In re SWEE KHENG PROPERTIES LTD.

NO. 468 of 1994
COMPANY (WINDING-UP)

IN THE SUPREME COURT OF HONG KONG

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J U D G M E N T

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1. This is a petition for the winding-up of the company Swee Kheng Properties Ltd (which I shall refer to as 'the Company') and in the alternative for an order that the Petitioner's shares be purchased by Lim Boon Yong ('BYL') at a price determined by an independent valuer to be the fair market value of the said shares.

2. The basic facts in the petition are not disputed. For convenience I will set them out.

3. Prior to becoming a shareholder and a director of the Company, the Petitioner through his accounting practice known as Joseph Ng & Co. had acted as auditor of Swee Kheng Import & Export Ltd. which is referred to in the petition as "SKIE". The firm had acted as auditor for 8 years since SKIE's incorporation on 19th April 1985. BYL is the major shareholder and managing director of SKIE.

4. In early 1993 BYL informed the Petitioner of the intention that SKIE should be listed on the Stock Exchange of Hong Kong. As it was felt desirable for a professional to sit on the board of directors, BYL in his capacity as shareholder of SKIE invited the Petitioner to join the board of directors of SKIE. The Petitioner accepted and was appointed a director on 1st July 1993. Joseph Ng & Co. resigned as auditors of SKIE with effect from 1st July 1993 and on 1st November 1993 the Petitioner was also appointed as SKIE's company secretary.

5. On 1st November 1993 Joseph Ng Management Consultant Ltd. ("JNMC"), a management consulting firm of which the Petitioner is a shareholder and director, was engaged to provide full accounting services for the SKIE group of companies.

6. In early January 1994, BYL invited the Petitioner to become a minority shareholder of SKIE and suggested that the Petitioner purchase 25% of the share capital of SKIE. However, as SKIE intended to relocate to the Property, which is on the 13th Floor of Kodak House, BYL instead subsequently invited the Petitioner to purchase 25% of the share capital in the Company. The Company had been formed for the purposes of owning the Property. The Petitioner was further induced to invest in the Company by BYL's representation that the Petitioner's businesses could use 25% of the gross floor area of the Property as their offices.

7. The Petitioner accordingly acquired 25% of the share capital of the Company and the costs and expenses associated with the purchase of the Property were divided 75% as to BYL and 25% as to the Petitioner. The Property was purchased for the sum of HK$14,347,000.

8. The nominal capital of the Company is HK$10,000.00 divided into 10,000 Ordinary shares of HK$1 each. The amount of the capital paid up or credited as paid is HK$10,000.00. The Ordinary shares of the Company were issued shortly after the incorporation of the Company and have since then stood credited as fully paid in the books of the company.

9. The Petitioner and BYL are the directors of the Company.

10. After the Company acquired the Property, BYL failed to honour his representation by informing the Petitioner that SKIE would occupy the entire floor area of the Property.

11. On 14th March 1994 an offer of a tenancy was made to SKIE by the Company by a letter of that date signed by the Petitioner on the Company's behalf. The tenancy was to commence on 1st April 1994 at a rental of HK$121,140 per month (equivalent to HK$27.65 per square foot). The offer letter was countersigned by BYL on behalf of SKIE. Based on the relationship of trust existing between BYL and the Petitioner, the keys to the Property were released to SKIE.

12. To pause there for a moment, it is not unimportant to note that I have been told that in fact rent was paid as follows: there was $121,140 paid on each of 29th of March and 30th of April 1994. The banking documents were apparently available and there is no dispute as to this. The petition then goes on to say that the required rental deposit was not paid by SKIE and SKIE failed to execute a formal tenancy agreement. The Petitioner subsequently became aware that SKIE was decorating the Property. Moreover, the Petitioner discovered that in or about April 1994 BYL, without board approval or the consent of the Petitioner, intended to reduce the rental payable under the tenancy to HK$21 per square foot per month because, as he told the Petitioner, he thought the rent was too high. The Petitioner objected to these developments. In a letter dated 17th May 1994 addressed to SKIE, in his capacity as a director and shareholder of the Company he gave notice to SKIE that it should not move into the Property. Notwithstanding this, SKIE entered into occupation of the Property on or about 30th May 1994.

13. Furthermore, in May 1994 a dispute arose between BYL and the Petitioner in respect of the accounting services performed by JNMC in regard to SKIE. This caused the relationship between BYL and the Peitioner to deteriorate further. In addition legal proceedings have been commenced in the High Court by, inter alia, SKIE and the Petitioner against each other in respect of this dispute.

