CHEUNG HON WAH v. CHEUNG KAM WAH AND OTHERS

HCMP 2686/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 2686 OF 2003

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D E C I S I ON

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Introduction and background

1.  This is an application for leave to amend the petition in these proceedings.  As the proceedings currently stand, the petition is one that is brought pursuant to section 168A of the Companies Ordinance (Cap. 32) by the Petitioner, Mr Cheung Hon Wah, who says he is a 50% shareholder and a director, at least until 5 March 2004, of Kammy Town Limited (“the Company”).

2.  The circumstances of his removal as a director are the subject of controversy as between the Petitioner and the 1^st Respondent, and will, no doubt, have to be investigated, either in these proceedings or in other proceedings, in due course.  The 1^st Respondent is Mr Cheung Kam Wah, the holder of the other 50% of the shares in the Company and also a director of the Company.

3.  As it presently stands, the petition seeks relief principally in the form of an order that the 1^st Respondent be ordered to sell his shares in the company to the Petitioner.  It is based on various allegations of misconduct and wrongdoing by the 1^st Respondent in relation to the Company.

4.  These include allegations that there have been substantial transfers of the Company’s funds out of a bank account over which the Petitioner had some control, into a bank account over which the Petitioner had no control, and subsequent non-payment by the Company of bills and invoices due to its suppliers, with a consequent detrimental effect on the Company’s business, which involves the manufacture and sale of garments for export.

5.  It is said also that there have been attempts to seek the release of one of the Company’s properties from a mortgage over that property, granted to its bankers as security for banking facilities granted to the Company, which have led to a withdrawal, or at least a reduction, of those facilities.

6.  It is said further that the 1^st Respondent has forced out certain key employees of the Company, replacing them with employees loyal to himself, resulting in the petitioner being excluded from the management role, which he previously enjoyed in relation to the Company and which it is his case had been mutually understood by himself and the 1^st Respondent to be the role that the Petitioner should play within the Company.  There are also complaints of the 1^st Respondent having by his conduct forced out the Company’s then auditors.

7.  There are also complaints as to the way in which the 1^st Respondent has dealt with the affairs of the Company.  In particular it is alleged that he has refused to sign the Company’s audited accounts, which has led to penalties being imposed on the Company by the Inland Revenue Department.  There are also allegations that there have been failures to pay an important supplier of the Company (known as the Shi Mei Factory), which has now had the result that that supplier has been wound-up, and (at the time the petition was presented on 24 June 2003, had had the effect of the supplier being faced with legal action in the PRC, which had hampered the production of garments for the Company to sell to its customers.

8.  There is also a complaint that unfounded legal actions have been commenced by the 1^st Respondent against the Petitioner.

9.  The 1^st Respondent, for his part, paints a very different picture of the situation, and says that it was the Petitioner who was to blame for any breakdown in the relationship between them, and makes similar accusations against the Petitioner.  Among these, the more prominent are allegations that the Petitioner has misused the Company’s funds, that he has been running his own businesses which he has been using the Company’s funds to maintain, and that he has conducted those businesses in a manner which is detrimental to the interests of the Company.

This application

10.  The application before me involves an application by the Petitioner for leave to amend the petition.  There are three main parts to the proposed amendments.

11.  The first is that the Petitioner seeks to introduce by way of amendment a prayer for winding-up relief into the petition.

12.  The second is that the Petitioner seeks to plead certain further instances of unfairly prejudicial conduct.  As to these, the proposed amendments consist of allegations that are, in part, a repetition of matters that are already pleaded, but also involve the introduction of new materials, the bulk of which relate to events that took place after the presentation of the petition.

13.  The final aspect of the Petitioner’s application to amend concerns an application to join the proposed 3^rd Respondent, Madam Cheung Lai Ming, who is the sister of the 1^st Respondent and the Petitioner, as a party to these proceedings.  In relation to Madam Cheung, two matters in particular are raised, both of which appear in the proposed amended prayer for relief.

