XU LIU CHUN v. WU CHANG JIANG AND ANOTHER

CAMP 160/2019

[2019] HKCA 975

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO 160 OF 2019

(ON AN INTENDED APPEAL FROM HCMP NO 3166 OF 2014)

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REASONS FOR DECISION
AND ASSESSMENT OF COSTS

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Hon Barma JA (giving the Reasons for Decision and Assessment of Costs of the Court):

1.  This was a renewed application for leave to appeal, and for a stay of execution pending appeal, against the judgment of DHCJ Patrick Fung SC dated 23 April 2019 whereby the 1^st respondent (“the respondent”) was ordered, inter alia, to pay into court US$1.2 million as an interim payment for the purchase from the petitioner of 12,000 shares in the 2^nd respondent (“the Company”). At the conclusion of the hearing, we dismissed the application upon certain undertaking given by the petitioner, and ordered the respondent to pay the petitioner’s costs of the application to be assessed on a gross sum basis. We now hand down our detailed reasons, and our assessment of costs.

2.  By a summons dated 6 May 2019, the respondent sought leave to appeal against the Judgment and a stay of execution pending appeal before the judge.  On 27 June 2019, the judge refused leave to appeal but he granted a stay conditional upon the due prosecution of an application for leave to appeal by the respondent before this court.  By a summons dated 11 July 2019, the respondent renewed his application for leave to appeal to this court.

The judgment below

3.  The background of this case is set out in [1] – [9] in the judgment of this court delivered on 18 April 2019 ([2019] HKCA 355).  The petitioner is the minority shareholder in the Company, holding 40% of its shares, while the respondent holds the remaining 60%.  One of the main businesses of the Company is road repair works for the Angolan government.

4.  On 4 December 2014, the petitioner filed a petition pursuant to sections 724 and 725 of the Companies Ordinance, Cap 622 seeking a buy-out order in respect of his shares, on the ground that the affairs of the Company were being conducted in a manner unfairly prejudicial to his interests.  In a judgment given on 13 July 2018, DHCJ Lee (as he then was) held that the petitioner had established unfair prejudice based on the withdrawal of US$4.4 million from the Company by the respondent in favour of a company owned by the respondent and his wife (see DHCJ Lee’s judgment at [97] – [100]) and the denial of financial information concerning the Company to the petitioner (see the same judgment, at [101] – [107]). 

5.  DHCJ Lee ordered that the respondent should buy out the shares in the Company held by the petitioner, and that the shares should be valued on the following basis: (a) by reference to the assets, profitability and future prospects of the Company as at 4 December 2014 (the date of the petition); (b) taking into account the unilateral withdrawal of US$4.4 million by the respondent; and (c) without any discount for a minority shareholding.

6.  By a summons dated 2 November 2018, the petitioner applied for interim payment by the respondent for 40% of the sum of US$4.4 million pursuant to sections 724 and 725 of the Ordinance and also pursuant to RHC Order 29, rules 10-13.

7.  In the judgment dated 23 April 2019, DHCJ Patrick Fung SC allowed the application for interim payment to the extent that the respondent was ordered to pay into court the sum of US$1.2 million for the 12,000 shares held by the petitioner, which had a par value of US$100 per share.  At the time of the hearing before DHCJ Fung SC, an appeal to the Court of Appeal by the petitioner, and a cross-appeal by the respondent, against the judgment of DHCJ Lee were awaiting judgment, and DHCJ Fung SC gave leave to the petitioner to have the sum paid out to him in the event that the respondent’s cross-appeal was unsuccessful.

8.  On 18 April 2019, in [2019] HKCA 355 (CACV 380/2018) the Court of Appeal (differently constituted) dismissed the appeal by the petitioner and the cross-appeal by the respondent against the judgment by DHCJ Lee.  To date, however, no payment in has been made by the respondent.

Grounds of appeal

9.  By his draft Notice of Appeal, the respondent raises two broad grounds of appeal against the interim payment ordered by DHCJ Patrick Fung SC.  He submits first, that the court has no jurisdiction to make the order for interim payment (“the Jurisdiction Point”), and secondly, that the court in any event exercised its discretion wrongly (“the Discretion Point”).

10.  In relation to the Jurisdiction Point, the respondent contends that neither sections 724 and 725 of the Ordinance, nor RHC Order 29, empower the court to order an interim payment in respect of an order to buy out shares.  The respondent relies on Smuts v Pearson [2010] EWHC 814 (QB) §§96‑97 for the proposition that a defendant has a right not to be held liable to pay until liability and quantum has been established by a final judgment.  He submits that sections 724 and 725 of the Ordinance do not contain any express power to make an interim payment order, and that the court’s powers to order interim payment are exclusively and exhaustively governed by RHC Order 29.  He further relies on Re a Company (No 004175 of 1986) [1987] BCLC 574 and my judgment in Lam Yuk Hon v Kook Tai Wai (HCCW 1138/1999, unreported, 4 September 2007) for the proposition that an order for purchase of shares is not a “judgment for a substantial sum of money” within the terms of RHC Order 29 r 12(c), so that Order 29 does not empower the court to make an order for interim payment in a case such as the present.

11.  In our view, the Jurisdiction Point is without merit, and can be disposed of briefly.  There is a well-established line of Scottish and English cases on the equivalents of sections 724 and 725 of the Ordinance supporting the power of the court to order interim payment where it is satisfied that there has been unfairly prejudicial conduct of a company’s affairs – see Whyte, Petitioner 1984 SLT 330, Ferguson & Anor v Maclennan Salmon Co Ltd & Ors [1990] BCC 702, Re Clearsprings (Management) Ltd [2003] EWHC 2516 (Ch) and Re Annacott Holdings Ltd [2011] EWHC 3180 (Ch).  The principles established in these cases were applied in Hong Kong by Kwan J (as she then was) in Re Hang Sang Engineering Factory Ltd(HCCW 456/2005, unreported, 7 November 2007).

