GENG HUA ZHONG AND ANOTHER v. LI SHU HON AND ANOTHER

HCCW 403/2017

[2018] HKCFI 1041

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 403 OF 2017

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D E C I S I O N

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1.  I have before me a summons issued on 26 April 2018 for a validation order in respect of payments and other dispositions of property made by the Company in the ordinary course of its business. The petition is a shareholders’ dispute. The background to the dispute and the complaints advanced by the petitioners are not material for present purposes. The relevant paragraphs of the petition are [7] and [87]:

“7. At all material times, the Company is and was the parent company of the T-Hero Group (defined below) and through the Group, carrying on the business of trading electronic devices and medical devices in the People’s Republic of China (‘the PRC’).”

“87. By reason of the aforesaid, the Petitioners aver that it would be just and equitable to wind-up the Company pursuant to section 177(1)(f) of the Companies (Winding-up [Winding Up] and Miscellaneous Provisions) Ordinance (Cap. 32). It is believed that there will be a surplus for distribution to its shareholders in the event that the Company is to be wound up, and it is further believed that it is unlikely that William would have sufficient cash to buy out the shares of the Petitioners and Vito in the Company at their fair price.”

2.  It is a necessary part of the case of a petitioner seeking a just and equitable winding up pursuant to section 177(1)(f) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32, that the company is solvent and a surplus will be available for distribution to the petitioner in the event of a winding-up order being made. If the company is insolvent, then a shareholder would have insufficient interest in the company to sustain a petition.  It therefore follows that a petition of this sort where what is sought by the petitioner is to wind up a solvent company which, albeit through operating subsidiaries, carries on an active business, should not give rise to contentious applications for validation orders. 

3.  The approach of not only the courts but the parties to applications for validation orders in these circumstances have been discussed fairly comprehensively in various authorities: Re Emagist Entertainment Ltd,[1] Re The Baptist Convention of Hong Kong,[2] Re Raising Engineering Ltd,[3] Re Fonfair Company Ltd,[4] Re Jessop & Baird (Hong Kong) Ltd.[5]  It is only necessary to summarise the principles that emerge from the authorities by quoting [5]–[7] of my decision in Emagist:

“5. It seems to me to be implicit in Slade J’s judgment that where the Court is faced with a shareholder’s petition in respect of a solvent company which has a valuable ongoing business that the directors should be allowed to continue to operate that business normally and without close supervision by the Companies Court. In practice this means that one would normally expect a company to obtain without any difficulty a validation order in respect of ‘payment of expenses made in the ordinary course of business’. Such an order I would expect normally to be readily made once the Court is satisfied of the solvency of the company and the fact that it has an active and ongoing business.

6. The Companies Court would not be concerned to check with precision the nature and the amount of the expenses. There may be, however, particular items of expense which those in control of a company consider to be sufficiently exceptional that there may be some question as to whether or not they are incurred in the ordinary course of business and in such circumstances I would expect prudent lawyers to advise that a validation order be sought in respect of those specific items of expense.

7. In my view a petitioning contributory should not approach an application for a validation order on the basis that there is an adversarial application before the Court. I would expect normally for a petitioning contributory to be advised that it is not only normal but necessary for a company to obtain a validation order and that it would only be if the shareholder has specific concerns which he can support by credible evidence that he should actively contest any part of the application. I appreciate that in practice where the relationship between shareholders has reached such a stage that a petition has been issued it is likely that there will be suspicions on the part of a petitioner about the way in which those in charge of the company are conducting its affairs, but such a shareholder needs to be advised that this in itself does not justify trying to turn what should be a straightforward application into something more adversarial and complicated than is necessary. A practical way of alleviating the concerns of a petitioning shareholder may be by doing, as the company has agreed in the present case, to provide a regular summary to the petitioning shareholder of the expenses that are being paid by the company.”

4.  Ms Law, on behalf of the petitioners, submitted that a validation order should not be made until further information was provided about the financial state of the Company, and in particular, audited financial statements for the most recent year for which they should by now be available, namely, 2016.  It is not necessary to go into the reasons why those financial statements are not yet available. 

5.  Ms Law’s basis for suggesting that further financial information should be required demonstrating the current financial state of the Company was that the onus was upon it to demonstrate its solvency and justify the application.  I accept that as a very general statement, that would appear to be correct.  However, as I have sought to emphasise in Emagist [6]and on other occasions, applications for validation of expenses incurred in the normal course of business by a company, which the petitioner itself says is solvent and acknowledges has an ongoing business, need to be considered in a practical manner.  If the petitioner itself has in its petition acknowledged that a company is solvent and carrying on a business, one would not expect the evidence that the company files to support a validation order to be particularly extensive as its financial state, or its general financial state, should not be contentious.  It is only if the petitioner has particular concerns that it can substantiate about the possible adverse impact on its economic interest in the company that the court should, in practice, be concerned to look in any detail at its financial position.  The application is not an opportunity for the petitioner to obtain financial information not otherwise available to it, or an opportunity to criticise or query the current management’s business decisions.  I would expect it only to be in unusual cases for validation order applications arising from just and equitable winding‑up petitions issued by shareholders to be contentious.  If both parties are being sensible, it should be possible for them to agree the terms of the validation order which, it is now common practice, will contain a term requiring a schedule of payments to be provided on a monthly basis to the petitioner.

6.  I will make a validation order in the terms discussed with counsel which I will append to these reasons. 

7.  I will make an order that the 1^st respondent’s costs of the application are paid out of the assets of the Company.  Mr Maurellet SC sought no other costs order.  Ms Law sought an order that the petitioners’ costs of the application be paid by the 1^st respondent.  Although the application came on at short notice, it still seems to me that the petitioners should have been able to have agreed an order with the 1^st respondent as it is the petitioners’ principal position that no order should be made today.  I will, therefore, deal with costs as Mr Maurellet SC proposes and make no costs order as between the 1^st respondent and the petitioners.

Appendix

1.   Notwithstanding the presentation of the Petition dated 29 December 2017 (the “Petition”), unless otherwise ordered by the Court, any payment or other disposition of property made on or after 29 December 2017 in the ordinary course of the business of the 2^nd Respondent (the “Company”), provided the total of such payments or dispositions do not exceed HK$1,000,000 in each calendar month, shall not be void by virtue of section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUO) (Cap.32);

2.   Without prejudice to the generality of paragraph 1 above, the payments made into or out of the bank accounts of the Company maintained with:‑

(a)   Bank A [account details redacted]

(b)   Bank B [account details redacted]

(c)   Bank C [account details redacted]

in respect of expenses / payments occurred in the ordinary course of business be sanctioned.

3.   The bank in paragraph 2 above shall be under no obligation to verify for itself whether any transaction through the Company’s bank accounts is in the ordinary course of business.

4.   The 1^st Respondent shall provide to the Petitioners within five (5) clear working days of the end of May 2018 a schedule recording each payment made in the ordinary course of its business and validated pursuant to paragraph 1 hereof from 29 December 2017 to 31 May 2018 and for each calendar month thereafter five (5) clear working days from the end of the calendar month (“Schedule”).

5.   The Petitioners be at liberty to inspect the documents supporting or evidencing the payments in the Schedule pursuant to paragraph 4 hereof within 5 clear working days of the end of each calendar month.

6.   There be liberty to apply.

7.   The costs of this application be paid to the 1^st Respondent out of the assets of the Company.

8.   There be no order as to costs as between the 1^st Respondent and the Petitioners.