14.  The first relates to events in March 2004, some months after the presentation of the petition, when the Petitioner says that he was wrongfully removed as a director of the Company and Madam Cheung improperly appointed a director of the Company in his place.  In relation to this, a declaration is sought that the appointment of Madam Cheung was invalid. An order removing Madam Cheung as a director of the company is also sought.

15.  The second complaint against Madam Cheung relates to a property owned by the company, located in College Road in Kowloon, which the Petitioner says belongs to the company and is held on trust for it by Madam Cheung, in whose name it is registered.  Madam Cheung says that the property belongs to her beneficially.  Against that background, the petitioner seeks a declaration in these proceedings that the property is held by Madam Cheung on trust for the company.  I should add that the same claim appears to also be made in a derivative action brought by the Petitioner on behalf of the company, HCA No. 1377 of 2004.

Introduction of winding-up relief

16.  I shall deal first with the question of whether or not leave should be given to amend the petition so as to introduce a prayer seeking winding-up relief.  This amendment was opposed both by Mr Ng, appearing for the 1^st Respondent, and Mr Chow, appearing for the proposed 3^rd Respondent.

17.  This application is a somewhat uncommon one. It is not uncommon for a petition to be issued claiming relief under section 168A of the Ordinance in respect of allegedly unfairly prejudicial conduct, and at the same time seeking, as an alternative, the winding-up of the company concerned pursuant to section 177(1)(f) of the Ordinance.  It is also not uncommon for such petitions to be amended during the course of the proceedings by the elimination of the claim to winding-up relief, so as to turn the petition into a pure section 168A petition.  This application, however, seeks to do the reverse, by converting a pure section 168A petition into one which seeks winding-up as well.

18.  Only one case was cited to me in which this appears to have happened.  That was Re Carlton Hotel Limited (unreported, High Court, CWU No. 170 of 1986, 24 September 1986), in which, in the course of his judgment on the trial of the proceedings, Jones J indicated that there had earlier been an order made by which winding-up relief was introduced by amendment after the presentation of the petition.  The judgment suggests that the petition was re-presented following the introduction of winding-up relief.  However, nothing is said as to the basis on which the order was made earlier in the proceedings by MacDougall J.  I therefore do not find the decision to be of great assistance for present purposes.

19.  As to this application, Mr Chow submitted first that the court had no jurisdiction to entertain an application for the introduction of winding-up relief into a section 168A petition.  He went on to submit that even if the court had jurisdiction to do so, it should not exercise its discretion in favour of permitting the proposed amendments here.

20.  Mr Chow pointed to a number of problems that would arise in relation to the conversion of a section 168A petition into a petition claiming winding-up relief.

21.  The first was in relation to the impact of section 182 of the Ordinance, which has the effect of avoiding all dispositions of a company’s property following the presentation of a petition for winding-up against it.  Mr Chow suggested that to permit the present petition to be converted, in effect, into a winding-up petition would cause problems in respect of transactions that had taken place between the time of the presentation of the petition and the granting of an order granting leave to amend in this way, on the basis that in accordance with the normal principles of relation back, the amendments would be treated as relating back to the date on which the proceedings were commenced - that is to say, the date of presentation of the petition.  This would have an unsatisfactory result in that transactions which had been undertaken by the Company in good faith between the presentation of the petition and the application to amend would thereupon become susceptible to challenge under section 182.

22.  Mr Chow also submitted that the Winding-Up Rules appear to contain no provisions which provide a procedure whereby a petition originally presented under section 168A alone could be amended and re-presented as a winding-up petition if relief by way of a winding-up order was sought to be introduced to the petition by way of amendment.  He drew my attention to the various provisions in the Winding-Up Rules which govern the procedure which is to be adopted in relation to the presentation, advertisement and hearing of a winding-up petition, and suggested that there was nothing in those rules to indicate that there was any similar procedure that could appropriately be adopted in relation to a petition in which winding-up relief had been added by way of amendment.

