KAM KWAN SING v. KAM KWAN LAI AND OTHERS

HCCW 154/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 154 OF 2010

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D E C I S I O N

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Introduction

1.  This is the application of the 1^st and 2^nd respondents (“the respondents”) to strike out the parts of the petition which seek the winding up of the 5^th respondent (“Yung Kee Holdings”).

Background

2.  The background leading to this application is largely undisputed and can be summarised as follows.

3.  In the 1940’s, the father of the petitioner and the 1^st respondent (“KL Kam”) founded a Chinese restaurant in the Central District.  In time, the restaurant became of fame and is now located in a building in Central owned by a related company.

4.  After the petitioner and KL Kam came of age, they were brought into the management of the restaurant at different stages.  When the father passed away in 2004, they became in effect the only individuals managing the restaurant (their younger brother, who later passed away in 2007, took up a role in the kitchen).

5.  Yung Kee Holdings began to be used as a holding company of the restaurant business in 1994 (see also para. 18 and 31 below).  The precise shareholdings of the petitioner and KL Kam in Yung Kee Holdings are disputed, but it is sufficient for present purposes to treat them as equal shareholders.

The Petition

6.  The petitioner commenced this petition in March 2010 relying on s. 168A, Companies Ordinance (Cap. 32) (unfair prejudice) and s. 327(3)(c), Cap. 32 (just and equitable winding up).  Various misconduct on the respondents’ part has been set forth in the petition, but this is irrelevant for present purposes.

7.  It is undisputed the primary relief sought is for the petitioner’s shares in Yung Kee Holdings to be purchased by KL Kam.  The winding up of Yung Kee Holdings is sought by way of alternative relief.  The petition also seeks damages, but this is also irrelevant for present purposes.

This Application

8.  This application is brought on the following grounds.

9.  Yung Kee Holdings is solvent and has significant assets.  In particular, the restaurant business is trading profitably with good business prospects.  It will not be in the interest of its members to wind up Yung Kee Holdings.

10.  The petitioner’s primary case is for his shares to be bought-out.  He is not seeking to be placed in control of Yung Kee Holdings, or the restaurant business, to the exclusion of KL Kam.

11.  It is incumbent on the petitioner to adduce evidence to show why a winding up order is the preferred remedy.  He has not done so.

12.  For the above reasons, there is no real prospect of a winding up order being made.

13.  The restaurant business has been prejudiced by the commencement of the petition which includes a relief seeking its winding up.  It will continue to be prejudiced if the relief is not struck out.

14.  Further or in the alternative to para. 9 to 13 above, the petitioner is acting unreasonably in including the winding up relief in the petition.

15.  These grounds will be dealt with below.

(a)   The Restaurant is a Profitable and Solvent Concern

16.  The respondents argue that, in the absence of good reasons for doing so, the courts will not wind up a company which is a solvent and profitable going-concern: Re Wong To Yick Wood Lock Ointment Ltd. [2001] 1 HKC 618, 624D-F and G-H, [2003] 1 HKC 484, para. 7, 8, 19 and 20.

17.  The petitioner does not dispute the above principle.  However, he points out the underlying reason for the principle is that the winding up of such a company, especially when it is one with valuable goodwill and “know-how” (such as the secret formula of a medicated ointment), is that it may result in the sale of its assets at mere breakup value, without regard to the value of the goodwill and “know-how”.

18.  But in this application, Yung Kee Holdings is not the company which directly owns or operates the restaurant business; rather, it is a company which in effect holds 80% of the shares of the company which does (namely, Yung Kee Restaurant Group Ltd.”) (“the YKR shares”).

19.  The winding up of such a holding company can result in the sale of the YKR shares, either to KL Kam or to other parties.  But, as a matter of law,  the restaurant business itself will not be wound up, nor will it be disturbed.

20.  Indeed, (so the petitioner argues) a sale to other parties upon the winding up of Yung Kee Holdings (if and when it is wound up) may be to the greater benefit of the petitioner and/or all the existing shareholders.  This is because, in view of the restaurant’s reputation (and/or the ownership of a centrally-located building), more than a few famous and/or sizeable food and/or hotel operators could be interested in paying an even higher price than what the respondents may be willing to pay.