14. The Company's banker and mortgagee of the Property, namely Belgian Bank, has also informed the Petitioner that the Company has accumulated an unauthorised overdraft and has fallen behind in respect of the repayment of loan instalments for the Property. The total of the loan outstanding to the Belgian Bank as at 28th September 1994 was HK$9,242,631.12. I would add that that sum has, of course, now increased. Proceedings by the mortgagee bank are pending and due to be heard at the end of March.

15. The major complaints of the Petitioner are threefold:-

1. The company was formed for the purpose of holding property and the Petitioner was going to share in the managment of the company.

2. The Company let the Property to a linked company to BYL who I shall also term "the Respondent" and that thereafter rent was reduced largely at the instigation of BYL and indeed it was not paid.

3. The Company under the direction of BYL failed to pay the mortgage since July 1994.

16. I will come back later to whether the just and equitable ground is satisfied but I would say, at this stage that when the disputes arose between the parties, the Petitioner made it clear in his letter of the 17th May 1994 that what he wanted was his share of what the company was worth. Whether he got it by a winding-up or whether he got it by being bought out or in any other way did not seem to matter to him. He gave the Respondent 3 options. They are all quite reasonable, it seems to me. They are set out at the end of the letter which reads:

"1) To sell the property in the open market and dissolve SKPL after the disposal of property;

2) To divide and share the area of the premises between BYL and JN on 75% and 25% basis i.e. pro-rata to the respective parties' interests in the investment in the property. This is as per previous agreement between BYL and JN;

3) BYL take over JN 25% shares in the Company at open market value as already agreed by BYL through his family's authorised agent, Mr. Henry Lee of Hilltop Development (Pte) Limited (Hilltop)."

17. Initially the Respondent's reply was reasonable. By the letter of 1st June it was stated:

"As regards 'Kodak House', we understand that Mr. B.Y. Lim (the 75% shareholder of Swee Kheng Properties Ltd - owner of the Kodak House) is prepared to accept your offer of your transferring the 25% interest at the current market value to be determined by a reputable property valuer."

18. Thereafter both parties seem to me to have become more and more antagonistic. I feel both parties have been bargaining. As a result, if one looked upon it as a pure calculation, one would say that they were both perhaps asking for too much. If one looked upon it as bargaining in the market place, one would reach the conclusion that probably this was just standard bargaining. The Petitioner wanted to bargain for the payment of the accounting fees due from SKIE. A criticism is also put against him that he was valuing the premises too high.

19. On the other side, Mr. Lim's other company had stopped paying rent although it continued to occupy the premises. The Company, which was effectively under the control of Mr. Lim, stopped paying the mortgage. Mr Lim wanted the valuation done on the basis of a rental income that was below the mortgage repayments and below the level of rent fixed in the Spring.

20. The Respondent says that the way the Petitioner is using this petition is an abuse. The allegation is that it is being used for ulterior motives i.e. to settle other differences. The Respondent says that having made a reasonable offer that should be the end of the matter.

21. The way I see the case is this. There are some difficulties in the Petitioner putting his case on the classic lines as expounded by Lord Wilberforce in Westbourne Galleries case [1972] 2 All ER 492 at page 500:

"The 'just and equitable' provision....... does ..... enable the Court to subject the legal rights to equitable considerations; considerations, that is of a personal character arising between one individual and another.

The super-imposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence - this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be 'sleeping' members), of the shareholders shall participate in the conduct of the business; (iii) restriction on the transfer of the members' interest in the company - so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere."

22. The petition does not show that the Company was set up as a partnership. It is difficult to spell out of the allegations in the petition that the Petitioner would have part of the management or conduct of the business. What is clear is that he was to have the use of 25% of the premises, which corresponded to his contribution. The fact of his signing the letter of the 14th March which is referred to in para. 9 of the petition which amounted to the rental of the whole premises to SKIE is not properly explained. I can only deduce that the Petitioner was content at least at that stage that that should happen. However it was on the basis that what seems a reasonable rent would be paid, i.e. rent which would approximate the mortgage repayments.

23. What I would spell out of all this is that the Petitioner would have that amount of say in the running of the Company that would entitle him either to his 25% occupancy or he would have a sufficient say as to how the premises would be rented out at least to the extent of ensuring that the company and thereby himself would not be put in difficulties. In default of having that, it seems clear to me that the Petitioner should be entitled to get out of the company.

