SHUI ON INVESTMENT CO LTD v. SHANGHAI HOTEL INVESTMENTS LTD AND OTHERS

HCCW 452/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 452 OF 2009

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BETWEEN

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J U D G M E N T

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1.  On 24 July 2009, the petitioner, Shui On Investment Company Limited (“the Petitioner”), presented the petition in these proceedings seeking various relief pursuant to sections 168A and 177(1)(f) of the Companies Ordinance against the 1^st to 4^th Respondents. The 1^st Respondent is a company called Shanghai Hotel Investments Limited (“SHIL”) which is wholly owned by the 2^nd Respondent, Mr Leo Koguan (“Leo”). The 3^rd Respondent, Harbin Institute of Technology Group Inc (“HIT”), and the 4^th Respondent, Pavilion International Limited (“Pavilion”) are companies whose dealings with the 1^st and 2^nd Respondents form part of the matters of which the Petitioner complained, and on which the petition was based.

2.  This was the hearing of an application by HIT and Pavilion to strike out certain paragraphs of the prayer for relief in the petition.  However, as a result of the developments to which I shall refer below, at the hearing the only matter in issue related to costs.

3.  According to the petition, the Company is a British Virgin Islands company.  The Petitioner was originally the owner of all the shares in the Company, which was established to invest in and develop hotels in Shanghai.  Through a wholly owned subsidiary called Landton Limited (“Landton”) and its wholly owned subsidiary Shanghai Li Xing Hotel Company Limited (“Li Xing”) the Company owned two sites in Shanghai which it was intended to develop into hotels.

4.  In about 2003, the Petitioner sold an 85% interest in the Company to SHIL, and entered into a shareholders’ agreement in respect of the Company with (among others) the Company, Leo and SHIL (“the Shareholders’ Agreement”).  The Shareholders’ Agreement contained provisions relating to the funding of the Company and its hotel projects, by which the shareholders agreed to contribute to its funding needs proportionately to their shareholdings, insofar as it was not possible to secure funding from commercial lenders.  It contained provisions requiring the consent of the Petitioner to be obtained for that certain important matters relating to the operation of the Company and the hotel project.  It also contained a provision restricting the sale or other transfer of shares in the Company to third parties.  Clauses 9.01 to 9.06 of the Shareholders’ Agreement had the effect of prohibiting either shareholder from selling its shares in the Company to a third party without first offering them to the other shareholder on the same terms as it was proposed to sell the shares to the third party.  As SHIL was wholly owned by Leo, clause 9.07 of the shareholders’ agreement provided that the provisions of clauses 9.01 to 9.06 should also apply to any proposed sale by Leo of his shares in SHIL.

5.  The Petition alleges that contrary to the Shareholders’ Agreement and the mutual understanding of the parties, Leo and SHIL acted in breach of their obligations in a number of ways.  Two of the complaints are of particular relevance for present purposes.  First, paragraphs 67 to 74 of the petition allege that Leo took steps to transfer or dispose of his beneficial interest in SHIL to HIT without complying with the obligation to offer to dispose of it to the Petitioner on the same terms, as required by clause 9.07 of the Shareholders’ Agreement.  Second, paragraphs 78 to 89 of the petition complain about an alleged attempt by Leo and SHIL to appoint HIT as the “Project Owners Representative” of Li Xing in relation to the hotel projects without first having obtained the consent of the Petitioner to such appointment, and the failure or refusal of Leo and SHIL to provide the Petitioner with information concerning the involvement of HIT and Pavilion in the hotel projects.  There is, however, no allegation that HIT or Pavilion were (or ought to have been) aware that these matters were contrary to the terms of the Shareholders’ Agreement, to which they were not parties.

