LUK KWOK ON AND ANOTHER v. LUK KEUNG JOHN AND OTHERS

HCCW 485/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 485 OF 2007

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D E C I S I O N

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1.  There are two applications before me.  One is to strike out the amended petition under sections 177(1)(f) and 168A of the Companies Ordinance, Cap. 32 in its entirety taken out by the 1^st and 2^nd respondents on 30 January 2008.  The other is a summons issued by the petitioners on 29 January 2008 for the appointment of provisional liquidators.  The petition was presented on 29 October 2007.

2.  It is logical that I should deal with the striking out summons first.

Background

3.  I will first set out the relevant background matters for both applications.

4.  The company concerned is Trable Industries Limited (“the Company”).  It has two business names: Rapid Industrial Company 快速實業公司 and Hong Kong Lee Hong Industry Company 香港利康實業公司.  The Company had been engaged in the business of manufacturing and trading of toys.

5.  There are essentially four shareholders of the Company, being the 1^st and 2^nd petitioners and the 1^st and 2^nd respondents.  I need not be concerned with the 3^rd and 4^th respondents who are just nominal respondents.  The 1^st petitioner and the 1^st respondent are brothers, the 2^nd petitioner is the 1^st petitioner’s wife and the 2^nd respondent is the 1^st respondent’s wife.  All four were appointed directors when the Company was incorporated on 25 October 1990 in Hong Kong.

6.  The 1^st respondent was responsible for the day-to-day operation of the office of the Company in Hong Kong in Fotan, including the administration, financial management and accounting matters.  The 1^st petitioner was responsible for the sourcing of raw materials and customers, overseeing the manufacturing of goods and the delivery of the goods traded by the Company.  All the goods traded by the Company were manufactured by a factory in Dongguan known as Dongguan Changping Tutang Lee Hong Toy Factory 東莞常平土塘利康玩具廠 (“the Toy Factory”).  I will come back to the question of the identity of the foreign party who had invested in the Toy Factory.

7.  Disputes arose between the parties in late 2001 and early 2002.  In April 2002, the 1^st respondent issued a notice on behalf of three companies, including the Company, to customers and suppliers alleging that the petitioners had mismanaged the Company and that the Company would cease to be responsible for all conduct of the petitioners since 16 February 2002.  The Company had ceased business in Hong Kong since April 2002.  At a board meeting on 16 May 2002 attended by only the 1^st and 2^nd respondents, a resolution was passed to remove the petitioners from all offices of the Company and to relieve the 1^st petitioner from all his duties in the Toy Factory.

8.  On 30 May 2002, the 1^st respondent caused the Company to bring proceedings against the 1^st petitioner in Dongguan, alleging that the 1^st petitioner had continued to exert control over the Toy Factory notwithstanding he had been relieved from his duties and seeking an order that the 1^st petitioner should hand over relevant documents of the assets and the right to operate the Toy Factory to the Company.  The 1^st petitioner contested the proceedings and asserted that the foreign party that had invested in the Toy Factory was not the Company but a sole proprietorship owned by him.

9.  In January 2004, the 1^st petitioner caused the Toy Factory to be de-registered in China.  On 2 August 2006, the Dongguan Intermediate People’s Court gave judgment in favour of the Company and ordered the 1^st petitioner to deliver up to the Company within 10 days of the order all relevant documents regarding the right to operate the Toy Factory and the assets of the Toy Factory.  The 1^st petitioner brought an appeal against that judgment.

10.  In October 2006, the 2^nd petitioner acting on behalf of Winning Team Industrial Limited 添安實業有限公司 entered into a tenancy agreement as landlord by which the factory premises of the Toy Factory were let to a tenant for 12 years.

11.  On 14 March 2007, the Higher People’s Court of the Guangdong Province upheld the judgment of the Dongguan Intermediate People’s Court but varied the relief granted to the Company.  The 1^st petitioner was ordered to return to the Company within 15 days of the judgment the factory premises of the Toy Factory and the land use rights of the factory premises.  From then onwards, the 1^st respondent has been attempting to enforce against the 1^st petitioner the judgment obtained in the Company’s favour.

12.  On 16 September 2007, the Dongguan Intermediate People’s Court accepted the Company’s application to enforce execution of the judgment of the Higher People’s Court.