23.  My attention was also drawn to the various procedural steps that need to be taken in relation to a winding-up petition such as the presentation of the petition; the fixing of a first hearing date; the payment by the petitioner to the Official Receiver of the necessary deposit in relation to the winding-up proceedings; the advertising of the petition in the manner required by the Winding-Up Rules; the obtaining of the certificate of the Registrar to the effect that all procedural requirements have been complied with before the winding-up petition can be heard; and the first hearing of the petition before the registrar and, if necessary, before the court at which any party interested in the petition, including creditors or other contributories, may appear.

24.  I do not propose today to come to a concluded view as to whether or not I have jurisdiction, strictly speaking, to make an order in the terms that is sought by the Petitioner.  I do so because it seems to me that even if I did have jurisdiction in the technical sense to make such an order, it would be a very rare case in which it would be appropriate for the court to exercise its jurisdiction in the way suggested by the Petitioner.

25.  It seems to me that as a matter of discretion, having regard to the procedural complications that would be caused by the proposed amendment that is sought, it would be a more appropriate exercise of my discretion to decline leave to amend and to leave the Petitioner to take steps to seek the winding-up relief that he now wishes to obtain by means of a fresh petition presented for the purpose of obtaining a winding-up order.

26.  It seems to me that there is nothing to stop the petitioner from presenting a fresh petition in which winding-up relief can be sought.  If that course is adopted, it will have the advantage of avoiding any of the procedural difficulties and pitfalls to which I have adverted.  It will also have the advantage of avoiding any difficulties as to the voiding of transactions that have already been entered into and avoiding the need to apply for a validation order to give retrospective validation to those transactions.

27.  During the course of the hearing, I inquired of Mr Chong, who appeared for the Petitioner, as to whether there was any particular reason why it had not been sought to proceed by way of a fresh petition seeking winding-up relief.  The answer that I was given was that there was a concern that it might be said by the 1^st Respondent and proposed 3^rd Respondent that this was an abuse of process, in that it would have been open to the Petitioner to proceed by way of amendment (as it has sought to do).

28.  It does not appear that this was a point that was ever actually debated between the parties, whether in correspondence or otherwise, before the hearing.  In those circumstances it seems to me that it would be difficult to suggest the concern was justified.  In any event, it seems to me that if the court, rightly or wrongly, takes the view that the appropriate course is for the Petitioner to commence fresh proceedings, there will be little scope for any suggestion to be made at a later date that for Petitioner to do so would in any way constitute an abuse of the process of the court.

29.  Mr Chong also suggested that I should exercise my discretion in favour of allowing the amendments on the basis that to do so would save both costs and time.  Although there might be some limited savings in costs, I do not see that such savings are likely to be substantial. 

30.  The petition in any fresh proceedings is likely to substantially follow the form of the proposed amendment that has been put forward.  It seems to me, therefore, that the substance of the work in relation to any fresh petition will have already been done, and there should be little additional cost beyond the cost of preparing the petition itself, and the steps which would in any event have to be taken in order to have it presented and proceeded with.  It seems to me also that so far as the affirmations and the evidence in support of any new petition are concerned, that such evidence is to a very large extent already before the court in the many affirmations that have been filed in relation to the present proceedings, and indeed, in support of the present application.  It seems to me, again, that that work having been done it should not be particularly difficult for affirmations in support of any fresh proceedings to be prepared, either repeating or incorporating material that is currently before the court in these proceedings.

31.  It seems to me also that the course of requiring a fresh petition to be issued is not likely to result in any great delay.  While it may be said that there is inevitably going to be some delay to these proceedings as a result of the various procedural steps that will have to be taken if the proceedings are converted into winding-up proceedings, it seems to me that regardless of which approach were adopted, those are steps that would have to be gone through, and I therefore do not see that any great saving in time will be achieved by permitting the prayer for winding-up relief to be introduced by way of amendment into these proceedings.  To the extent that it was suggested that it might be possible for the court to abridge time in these proceedings so as to reduce this delay, I say only that I can see very little justification for doing so.