6.  On the basis of these and other allegations, the Petitioner sought a variety of relief, including:-

(1)	A declaration that the arrangement between SHIL, Leo, HIT and Pavilion for any transfer of SHIL’s shares in the Company or of Leo’s shareholding in SHIL were invalid (paragraph (2) of the prayer for relief);
(2)	A declaration that the purported appointment of HIT as “Project Owners Representative” of Li Xing was invalid (paragraph (3) of the prayer for relief);
(3)	An order that Leo, SHIL, HIT and Pavilion provide copies of all documents relating to the arrangement referred to in (1) above (paragraph (4) of the prayer for relief);
(4)	Orders entitling the Petitioner to buy out Leo’s interest in SHIL or SHIL’s interest in the Company on the terms agreed by Leo and/or SHIL with HIT and Pavilion, or to buy out SHIL’s interest in the Company on the basis of a valuation to be ordered by the court (paragraphs (5) to (8) of the prayer for relief); and
(5)	The making of a winding up order in respect of the Company (paragraph (9) of the prayer for relief).

7.  After the presentation of the petition, on 5 October 2009, SHIL and Leo took out a summons to strike out allegations and relief that related to the claim under section 168A of the Ordinance, on the basis that section 168A had no application to the Company as it was not a “specified corporation” within the meaning of the Ordinance.  The Petitioner appears to have accepted that this was correct, as on 8 October 2009, the Petitioner applied for leave to amend the petition, so as to delete references to section 168A, and paragraphs (5) to (8) and (10) of the prayer for relief.  On 27 October 2009, HIT and Pavilion took out their own summons, seeking the striking out, as against them, of prayers (2) to (4) of the petition (which were the only prayers seeking relief against them), on the grounds that the court had no jurisdiction to grant such relief under either section 168A or section 327 of the Ordinance, and that the petition disclosed no reasonable cause of action against them, or was otherwise scandalous, vexatious or an abuse of process.

8.  HIT and Pavilion filed affirmations in support of their application, in which it was stated that their proposed investment had never gone beyond a preliminary stage, and that neither of them had in fact entered into any agreement to acquire Leo’s shares in SHIL.  They said that upon receiving a letter from the Petitioners dated 30 May 2009, in which the Petitioner stated that any acquisition by them of an interest in SHIL would be in breach of the Shareholders’ Agreement, they promptly advised SHIL and Leo that they did not wish to further pursue any possible investment or acquisition of Leo’s shareholding in SHIL, and had thereafter taken no further action in relation to the matter.

9.  Thereafter, the proceedings were settled as between the Petitioner, SHIL and Leo.  It appears that Leo and SHIL agreed with the Petitioner that the Petitioner should acquire SHIL’s shares in the Company, which the Petitioner duly did.  Thereafter, as the Petitioner had become the sole shareholder in the Company, there was no longer any reason for it to pursue these proceedings.  Accordingly, the Petitioner, Leo and SHIL agreed that the petition should be dismissed, so far as the Leo and SHIL were concerned, with no order as to costs.  This was put into effect by a consent order dated 14 January 2010.  The consent order did not, however, deal with the position of HIT and Pavilion.

10.  On learning of the consent order, the solicitors acting for HIT and Pavilion wrote to the Petitioners’ solicitors, suggesting that as the Petitioner did not appear to intend to pursue the petition any longer, it should be dismissed as against HIT and Pavilion as well, and that the Petitioner should pay the HIT and Pavilion their costs.  In correspondence between the solicitors, the Petitioner in effect confirmed that it would not pursue the proceedings against HIT and Pavilion, but contended that the appropriate order, so far as costs were concerned, was that there should be no order as to costs.  This was not acceptable to HIT and Pavilion, who insisted on being paid their costs of the proceedings.

11.  Before me, Ms Chan, who appeared for the Petitioner, indicated that the Petitioner (as it had made clear in pre-hearing correspondence) did not oppose the striking out of its petition and the consequent dismissal of the proceedings against HIT and Pavilion.  In the light of that position, the Petitioner did not pursue its application for leave to amend.  However, she maintained that the appropriate costs order was no order as to costs of the proceedings, on the basis that while the Petitioner accepted that, in principle, it should bear HIT’s and Pavilion’s costs of the petition, as well as such costs as they may have incurred in respect of the Petitioner’s application to amend, their application to strike out would have failed, so that the Petitioner should get the costs of that application, and that taken overall, the two sets of costs could be regarded as offsetting each other, so that to make no order as to costs would be, in broad terms, the right result.

