SHIH-HUA INVESTMENT CO., LTD v. ZHANG AIDONG AND OTHERS

HCCW 198/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 198 OF 2016

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D E C I S I O N

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1.  This is the application of the 1^st Respondent (“Zhang”) by Summons dated 15 July 2016 (“Summons”) for a validation order under s.182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“Ordinance”) in respect of the following categories of payments or dispositions by the 3^rd Respondent (“Company”) on or after 20 June 2016, the date of presentation of the Petition herein (“Petition”) :

(1) payments or other dispositions of property by the Company in the ordinary course of business;

(2) repayments of loans or debts by the Company in the ordinary course of business, including the loans from the Petitioner (“SHI”), Zhang and the 2^nd Respondent (“Motivi”) or any of their associated companies; and

(3) payments of all reasonable legal expenses by the Company in these proceedings.

2.  The Company was incorporated in Hong Kong in August 2012.  Its principal business is trading in liquefied petroleum gas.

3.  SHI and Motivi are the 2 shareholders of the Company, each holding 50% of its shares.  The Company’s board of directors comprises of SHI and Zhang, who is the majority owner and controller of Motivi.

4.  The Petition was presented by SHI pursuant to s.177(1)(f) of the Ordinance and ss.723 to 725 of the Companies Ordinance, Cap 622.  Under the Petition, SHI seeks, inter alia, an order that Zhang do purchase its shares in the Company at a fair value, or alternatively, that the Company be wound-up on the just and equitable ground.      

5.  For the present purpose, it is unnecessary to go into the details of the complaints in the Petition.  It suffices to say that very serious allegations have been made by SHI against Zhang and/or Motivi concerning, inter alia, misappropriation, forgeries, exclusion of SHI from management, making unauthorized transactions, denying SHI of access to the books and accounts and breach of fiduciary duties. 

6.  The first hearing of the Petition has been fixed for 24 August 2016.  Zhang has indicated in the evidence filed in support of the Summons that the Petition will be opposed. 

7.  There is no real dispute that the Company is solvent and has an on-going business.  The evidence is that it has a profitable business and the draft financial statements of the Company for the year ended 31 December 2015 show that it had bank and cash balance in excess of HK$441 million. 

8.  SHI complains about the short notice for this hearing.  It proposes that an interim validation order in restrictive terms be put in place to allow the Company to meet its pressing financial obligations, pending a substantive hearing for the determination of the Summons.  Meanwhile, directions for the filing of further evidence should be given by the court.

9.  SHI cannot be surprised by this application.  It is legally represented all along.  It is inconceivable that an application for validation order could have escaped SHI’s mind.  Further, before the issuance of the Summons, letters have been written by Zhang’s solicitors to those representing SHI to try to elicit an agreement on a validation order to be made by the court.  Regrettably, such efforts were in vain.   

10.  There is no argument on the applicable legal principles, which are trite.  Where a company is solvent and has an on-going business, the court will normally grant a validation order to enable it to continue to trade.  To do otherwise would not only stifle its business, it is likely to be harmful to the interest of its creditors. 

11.  In this case, it would be inconsistent with the stance taken by SHI in these proceedings to stifle the Company’s business in any way. 

12.  The court has repeatedly said that this kind of application should not be treated as normal adversarial litigation (see Re Emagist Entertainment Ltd [2012] 5 HKLRD 703 and a summary of the authorities in Re Raising Engineering Ltd, HCCW 318/2014, unrep, 29 May 2015, §§3-9).  Regrettably, such advice is consistently ignored.  It befalls upon the court to try to encourage a change of litigation culture for this type of application.  

13.  It is the duty of the court to discourage unnecessary satellite litigation: see Re K&A International Co Ltd, HCCW 317/2013, unrep, 27 November 2013, §6.  Also, the court should guard against an application of the present type being used as leverage in an adversarial tussle. 

14.  Instead of making an interim order as suggested by SHI, I shall make the order which is warranted on the evidence.  The parties are free to make an application subsequently to vary the order if it is properly justified. 

15.  Subject to adequate safeguard, I see no good reason not to grant the order sought in para 1 of the Summons, save that the repayment of loans from the parties or any of their associated companies should be excluded.  The exclusion is justified given the allegations of misappropriate of the Company’s assets by Zhang and/or his associates.  Further, I am not satisfied about the urgency in making those repayments. 

16.  As regards the disagreement over the payment of salaries in the sum HK$50,000 per month to Zhang as the Company’s managing director, I see no proper reason to exclude it from the scope of the validation order given the evidence that he is the only director managing the Company: see Re Mi Fung Beads Co Ltd, HCCW 224/2004, unrep, 19 April 2004, §§23 and 24.

17.  I confine the payment of the Company’s legal expenses sought in para 2 of the Summons to “necessary legal expenses incurred by the Company for the compliance of this order”.  It is well-established that where a company is a nominal party to a petition which involves the dispute between shareholders, its money should not be spent on such dispute save for proper costs incurred on, eg, giving discovery or an application for validation order, and such further costs as may be expedient and necessary in the interest of the Company as a whole: see Re Wah Ying Cheong Co Ltd, HCCW 225/1996, unrep, 14 March 2003, §16.

18.  In respect of safeguard, in light of the serious nature of the allegations made in the Petition, I order that the Company do report to SHI on a monthly basis by way of a schedule setting out the date, amount, payee and nature of payment made by it out of its bank accounts in the previous month.  In addition, SHI be at liberty to inspect the documents supporting or evidencing these payments.   

19.  I should say that the resistance to allowing inspection of the supporting documents is quite unmeritorious in light of the fact that SHI is a director of the Company and has the right to inspect its books and accounts.  It has been suggested that there is no authority for making such a provision in a validation order, and in Re Sellen International Ltd, HCCW 436/2012, unrep, 25 January 2013, §12 (a case relied upon by SHI), the order for inspection was made with agreement by the parties.  I do not believe that there is any legal inhibition on the appropriate safeguard which can be imposed by the court in making a validation order.  It is a matter of proper exercise of discretion, which must be case specific.  

20.  I grant liberty to apply and the abridgement of time sought in para 4 of the Summons.

21.  I shall hear the parties on costs.