CHAN KAM CHEUNG v. SUN LIGHT ELASTIC LTD AND ANOTHER

HCCW 302/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING UP) PROCEEDINGS NO 302 OF 2012

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D E C I S I O N

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1.  On 21 August 2012 the Petitioner issued a Petition pursuant to section 168A of the Companies Ordinance and also seeking in the alternative an order for a winding up of the Company which is the 1^st Respondent. The Petitioner holds 875,000 of 2,500,000 issued shares in the Company. The 2^nd Respondent holds 1,125,000 shares. The remaining 500,000 shares are held equally by 2 shareholders who have not been made parties to the proceedings.

2.  The Petitioner makes it clear in paragraph 22 of the Petition that the relief he primarily seeks is a buy-out order and that the prayer for a winding-up order is in the alternative. The Petition does not explain in what circumstances it is envisaged the court might order a winding up.

3.  It is not in dispute that if a petitioner has made out a case of unfair prejudice, the court will not order a winding up if alternative relief under section 168A is available.  This principle and the fact that the companies that are carrying on business do not wish the inconvenience and stigma of a winding-up Petition hanging over them frequently leads to applications by respondents to Petitions such as this seeking to strike out alternative relief for a winding-up order on the grounds that there is no prospect of such relief being granted.  This is such a case, and I have before me a summons to strike out that part of the prayer which seeks in the alternative a winding-up order.

4.  The principles by reference to which such applications are assessed is not in issue and are as follows:

(1) It is assumed that the particulars and allegations in the petition and the supporting affidavits of the petitioner would be established and the conflicts resolved in favour of the petitioner [1];

(2) The application should be approached with the greatest circumspection and it is only in a plain and obvious case that the court should exercise its discretion to strike out the petition for winding up or the parts complained of [2];

(3) The burden is on the applicant to show that it is plain and obvious that the petition for winding up would fail on the ground there is an alternative remedy available to the petitioner and that the petitioner is acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy [3];

(4) Where proposed amendments are put forward in an application to strike out, the court should have regard not only to the allegations in the existing petition but also to matters in the proposed amendments [4].

5.  Madam Justice Yuen (as she then was) explained in Wong To Yick Wood Lock Ointment Limited the court’s task as follows:

“The question in the application before me is whether even at the present stage, assuming that the petitioners prove all the facts in the amended petition, there is no real possibility or prospect of a winding-up order being made such that the court should exercise its discretion to strike-out the claim for a winding-up order.”

6.  I am, therefore, to consider the application on the basis that the Petitioner’s factual allegations will be established at trial.  Before striking out the prayer for a winding up order, I need to be satisfied that it has no realistic prospect of success. 

7.  In the present case the factual background is not of itself material, as for present purposes I will proceed on the basis that the complaints of unfair prejudice are made out, and that the Petitioner will be found to be entitled to some relief if the matter proceeds to trial.

8.  However, the authorities in Hong Kong have shown some difference of approach in practice with some decisions placing more weight on the undesirability of having an unnecessary winding-up petition hanging over a company on the one hand, and on the other on the difficulty of concluding with sufficient certainty at the early stage of proceedings that a winding-up order would never be the appropriate remedy for the court to grant.  In Re Mahr China Ltd [5]I explained how this divergence of approach should be resolved:

“14. It seems to me that there is a difference between the decisions in Re Ranson Motor Manufacturing Co Ltd and Re Wong To Yick Wood Lock Ointment Ltd on the one hand and Re Prudential Enterprise Ltd, Kinong Group Ltd and Re Company on the other. The former places more emphasis on the generally recognised undesirability of having a winding-up petition hanging over the head of an ongoing business and the court’s reluctance to wind up companies if some other remedy is available. The latter recognises the possibility that although at the time an application to strike out is made it may appear that a purchase of shares is the inevitable result of the proceedings, unforeseen events may intervene and lead the court ultimately to be persuaded that a winding-up order is the appropriate remedy. For this reason the correct approach is to stay rather than strike out the claim for a winding-up.

15. In my view the way to resolve this difference is to return to the accepted test by which a strike-out application is determined. This was explained as follows by Bingham LJ in Re Copeland & Craddock Ltd [1997] BCC 294 at p.300:

‘It has been often and rightly said that the court’s jurisdiction to strike out a claim advanced by a plaintiff or a claimant or a petitioner is to be exercised very sparingly and only where the clearest grounds are shown for doing so. The reason for this practice is clear. Although a court may at a preliminary stage regard a claim as tenuous and having a negligible chance of success, the claimant is nonetheless entitled to the court’s adjudication on it on the merits unless it is a claim which the court is satisfied cannot succeed. In this case the judge clearly regarded the plaintiff’s claim to wind up this company as one which was unlikely to succeed, but he did not feel that the claim was so manifestly unarguable as to justify him in striking it out … I share the judge’s view that this claim is unlikely to succeed. I am indeed persuaded that the case is very close to the borderline where striking out would be appropriate. But I am not quite persuaded that the claim is unarguable whatever comes out relevant to the petition on discovery and in the course of oral evidence.