12.  Mr Wong, who appeared for HIT and Pavilion, disagreed.  He contended that:-

(1)	As the Petitioner did not oppose his clients’ application to strike out, a striking out order should be made and costs should simply follow the event.
(2)	Alternatively, the court should treat the application as, in effect, an application by the Petitioner to discontinue as against HIT and Pavilion, and make the usual costs order on an application for leave to discontinue, namely that the party seeking to discontinue should pay the costs of the parties against whom the proceedings had been discontinued, without consideration of the merits of the proceedings.
(3)	Alternatively, even if it might be appropriate to have regard to the underlying merits of the proceedings and of HIT’s and Pavilion’s application to strike out, such merits were in favour of HIT and Pavilion, in that:-
	(a) Having indicated that it no longer relied on section 168A of the Ordinance, the Petitioner could only (until its acquisition of SHIL’s shares in the Company) have sought relief under section 327(3)(c) of the Ordinance, and the orders sought in paragraphs (2) to (4) of the prayer to the petition are not orders that the court can or should make under section 327(3)(c). (b) The relief sought under prayers (2) and (3) should not be granted as it was wholly academic, given that neither HIT nor Pavilion sought to assert any rights or interests under the alleged arrangements or in respect of the alleged appointment as “Project Owners Representative” of Li Xing. (c) If (contrary to the previous submission) the matter was not academic, in the absence of any allegation in the petition that HIT or Pavilion were aware of the terms of the Shareholders’ Agreement that would allegedly have been breached by the matters complained of, there was no basis for seeking the declaratory relief sought, since absent such awareness on their part, it would not be appropriate to interfere with their rights acquired under contracts entered into by them in good faith, without notice of any impediment to their doing so. (d) The relief sought under prayer (4) should not be granted since there was no reason to think that HIT and Pavilion would not have provided the information sought voluntarily, and in any event, such information could have been obtained from them by other means without making them parties to these proceedings, for example, by an application for Norwich Pharmacal relief, or an application for non-party discovery under sections 41 and/or 42 of the High Court Ordinance.

13.  I do not think that Mr Wong’s first or second points prevent the court from having regard to the likely outcome of the striking out application taken out by HIT and Pavilion in considering what order as to costs is appropriate.  Although it is clear that the Petitioner does not intend to pursue these proceedings, given that it had indicated in the correspondence that it was prepared, subject only to an argument as to costs, to agree to the striking out and dismissal of the proceedings against HIT and Pavilion, I do not think that the failure on the Petitioner’s part to apply for leave to discontinue or to take independent steps to bring the proceedings to an end (when there was already on foot an application to strike out which it did not intend to oppose), is a matter that amounts to an abuse of the process by the Petitioner.  While it would be an abuse of process for a plaintiff or petitioner to leave in existence proceedings which it has no intention of pursuing, I do not think that it can be said that this is what the Petitioner was doing here.  Rather, having accepted that the proceedings should be brought to an end, the Petitioner has come to court to argue about the only outstanding matter – namely, how the costs of the proceedings, and the various applications that have been made in the course of it, should be dealt with.  In these circumstances, it does not seem to me that the general principle that costs should follow the event, or the general rule that a party seeking to discontinue proceedings should bear the costs of the proceedings, should be applied as a matter of course to all of the costs of each application that has been made.

14.  In effect, the Petitioner’s position is that while it is prepared to bear HIT’s and Pavilion’s proper costs of the proceedings, the costs that they have incurred in relation to the striking out application are not proper costs which they should be entitled to recover.  In order to decide whether or not that is right, it seems to me that I can and should consider whether or not the striking out application was one which was properly made and would be likely to have succeeded.