32.  For all of these reasons, it seems to me that it would not be appropriate in this case for me to exercise my discretion by granting leave to amend so as to introduce winding-up relief, and I decline to give leave to make the amendments proposed insofar as they seek the introduction of winding-up relief into these proceedings.  As I have explained, I consider that the more appropriate and convenient course would be for fresh proceedings to be instituted in relation to winding-up relief.  In due course, applications can be made for those proceedings to be heard at the same time as these proceedings, if that is what the parties think (as I would expect them to) is appropriate.

Post petition events

33.  I turn now to the second question, of whether or not the amendments should be permitted in the context of the current section 168A proceedings.  As I have said, the amendments consist, in part, of repetition of existing material, and to that extent would not appear to be strictly necessary.  But insofar as they do not consist of repetition, they consist, as far as I can see, of the introduction of new materials based on matters that have occurred after the presentation of the petition, which the Petitioner wishes to rely on in support of his claim under section 168A.

34.  There are four main aspects to the material that is sought to be introduced. The first relates to the removal of the Petitioner and the appointment of the proposed 3rd Respondent as a director of the company in March 2004.  The second concerns the fact that the Company’s principal supplier, the Shi Mei Factory, has, allegedly because of the acts of the 1st Respondent, gone out of business and been placed into liquidation in the PRC in about May 2004.  The third is that there is a complaint as to an assertion by the proposed 3^rd Respondent that she is the beneficial owner of the College Road property, and the failure of the 1^st Respondent to take any steps to protect the Company’s interests in that respect, a matter which also occurred in May 2004.  Finally, there is a complaint as to a refusal, in about August 2004, to make available management accounts and bank accounts of the company to the Petitioner for inspection.

35.  Mr Chong suggests that the court can and should look at the position at the hearing of the petition when it determines whether or not a winding-up order should be made or other relief granted.  He relied on the terms of section 168A and 177(1)(f) of the Ordinance, by which the court is directed to consider whether it is appropriate to make orders in the terms that are sought, which he says indicates that the court must have regard to the state of affairs existing at the time when the order is made.

36.  Mr Chong referred me to the decision in Re Fildes Brothers Limited [1970] 1 WLR 592, in which this was said.  However, it is perhaps relevant to bear in mind that in that case the court was concerned with the reverse situation where there had been, apparently, grounds at the time that the petition was presented on which it could be said that there had been unfairly prejudicial conduct, but where the unfairly prejudicial conduct had apparently ceased by the time of the trial so that the court took the view that it was no longer appropriate to grant the relief that was sought.

37.  Mr Chong also referred me to a decision of my own in Re Saint Power Industrial Limited (unreported, CFI, HCCW 1309 of 2002, 6 May 2004).  But as to that case, it should be pointed out that there were, in fact, allegations in the petition that would have justified the making of the winding-up order on the just and equitable ground which had been introduced by an amendment by which unfairly prejudicial acts which were said to have occurred before the date of the presentation of the petition had been pleaded.  It is true that in that case there were also subsequent amendments which made reference to acts which took place after the presentation of the petition.  But there was no objection, on the basis that is now taken, to the introduction of those amendments and it was not suggested that the amendments should not be allowed on the basis that they sought to introduce post-petition events.

38.  Although Mr Ng objected to the introduction of the post-petition matters into these proceedings, Mr Chow, for his part, did not appear to have strong objections to the introduction of this material into the petition.  Although it is attractive to take the course of allowing the matters to be raised in these proceedings, it seems to me that the matter should be tested by analogy to the situation in actions begun by writ in which an application is made to introduce post-writ material by way of amendment.

