WONG KWONG MIU v. PEPPER BLOSSOM LTD AND OTHERS

HCCW 202/2025

[2025] HKCFI 4938

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 202 OF 2025

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D E C I S I O N

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Introduction and Background

1.  There is before this court an application by the 3^rd Respondent (“the Company”) for a validation order under section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“CWUMPO”).

2.  On 8 April 2025, the Petitioner presented a petition seeking unfair prejudice relief against the Respondents under section 724(1) of the Companies Ordinance (Cap 622) (“CO”), or alternatively, a just and equitable winding up of the Company pursuant to section 327(3)(c) of the CWUMPO (“the Petition”).

3.  The Company was incorporated in the Cayman Islands on 1 June 2021 registered under Part 16 of the CO. It is an investment holding company and its subsidiaries (collectively “the Group”) are principally engaged in the business of operating online social entertainment platforms, including live streaming services and social networking applications, in the PRC and overseas.

4.  Between 12 December 2022 and 16 December 2024, the shares of the Company were listed on the Main Board of the Stock Exchange of Hong Kong. On 1 February 2023, the Petitioner acquired 41,778,636 ordinary shares in the Company (i.e. approximately 3.98% of the Company’s issued shareholding). In the Petition, the Petitioner alleges that he acquired the shares “on the premise, and understanding and implied agreement” with the Company that its shares would remain listed and that it would do everything in its power to maintain its listing status. It is alleged that the Company failed to do so and that its affairs have been conducted in a manner unfairly prejudicial to the interests of its minority shareholders including the Petitioner. Accordingly, the Petitioner seeks an order that his shares be purchased by the 1^st and/or 2^nd Respondents (being the majority and controlling shareholders) or the Company at a price to be determined by the Court, or alternatively, the Company be wound up as its affairs would necessitate an independent investigation by the liquidators.

5.  As a result of the Petition, the Company’s 7 bank accounts in Hong Kong (“HK Accounts”) were frozen pursuant to section 182 of the CWUMPO.

6.  Despite the parties’ correspondence between 28 April 2025 and 3 June 2025, no agreement was reached on the proposed terms of a validation order.

7.  By summons dated 9 June 2025 (“the Summons”), the Company seeks an order to validate: (a) payments made on or after 8 April 2025 in the ordinary course of business, (b) payments for its reasonable legal and professional services expenses (including those in connection with these proceedings), and (c) payments to repurchase its shares from the minority shareholders (including the Petitioner) and for professional and other fees and charges in this connection. Apparently, the Company requires a validation order for (c) because it intends to use the funds in its accounts in Hong Kong for the repurchase of the shares of the minority shareholders (including those of the Petitioner) which, as mentioned above, is the primary relief sought in the Petition. The proposed payments under (c) can hardly be said to relate to the Company’s “ordinary course of business”. This appears to be reinforced by the fact that the Company has drafted a separate and distinct provision in the Summons for payment in this regard instead of subsuming it under (a) although the Company did not seem to entirely agree with this point at the hearing, which will be further discussed below.

The Relevant Principles

8.  The principles set out in the oft-cited decision Re Burton & Deakin Ltd [1977] 1 WLR 390 have been discussed and applied by the Hong Kong court in various authorities, including Re Emagist Entertainment Ltd [2012] 5 HKLRD 703 (Harris J) and Re K&A International Co Ltd (HCCW 317/2013, 27 November 2013, Anthony Chan J, as he then was). A helpful summary can be found in the decision of Recorder Yvonne Cheng SC (as she then was) in Re Orient Venture Investment Ltd [2020] HKCFI 576 at §§10-12 as follows:-

(1)  The weight to be attached to the opposition of a contributory to an application for a validation order in the case of a solvent company is very different from the situation where a petition is presented on the ground of insolvency.

(2)  For a solvent company, the responsibility of managing the business of the company is entrusted by its articles of association to its directors. The court does not generally, save in the case of proven bad faith or other exceptional circumstances, interfere with the exercise of the discretion conferred on the directors by the articles of association at the instance of a shareholder. This does not change simply because a winding up petition has been presented.