(b)   Winding Up is Not the Primary Relief Sought

21.  The petitioner accepts that winding up is only sought as an alternative relief.  However, this is not a plain and obvious case where the court can conclude at this stage he should be restricted to relief of a personal nature only (namely, the relief of seeking a buy-out by KL Kam of his shares in Yung Kee Holdings): see, for example, Re Kinong Group Ltd. [1999] 4 HKC 100, 104-5; Re Prudential Enterprise Ltd. [2002] 1 HKLRD 267, para. 14.

22.  In this connection, the petitioner relies on the following matters.

23.  The assets held by Yung Kee Holdings through the share-holdings of its various “subsidiaries” are very substantial in value:-

(a) the total cash deposits amounted to about $882 million at the end of February 2010;

(b)    the restaurant building located in Central and the godown units are unencumbered and must be worth substantial sums (the petitioner mentioned sums in the billions);

(c) according to the audited accounts of Yung Kee Restaurant Group Ltd. for the financial year ending April 2009, the restaurant’s net profits were about $51 million (about $54.89 million in 2008) and its net assets were about $126.9 million.

24.  In light of the above, one must treat with caution KL Kam’s bold but imprecise assertion that he is:-

“willing and able to purchase the Petitioner’s shares, subject to the finalization of arrangements as to the basis of valuation and the mechanism through which the buy-out is to be effected”: para. 5, KL Kam’s 2^nd affirmation.

This is especially so when KL Kam has failed to show he has, and will continue to have, the necessary financial means to do so, despite queries raised by the petitioner, both in pre-action correspondence and in the affirmation evidence filed in this application.

(c)   Prejudice to the Restaurant Business

25.  The respondents contend that the restaurant business has been prejudiced by the winding up relief sought in the petition:-

(1) the media has mis-reported the relief as the primary relief sought in the petition;

(2) some of the restaurant’s patrons, staff and creditors also labour under the impression the restaurant business will be closed down;

(3) as a result, staff morale has suffered and customer confidence in future bookings for banquets or functions has been affected;

(4) detriment has thus been caused to the restaurant business.

26.  The petitioner denies the above contentions:-

(a) any mis-reporting by the media has subsequently been rectified;

(b)    the business data from March 2010 to the date of hearing do not show any detectable adverse affect on either staff turnover or the restaurant business;

(c) the petitioner’s impression, based on his daily attendance at the restaurant premises, is that any concern of the patrons, staff or creditors is far from widespread, and likely to be temporary.

(d)   Is the Petitioner Acting Reasonably?

27.  Although the respondents have not expressly said so, the allegation that the petitioner is acting unreasonably in seeking the winding up relief must have been premised on the grounds set out in para. 9 to 13, 16 and 25 above.

Conclusion

28.  For the reasons given by the petitioner (summarised in para. 17 to 24 and 26 above), I agree with the petitioner and disagree with the respondents.

29.  Consequently, I do not find the respondents have been able to establish any of the grounds put forth in support of this application (see para. 27 above).  This is not a plain and obvious case the winding up relief will fail: Re Four Twenty Co. Ltd., HCCW 278/2004(6 January 2005), para. 5(2) and (3); Re Mahr China Ltd. [2008] 4 HKLRD 141, para. 15 and 16.

30.  This application is therefore dismissed.

Other Matters

31.  The respondents mentioned during the hearing Yung Kee Holdings effectively only holds 80% of the shares of Yung Kee Restaurant Group Ltd.  Even if Yung Kee Holdings is wound up, the liquidator will not be able to sell the entire restaurant business.

32.  I also agree with the petitioner that any such difficulty (which may not be real) is ultimately a matter of details for the liquidator and/or the potential purchaser of the YKR shares to consider, and cannot advance the respondents’ case in this application.

Costs Order

33.  The parties agree the usual rule that costs should follow the event is applicable.  There will accordingly be a costs order that the costs of this application be paid by the respondents.

34.  Having considered RHC Ord. 62 r. 9A(1), this appears to be a case appropriate for summary assessment of costs to be directed.  For such purpose:-

(1) the petitioner be at liberty to lodge with court and serve a statement of costs within 7 days;

(2) the respondents be at liberty to lodge with court and serve a statement of objections within 7 days thereafter.