39.  It appears clear from the authorities, including Lark International Finance Ltd v Lam Kim Marisa [2000] 4 HKC 688 and Wing Siu Co. Ltd v Goldquest International Ltd (No. 1) [2003] 2 HKC 64, both decisions of the Court of Appeal, that while it may be permissible to introduce such material where the effect is to clarify the basis on which it is said that a cause of action exists and that cause of action already existed at the time that the writ was issued, it is not permissible to allege facts so as to introduce into the proceedings a cause of action that did not exist at the time that the writ had been issued.

40.  Adopting that approach, which I think I am bound to do, I think one can test the matter in this way.  If the position were that there was, on the basis of the material presently pleaded, a viable claim for relief under section 168A, then the additional allegations would strictly be unnecessary, in that they would add little or nothing to the claim that was being made.  On the other hand, if, on the basis of the material in the petition as at the date of the petition, there was no basis, or no sufficient basis, for the court to grant relief under section 168A, it would seem to me that on that analysis there would be no basis for the claim or, put loosely, no cause of action, that subsisted as at the date of the petition.

41.  Any justification for making an order granting relief on the basis of unfairly prejudicial conduct would then have to depend on matters which took place after the presentation of the petition.  That seems to me to be equivalent, for all practical purposes, to a situation in which what is being introduced by the amendment is, in effect, a cause of action that did not exist at the time of the petition.

42.  Although Mr Chow suggested that it might be possible to find a middle way by looking to see whether or not the new conduct complained of constituted part of the same course of conduct as underlay the petition when originally presented, it seems to me that this is not, on analysis, correct.  If the conduct initially complained of, even though it might be part of a course of conduct that carried on after the petition was presented, was not sufficiently prejudicial or unfair to justify the making of an order under section 168A, or the granting of relief under section 177(1)(f), at the time that the petition was presented, the position would be, as I have indicated, that there was no “cause of action” at the time that the petition was presented, and that the amendments would necessarily involve the introduction of a cause of action (or basis for relief) which did not exist at the time when the petition was presented.  On balance, therefore, it seems to me that it would not be appropriate to permit the introduction of the post-petition events into the petition in this case.

43.  That said, however, it does not follow that the Petitioner is shut out from relying on those matters altogether, since it is in my view perfectly open to the Petitioner to rely on those matters in the context of any petition that it may present in which it seeks winding-up relief.  It would be open to him in that petition to seek relief under section 168A of the Ordinance as well.

44.  As I have said, I can see no great difficulty in that course being adopted in terms of the time and expense that is involved, nor do I see that there is any reason why it should not be possible to have the matters heard together, if that is what is most appropriate.

Joinder of and allegations against the proposed 3^rd Respondent

45.  That leaves the position of the proposed 3^rd Respondent.  So far as the she is concerned the allegations that are sought to be introduced by way of amendment consist of, I think, paragraph 86(iv), 95 and 96 of the proposed amended petition.  Paragraph 86(iv) relates to the appointment of the 3^rd Respondent as a director of the company.  That is clearly a post-petition event and therefore is a matter which (if it is to be made the subject of complaint against the 3^rd Respondent) should, in my view, be made in fresh proceedings.

46.  As far as paragraphs 95 and 96 are concerned these relate to the College Road property.  Paragraph 95, I think, is largely repetitive of paragraph 46.  Paragraph 96, however, refers to, again, a post-petition event in relation to the assertion by the proposed 3^rd Respondent of a beneficial interest in the College Road property.  It seems to me that therefore that, too, is a matter which can and should be raised in fresh proceedings if that is what the Petitioner wishes to do.

47.  So far as the prayer for relief is concerned, two of the amendments in relation to the proposed 3^rd Respondent relate to her appointment as a director.  Those are the amendment to [[paragraph 3]] of the prayer, and also the proposed introduction of paragraph 5(i) into the prayer.  They are therefore matters that should, in my view, be raised in any new petition that may be presented.  So far as paragraph 5(ii) of the prayer is concerned it seems, technically, that this may be a matter that is currently available, having regard to the allegation that the 3^rd respondent is a trustee for the company.