12.  Sections 724 and 725 of the Ordinance are in extremely wide terms.  Section 724(1)(a) provides that where the court considers that the affairs of a company are or have been carried on in an unfairly prejudicial manner, the court may make an order pursuant to section 725(1)(a).  Section 725(1)(a) in turn authorises the court to make any order that it thinks fit to deal with the unfairly prejudicial conduct.  Provided that the court is satisfied that there has been unfairly prejudicial conduct, its powers to grant relief are extremely wide. Nothing in the relevant provisions of the Ordinance suggests that the power should be so limited as to preclude the possibility of interim relief being given pending the final determination of the price at which a buy-out should take place, when one is ordered.  We do not accept that the principles stated in §§96-97 of Smuts v Pearson apply to the present case.  In Smuts, the application for interim payment was refused because there were a large number of detailed issues of fact for the court to consider (see §102), a situation markedly different from the present case where the question of unfair prejudice has been decided in the petitioner’s favour, and confirmed on appeal.

13.  In Re a Company (No 004175 of 1986), Scott J considered at p 578b and p 579d-h that the court did not have jurisdiction to make an interim order pending the hearing of the petition.  That is, again, a fundamentally different situation from the present case where the petition has been disposed of in the petitioner’s favour.

14.  In Lam Yuk Hon, the court had to decide whether it had jurisdiction to order interim payment after the parties had settled a winding up petition on the just and equitable ground (under section 177(1)(f) of the old Companies Ordinance) on terms, embodied in a Tomlin order, which involved a sale of shares by one party to the other on the basis of a valuation to be made.  It was held that the court had no such jurisdiction, as the proceedings were not brought pursuant to section 168A of the old Ordinance, and also because the petition had been stayed save for the purpose of carrying out the terms of the Tomlin order.  This case does not assist the respondent.  On the contrary, it envisages the possibility that an interim payment order might have been made pursuant to section 168A, the forerunner of what are now sections 724 and 725.

15.  The respondent also contended that an interim payment order should not be regarded as available under sections 724 and 725, as he would not be able to exercise the rights conferred by the petitioner’s shares, despite having paid (or partially paid) for them by way of interim payment.  Given that the respondent is the majority shareholder, we do not see that this argument has any force.  In a different case, any concerns of this nature might be addressed by the imposition of terms regarding the exercise of shareholder rights by the party whose shares are to be bought out pending the completion of the buy-out.

16.  We therefore conclude that the court has jurisdiction to make an order for interim payment under sections 724-725 of the Ordinance and Order 29, and do not think that the contrary is arguable.  In the light of this conclusion, it is not necessary for us to express any concluded view on whether jurisdiction to order an interim payment arises independently under RHC Order 29.

17.  Turning to the Discretion Point, the respondent submitted that it was wrong for the judge to value the shares by reference to the paid-up capital of the Company, particularly as there was no evidence from which the judge could conclude that the paid-up capital of the Company (US$3 million) was still with the Company.

18.  We accept that there is at present no valuation in respect of the Company, nor is there much financial information relating to the Company available.  However, the petitioner is not in any position to value the Company, given that one aspect of his complaint of unfair prejudice related to his lack of access to financial information concerning the Company.  The respondent could be expected to have financial information relating to the Company available, but has not put any forward, and has merely highlighted possible difficulties with valuing the Company without putting forward any positive case on its valuation.

19.  We do not think that the lack of a valuation precludes the court from arriving at a figure for interim payment.  It must be remembered that the finding of unfair prejudice was in large part based on the withdrawal of US$4.4 million from the Company by the respondent, and that the valuation is to be conducted on the basis that this amount is to be taken into account.  Although Mr Wong sought to suggest that the question of how much of this amount actually belonged to the Company beneficially remained open for further argument, we would (without expressing a concluded view on the matter) observe that the order of DHCJ Lee might have been worded somewhat differently if this were the case.  In these circumstances, absent any evidence to the contrary (such as the Company having more liabilities than assets, or that it has incurred substantial losses), there is at least a prima facie case that the petitioner’s shares will be worth at least 40% of the US$4.4 million (ie US$1.76 million).  Indeed, this was one basis on which the petitioner made his application for an interim payment.

20.  As the US$1.76 million figure mentioned above is substantially greater that the amount of the interim payment ordered by DHCJ Fung SC, we see no reasonable basis for the respondent to contend that he has been prejudiced by the deputy judge’s approach to valuation.

21.  In all other respect, we agree with the deputy judge that this is an appropriate case for the discretion to be exercised in favour of the making of an order for interim payment.  The Discretion Point therefore has no reasonable prospects of success either.

22.  Mr Suen informed us that he had instructions that the petitioner was content to leave the interim payment in court pending the conclusion of the valuation exercise, notwithstanding the dismissal of the cross-appeal against DHCJ Lee’s judgment.  In the light of the possible argument as to whether some of the US$4.4 million did not in fact form part of the Company’s assets, we accepted an undertaking from the petitioner not to seek payment out of the interim payment until after the conclusion of the valuation process.

23.  We therefore dismissed the application for leave to appeal on the basis of such an undertaking.  It follows that the application for a stay pending appeal must also be dismissed.

24.  We would therefore dismiss the summons dated 11 July 2019 with costs to the petitioner. Having considered the petitioner’s statement of costs as updated by Mr Suen, we assess such costs on a gross sum basis in the amount of HK$300,000.