(3)  If on an application for a validation order for a particular disposition relating to a solvent company, (a) evidence is placed before the court showing that the directors consider that that 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 court 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.

(4)  It follows that one would normally expect a company to obtain without difficulty a validation order in respect of payment of expenses made in the ordinary course of business, once the court is satisfied that the company is solvent and has an active and ongoing business. The court would not be concerned to check with precision the nature and amount of the expenses.

(5)  A practical way of alleviating any concerns of a petitioning shareholder may be to provide a regular summary to the petitioner of the expenses that are being paid by the company.

(6)  The court will not allow the dispute and/or mistrust between the shareholders to prevail over the interest of the company or its creditors, or to allow the application for a validation order to be developed into satellite litigation.

(7)  As for validation of legal expenses, where a company is a nominal party to a petition, and in substance the proceedings involve a dispute between shareholders, the company’s money should not be spent on disputes between shareholders save for proper costs incurred, for example, on giving discovery, on an application for a validation order, and such further costs as may be expedient and necessary in the interest of the company as a whole.

(8)  The purpose of the court’s jurisdiction to grant validation orders is to preserve the value of assets of a company for the benefit of the people interested in the assets, notwithstanding the pendency of winding up proceedings, in order that the company might not be unduly hampered in carrying out transactions which might be for the benefit of those interested in the value of its assets.

Solvency of the Company

9.  The Company submits that the solvency of the Company is demonstrated by its latest audited consolidated financial statements for the year ended 31 December 2024, which show that as at the end of the reporting period:-

(1)  The Group’s cash and cash equivalents, represented by cash at banks and on hand, are RMB 2,114,318,000;

(2)  The Group’s net increase in cash and cash equivalent is RMB 288,806,000;

(3)  The Group’s net cash generated from operating activities is RMB 211,457,000;

(4)  The Group’s net current assets are RMB 1,997,625,000, net assets are RMB 2,103,445,000, and total assets less current liabilities are RMB 2,119,091,000; and

(5)  The Group’s current liabilities are RMB 429,914,000 and non-current liabilities are RMB 15,646,000.

10.  In the Petitioner’s affirmation in opposition dated 8 July 2025, the Petitioner noted that these are the figures of the Group as a whole. The Company itself, as opposed to the Group, did not have had cash at banks and on hand of RMB 2,114,318,000 but RMB 92,812,000. The same observation, says the Petitioner, applies to the other figures referred to by the Company. Nonetheless, the debate on insolvency seems unnecessary because in the Petition, the Petitioner avers that “the Company is solvent and thus there will be a surplus for distribution to its shareholders … on a winding up” (§64) and seeks as his primary relief a buy-out order from, amongst others, the Company (§49). Counsel for the Petitioner did not seem to argue otherwise at the hearing.

11.  In the circumstances, I accept that the Company is solvent and will proceed to consider the Company’s present application for a validation order on this basis.

Expenses in the Ordinary Course of Business

12.  In §§1-3 of the Summons, the Company seeks a general validation for payments and other dispositions of property made on or after 8 April 2025 in the ordinary course of business of the Company.

13.  As noted above, where a solvent company has an active and ongoing business, the court will normally grant a validation order in respect of payment of expenses made in the ordinary course of business. The court would not be concerned to check with precision the nature and amount of the expenses.

14.  In this regard, the Petitioner argues that the Company does not have an active and ongoing business. This is because it is an investment holding company, and the operations of online social entertainment platforms are conducted by the Group’s subsidiaries and not the Company itself. The Petitioner has referred to the Company’s listing prospectus in 2022, its 2023 annual report and its 2024 audited consolidated financial statements to illustrate the above and to highlight that the Company was incorporated in 2021 to act as the holding company and listing vehicle of the Group incepted earlier in 2006. The Petitioner submits that no payments are needed for the various activities of the Company which are “merely administrative tasks”.