15.  I therefore turn to consider the merits of that application.

16.  In that context, it seems to me that Mr Wong’s first point, that the orders sought against HIT and Pavilion are not orders that the court can or should make under section 327(3)(c) of the Ordinance, is a good one.  Section 327 of the Ordinance is in the following terms:-

“(1)	Subject to the provisions of this Part, any unregistered company may be wound up under this Ordinance, and all the provisions of this Ordinance with respect to winding up shall apply to an unregistered company, with the exceptions and additions mentioned in this section.
…
(3)	The circumstances in which an unregistered company may be wound up are as follows –
…
(c)	if the court is of opinion that it is just and equitable that the company should be wound up.””

17.  Mr Wong submitted that the only order that section 327 envisages that the court might make under it is a winding up order against the company concerned, and that the court therefore does not have power to make any other order under the section, other than perhaps an order that can be regarded as incidental or ancillary to the making of a winding up order.

18.  Ms Chan, however, suggested that the court had a wide power to make any order as may in the circumstances be just under section 327 (or, I suppose, for that matter, under section 177 in relation to companies registered under the Ordinance).  She said that no authority had been cited by Mr Wong to the contrary, and relied on the standard form of winding up petition to be found in the appendix to the Companies (Winding Up) Rules (Forms 2 and 3A, both of which contain the formulation “or that such other order may be made in the premises as shall be just”).

19.  With respect, the proposition advanced by Ms Chan is a somewhat surprising one.  Although it is undoubtedly the case that most winding up petitions contain some form of words along the lines of those in the forms to which Ms Chan referred, I am unaware of, and Ms Chan was not able to direct my attention to, any authority in which the court made some other substantive order, other than a winding up order, an order dismissing the petition, or an order staying the petition, when dealing with a winding up petition.  Unlike section 168A, which specifically provides the court with wide powers to make appropriate orders to deal with unfairly prejudicial conduct, there is nothing in section 327 (or section 177) to suggest that it is concerned with anything other than the making of a winding up order in respect of the company concerned.  Nor is this surprising, since the making of a winding up order sets in train a process which has as its objective the bringing to an end of the company’s existence, by its ultimate dissolution.

20.  Although Mr Wong was prepared to accept that the court might, in an appropriate case, make incidental or ancillary orders when ordering that a company be wound up, neither he nor Ms Chan could enlighten me as to what such orders might be.

21.  But even if there might be some incidental or ancillary orders that could be made on a winding up petition under section 327, I am unable to see how any of the orders sought under paragraphs (2) to (4) of the prayer to the present petition could sensibly be said to be incidental or ancillary to the winding up of the Company.

22.  So far as paragraph (2) of the prayer is concerned, this seeks declarations as to the invalidity of arrangements or agreements relating to the sale by Leo of his interest in SHIL, and of the sale by SHIL of its interest in the Company.  However, as to the former, it is impossible to see what impact the identity of the owners of one of the Company’s shareholders could have on its winding up.  As to the latter, I do not see that there is any basis in the petition for the declaration sought, since the entirety of the allegations in paragraphs 67 to 74 of the petition are premised on an alleged sale or other disposition by Leo of his interest in SHIL, and there is no hint of any arrangement or agreement that would affect the position of SHIL as a shareholder in the Company.  In these circumstances, I can see no basis on which the court would make the declarations sought in proceedings for the winding up of the Company.

23.  So far as paragraph (3) of the prayer is concerned, it seems to me that the position is the same.  The declaration sought under this paragraphs relates to the appointment of a representative of the Company’s sub-subsidiary, Li Xing.  It is again impossible to see what impact this could have on a winding up of the Company, so as to make it a declaration that could on any sensible view be regarded as ancillary or incidental to the making of a winding up order as against the Company, and I can see no basis on which the court would grant such a declaration in proceedings for the winding up of the Company either.

