XCHRX WAH YAN PROPERTY LTD. v. IDEATION STRATEGIC INVESTMENT LTD. and Another

1997, No.CWU 187

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H E A D N O T E

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Petition for winding-up where only relief sought is winding-up order - proper parties - whether person who has not filed a notice or obtained special leave under rule 30 may be made a respondent

1997, No.CWU 187

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

(COMPANIES WINDING-UP)

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D E C I S I O N

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1. This is an application by Ideaction Holdings Limited ("the 2nd Respondent") to a Petition filed by Wah Yan Property Limited ("the Petitioner") to wind-up Ideaction Strategic Investment Limited ("the Company"), that the 2nd Respondent do cease to be the 2nd Respondent in these proceedings on the ground that it has been improperly and/or unnecessarily joined as a party.

2. The Petitioner and the 2nd Respondent each holds one of two issued shares in the Company. The Petition was initially a creditor's petition founded on the non-payment of a debt. In July 1997, the Amended Petition was re-amended to add the "just and equitable" ground. At that stage, the Company was the only respondent. Since August 1995, the directors of the Company have consisted of To Nip-wah, To Keung-wa and To Fan-wa who control the Petitioner and Cheung Ka-lung, Ng Kwai-hang and Lee Yuk-seng who control the 2nd Respondent. Allegations are made by the Petitioner against Cheung, Ng and Lee in their conduct of the Company's affairs and it is alleged that a deadlock has arisen. On 3 October 1997, each of Cheung and Ng filed an affidavit to deny the Petitioner's allegations. Both Cheung and Ng state in their respective affidavits that they have been "duly authorised by the [Company]" to make the affidavits "to oppose the Re-amended Petition" which deny the just and equitable allegations. In view of this "opposition", the Petitioner obtained leave from Rogers J. (as he then was) to re-re-amend the Petition by adding the 2nd Respondent as a party.

3. The short point that arises is whether a person who has not filed any notice of intention to appear on the hearing of a petition pursuant to rule 30 of the Companies (Winding-up) Rules ("the Rules") can, as it were, against his will, be made a party to a winding-up petition in which the only relief sought is a winding-up order.

4. Leading counsel for the 2nd Respondent accepted that there is no authority as such to the effect that it is never proper to join a person as a respondent to a winding-up petition where that person has not given notice of his intention to appear under rule 30. Nor is there any express statutory prohibition. In summary, the argument advanced is as follows. By virtue of section 296 of Cap.32, the Rules have statutory effect. Rule 30 provides :

"30. Notice by persons who intend to appear

Every person who intends to appear on the hearing of a petition shall serve on, or send by post to, the petitioner, or his solicitor, at the address stated in the advertisement of the petition, notice of his intention. The notice shall contain the address of such person, and shall be signed by him or his solicitor, and shall be served, or if sent by post shall be posted in such time as in ordinary course of post to reach the address not later than 6 o'clock in the afternoon of the day previous to the day appointed for the hearing of the petition, or if such day be a Monday, not later than one o'clock in the afternoon of the Saturday previous to such day. The notice shall be in Form 10 with such variations as circumstances may required. A person who has failed to comply with this rule shall not, without the special leave of the court, be allowed to appear on the hearing of the petition."

To appear on the hearing of a petition, a person has to comply with rule 30. If he fails to comply with that rule, special leave of the court is required before he may appear. It was submitted that by implication, a petitioner may not join any person other than the Company itself as a respondent to winding-up proceedings where the relief sought is nothing more than a winding-up order. If a petitioner were free to join anyone he wished, it would effectively deprive a person of his "rights" under rule 30. Moreover, it would operate unfairly on a person who has no wish to be a party to the proceedings as a party since he is necessarily exposed to the possibility of a costs order being made against him.

5. Reference was made to precedents contained in various editions of Atkins Court Forms (viz. the 1981, 1992 and 1995 issues) for the form of a petition based on the just and equitable ground. In none of them, whether pre or post the Insolvency Act, was a respondent named other than the company itself notwithstanding allegations in the body of the petition against named directors or shareholders which formed the basis for the just and equitable claim. This, it was submitted, supports the view that no person other than the company should be made a respondent to such a petition : moreover, there is no requirement under the Rules to serve the petition on anyone other than the company. By way of contrast, where the relief sought includes relief under section 168A of Cap.32, personal respondents would be joined. That is common ground : see Paul Murray-Jones v. Hongkong and Shanghai Banking Corporation Ltd. [1982] HKLR 191 andRe Little Olympia Each-Ways Ltd. [1994] 2 BCLC 420. Indeed, in England, special rules were introduced for unfair prejudice applications which provide for service of the petition on every respondent named in the petition and for their attendance for directions after the passing of the Insolvency Act 1986 to cater for the fact that there would be personal respondents.

6. In Boyle & Marshall's Practice and Procedure of the Companies Court (1997 Edn.) it is stated (at para.7.4) that :

"By definition, every petition to wind up a company under s.122(1)(g) must include the company as a respondent. The Insolvency Rules themselves do not, in fact, require service of a copy of the petition on the named respondents other than the company (see para.7.8.6, infra). However, as in the case of s.459 petitions, these petitions are in substance usually disputes between the shareholders rather than between the petitioner and the company. It is therefore the position that all the shareholders, in the case of a private company, should be joined as respondents to the petition." (emphasis added)

Section 122(1)(g) and section 459 correspond to section 177(1)(f) and section 168A respectively of Cap.32. At para.7.8.6, it is further stated that :

"... the Rules do not expressly provide for the service of a contributory's petition on anyone other than the company. However, the practice of the Companies Court is to require service of a copy of the petition on all the named respondents."