13.  On 29 October 2007, the petitioners presented this petition seeking to wind up the Company, alternatively for relief under section 168A that the 1^st and 2^nd respondents be ordered to purchase the petitioners’ shares and other reliefs. 

14.  As mentioned earlier, the Company had ceased business in Hong Kong in April 2002, and in Dongguan at a date no later than January 2004.  Its only activity in the past few years is to pursue its claim against the 1^st petitioner in the courts in China.  It is common ground that the only substantial assets of the Company at present are the factory premises of the Toy Factory and the land use rights of those premises, estimated at about RMB 3 million.  The petitioners seek an appointment of provisional liquidators claiming that these assets are in jeopardy.

Allegations in the re-amended petition

15.  The petition is founded on two broad grounds.  Firstly, there has been total break down of mutual trust and confidence.  Secondly, the Company has lost its substratum in that it had ceased operation for some time and it is unlikely that business would ever be resumed.

16.  On the 1^st broad ground, the petitioners have alleged a number of matters which they say constituted unfairly prejudicial conduct, it being the petitioners’ case that the Company was a quasi-partnership and formed with the understanding that the four family members were to share the management powers with division of labour.

17.  The complaints of unfairly prejudicial conduct appeared in the petition under these headings:

(1)	failure to appoint auditors and convene annual general meetings;
(2)	financial irregularities;
(3)	wrongful interference with the Company’s operation;
(4)	wrongful removal of the petitioners from all offices of the Company;
(5)	domination of the board by the 1st and 2nd respondents;
(6)	the 14 June 2007 meeting; and
(7)	the 7 July 2007 meeting.

Bases for striking out

18.  It is the contention of the respondents’ counsel Ms Fong that the petition should be struck out on two bases:  firstly, the complaints in headings (2) and (5) disclose no reasonable cause of action; and secondly, the complaints in all the other headings are frivolous or vexatious and otherwise an abuse of the process of the court.

19.  Ms Fong acknowledged that for the first basis, the matters alleged are to be assumed in the petitioners’ favour and no evidence from the respondents is admissible.  However, it would appear from her submission that she did not adhere to this, when dealing with some of the complaints in heading (2).

20.  I have been referred to a number of authorities on both sides for well established principles in striking out applications.  There is no disagreement as to legal principles.  I do not propose to set out the authorities.

21.  Insofar as Ms Fong has asked me to go into the facts alleged and to analyse the different versions on both sides, I would only say that I have attempted the exercise and scrutinised the evidence, but I do not find this meaningful as, on the whole, I do not think it possible to resolve the conflicting versions at this stage.

22.  Without further ado, I turn to each of the complaints under the seven headings listed above.  I will take them in the same order as in Ms Fong’s submission.

Financial irregularities

23.  The argument here is that the allegations in paragraph 15 of the petition are not sufficiently particularised leaving the respondents unable to deal with them.  Ms Fong cited the decision of Barma J in Re Linea Trading Company Limited, HCCW No. 350 of 2004, 7 December 2005, in which the judge had this to say at paragraph 17:

“… it is necessary for a petitioner to set out in his petition all material averments relied upon in support of his claim for relief with proper particularity, and that in the absence of such particularity, it is not possible to order that particulars should be given, but an application to strike out can be made in an appropriate case.”

24.  It is alleged in paragraph 15 of the petition that the 1^st petitioner discovered financial irregularities in early 2002 and these irregularities were as follows:

(1)	the 1st respondent caused the Company to delay or fail to pay on time the outstanding sums due to the raw material suppliers of the Company;
(2)	as a result, substantial compensation had to be paid at the Company’s expense;
(3)	the 1st respondent caused the Company to fail to pay its employees’ salaries and other fees and expenses; and
(4)	the 1st respondent caused the Company to pay its creditors sums which were not yet due.

25.  I agree with Ms Fong that material facts and particulars are lacking in the above allegations.  I do not agree with the submission of Ms Lok, counsel for the petitioners, that this is just a quest for evidence not material averments.  Nothing is known of the outstanding sums allegedly not paid on time, the amount and to whom they were due.  No information was given of the substantial compensation allegedly paid, in terms of the amount, and to whom.  The same criticism applies to the remaining two allegations.

