XCHRX WENDEN ENGINEERING SERVICES CO. LTD. v. LEE SHING YUE CONSTRUCTION CO. LTD.

HCCW717/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO.717 OF 2000

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REASONS FOR DECISION

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1. In these proceedings, the Petitioner, as one of the two contributories, petitions for the winding-up of Tai Ping Yeung Motors Limited ("the Company"), on the just and equitable ground. The Petition is opposed by the other contributory, Mak Chik Lun ("the Opposing Contributory").

2. On 16 October 2000, the Opposing Contributory applied by summons for a stay of the Petition on the basis that the Petitioner lacks the locus standi to present the Petition. By another summons filed on 5 December 2000, the Opposing Contributory further applies for the locus standi point be tried as a preliminary issue in these proceedings and for consequential directions. At the hearing on 11 December 2000, I ordered that the locus standi point be tried as a preliminary issue and made various consequential directions. I made no order on the summons for stay save on the costs thereof. The reasons appear below.

Background

3. The Petitioner and the Opposing Contributory are the shareholders appearing on the Register of Members of the Company, each holding 50% of the shares. The basis of the Petition is that the mutual trust and confidence between the Petitioner and the Opposing Contributory no longer exist and there has been a deadlock between them, all as a result of 13 financial transactions, totalling approximately $55 million. The Petitioner says that these 13 payments made between March and September 1998 were without the shareholders' approval and had extracted most of the working capital and reserves of the Company.

4. The Opposing Contributory denies the allegations. At the same time, he contends that as a result of an oral agreement made between the Petitioner and himself in July 1999 ("the July Agreement"), the Petitioner is no longer the beneficial owner of the 50% shares registered in his name, but is holding the same on trust for the Opposing Contributory. The July Agreement is the subject matter of a pending High Court Action No.4854/2000 ("HCA4854/00") instituted by the Opposing Contributory prior to the presentation of the Petition herein. In reliance of the July Agreement, the Opposing Contributory says that the Petitioner has no locus standi to present the Petition herein and therefore seeks a stay of these proceedings pending the determination of HCA4854/00. By the time the summons for stay was returnable on 23 October 2000, the Writ in HCA4854/00 had not been served and the Statement of Claim yet to be issued. The application for stay was opposed by the Petitioner. Having heard submissions, I indicated that I was not convinced that the issue of locus standi cannot or should not be determined in these proceedings and had to be litigated in separate proceedings before the Petition should be allowed to continue. I observed that it would be more practical and expedient to have the issue heard and determined in these proceedings either by way of a preliminary issue, or as one of the issues at the full hearing of the Petition. I adjourned the application for stay to 11 December 2000 for mention so that the parties can file evidence on the application in the meantime. The Opposing Contributory then issued the second summons seeking, inter alia, a trial of the locus standi point as a preliminary issue and for the trial of the preliminary issue to be heard together with the trial of HCA4854/00. This second summons in effect supersedes the initial application for stay. The Opposing Contributory opposes the application for the trial of the preliminary issue as well as for it to be heard together with the trial of HCA4854/00.

Reasons for the Decision

5. For the Opposing Contributory, it is argued that the advantages of having the locus standi point resolved as a preliminary issue is that the proceedings herein can be shortened. It is submitted that if the point is resolved against the Petitioner, then the Petition will have to be dismissed; alternatively if it is resolved in favour of the Petitioner, then the Opposing Contributory may elect not to contest a winding-up order and leave the question of the propriety of the 13 disputed payments to be investigated by the liquidators.

6. Mr Chan SC for the Opposing Contributory further argues that the direction for having the trial of HCA4854/00 heard together with the trial of the preliminary issue herein is occasioned by the concern that the Opposing Contributory may not be able to enforce the July Agreement by counterclaiming for specific performance in these proceedings. On this point, Mr Barlow for the Petitioner pointed out there is wide power on the Companies Court under section 180 of the Companies Ordinance, Cap.32, to make any order as it thinks fit, and that can include ordering a rectification of the Register of Members pursuant to section 100 of the same Ordinance. Thereupon, Mr Chan SC indicated that the Opposing Contributory no longer insisted on having the trials of the preliminary issue and of HCA4854/00 being heard together.