7. In re A. & B.C. Chewing Gum Ltd. [1975] 1 WLR 579, Re CG & L Investment Ltd. and Wyatt Estates Ltd. [1992] 1 HKC 78 and Re Cirtex Co. Ltd. [1987] 3 HKC 13 and 21 are examples of petitions for the just and equitable winding-up of companies where shareholders and directors have been joined as respondents. Prima facie, they appear to support the statement in Boyle & Marshall set out above.

8. Leading counsel for the 2nd Respondent does not accept that the statement in Boyle & Marshall is accurate inasmuch as no authority is actually cited. As to the cases noted above, Mr Poon SC sought to explain them on the basis that those shareholders and directors were joined subsequently because they opposed the petition : they were joined as respondents as a result of that opposition. That apparently was the case, at least, in CG & L Investment Ltd. and Wyatt Estates Ltd. in which Mr Poon was junior counsel. As to the other cases cited, the position remains wholly unclear since it is not apparent from the reports that the personal respondents were not respondents from the outset but were only joined at a later stage after or as a result of their filing a notice of intention to appear and affidavits in opposition. In any event, the possibility that they were respondents from the outset cannot be ruled out. If they were, that would almost certainly invalidate the 2nd Respondent's submission.

9. Is the 2nd Respondent right that a prohibition is to be inferred from the provisions in the Companies Ordinance and the Rules relating to the presentation of a winding-up petition against joining a person other than the company sought to be wound up unless and until a notice has been served or special leave obtained under rule 30? As a preliminary matter, such an inference should not be lightly made and certainly not unless it were necessary or irresistible. Looking at the provisions of the Companies Ordinance including the Rules as a whole, I find no basis for making such an inference, much less that it is a necessary or irresistible inference. First, such an inference carries with it an implication that a person other than the company sought to be wound up has an inviolable right not to be made a party to a winding-up proceeding unless he chooses to serve a notice or obtains special leave pursuant to rule 30 and files an affidavit to oppose the petition. The implication does not appear to be consonant with the general law : I am certainly not aware of any right under the general law of a person not to be sued. Second, the argument might be stronger if service of a notice pursuant to rule 30 would ipso facto render that person a party to the winding-up proceedings which is not the case. Where a person who serves a notice has not already been joined, it is a matter for the judge to give directions as appropriate depending on the circumstances of the case : he is not entitled as of right to be made a party. Third, the fact that the Rules do not provide for service of the petition on anyone other than the Company may be considered a shortcoming but is not of particular significance since petitions may be presented on a number of grounds, the most common of which being the Company's inability to pay debts and in those cases, there would not normally be any need to join any person other than the Company as respondent. In any event, in my judgment, the inference suggested is not warranted unless it is either a necessary or irresistible inference which it is not. Accordingly, I agree with counsel for the Petitioner that the question of whether the 2nd Respondent is a proper party does not go to jurisdiction but discretion.

10. As stated by Harman J in Re Hydrosan Ltd. [1991] BCLC 418 at 421 d-e :

"... The claim on a contributories' petition for a just and equitable winding up is not in truth hostile litigation by a shareholder against a company. It is in truth a claim by a shareholder based upon wrongful acts by other shareholders or directors which have amounted to some equitable mal-doing even within the articles as is exemplified in Ebrahimi v Westbourne Galleries Ltd [1972] 2 All ER 492, [1973] AC 360 which went to the House of Lords and reinstated the width of just and equitable petitions."

I respectfully agree. In a case such as this where there are two equal shareholders only, and a petition is presented on the just and equitable ground, the dispute is in reality between the shareholders and not between a shareholder and the company. The Company is no more than a nominal Respondent to the just and equitable petition. See In re a Company [1992] BCLC 701 at 702 I to 703 A. Prima facie, the 2nd Respondent being the corporate shareholder controlled by the three directors against whom the allegations of misconduct are made, appears to be a proper party.

11. I now turn to consider the prejudice (in terms of costs) point. The submission is that it would be unfair to expose the 2nd Respondent to a possible costs order if at the end of the day, the 2nd Respondent does not wish to take any active part in opposing the petition. But if the 2nd Respondent does not wish to oppose the Petition, it is open to it to consent to a winding-up order being made. In those circumstances, it will effectively be acknowledging the wrongful acts alleged which brought about the Petition in the first place and there is nothing intrinsically unfair in it being exposed to the possibility of a costs order. Of course, it is always open to the 2nd Respondent to make representations as to costs and it does not follow that a costs order will necessarily be made against it. The second possibility is that without actively opposing the Petition, the 2nd Respondent does not consent to a winding-up order being made so that the Petitioner is put to proof thereby incurring additional costs. If at the end of the day a winding-up order is made, the 2nd Respondent cannot complain if in all the circumstances, it is considered appropriate to make a costs order against it. The third possibility is that the 2nd Respondent decides to oppose the Petition in which case, cadit quaestio? In my judgment, the prejudice point does not take the inference of an implied prohibition any further.

12. It would appear that the 2nd Respondent is not prepared even at this stage to commit itself to consenting to the order sought or to contest it. Meanwhile the Petition is opposed and the allegations denied in affidavits ostensibly filed on behalf of the Company. I note in passing that I fail to see how in a deadlock situation, Ng and Cheung can be "duly authorised" to make affidavits on behalf of the Company. It is no answer to say that if Ng and Cheung are not duly authorised, there are remedies available. The suggested remedies are proceedings against the individuals concerned. The court's time, not to mention costs, should not be wasted in this manner to resolve the obfuscation that has resulted.

13. In view of my holding that the 2nd Respondent is a proper party, I will direct that it has to give notice to the court and the Petitioner, within 14 days of this decision, whether or not it intends to rely on the affidavits filed by Ng and Cheung.

14. The 2nd Respondent's summons is dismissed and I make an order nisi for costs in favour of the Petitioner.