15.  I am unable to accept the Petitioner’s submissions. Although the Company is an investment holding company, it is one which, albeit through operating subsidiaries, carries on an active and ongoing business. It would not be appropriate to determine whether a company has an “active and ongoing business” by merely referring to the extent and volume of its own trading activities. I agree with the Company’s submissions that in a corporate group, it is not uncommon for various entities to serve their supporting functions, say, for the purpose of compliance without conducting or taking part in the group’s actual trading and business operations. If any entity of this kind has duly prepared and submitted their financial statements and audited accounts, it should prima facie be regarded as carrying on active and ongoing (as opposed to dormant) business. The reality, in the context of validation orders, is that the scope of a company’s ordinary expenses would be commensurate with the extent of its activities and operations. For example, if it only serves a limited supporting role for the group, this should be reflected in the regular summary of expenses presented by the company, which the petitioner could scrutinise from time to time.

16.  In support of the above, the Company has referred to Singasia Holdings Ltd v 劉新生 [2019] HKCFI 2555 concerning a holding company listed on the GEM Board of the Stock Exchange in which Queeny Au-Yeung J also held (at §19) that the monthly fees and charges for compliance and regulatory expenses were ordinary business expenses of such holding company.

17.  In the present case, I am prepared to accept the evidence filed by the Company that the Company has, for the continued operations of itself and the Group, ordinary business activities including the preparation of financial statements, conducting regular audits, assessing operational performance, ensuring compliance with applicable laws, regulations and internal policies, and handling regulatory inquiries and litigation matters. These are not “merely administrative tasks” but would naturally involve payments of fees and charges to its professional advisers, service providers, the government, etc. The Petitioner appears to accept in his skeleton that expenses for “audits, assessments and compliance management” are, in principle, “proper expenses”.

18.  For completeness, it is noted that the Petitioner’s submissions have also made specific complaints in relation to certain items in the Company’s list of anticipated expenses between June 2025 and June 2026 and queried the bases of some projections therein (such as the estimated audit and appraisal fees in 2025). While the Petitioner’s reaction is understandable not least because the invoices produced by the Company are heavily redacted for no apparent reason (a matter which I will also come to in §§36-37 below), it should be pointed out that the Company’s application in §§1-3 of the Summons is only for a general validation for expenses in the ordinary course of the business, as opposed to a specific validation of the individual items listed in its projections. As such, and without the benefit of full evidence and submissions from the parties, I do not consider that this is the appropriate occasion for the Court to make any definitive ruling one way or the other on the validity of each specific item.

19.  The Petitioner submits that the validation order should be subject to a cap. However, in Re Meanmax Ltd [2019] HKCFI 801 which is the only case the Petitioner cited that refers to a cap, the court did not discuss whether or why a cap should be made, as the cap there was only a term of the parties’ agreement.

20.  Having considered the parties’ evidence and submissions and the safeguards which the court will impose in §21 below to enable the operation of the order to be monitored by the Petitioner, I am of the view that it is not necessary in the circumstances for the court to impose any particular cap on the validation order. Where a payment is made or purportedly made pursuant to the validation order which proves not to be in the ordinary course of the Company’s business, it would be open to the Petitioner to challenge that payment, or in the event of the Company eventually going into liquidation, for a liquidator to do so, on the basis that the payment, not being made in the ordinary course of business, was outside the scope of the validation order and so was not protected thereby. Further, if a payment which on the face of it is made in the ordinary course of the Company’s business proves ultimately to have been made in bad faith or in some way in an abuse of the directors’ powers, this no doubt could also be the subject of investigation at a later stage should that be necessary: see Re Mi Fung Beads Co Ltd (HCCW 224/2004, 19 April 2004) at §§27-29 per Barma J (as he then was).

21.  For the above reasons, I am of the view that it would be appropriate to permit the Company to carry on its ordinary business activities, and accordingly, I am satisfied that the Court should grant a validation order in terms of §1 of the Summons, subject to the appropriate safeguards (as accepted by the Company in §§6-7 of its Summons) as follows:-

(1)  The Company shall provide to the Petitioner, within 14 days of the end of each calendar month, a statement of accounts summarising the expenses and payments of the Company (with the date, amount, payee and nature of payment) for the relevant calendar month; and

(2)  The Petitioner be at liberty to inspect the documents supporting or evidencing the above payments.