26.  I have looked at the supporting affirmation of the 1^st petitioner.  I am quite simply unable to find any or any sufficient information regarding the above allegations, leaving aside the question (which may be a matter of degree) whether any deficiency in the petition may be cured by the evidence filed.  It is not sufficient to exhibit a bundle of invoices, receipts and cheques without condescending to particulars that are required to be given.  In any event, the invoices, receipts and cheques were said to be some, not all, of the payments made by the petitioners on the Company’s behalf.  The invoices only came up to a total of $20,000 odd.

27.  The objection about the lack of particulars of the matters alleged in paragraph 15 was mentioned for the first time only in the letter of the respondents’ solicitors to the petitioners’ solicitors dated 1 March 2008, at no time have the respondents sought particulars from the petitioners as detailed in the submissions of their counsel.  The petitioners should be given an opportunity to amend the petition to put their house in order before the offending parts are to be struck out.

28.  I order the opening paragraph in paragraph 15, and sub-paragraphs (a) to (d) to be struck out, if the petitioners should fail to issue an application within 14 days to amend these paragraphs to condescend to particulars of the matters alleged and is successful in the application to amend.

29.  I do not find the allegation in sub-paragraph (e) of paragraph 15 in the petition lacking in material particularity.  I will come back to the allegation when I deal with the complaint under heading (1).

30.  I decline to strike out this sub-paragraph.

31.  The respondents have also attacked paragraph 16 in the petition, not for lack of particulars, but on the basis that the allegation has no chance of success and should be struck out as disclosing no cause of action.  I am not sure if Ms Fong’s attack is founded on the first broad basis of no reasonable cause of action (in which case the petitioner’s allegations are assumed to be established and conflicting evidence should not be looked at) or the second broad basis that the allegation is frivolous or vexatious.  In any event, I do not agree with her submissions on whichever basis of attack.

32.  I decline to strike out this paragraph.

Domination of the board by the 1^st and 2^nd respondents

33.  The next complaint also objected to for lack of particulars is the complaint under heading (5).  In paragraph 22 of the petition, it is alleged that at the board meetings purportedly held on four dates as specified, resolutions were purportedly passed under the domination of the 1^st and 2^nd respondents, against the spirit and intention of the quasi-partnership.  These meetings were only attended by the 1^st and 2^nd respondents.

34.  I reject the respondents’ contention that the above allegation is lacking in material particulars.  That the respondents have also queried the truthfulness of the purported minutes if these board meetings were really held is neither here nor there.

35.  I decline to strike out paragraph 22.

36.  The rest of the challenge is founded on the basis that the matters alleged in the petition do not make out a viable case and should be struck out on the ground that these offending parts are frivolous, vexatious or otherwise an abuse of the process of the court.  As all these matters are fact sensitive, and this is a strike out application, I would not exercise the power to strike out unless it is plain and obvious that the allegation is entirely without substance.  With that I turn to the rest of the complaints, they are under headings (1), (3), (4), (6) and (7).

Failure to appoint auditors and convene annual general meetings

37.  In paragraph 13 of the petition, it is alleged that to date only one set of audited accounts for the year ended 31 March 2000 had been caused to be prepared for the Company.  To rebut this allegation, the respondents have exhibited documents to show that audited accounts were prepared for the earlier years from 1997 to 1999 and that there were audit confirmations for the years of 1995 to 1997.

38.  The gravamen of the complaint, as I see it, is that no audited accounts were prepared for the years subsequent to the financial year ended March 2000.  That is a fact not in dispute.

39.  I decline to strike out paragraph 13.

40.  In paragraph 14 of the petition, it is alleged that to date no annual general meetings had been convened.  Again, the respondents have pointed to documents to show that annual general meetings had been held from 1991 to 1995.  That I think is missing the point, which is that the Company had not been administered properly to all intents and purposes and no contrary evidence was adduced that annual general meetings had not been held for the past 10 years.  In any event, the petitioners also queried if annual general meetings were indeed held as they only signed the purported minutes on instructions from the 1^st respondent.

41.  I decline to strike out paragraph 14.

Wrongful interference with the Company’s operation

42.  It is alleged in paragraph 17 of the petition that in April 2002, without the prior notice or consent of the petitioners, the 1^st and 2^nd respondents cut off the telephone and fax lines of the Company at the Fotan office, removed the cheque book, seal and account documents from its registered office at Fotan, and sent notices to customers and suppliers informing them that the petitioners had mismanaged the Company and that the Company would cease to be responsible for their conduct as from 16 February 2002.

