LUO XING JUAN ANGELA v. THE ESTATE OF HUI SHUI SEE, WILLY, DECEASED AND OTHERS

HCCW 568/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 568 OF 2002

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D E C I S I O N

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1.  This is a summons issued by the 1^st to 3^rd respondents herein on 31 May 2005 for an order that the winding-up order against the 3^rd respondent, Glory Rise Limited (“the Company”) be stayed pending an appeal to the Court of Appeal in CACV No. 381 of 2004.  The application is made pursuant to section 209 of the Companies Ordinance, Cap. 32.  Suffice to say that of the three respondents, I am satisfied that the 2^nd respondent, as the registered holder of one share in the Company, has locus to make this application.

2.  The application is opposed by the petitioner, it does not have the support of the Official Receiver either.  The parties have filed evidence and the Official Receiver has filed a report in this application.

3.  The winding-up order was made on 17 November 2004 on a petition brought by Luo Xing Juan Angela (“Ms Luo” or “the petitioner”) to wind up the Company on the just and equitable ground and for relief under section 168A.  The winding-up proceedings were ordered to be heard at the same time as HCA No. 285 of 2003.  The Company was the plaintiff in the High Court Action and Ms Luo was the defendant.  I also gave judgment in favour of Ms Luo in the High Court Action.  The claim of the Company in trespass was dismissed, and it was adjudged that Ms Luo is not liable to pay mesne profits, although she remains liable to reimburse the Company for management fees, rates and government rent paid on her behalf.

4.  On 18 December 2004, the 1^st to 3^rd respondents in the winding-up proceedings and the Company in the High Court Action filed a Notice of Appeal against the judgment. This is CACV No. 381 of 2004.

5.  It should be readily apparent to the legal advisers for the appellants that the appeal lodged by the Company in the High Court Action is improper.  This was pointed out to them by the Official Receiver in a letter dated 6 January 2005, as once a winding-up order was made, although the right to appeal the winding-up order would be retained by the board of directors, the Company would have no right to proceed with the appeal in the High Court Action without the consent of the Official Receiver who is the provisional liquidator.  The Official Receiver also indicated that he will give consent to an appeal to be brought in the name of the Company in the High Court Action, if he is satisfied that the appeal is not without merits and he is fully indemnified as to costs.  Sufficient funds should be provided to the Official Receiver to guard against an adverse costs order.  Alternatively, if the 2^nd respondent is to give an undertaking to bear all costs, this should be fortified by a bank guarantee.

6.  Later, having considered the judgment and the grounds of appeal, the Official Receiver expressed the view that although he is not convinced on the merits, he accepted that it is difficult to say the appeal is hopeless.  The question of merits of the appeal has not been further pursued by the Official Receiver.  For the purpose of the present application, I am prepared to say there are arguable grounds of appeal.

7.  The respondents’ solicitors, the Official Receiver and the petitioner’s solicitors had entered into protracted correspondence between January and May 2005.  There was argument on the undertakings to be given and the conditions upon which a stay is to be granted.  In the course of this, the respondents changed their solicitors.  Nothing came of the negotiations in the end.  The petitioner issued a summons in the High Court Action on 19 April 2005 to strike out the Notice of Appeal insofar as this relates to the appeal in the High Court Action, asserting that the appeal was brought without authority.  This was adjourned for argument.  The petitioner refused to consent to a stay of the winding-up order on any terms. 

8.  The respondents did not give the Official Receiver a full indemnity as to costs, by putting the Official Receiver in funds or by fortifying the 2^nd respondent’s undertaking with a bank guarantee.  In the latest affirmation of the 2^nd respondent on 21 September 2005, she stated that she will give an undertaking to be personally liable for costs incurred by the Company in the appeal and provide “reasonable and suitable” fortification if required by the court or the Official Receiver.  At the hearing today, Mr Lin for the respondents provided a cash deposit of about HK$0.5 million that the 2^nd respondent is prepared to put up in respect of the costs to be incurred in the appeal. 

9.  The Official Receiver initially had no objection to a stay, on the basis that the petitioner and all the other creditors of the Company would consent.  When the petitioner no longer agrees to a stay, the Official Receiver withdraws his support.

