CHEN LEE YUAN HUA v. HSIEH YANNIK AND OTHERS

HCCW 436/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 436 OF 2012

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D E C I S I O N

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1.  There is before me an application taken out by summons dated 11 January 2013 for a validation order under section 182 of the Companies Ordinance in respect of any payment or other disposition of property made by Sellen International Limited (the company) in the ordinary course of business on or after 26 November 2012, that is, the date of presentation of the petition, to the date of judgment.

2.  The company is a company incorporated in Hong Kong in 1992 and has since been carrying on the business of trading, in particular, retail sales in cameras and related products and accessories in Hong Kong.  The issued share capital is HK$3 million.  The petitioner holds shares representing 20 per cent of the issued share capital.  The 1^st to 3^rd respondents to the petition hold the remainder of the shares.

3.  The petition was presented by the petitioner as a contributory of the company whereby she seeks relief under section 168A of the Companies Ordinance in the form of an order, inter alia, for the purchase of her shares in the company; alternatively, an order that the company be wound up by the court on the just and equitable ground.

4.  For present purposes it is unnecessary to go into the details of the complaints in the petition. Suffice it to say that there are allegations of exclusion of the petitioner from management, refusal to allow her to inspect the books and accounts, improper adjustments to the accounts resulting in the reduction of profits, sales being effected to a specific customer at unusually low prices, and failure to declare and pay dividends.

5.  The present application is made by the 1^st, 2^nd and 3^rd respondents to the petition.

6.  The principles governing the grant of a validation order in a case such as the present are well known and not in dispute between the parties.  In In re Burton & Deakin Limited [1977] 1 WLR 390 at 397G, Slade J said:

“If on an application under section 227 relating to a solvent company, (a) evidence is placed before the court showing that the directors consider that a particular disposition, falling within their powers under the company’s constitution, is necessary or expedient in the interests of the company, and (b) the reasons given for this opinion are reasons which the considers that an intelligent and honest man could reasonably hold, it will in the exercise of its discretion normally sanction the disposition notwithstanding the opposition of a contributory unless the contributory adduces compelling evidence proving that the disposition is in fact likely to injure the company. A fortiori in my judgment the court will be inclined to exercise its discretion in this manner in a case such as the present, where the primary relief sought by the petition is an order under section 210 that the other shareholders be ordered to purchase the shares at a stated price.”

7.  Although Slade J spoke in the passage quoted with reference to a particular disposition, he eventually made an order that not only sanctioned the disposition of property in relation to a particular transaction, but also payment of monies and disposition of property and assets in the ordinary course of business.  (See pages 394H and 398D.)

8.  As Harris J said in his recent decision in Re Emagist Entertainment Limited [2012] 5 HKLRD 703 at paragraph 5, in a winding‑up petition presented by a contributory on the just and equitable ground, a validation order with respect to payment of expenses in the ordinary course of business would readily be made once the court is satisfied that the company is solvent and has an active and ongoing business.

9.  In the present case, the company is, on the evidence before me, plainly solvent.  The balance sheet as at 31 March 2012 shows there to be net assets of HK$22.3 million, and cash and cash equivalents of HK$11.8 million.  It also appears to be a profitable concern, with profits of HK$1 million and HK$2.4 million in the two years to March 2012.  Accumulated profits were also substantial as at March 2012.  Furthermore, the relief sought by the petitioner in the petition seems primarily to be an order for the purchase of the petitioner’s shares at a proper valuation; and winding-up is only sought in the alternative, possibly as a fallback position.

10.  This therefore seems to me, prima facie, an appropriate case in which to grant a validation order in respect of payment of monies and disposition of other assets in the ordinary course of business.

11.  In fact, the petitioner does not put up a blanket objection to any validation order, but proposes certain conditions including that the total monthly withdrawals from the company’s bank accounts be capped at HK$10,000; that the company do provide the petitioner with a weekly schedule on each Monday identifying the expenses in relation to the preceding week with the date, amount, payee and purpose of each payment and identifying each payee by name and address; that all expenses and payment in excess of the amount of HK$10,000 be subject to the approval of the petitioner.

12.  The 1^st to 3^rd respondents do not accept these conditions but are prepared to submit to conditions including a direction that the company or, alternatively, the 1^st to 3^rd respondents, report to the petitioner by way of a monthly schedule setting out the date, amount, payee and nature of payment made by the company out of its bank accounts in the previous month, and the condition that the petitioner be at liberty to inspect documents supporting or evidencing those payments.

13.  In my judgment, the conditions the petitioner has sought to impose are unwarranted.  The monthly recurrent expenses of the company amount to slightly over HK$400,000.  The limit of HK$10,000 is thus wholly unrealistic.  The suggestion that they are recurrent expenses and therefore prior approval of the petitioner could be sought in good time is no justification for imposing that condition.  It would effectively be to give a power of veto to the petitioner in respect of the day-to-day operations of the company or, as described by Slade J in In re Burton & Deakin Ltd at page 397D, a drastic improvement of the rights of interference by a shareholder vis-à-vis the company or the directors, which I decline to grant.

14.  I shall therefore make the order sought, subject to the conditions on reporting and inspection which I have already mentioned.  I shall also give liberty to apply. 

15.  As to the costs of the application, I consider that the costs of the summons, including the supporting affidavits, should be in the cause of the petition. 

16.  However, I am persuaded that the costs of today’s hearing should be borne by the petitioner because of the conditions that she has proposed and insisted upon necessitating the hearing this morning.