FUSCUS HOLDINGS LTD. v. KINONG GROUP LTD. AND OTHERS

HCCW907/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO.907 OF 1998

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J U D G M E N T

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1. There are two matters before me : an inter partes summons issued by the 1st to 4th and 6th to 11th Respondents and a notice of motion taken out by the Petitioner Fuscus Holdings Limited.

2. The Petitioner seeks relief as a minority shareholder pursuant to section 168A of the Companies Ordinance, Cap.32 for an order that its shares in Kinong Group Limited ("the Company") be purchased by the 2nd to 12th Respondents and/or the Company at a fair value or alternatively, that the Company be wound up on the just and equitable ground. There are various other heads of relief sought which do not arise for consideration. As to the proposed buyout, the machinery for selecting an independent accountant is contained in paragraph 1 of the prayer. Paragraph 2 seeks an order that the accountant be directed to value the Petitioner's shares by reference to the assets, profitability and future prospects of the Company as at such date as the court thinks fair and reasonable and without any discount for the fact that the Petitioner's shareholding is a minority shareholding. The petition was presented on 17th December 1998.

3. On or about 5 February 1999, it was agreed that the 2nd, 3rd and 9th Respondents ("the Purchasing Respondents") would acquire the Petitioner's shares in the Company. However, the parties could not agree on the date of valuation. The petition is founded on alleged misconduct on the part of the Respondents. The Petitioner's complaints relate to five matters. It is common ground that whether or not the alleged wrongdoing is made out will have a bearing on the date of valuation. That being the case, the fact that the parties have agreed that the Petitioner's shareholding be acquired by the Purchasing Respondents does not dispose of the petition. A trial of the issues raised concerning alleged misconduct must still take place. In the circumstances, the difference between a full hearing of the petition and of these issues that pertain to the date of valuation is marginal. Had a speedy resolution been possible, the court's offer of an early hearing date (to take place in September) would not have been rejected as not providing sufficient time for the parties to prepare for the trial. Instead, the hearing is now fixed to come on in November.

The issue

4. The issue for determination arising from the summons and the notice of motion is a narrow one. As noted above, the prayers for relief contained in the petition included, in the alternative, an order that the Company be wound-up. In view of the agreement for the buyout, the Petitioner is content for that prayer to be stayed until such time as the sale is completed. The Respondents on the other hand seek to dismiss or strike out the prayer for a winding-up order.

5. The Respondents submitted that because of the agreement to purchase (albeit the date of valuation remains to be adjudicated by the court), the alternative relief sought of a winding-up order is no longer feasible. Further, there is nothing in any of the authorities to the effect that the purchaser has to provide evidence of financial ability to purchase or a guarantee and no court has ever made that a condition of the purchase. It was also submitted that if the Respondents were to refuse to go through with the purchase, the Petitioner would have a personal remedy by way of debt or for specific performance of the agreement against the Respondents.

6. The Purchasing Respondents together hold 15% of the shares of the Company. In addition, the 9th Respondent has a 60% beneficial interest in the 4th Respondent which, in turn, is beneficially entitled to 43.5% of the shares in the Company. The Purchasing Respondents accordingly have a beneficial interest in approximately 41% of the issued share capital of the Company. The Petitioner holds 30% of the issued share capital of the Company. On that basis, it was submitted that the Petitioner would be amply protected since the interest of the Purchasing Respondents in the Company exceeded that of the Petitioner should the need to enforce the agreement ever arise. Further, in the event that the prayer for a winding-up of the Company is either dismissed or struck out, the Purchasing Respondents are prepared to give an undertaking that pending completion of the purchase or further order, they will not dispose of or charge their shares. The corollary must be that if the prayer is not struck out, the Respondents may do as they wish with their shares pending trial.

7. In support of their summons for the prayer for a winding-up order to be either dismissed or struck out, the Purchasing Respondents relied on section 180(1A) of Cap.32 and five English authorities. Section 180(1A) provides :

" Where the petition is presented by members of the company as contributories on the ground that it is just and equitable that the company should be wound up, the court shall not refuse to make a winding-up order on the ground only that some other remedy is available to the petitioners unless it is also of opinion that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy."

This is in substance similar to section 225(1) of the Companies Act 1948.

8. The following propositions may be extracted from the cases cited by the Respondents :

(1) Where prior to the institution of proceedings, an open offer had been made to acquire the petitioner's shares on the basis

(a) "that met all his reasonable objections" (see In re A Company (No.002567 of 1982) [1983] 1 WLR 927 at 936F); or

(b) to buy at a fair and reasonable price (Re Ringtower Holdings plc (1989) 5 BCC 82); or

(c) to purchase the petitioner's shares at market value (Re a Company (No.006834 of 1988) ex parte Kremer [1989] BCLC 365),

it is unreasonable for the petitioner to reject the offer and instead to commence proceedings for a winding-up. Accordingly, in those three cases, the winding-up petition was struck out.