16.    I, therefore, ask this question: am I satisfied at this stage of the proceedings and on the evidence before me that the claim for a winding-up cannot succeed? I am not. I cannot rule out the possibility that it will prove impossible to require the first respondent to purchase the petitioner’s shares at a price and on terms that the Court considers reasonable.”

9.  In my view what is clear from the authorities is that the court will only grant a winding-up order rather than relief under section 168A if there is good reason to do so.  In my view if a winding-up order is to be sought, particularly in the alternative it should only be because the Petitioner has a particular reason for doing so.  It is not enough simply to say “well one never knows what will transpire”.  This would be no criteria at all.  The Petitioner must be able to point to particular matters he is concerned might make a winding-up order the appropriate or only practical relief.  It is for this reason that in Sin Chung Yin Ronald and others v Sinodental Investments Ltd and Anor [6] I said:

“21. I think it is appropriate to end with the salutary reminder of Madam Justice Yuen in Re Wong To Yick Wood Lock Ointment Limited [2001] 2 HKC 618 at 623F. There is a Practice Direction in England, (No. 1 of 1990) [1990] 1 WLR 490 reminding practitioners of the undesirability of including as a matter of course a prayer for winding up as an alternative to an order under section 459 of the Companies Act (1985) (equivalent to section 168A of the Companies Ordinance) that:

‘It should be included only if that is the relief that the petitioner prefers or if it is considered that it may be the only relief to which he is entitled.’

22. It is clear that the prayer for a winding-up order has been included in this case without sufficient thought as to whether or not it is necessary. Practitioners should not automatically include as an alternative relief in a petition presented primarily for relief under section 168A of a prayer for winding up. They should only do so if there is reason to believe that this may be the relief that will be sought at trial, and the facts relied on in forming this view should be set out in the petition and amplified as necessary in the petitioner’s evidence filed in support of that petition.”

10.  It seems to me that to require a petitioner to state in his Petition why he has sought in the alternative a winding-up order is not only sensible but consistent with the requirement that a petition must adequately set out the grounds on which relief is sought: Re Fildes Bros Limited [1970] All ER 923.

11.  In the present case there is no explanation in the Petition for the inclusion of a prayer for a winding-up order.  Neither is there anything in the Points of Claim.  The Points of Defence state in paragraph 18 “It is further averred that the Company is a going concern with substantial turnover and profits and the winding-up petition is bound to fail”.  The reply in paragraph 30 of the Points of Reply is this. 

“30. The Petitioner is just trying to withdraw, he has no intention to revenge nor to wind up the Company to any one’s expense. He is willing to exhaust all other venues to redress his grievances. He understands that this is a equitable remedy and he confirms that he comes with clean heads and had never done any wrong to the Company or the 2^nd Respondent or any other member of the Company.”

12.  The affirmation in opposition to the strike out summons is very limited.  In paragraph 4, it says:

“4. I would say that such a view is entirely incorrect and misconceived : my position is simply that a winding up would and should be the last resort and if and only if the 2^nd Respondent is neither willing to sell his shares to me nor to buy out my shares. There is now produced and shown to me exhibited and marked “CKC-19” copies of recent correspondences between parties’ solicitors. I must say there is no reply to our respective letters dated 19^th February 2013 and 21^st February 2013 from the Respondents’ solicitors up to the date hereof.”

13.  At the hearing before me Mr K M Chong who appeared for the Petitioner argued that it was not unreasonable to include the prayer for a winding-up order for the following reasons.  First, that despite agreeing to have the Company valued for the purposes of settlement negotiations, the 2^nd Respondent had not agreed to buy the Petitioner’s shares and the court could infer from this that he was not willing or perhaps might not be able to do so.  It seems to me that nothing can reasonably be inferred from this.  Secondly, that the 2^nd Respondent had dragged his feet in agreeing to the appointment of a valuer.  From the correspondence it is unclear that this is in fact the case, but in any event I do not see how one can draw the conclusion from this that the Respondent would not be willing or able to buy the Petitioner’s shares if he was unsuccessful at trial.  Thirdly, that given the fact that the Petitioner provided the initial finance for the establishment of the Company and the fact that the Company is not particularly profitable, the 2^nd Respondent might not be able to buy the Petitioner’s shares.  Mr Tony Ko, who appeared for the 2^nd Respondent, quite fairly points out that as this matter was referred to for the first time at the hearing, his client has not had the opportunity to address it.  I agree and I do not see how one can fairly draw the conclusion that the 2^nd Respondent may not be able to comply with any order the court makes that he buy out the Petitioner’s shares.

14.  On the basis of what is before the court now, I do not consider that there is any realistic prospect of a winding-up order being made and I strike out the prayer and order that the costs of the application be paid by the Petitioner.

15.  I would add that another indication that the inclusion of a prayer for a winding-up order had not been properly thought through is the fact that not all the shareholders have been joined.

16.  The Petitioner has issued a summons to stay the proceedings pending the conclusion of a mediation.  The Respondent did not object to such an order if the winding up relief was struck out.  I, therefore, order that the Petitioner that the Petition be stayed with liberty to either party to apply for the stay to be lifted.  I shall order that the costs of that application be costs in the Petition.