22.  I do not consider it necessary to further grant §§2-3 of the Summons which, as submitted by the Company at the hearing, were only sought for the avoidance of doubt.

Legal and Professional Services Expenses

23.  In §4 of the Summons, the Company seeks an order to validate payments for reasonable legal and professional services expenses, including those in connection with these proceedings.

24.  Given the general validation order already granted to the Company for payments made in the ordinary course of its business, it appears to me only appropriate to additionally grant a validation order for the payment of reasonable legal expenses incurred by the Company in these proceedings.

25.  In the letter from the Company’s solicitors Messrs. Hogan Lovells to the Petitioner’s solicitors Messrs Iu, Lai & Li dated 28 April 2025, it was noted that the Company intends to take a neutral position in these proceedings (presumably because the fight is essentially between the shareholders). Hence, at this stage, I am inclined to agree with the Petitioner that the Company’s reasonable legal expenses may well be limited to those for seeking a validation order, making discovery, and attending the substantive hearing of the Petition.

26.  It is noted that the Petitioner, in his skeleton, has also remarked that the fees of US$230,000 charged by the Company’s solicitors as shown in their invoices appear to be far beyond what is required for a validation order (even after including attendant advice), but the work performed has been redacted from their invoices produced by the Company. It is submitted that unless proper evidence is provided, they should not be validated. Further, the Petitioner contends that the said fees, together with the previous legal fees of Loeb & Loeb (retained by the Company for other matters) which are non-recurring, cannot be used as the basis for estimating further legal fees for the second half of 2025. However, given that what is now sought by the Company is a general validation as opposed to one for any specific invoice or transaction, it is not necessary for me to make any definitive ruling on whether the particular invoices of the Company’s solicitors should be validated and whether the Company’s projection of legal fees (for the purpose of its ordinary course of business and/or the present proceedings) is sound or not.

Share Repurchase Scheme

27.  In §5 of the Summons, the Company seeks an order to validate payments relating to the repurchase of its shares from minority shareholders (including the Petitioner) and for professional and other fees and charges in this connection.

28.  In the affirmation of Zhao Dan (a Board Director of the Company) dated 9 June 2025, it was stated that since around the same time as the presentation of the Petition, the Company has been formulating a share repurchase scheme to repurchase the shares of minority shareholders (including the Petitioner) by way of a scheme of arrangement. In this regard, the Company intends to use the funds in the HK Accounts (and, if necessary, other accounts of the Group) to execute the repurchase. In order for the Securities and Futures Commission (“SFC”) to approve the scheme, the Company is required to submit a fund proof and to place the funds in an account jointly controlled by the Company and the financial adviser, which cannot be subject to any restrictions or used for any other purpose. The scheme cannot, says the Company, progress further unless there is a validation order.

29.  In the second affirmation of Zhao Dan dated 6 August 2025 (“Zhao 2^nd”), it was added that although the Company does not consider that payments relating to the repurchase of shares fall outside its ordinary course of business, it is unnecessary to debate the point given the Company’s proposal to include a separate term in the draft order expressly permitting the Company to pay its professional advisers for advising on and executing such repurchase.

30.  On the currently available materials before the court, I am unable to accept that the proposed share repurchase scheme constitutes an ordinary course of the Company’s business. To say the least, share repurchases are not part of the business operations of the Group, nor does the Company need to pay for the repurchases in order for it (or the Group) to continue in business. As stated in §7 above, the fact that the Company seeks a provision for payments in relation to share repurchase (which is separate and distinct from the general provision for payments in the ordinary course of business) also seems to reinforce this point. Hence, this part of the Company’s application would be met with a closer scrutiny by the court.

31.  As matters stand, I am unable to grant a validation order as sought by the Company in §5 of its Summons. My reasons are as follows.

32.  First, the anticipated fees for the Company’s proposed share repurchase scheme involve significant sums to the tune of about HK$21,610,000, which comprises (1) financial adviser fees of HK$12,000,000, (2) legal fees of US$1,200,000 (about HK$9,360,000), and (3) SFC’s fees of HK$250,000.