10.  The Company has only one asset, the landed property in Sai Kung that is the subject of litigation.  Other than holding this property, it has no business activity.

11.  According to the respondents, there are two major creditors of the Company, the estate of Hui Shui See Willy deceased, the 1^st respondent herein, and Inter-Trade Agencies Limited (“Inter-Trade”).  Together they are owed about HK$9 million by the Company.  The property is worth about HK$6 million, so the Company is clearly insolvent.  I should also mention that in the judgment, it was found that the deceased had assigned to the petitioner 35% of the loans he provided or caused to be provided to the Company.

12.  The 2^nd respondent procured the consent of the two major creditors to a stay of the winding-up order.  She controls the affairs of Inter-Trade and she is applying or has applied for letters of administration of the estate of the deceased to be granted to her. 

13.  There is no dispute that the onus is on the 2nd respondent to make out a sufficient case for a stay of the winding-up order under section  209.  It is also not in dispute that as a matter of practice, the court would not stay a winding-up order pending an appeal.

14.  The 2^nd respondent said that it is appropriate to grant a stay of the winding-up order pending appeal, as otherwise the Company’s appeal in the High Court Action would be rendered nugatory.  I fail to see why that is the case or why the Company’s appeal in the High Court Action may be stifled if a stay were not granted.  The Official Receiver has indicated in correspondence that he is prepared to give his consent for an appeal to be brought in the Company’s name, provided that he has full indemnity to cover any adverse costs order that might be made.   The 2^nd respondent should not have difficulty in complying with this.  If she is prepared to give an undertaking as stated in her latest affirmation and she is prepared to give reasonable and suitable fortification to her undertaking, there is no reason why she should not or could not provide such fortification.  This ground for seeking a stay falls away.

15.  Further, as submitted by the Official Receiver, whether a stay is granted or not, the directors must provide security for costs of both the appeal in the winding-up proceedings and the appeal in the High Court Action at some stage, as in the absence of security for costs, the costs of the Company in the event that the appeal is not successful would be borne by the Company and payable out of its assets, thus reducing what is available to be distributed to the petitioner on liquidation.  So obtaining a stay would not mean that the directors would not be responsible for security for costs, if they are minded to pursue the appeal.  These matters were fully ventilated in correspondence, the 2^nd respondent would appear to be unwilling to provide any security for costs of the appeal.

16.  It was also suggested in the 2^nd respondent’s affirmation that if a stay were not granted, and if the Sai Kung property should be sold by the Official Receiver before the appeal comes to be heard, this would render the appeal nugatory.  The Official Receiver has not taken any major steps in the liquidation pending the appeal against the winding-up order.  Ms Luo also said that if the appeal should proceed expeditiously, she will not press the Official Receiver for a sale of the property.  This does not appear to be a sufficient reason for a stay to be granted pending an appeal.

17.  The Official Receiver and the petitioner have advanced reasons why a stay should not be granted.

18.  They said that a stay should not be granted where a winding-up order was made on the basis that the affairs of the Company had been conducted in a manner unfairly prejudicial to the petitioner’s interest and where there is deep mistrust and major disagreement between the petitioner and those who controlled the Company, as the effect of a stay is that the management of the Company would revert to the directors.  Mr Au for the petitioner pointed out various matters as requiring investigation, namely, the increase of the debt owed by the Company to Inter-Trade of about HK$900,000.00 odd, why substantial legal costs had been incurred on behalf of the Company in the litigation which is a dispute between the shareholders, and whether the loan purportedly advanced to the Company by Inter-Trade was not in fact advanced by the deceased as contended by the 2^nd respondent.  He submitted that it is important that all these matters should be investigated by the Official Receiver.  Even though the Official Receiver does not think a stay would prejudice his investigation, and there is no apparent urgency in proceeding with the winding up, the petitioner contended that it is undesirable and inappropriate that the directors should resume control where there are unresolved matters concerning the management.  This is where the deep mistrust and disagreement between the parties come in.  I think there is validity in these arguments of the Official Receiver and the petitioner that in the absence of the agreement of the aggrieved minority shareholder, it would not be appropriate to grant a stay pending an appeal in this situation. 

19.  I therefore dismiss the summons.  The 1^st and 2^nd  respondents are to pay the costs of the petitioner and the Official Receiver in this application.