43.  I have considered Ms Fong’s submission, which is founded on the evidence adduced by the 1^st respondent that the above actions were triggered by a rumour allegedly spread by the petitioners that the Company was being wound up.  There is clearly a factual dispute on these matters which cannot be resolved on the affidavits.  The reference in the petitioners’ evidence to the “conglomerate companies” is immaterial, as the affairs in the other two companies are not relied on by the petitioners as affairs of the Company to found their allegation of unfairly prejudicial acts in this petition.

44.  I refuse to strike out paragraph 17.

Wrongful removal of the petitioners from all offices of the Company and meetings on 14 June 2007 and 7 July 2007

45.  I will deal with the complaints under the remaining headings together, as they relate essentially to the same complaint that the petitioners were excluded from management of the Company, contrary to the spirit and intention of the quasi-partnership.

46.  It is alleged in paragraph 18 of the petition that at the request and on the representation of the 1^st respondent that the Company needed a driver to travel between China and Hong Kong frequently and that the post of driver could not be taken up by a director, the 1^st petitioner resigned as a director in 1997 to take up the post of driver.  There is a factual dispute if the 1^st respondent had made the representation to the 1^st petitioner as alleged.  The fact that the 1^st petitioner did not complain about this initially until he was removed from his other positions in the Company and in the Toy Factory in May 2002 is immaterial, as the allegations of wrongful exclusion from management should be considered in their totality and in the light of the alleged understanding of the quasi-partnership that all the four family members were to take part in the management.

47.  I refuse to strike out paragraph 18.

48.  Paragraphs 19 and 20 of the petition relate to board resolutions purportedly passed by the 1^st and 2^nd respondents on 16 May 2002 to remove the petitioners from all offices of the Company.  I need not consider whether this resolution is contrary to the provisions of Cap. 32 or the articles of association.  The important thing is that it is alleged that the resolution is against the spirit and intention of the understanding on which the quasi-partnership was formed.  That is not an issue considered in the judgment of the Dongguan Intermediate People’s Court, whatever rulings that court might have made about that board resolution.  I reject the argument of Ms Fong that res judicata in the wider sense should have any application in this situation.  There is no good reason to strike out these paragraphs.

49.  The petitioners alleged in paragraph 21 of the petition that the Company failed to pay the 1^st petitioner’s debt of $808,500 being his outstanding remuneration as an employee from July 1997 to May 2002.  I am unable to see how this is not conduct in the affairs of the Company.  That the amount was due to the 1^st petitioner as employee is immaterial.  The complaint is that the Company was not properly managed in that it had failed to discharge the debt properly owed to the 1^st petitioner and it is alleged that the 1^st respondent was responsible for the administration and financial matters of the Company.  The fact that outstanding payments prior to October 2002 would be time barred is irrelevant.  There is no basis to strike out paragraph 21.

50.  Paragraphs 23 to 29 of the petition are concerned with the two board meetings on 14 June 2007 and 7 July 2007.  The gravamen of the complaints is that the board meetings were dominated by the 1^st and 2ⁿ respondents to the exclusion of the 2^nd petitioner, contrary to the spirit and intention of the quasi-partnership.  I reject the respondents’ contention that this allegation is lacking in material particulars.  I do not think there is any sufficient reason to strike out these paragraphs.

51.  The respondents made no attack on the other broad ground in the petition to wind up the Company, being the loss of substratum in paragraphs 31 and 32 of the petition.

52.  Lastly, it was submitted on behalf of the respondents that the entire petition should be struck out as an abuse of the process of the court in that the petition was presented for a collateral purpose, which is to obstruct the enforcement by the Company of the judgment against the 1^st petitioner in its favour given by the Higher People’s Court of the Guangdong Province in March 2007.  It was pointed out that the matters complained of in the petition took place in 2002 or prior to 2002.  There was no letter before action.  It was contended that the petitioners’ explanation for delay in presenting this petition is not credible.

53.  I decline to strike out the petition on this ground, as I do not consider it plain and obvious on the evidence before me that the petition was presented primarily for a collateral purpose as contended by the respondents, and not for the interest of all the members and creditors to wind up the Company which would appear to be insolvent and had ceased business for quite some time.  The bona fides of the petitioners in presenting the petition should be tested in cross-examination.