24.  As for paragraph (4) of the prayer, it does not seem to me that an order requiring a party to a winding up petition to give disclosure of documents or information to the petitioner is substantive relief that can be said to be incidental or ancillary to the making of a winding up order, and I therefore do not think that such an order is one which the court would make in the context of proceedings in which only winding up relief is sought.

25.  I am therefore satisfied that it is not reasonably arguable that any of the relief sought under paragraphs (2) to (4) of the prayer to the petition could or would be granted in a petition brought under section 327(3)(c) of the Ordinance.  So far as Mr Wong’s other points are concerned, while it is not necessary to deal with them having regard to my views as to the availability of the relief sought under section 327(3)(c), I would say that there is force in them.

26.  Ms Chan also submitted that having regard to the fact that relief was sought that would affect HIT and Pavilion, that allegations were made concerning them, and that discovery was sought against them, it was appropriate for them to be made parties to the petition.

27.  As to the first of these points, having held that it is not reasonably arguable that the relief would be granted in a petition brought under section 327(3)(c), it follows that joinder of HIT and Pavilion for this reason is not justified.

28.  As to the second of these points, Ms Chan drew my attention to Re Ideaction Strategic Investment Ltd [1998] 1 HKR 186, in which it was held that it was in order for directors and shareholders of a company to be joined as parties to a petition seeking its winding up on the just and equitable ground.  I do not think that this authority assists the Petitioner – while it may be appropriate to join shareholders and officers to such a petition, in the present case, neither HIT nor Pavilion were shareholders of the Company, and as such, would not have an sufficient interest to oppose the making of a winding up order against it.  Ms Chan also drew my attention to Idmiston Ltd v Asian Master Enterprises Ltd [1988] HKC 588, in which it was held that it might be appropriate to join as a party to proceedings someone against whom serious allegations, such as allegations of fraudulent conduct were made.  However that is far from the present case, where the allegations in the petition do not include any suggestion of fraud on the part of either HIT or Pavilion, and do not even go so far as to suggest that they were aware of the terms of the Shareholders’ Agreement that had allegedly been breached.

29.  As to the last of these points, conflicting views have been expressed in English authorities as to the appropriateness of joining a non-shareholder party to the equivalent of section 168A proceedings with a view to obtaining discovery from them.  For my part, I incline to the view that it is not appropriate to do so, particularly given the availability of alternative means of obtaining such discovery where that is necessary.

30.  In the circumstances, I am satisfied that the striking out application by HIT and Pavilion was well founded.  It follows that it would not be right to make an adverse order against them in respect of the costs of that application.  The consequence is that the petition should be struck out and dismissed as against HIT and Pavilion, and that the Petitioner should pay HIT and Pavilion the whole of their costs of the proceedings, including any reserved costs.

31.  So far as such costs are concerned, HIT and Pavilion lodged a statement of their costs for assessment on a gross sum basis.  Ms Chan contended that costs claimed, which amounted to some HK$490,192 (which did not, apparently, include the costs of their solicitors’ attendance at the hearing itself), were too high.  She pointed in particular to the partner in charge of the matter having spent some 20 hours in communications with the client and 38 hours on perusal of papers as being, in her submission, self-evidently excessive, and also suggested that counsel’s fees for the drafting of affirmations and the summons, and advising in conference were similarly excessive.

32.  In my view, although the petition is a lengthy document, and the number of documents that have been exhibited to the affirmation in support are substantial, the 38 hours spent by HIT’s and Pavilion’s solicitors in perusal of documents, and the 20 hours spent on attending on the client are far more than can be regarded as reasonable, and I would reduce the time allowable for these matters to 15 and 10 hours respectively.  So far as counsel’s fees are concerned, Mr Wong explained that the charges for drafting and advising included reading and preparation time, and in those circumstances, I would not regard the fees charged as excessive.  I shall therefore reduce the costs claimed in the statement of costs by HK$132,000, and assess HIT’s and Pavilion’s costs which are to be paid by the Petitioner in the total amount of HK$358,192.