(2) If the court is of the view that the relief sought is wholly inappropriate and the petitioner is acting unreasonably in pursuing the petition, it may stay or strike out the petition as being an abuse of the process. See Re Ringtower Holdings plc. (1989) 5 BCC 82 at 90H-91A.

(3) Whether the petition be struck out or stayed is a matter for the court's discretion. In Re a Company (No.003843 of 1986) [1987] BCLC 562, the petitioners presented a petition seeking relief under section 459 (though not for a buyout but for the imposition of an entirely new regime on the company) or alternatively, an order that the company be wound-up on just and equitable grounds. On the respondents' motion to strike out or adjourn the petition on the grounds that in view of the offer by the respondents to buyout the petitioners at a reasonable and fair price, it would be an abuse of the process of the court to continue to press for the order sought in the petition, the court stayed the petition. Millett J held that it was manifestly unreasonable for the petitioners to continue to press for a winding-up order since that would give them a financial remedy only, but it would be a financial remedy which would inevitably result in a later payment of a lesser sum than could be obtained from the offer that has been made (at 571B). The petition was stayed rather than struck out, the court noting that the application to strike out the petition was merely a fall-back position in order to obtain the costs between the presentation of the petition and the service of the notice of motion (at 563I-564A).

(4) The basis on which the courts have exercised their jurisdiction to stay section 459 petitions (the English equivalent to section 168A petitions) is that an offer has been made which gives the petitioner all the relief that he could realistically expect to obtain on his petition and that it would therefore be an abuse of the process to continue to litigate matters just for the sake of having a day in court. See In Re a Company (No.00836 of 1995) [1996] 2 BCLC 192 at 197F-G.

9. The present case differs factually from the authorities cited by the Respondents. The issue which arises is not whether the petition be struck out or stayed; rather, it is accepted that the allegations of misconduct made in the petition have to be tried. The limited issue is whether the prayer for a winding-up order ought to be stayed or struck out. None of the authorities cited addresses that point.

10. The court's discretion : relevant considerations

11. As noted above, the authorities show that the effect of an open offer on a petition, be it a winding-up petition or a minority shareholder's petition, has not been consistent in that in some cases the petition was struck out and in others stayed. So no general principle can be extracted that a striking out is the necessary consequence. In those situations, from a respondent's perspective, whether the petition is struck out or stayed is broadly speaking the same : none of the matters raised in the petition is to be tried. By way of contrast, in the present case there are issues raised in the petition that fall to be adjudicated by the court. But by staying the relief for winding-up, the Petitioner is not pursuing a winding-up order which was found to have been unreasonable in circumstances where an open offer has been made and which ought to have been accepted. If a petition has been properly brought and this must be the case since it is not suggested that the entire petition ought to be struck out and there are issues that have to be tried, the alternative relief could only be activated or restored by having the stay lifted if the buyout does not proceed to completion.

12. As I am not compelled by authority to strike out the prayer for relief, the matter becomes one of discretion.

13. The real question is whether the Petitioner should be left with nothing more than a personal remedy in the event of the sale not going through for whatever reason which would be the effect of striking out the prayer. It would appear that this question is free from authority : certainly none of the authorities considered deals with the point.

14. In my judgment, it would not be right to leave the Petitioner with nothing more than a personal remedy. First, although the Purchasing Respondents are legally and/or beneficially entitled to approximately 41% of the issued share capital, which exceeds the Petitioner's shareholding by approximately a third, it is to be noted that the greater part consists of an indirect equity interest which may not be readily realizable. As to the direct shareholding amounting to 15%, being shares in a private company, it may also not be readily marketable. Second, there is a validation order in place so that the Company is able to continue to carry on business normally. Third, the evidence does not disclose any real prejudice to the Respondents by reason of the filing of the petition, much less evidence of prejudice by reason of a stay of the prayer for a winding-up order. Although it was submitted that it would be unfair to the Respondents other than the Purchasing Respondents because they are not involved in the matters relied on as constituting misconduct and oppression on the Petitioner, that is no reason for striking out the prayer altogether since to do so would allow the Purchasing Respondents to reap an advantage to which they would otherwise not be entitled.

15. Having regard to all the circumstances, I am not persuaded that it would be a proper exercise of my discretion to strike out the prayer rather than to stay it. Striking out is a remedy that should only be given in plain and obvious cases. For the reasons stated, the present case is far from plain and obvious. Accordingly, I will make the order prayed for in the notice of motion that the prayer for an order that the Company be wound-up be stayed pending completion of the sale or until further order.