54.  To conclude, on the strike out application, the respondents have failed by and large.  The only success is the attack on paragraph 15 of the petition.

The appointment of provisional liquidators

55.  I turn to consider the appointment of provisional liquidators.  The legal principles are not in dispute and are well known.  It is not necessary to set out the authorities.  In summary, the petitioners are required to show a good prima facie case that a winding-up order would be made on the petition and that it is right in all the circumstances that provisional liquidators should be appointed.

56.  On the question of a good prima facie case, I am prepared to say that on the broad ground of loss of substratum, the petitioners have made out a good prima facie case to wind up the Company.

57.  I am, however, not persuaded that this is an appropriate case to appoint provisional liquidators.

58.  As I understand from the petitioners’ submission, notwithstanding the broad terms of the powers proposed to be conferred on the provisional liquidators in the summons, the petitioners now seek to appoint provisional liquidators for one task only and that is to hold the legal documents regarding the land use rights of the Toy Factory and the factory premises until the determination of the petition.

59.  The need for protection is said to arise in this way.

60.  The petitioners claim there is a risk of dissipation of these remaining assets of the Company if the 1^st petitioner should return the relevant legal documents to the Company.  I note there is a dispute at the moment if the 1^st petitioner has complied with all that he is required to do under the order of the Higher People’s Court by 20 February 2008 or at all, pursuant to an enforcement notice issued to him by the Dongguan Intermediate People’s Court dated 8 January 2008.

61.  The petitioners claim that there is a risk of dissipation of these remaining assets of the Company in that the 1^st respondent would sell the land to repay himself a loan of $5 million odd which, according to the audited accounts for the year ended March 2000, was owed by the Company to him.

62.  In support of this apprehended risk, the 1^st petitioner relied on what the 2^nd respondent had allegedly told him of the 1^st respondent’s intentions and on what the 1^st respondent had allegedly said at a meeting with the enforcement officer of the Dongguan Court on 30 October 2007 that he intended to evict the existing tenant and sell the land use rights and factory premises immediately after enforcement of the judgment.

63.  The 2^nd respondent did not make any affirmation in these proceedings, but as regards what was allegedly said at the meeting with the enforcement officer on 30 October 2007, there is a statement from the Company’s lawyer in China disputing this.  The lawyer also mentioned that the enforcement officer had kept a detailed record of the representations made to him on both sides.  I have reservations about the 1^st petitioner’s assertions in this respect.

64.  The assets here are not liquid assets.  Indeed, on the available evidence, including the opinions given by three lawyers in China obtained on both sides, it does not appear to me to be a straightforward matter that the land use rights and factory premises could be disposed of readily – without a certificate of state land use rights 國有土地使用權証 and/or a certificate of house ownership 房屋所有權証, as in the present situation.

65.  This difficulty is compounded by the fact that there is even a dispute at the moment as to whether the 1^st petitioner has complied with all that he is required to do, to return the land use rights and factory premises to the Company as ordered by the Higher People’s Court.  I am given to understand by Ms Fong that it is the Company’s intention to make a further application for enforcement of judgment against the 1^st petitioner to the Dongguan Court.

66.  I also bear in mind that until recently, the petitioners have wrongly asserted rights and control over the land use rights and factory premises and did not comply with the court orders made as early as August 2006.  The 1^st petitioner has yet to account to the Company for any rental collected since 2002.

67.  With the presentation of the petition, the parties have no doubt been advised by their legal advisers in Hong Kong that under section 182 of Cap. 32, any disposition of the property of the Company would be null and void if leave for disposition has not been obtained from this court.  There is no or no cogent evidence before me of any likelihood that the 1^st or 2^nd respondent would cause the Company to act in contravention of that prohibition.

68.  The petitioners have failed to make out a case of assets in jeopardy to warrant an appointment of provisional liquidators.  I fail to see any urgency or need for provisional liquidators.  I therefore dismiss the petitioners’ summons.

Costs

69.  For the costs of the strike out application, as the petitioners are successful by and large and the summons is dismissed except for the attack on paragraph 15 of the petition, I order 75% of the costs of the application to be paid by the 1^st and 2^nd respondents to the petitioners in any event.

70.  As for the costs of the summons for provisional liquidators, I order the petitioners to pay the costs of the 1^st and 2^nd respondents in any event.