33.  However, as alluded to in Zhao 2^nd, the Company does not actually know how many shareholders will participate in the proposed scheme and how much the value of the offer will be.

34.  Although the Company contends that it is bound by the Codes on Takeovers and Merger and Share Buybacks (“the Codes”) and cannot disseminate details of the share repurchase to a particular shareholder unless disseminated to all shareholders, it acknowledges in Zhao 2^nd that it has in fact already obtained the SFC’s agreement for the Company to discuss matters relating to the share repurchase with the Petitioner. Nonetheless, it is the Petitioner’s case, which is not seriously disputed by the Company, that no meaningful information of the proposed scheme has been provided to the Petitioner. In any event, the Codes referred to by the Company also cannot explain the lack of dissemination of meaningful information about the proposed scheme to all shareholders.

35.  These are particularly significant because the repurchase, according to the Company, is intended to be implemented by a scheme of arrangement, which in turn requires shareholder approval. The Company has not provided any concrete information on the proposed scheme such as the anticipated price range. In the circumstances, it does not appear to me that expending significant sums for implementing the scheme could be reasonably considered as necessary or expedient in the interests of the Company. To say the least, any consideration of the proposed scheme would be rather speculative.

36.  I should also add that it is rather undesirable that the documents produced by the Company in support of the application are heavily redacted for no apparent reason. The Petitioner has raised some reasonable queries on the documents produced which are, in my view, not satisfactorily addressed by the Company’s evidence filed before the court. For example, one of the agreements in relation to financial advisor fees has included a PRC company北京花房科技有限公司as one of the parties, but it is unclear how and why it is involved in the Company’s share repurchase scheme. Further, the legal fees quotation produced by the Company is stated to include BVI lawyer fees, but it is unclear what BVI law has to do with a share repurchase of the Company which was incorporated in the Cayman Islands. Although the Company’s solicitors have sought to provide some explanations at the hearing based on the instructions they received from the Company, it is difficult for the court to derive any real assistance from such explanations in the absence of proper evidence filed by it before the court.

37.  In my view, the Company’s position — that shareholders are not entitled to all detailed information and that the Company must ensure equal treatment of all shareholders in information dissemination — also does not justify the redactions made by the Company and its lack of transparency in the present application. The court cannot be expected to simply rubber stamp the application (particularly when the validation order is sought for expenses not related to the ordinary business of the Company) and grant the order sought based on some unduly obscured documents and speculative guesswork. For the avoidance of doubt, I should emphasise that the requirement for candid and proper disclosure is equally imperative when the Company complies with its obligation to allow the Petitioner’s inspection of documents supporting or evidencing payments made pursuant to any validation order made by the court.

38.  It only remains for me to state that my views on the Company’s application made in relation to its proposed share repurchase scheme above are based on the materials currently before the court. Should further developments and materials regarding the proposed share repurchase scheme become available, the Company may, if so advised, take out an appropriate application in due course.

Disposition

39.  For the above reasons, I grant a validation order to the Company in the terms as appended to this Decision.

40.  I also grant liberty to apply as sought in §8 of the Summons.

41.  As to costs, as neither of the parties has been entirely successful in the application, I make an order nisi that the costs of the Summons be in the cause of the Petition.

42.  The costs order nisi shall become absolute unless an application to vary the same is made within the next 14 days.

Appendix

1.  Notwithstanding the presentation of the Petition dated 8 April 2025 (“the Petition”), unless otherwise ordered by the Court, any payment or other disposition of property made on or after 8 April 2025 in the ordinary course of the business of the 3^rd Respondent (“the Company”) shall not be void by virtue of section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“CWUMPO”).

2.  Notwithstanding the presentation of the Petition, the payment of reasonable legal expenses incurred by the Company in HCCW 202/2025 shall not be void by virtue of section 182 of the CWUMPO.

3.  The Company shall provide to the Petitioner, within 14 days of the end of each calendar month, a statement of accounts summarising the expenses and payments (including legal expenses) of the Company (with the date, amount, payee and nature of payment) for the relevant calendar month.

4.  The Petitioner be at liberty to inspect the documents supporting or evidencing the above payments.

5.  There be liberty to apply.