ZHENG ZHIQIANG v. MASTER BRIGHTON DEVELOPMENT LTD AND OTHERS

HCCW 896/2004

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 896 OF 2004

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D E C I S I O N

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1.  I am concerned with an inter partes summons taken out by the petitioner on 20 August 2004 seeking an order that a provisional liquidator be appointed for Master Brighton Development Limited (“the Company”). 

2.  I should mention that there is another substantive application in that summons which is for an order to allow the petitioner to inspect the books and records of the Company, including the account statements of the bank accounts of the Company in Hong Kong and elsewhere.  But as the respondents have filed evidence to say that they have no objection to allowing the petitioner access to the books and records of the Company, Mr Douglas Lam who appeared for the petitioner did not find it necessary to proceed with that part of the application.  So I am concerned only with the appointment of a provisional liquidator. 

3.  The petitioner must make out a good prima facie case for a winding-up order (on the just and equitable ground in this case) and that it is appropriate in all the circumstances to appoint a provisional liquidator.  As I have indicated to Mr Lam, I am not satisfied on the available materials that either ground is made out. 

4.  The dispute in these proceedings relates to a company incorporated in the Mainland known as Panyu Embroidery Clothing Company Limited (“PECC”).  PECC was acquired in 1999 by four shareholders, the petitioner and the 2^nd to 4^th respondents.  Until January or February 2004, these four were the directors of PECC.  The responsibilities of these four in PECC are not in dispute and are as set out in the petition, which I do not propose to repeat. 

5.  It is also not in dispute that the Company was incorporated in Hong Kong in early 2002, as the administrative and export agent for PECC.  The shares of the petitioner and the 2^nd to 4^th respondents in the Company are held in the same ratio as their shareholdings in PECC and all four were and are the directors of the Company.  The day to day affairs of the Company have been handled by the 2^nd respondent mainly.  The business of the Company is as described in the 2^nd affirmation of the 3^rd respondent.  In short, the Company was established in Hong Kong for the specific purpose of receiving and making payments on behalf of PECC in Hong Kong.  PECC is a manufacturer and seller of ladies undergarments.  Upon fulfilling the purchase orders of its customers, PECC would issue invoices to the customers.  In certain situations, PECC would ask its customers to pay the amounts invoiced into the bank account of the Company in Hong Kong.  From time to time, PECC would instruct the Company to make payments from the bank account in Hong Kong for the purchase of raw materials and other expenses such as transportation expenses incurred in Hong Kong.  That would have appear to be the primary business activity of the Company.  The Company also carries on quota trading on behalf of PECC.  This relates to quotas in excess of the needs of PECC and the funds are remitted to PECC after the transactions are carried out.  There would appear to be no or no substantial dispute about these matters in the petition and in the supporting evidence filed by the petitioner, save that the petitioner alleges that the Company has received a commission for acting as agent for PECC.

6.  The case for winding up the Company on the just and equitable ground is premised on a quasi-partnership in relation to both PECC and the Company, with an implied agreement or mutual understanding pleaded in these terms in the petition:

“(1)    Each of the Shareholders would, if he or she so wished, continue to be involved in the management of PECC and/or the Company so long as he or she remained a shareholder of PECC and/or the Company.

(2)     Executive control of PECC and/or the Company would not be ceded to a third party without the unanimous consent of each of the Shareholders, so long as he or she remained a shareholder of PECC and/or the Company.

(3)     Each of the Shareholders, so long as he or she remained a shareholder of PECC, would continue to enjoy a proportionate share of the profits generated by the export agency business operated by the Company, which was an inextricable part of the overall business and profits of the Shareholders.”

7.  I fail to see the basis for importing the equitable considerations in  Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 to PECC, which is a company incorporated in the Mainland and acquired by the petitioner, the 2^nd to 4^th respondents three years before the incorporation of the Company.  I do not understand how it could be contended that the rights and obligations of the shareholders in PECC should be governed by the laws in Hong Kong, instead of the laws in the Mainland, which is the jurisdiction under which PECC was incorporated and the place where it has been carrying on business.  If there is no or no sufficient basis for importing equitable considerations when PECC was first acquired by the parties, I fail to see why it should make any difference to the basis of association of these individuals when PECC decided to set up the Company in Hong Kong three years later.