7. The issue, therefore, is confined to whether the locus standi point ought to be tried as a preliminary issue. The opposition of the Petitioner is premised upon the concern that such a course may result in serious delays and that time is of essence in view of the fact that funds in the range of $55 million had been channelled out of the Company. Mr Barlow also argued that the application is in substance no different from an application to stay the Petition, which is inappropriate having regard to such authorities as Alipour v. Ary [1997] 1 WLR 534.

8. The authorities relied upon by Mr Barlow are in the context of applications to stay winding-up petitions on the basis that the status of the petitioners as contributories is challenged. Previously, the court's approach is to require the dispute as to the status or locus standi to be resolved in separate proceedings before the winding-up petition is heard : see the judgment of Brightman J in In re J.N.2 Ltd [1978] 1 WLR 183, at pp.187-188. The more recent judicial approach, however, acknowledges that dispute on locus standi can be dealt with in the winding-up proceedings without necessitating a stay of the petition, provided that the petition is not likely to cause substantial damage or inconvenience to the company : Alipour v. Ary, supra, pp.545-546.

9. In the present case, it is accepted that the determination of the Petition will be deferred if the locus standi point is to be tried as a preliminary issue. It is, however, not the same as staying or dismissing the Petition to enable the locus standi point to be resolved in separate proceedings. To say the least, the parties are not required to start a fresh set of proceedings thereby incurring a fresh set of costs and additional time. Much of the evidence already filed herein can be relied upon for the determination of the preliminary issue, thereby achieving savings in terms of time and costs. In my view, the question of whether there ought to be a trial of the preliminary issue involves balancing the advantages to be achieved by such a course against the detriment or prejudice occasioned to the opposing party.

10. There is no dispute that in this case, the locus standi point is a separate and distinct issue that does not involve or hinge upon the merits of the Petition. The advantage of avoiding a hearing on the merits of the Petition, as outlined by Mr Chan SC, is a real and probable one. On the other hand, it is acknowledged that a trial of the preliminary issue does have the effect of deferring an adjudication of the merits on the Petition, and that may mean some form of prejudice to the Petitioner. The prejudice, however, has not been demonstrated to be very grave or irreparable. The evidence filed thus far suggests that the Company is not actively trading. There is no indication of substantial damage or inconvenience to the Company as a result of the existence or prolonged existence of the Petition. As to the $55 million said to have been channelled out of the Company, it is true that the Company and its contributories will be prevented from seeking a recovery of the same in the meantime, but the evidence now before the Court does not suggest that the delay will result in the Company or its contributories losing the prospect of recovery in the event the Petition is granted. The evidence does not show, for instance, the Opposing Contributory and the directors responsible for allowing or causing the payments are or will be financially in no position to repay the sums to the Company.

11. Weighing the advantages and prejudice occasioned by a trial of the preliminary issue, I am of the view that the locus standi point ought to be tried as a preliminary issue, and I so order.

Conclusion

12. The orders that I make are as follows :

(1) The following issues be tried as the preliminary issues in these proceedings, namely,

(a) whether the Petitioner and the Opposing Contributory had entered into the July Agreement referred to in the affirmation of Mak Chik Lun filed herein on 16 October 2000; and

(b) if the answer to (a) is in the affirmative, whether the Petitioner has the necessary locus standi to present the Petition herein.

(2) There be a speedy trial of the preliminary issues and the parties be at liberty to set down the preliminary issues for trial with three days reserved in consultation with counsel's diaries.

(3) The Opposing Contributory to file and serve within 14 days from the date of this Order further affirmation on the preliminary issues.

(4) The Petitioner to file and serve within 21 days thereafter affirmation in reply on the preliminary issues.

(5) The affirmations filed on the preliminary issues to stand as witness statements for the trial of the preliminary issues.

(6) There be discovery in respect of the preliminary issues by lists of documents within 28 days from the date of this Order and there be mutual inspection within 7 days thereafter.

(7) A pre-trial review for the trial on preliminary issues be fixed not later than 4 weeks before the scheduled trial date.

(8) The costs of the Opposing Contributory's summons filed on 5 December 2000, including the costs of the hearing on 11 December 2000, be in the cause of the preliminary issues.

(9) There be no order on the Opposing Contributory's summons for stay filed on 16 October 2000, save that the costs of the summons be to the Petitioner in any event.