24. When the disputes first arose the Petitioner was prepared to be bought out. Things have not really changed since then. The Respondent has behaved in a way which people might not be expected to tolerate. He has, on paper, jeopardised the future of the company and the Bank, as I have said, has started proceedings in respect of the mortgage. They are likely to come to head in March when it seems, on the face of things as they stand at present, the Company will lose its one and seemingly only asset.

25. It seems to me that this is a case where there should at first blush be a buy out and that a winding-up should only be resorted to as a second or last resort. The Petitioner says that on the face of things the Respondent, Mr. Lim, may not be in a position to afford to buy him out. There is some ground for suspicion, but I do not think that I am in a position to proceed on that basis. SKIE seems to me to have a viable business. The lack of rent seems to me to be more likely to be attributable to the antagonism between the parties as to lack of finance. I do not consider that the Respondent's offers after the 1st June are such as should have been accepted and I would not dismiss the petition for that reason. What I would do is to stay the petition so that if the buy out for some reason falls then the petition can be restored.

26. I consider that the Respondent, Mr. Lim, should be ordered to buy out the Petitioner's shares. The basis should, it seems to me, be upon the value of the Company as it should have been at the date of the petition. I take that date because that date appears to be fair, as between the parties, when the Petitioner crystallised his position. I had thought of taking an earlier date but that seems to me to be wrong because the Petitioner was clearly content to carry on bargaining in the summer of last year in the hope of achieving a settlement in respect of the accounting fees and other differences which on the face of matters do not directly relate to the Company.

27. For the purpose of the valuation of the Company the value of the Property at 13th Floor Kodak House as at the date of the petition will have to be ascertained. It should be, and there is no dispute between the parties about this, on the basis of vacant possession as at that date. The shares should be valued as at the date of the petition by taking the value of the premises and deducting those sums as are agreed between the parties to be deducted from that amount. In particular in my view what should be deducted is the amount that would have been outstanding on the mortgage at that date had the repayments been made.

28. The other amount that would have to be deducted would be any further payments that the Petitioner would have had to have made from time to time had the rental income been at the figure of $120,140 as originally arranged. I say that because it seems to me that with the rising interest rates the mortgage repayments may have increased above that figure but I am not entirely clear about that, as the evidence did not go into it.

29. A valuer should hopefully be agreed between the parties if that has not already been done. In default one would have to be appointed and it seems to me the sensible person to pick a valuer would be the Chairman of the Hong Kong Institute of Chartered Surveyors.

30. Once that has been done it would be appropriate to appoint an accountant only if matters can not be agreed between the parties.

31. I would say this, the present arrangements according to the scheme that I set out may put the Respondent in some difficulties in that things will have to happen fast in view of the impending mortgage proceedings. It may be that the Respondent, Mr. Lim, may be financially slightly worse off, having to buy out the Petitioner than he would be if there were a winding-up. Nevertheless the Respondent has steadfastly resisted a winding-up order and asked the Court to order a buy out. So any difficulties that he may encounter are those that he is aware of and has elected to face.

32. In my view the appropriate time for payment for the shares would be 10 days after the valuation is completed and I consider that the appropriate arrangement would be that the transfer of shares and the payment of the amount should take place on the same day.

(Further discussion as to the form of order.)

33. There remains only the question of costs. I have to treat this as hostile litigation although I am happy to say that the parties have reached some measure of agreement as to the form of order which is now to made. Treating it as hostile litigation one sees these were proceedings which were in the first instance bought about because the majority can be said to have squeezed the Petitioner or at least the majority shareholder has acted in a way which has caused the Petitioner to be entitled to relief. It is true the Respondent has been asking the Court to order a valuation on the dates when this matter has been mentioned on the company call over days. However on those occasions the Court was not by any manner of means in a position to deal with such an application. It seems to me that an important point or at least it may be an important point is the date as of which that valuation is to be made. I have ordered it to be made as of the date of the presentation of the petition. In the present property market it may be a significant or it may be an insignificant difference between that date and today's date and that date and the date upon which the valuation is actually completed, but it seems to me first of all that is important.

34. The second thing which I think is important is the amount of the mortgage which has to be taken into consideration in reducing the value of the Petitioner's share. I have held that the amount should be as if the mortgage had been paid off in a regular manner up until the date of presentation of the petition.

35. Although I have some sympathy for the Respondent unfortunately the Respondent does not seem to me to have made an offer which fully encompasses the relief granted. In those circumstances, I am afraid it seems to me that the Respondent should bear the costs of this petition. By Respondent I mean of course Mr. Lim.