 321, at §179).

23. But more important, in my view, was the fact that there would be no legitimate benefit to the Petitioner, but there would be substantial prejudice to the Company, if the court were to order winding-up, as compared with a buy-out order.

24. If the court winds-up the Company, there would be the risk that this would lead to actions being taken to the Company's detriment in the joint ventures, such as repossession by the relevant authorities. If that were to happen, that would in effect be "killing the goose that laid the golden egg". Although Madam Wong has in her 2nd affirmation said that repossession would not necessarily happen, Mr Chung has deposed to a number of threats of repossession made in January 2002, February 2002 and April 2002 on account of delays. It would appear that the authorities in Beijing only became aware of the petition on 14 May 2002, and it is clear that if, on top of the delays, there was the further cloud of winding-up over the Company's head, that would further strengthen the authorities' hand in carrying out the threats of repossession that it had already made. If that were to happen, that would be to no-one's benefit and would lead to legal and practical complications for liquidators in the liquidation.

25. It is significant that in the submission of counsel for the Petitioner, it was accepted that a winding up would not help the Petitioner, but that its purpose was to stop the 2nd Respondent from profiting from the sale.

26. The wrong that the Petitioner alleges it has suffered or might suffer from such a profit could however be remedied by a buy-out order. Under s.168A, the Petitioner would have the advantage of the court's discretion in fixing the appropriate date for valuation - such that it would be protected to the same extent as if the unfair conduct had not occurred. Thus, if it is suggested that the sale was at an under-value, the Petitioner would be at liberty to claim a price for its shares, not at the sale value, but at the fair market value of the Project.

27. Further it would be noted that in the Petition, the Petitioner itself has claimed that the 3rd and 4th Respondents, not the 2nd Respondent, are liable to purchase its shares. Consequently, on the Petitioner's own case, there is no risk from the 2nd Respondent's financial ability to pay for the Petitioner's shares.

28. Finally, as for the Petitioner's suggestion that it would be able to apply for the appointment of provisional liquidators if it were to maintain its winding-up relief in the Petition, it has to be noted that this was obviously an after-thought. There had not been any previous application to appoint provisional liquidators, even though the allegedly unfairly prejudicial acts had occurred some time prior to the application to strike-out. There is also the further point that usually, the sale of a project as a going concern would be expected to generate better returns than a sale by liquidators, to avoid the risk of a market perception of "fire-sale" prices and additional obligations for liquidators' fees.

Order

29. By reason of the above, I ordered that paragraph 65 and the 1st prayer for relief in the Petition be struck out.

30. I would also give an order nisi that the costs of the application follow the event, i.e. that the Petitioner bear the costs of the 2nd Respondent and the Official Receiver.

31. In respect of the costs order nisi, although the 4th Respondent was served with the summons and attended by its solicitors, it was not a necessary party to the application which was concerned with the winding-up relief, and not the buy-out relief. Accordingly, I do not see why the Petitioner should have to bear its costs and the order nisi would therefore not include the costs of the 4th Respondent.