48.  It seems to me that it would be permissible for that amendment to be made, given that Mr Chow does not have any real objection to this claim being made in these proceedings.  That said, however, I am conscious of the fact that there are other proceedings in which the same issue is to be decided and, as Mr Chong has indicated, it would obviously be sensible for those proceedings to be dealt with at the same time as these and for an appropriate application to be made in due course to enable that to happen.

Other arguments advanced

49.  In the light of the conclusions to which I have come for the reasons which I have given so far, it is not necessary for me to express any concluded view as to the other arguments for refusing leave to amend to include a claim for winding-up which were advanced by Mr Ng.  Mr Ng had argued also that the amendments should not be allowed on the basis that they were useless or immaterial, in that the material sought to be introduced could not support any claim by the petitioner for a winding-up order to be made.

50.  Mr Ng said that the matters that were sought to be introduced by way of amendment were bound to fail on, I think, two broad grounds.  The first was on the basis that the Petitioner did not come to court with clean hands (being himself responsible for the breakdown in the relationship between himself and the 1^st Respondent), and was therefore debarred from seeking relief under section 168A or winding-up relief on the just and equitable ground.

51.  The second point that Mr Ng took was that this was a case in which the petitioner had effectively no reasonable cause of action in relation to a claim for winding-up relief, on the basis that he had not put forward any good reasons for wishing to pursue winding-up relief rather than some other form of relief, and, given that the company was solvent and profitable, there was no realistic prospect of winding-up relief being granted.

52.  Although it is not necessary for me to express a concluded view as to those arguments, I would say that it should be borne in mind that it is neither appropriate nor realistic to expect the court to come to a view as to the merits of such matters on the basis of contested affidavit evidence.  As far as the allegations as to clean hands are concerned, it does seem to me that, on the basis of the affidavit evidence as it stands, it would be difficult, and inappropriate, for a court to come to a concluded view one way or another at this stage, without having the benefit of hearing the parties and seeing them give their evidence under cross-examination.  So far as the question whether or not winding-up relief is a realistic possibility is concerned, on the basis of the material available so far I would hesitate to express a firm view one way or another as to that.

Conclusion

53.  It finally remains for me to say that it seems clear to me that it is necessary, in relation to these proceedings, to note the many actions that appear to have been commenced by the parties against each other.  Apart from these petition proceedings, there are likely to be fresh petition proceedings in which winding-up relief will be sought.  There is also the derivative action brought by the petitioner against the proposed 3rd respondent in relation to the beneficial ownership of the College Road property.  There are also other proceedings between the 1^st Respondent, Petitioner and the Company.  All of these are proceedings which will need to be reviewed at some stage by the parties and the court, and appropriate steps taken to ensure that they are dealt with as efficiently and cost-effectively as possible, with (so far as is possible) no duplication of the parties’ efforts or the court’s time.

54.  In the circumstances, I propose, effectively, to grant leave to amend by amending the prayer so as to include the declaration sought in relation to the 3^rd Respondent’s position as an alleged trustee of the College Road property, from which it follows that she should be joined as a party to these proceedings.  As to the other amendments, it seems to me that the effect of my decision is that they should not be permitted, since they either are redundant, consisting as they do of repetition of matters already in the pleading in the petition, or of new matters that have arisen after the date of presentation of the petition.

55.  To the extent that there may be some matters which it is thought should be introduced into the petition, which relate to events which occurred prior to its presentation, there seems to me to be no particular objection to those matters being added in these proceedings, if the petitioner wishes to do so.  This was, however, not a matter on which the argument has focussed, and I have not, at this stage, examined the whole of the proposed amendments with a view to isolating any parts of it that might be of this nature.

[Submissions on form of order and costs]