8.  I agree with the respondents’ counsel, Miss Eva Sit, that the real dispute here relates to PECC.  This is apparent from reading the complaints in the petition.  They relate by and large to differences between the parties arising out of an alleged breach of agreement to sell PECC to the petitioner and the subsequent agreement to sell the 2^nd respondent’s interest in PECC to the 3^rd and 4^th respondents.

9.  The dispute relating to the Company is very much a side issue and has not arisen until recently, when a decision was made by PECC in a shareholders’ meeting on 29 July 2004 to close down the agency business of the Company in Hong Kong (the actual words in the English translation of the minutes are to “deregister” the Company) and to appoint another company in Hong Kong to act as the agent of PECC.

10.  It is alleged by the petitioner that this is an unauthorised transfer of the Company’s business and has brought about a breakdown of mutual trust and confidence to justify winding up on the just and equitable ground.  The respondents’ case is that the decision was made by PECC to terminate the agency business of the Company in Hong Kong and that the decision was valid and in accordance with the laws in the Mainland.

11.  As I understand the petitioner’s case, this decision made by PECC should be challenged and that challenge is to be founded on equitable considerations based on a quasi-partnership under Hong Kong law.  On the arguments addressed to me, I fail to see why the laws in the Mainland should not be applied and I am not able to see a good prima facie case for winding up on the just and equitable ground.  I do not know why the petitioner should take his case to the Hong Kong court instead of the courts in the Mainland.

12.  I turn to consider if it is appropriate to appoint a provisional liquidator in this case.  Here I also accept the submissions of Miss Sit.

13.  The primary question I should ask in this situation is what are the assets to be protected, as this seems to be the main reason for the appointment of a provisional liquidator.  The Company was set up for a specific purpose, with no business of its own.  Although it had a turnover of HK$51 million during the accounting period of 9 April 2002 (being the date of its incorporation) to 31 December 2003 according to the audited financial statements, the sales were sales conducted for and on behalf of its principal PECC.

14.  It is accepted on both sides that the money received by the Company on behalf of PECC has all been remitted to PECC, after the deduction of certain expenses.  The only difference is whether the Company has received any commission from PECC.  The petitioner says yes, but this would appear to be a bare assertion.  He has not given any particulars at all of any such commission allegedly received by or payable to the Company, nor has he provided any documents in support of his assertion.

15.  The respondents say that no such commission was received by or payable to the Company.  The commission that has been deducted is the commission paid to other parties for introducing business to PECC .  There is no indication in the audited accounts of any such commission received by the Company as a source of income.  Indeed it would appear from the audited accounts that no profits have been made by the Company and it has actually suffered a loss of HK$39,000.00 odd after the deduction of all expenses.  Whatever is the position regarding the commission, I see no good reason why a provisional liquidator should be appointed.  No useful purpose would be served by appointing a provisional liquidator, if it is accepted that the provisional liquidator should pay over all moneys received to the principal PECC, after the deduction of expenses.

16.  I accept the submission of the respondents whether the Company or some other Hong Kong company should receive payments from customers on behalf of PECC for goods sold by PECC should not affect the petitioner’s interest, as the payments are all to be channelled back to PECC.  The petitioner is still a shareholder in PECC, although he has been removed as a director.  If there should be profits arising out of the sales of PECC, it would be a matter for the board of PECC whether to distribute dividends to the shareholders.

17.  Furthermore, the bank account of the Company has been frozen after the petition was presented.  It would be fanciful to suggest that the bank would allow withdrawal from the Company’s account without a court order notwithstanding receiving notice of the presentation of the petition.  The Company is willing to allow access to its books and records so that the petitioner can ascertain if there is any receivable due to the Company.  It is unlikely that further payment would be made by the customers of PECC to the Company, in view of the notice received from PECC that they should make payments in future to another Hong Kong company.  So if a provisional liquidator were to be appointed, he would only be looking after existing funds.

18.  The other reason put forward by the petitioner for appointing a provision liquidator is to preserve the books and records of the Company.  That is quite unnecessary in this case.  There is nothing to suggest that there is any risk of destruction of the books and records of the Company, nor, on the available evidence, is there anything to indicate that there is any risk of dissipation of the assets of the Company.

19.  For the above reasons, it does not appear to me that a case has been made for the appointment of a provisional liquidator.  Accordingly, I dismiss this application.