KOR HIN LUNG v. FUJISEIKO SAFE INDUSTRIAL CO. LTD. AND OTHERS

HCCW 381/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING UP NO. 381 OF 1999

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R U L I N G

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1. This is an application for the amendment of a petition. The Petition is a shareholder's petition seeking the following relief:- first, a winding up on the just and equitable ground and secondly, an order under Section 168A of the Companies Ordinance that the Respondents be ordered to purchase the Petitioner's shares in the Company. I understand that the Company has since ceased trading and that the Petitioner is no longer pursuing the relief of winding up.

2. On the first day of the hearing of the Petition, counsel for the Petitioner made an application for the amendment of the Petition. That proposed amendment has since been reformulated twice. There is now a third draft which was provided on the second day of the Petition which was estimated to take 8 days. The proposed amendment has been opposed by the Respondents.

3. Before I deal with the original Petition and the proposed amendments, I would first make some general observations.

General observations

4. A petition for a winding up or for relief under Section 168A should be, in my view, as clear and specific as pleadings in an action begun by writ. A modern petition should not contain merely general complaints, leaving the respondents and the court to search for any factual basis for the complaint from often lengthy and sometimes argumentative affidavits. Nor, however, should a petition be a lengthy narrative of evidence. What a petition should do, in my view, after introducing the company and the parties and any relevant background, is to state clearly and specifically the factual allegations for the petitioner's complaints, no more and no less.

5. When facts are clearly and specifically stated, some of those facts may be disputed by the respondents and some may not. Unlike pleadings, however, the procedure of a petition does not provide for the parties to draw the battle lines by way of the filing of a Defence and a Reply. Hence, the modern tendency is for the court to either order points of claim, or to order that the parties (after all the evidence has been filed) to agree on a list of issues.

6. Another useful procedure where further information is sought from the other side, and which would reduce the cost of the hearing itself, is for the parties to delivery interrogatories to each other.

7. It would only be to the benefit of all concerned, that is to say the litigants, their lawyers and the court, for the parties (and their legal advisers) to concentrate their minds on those differences between them which are meaningful to the issues between them: to borrow the language of a writ action, the differences which are meaningful to the "cause of action". Where there are many disputes of fact, each dispute should fit into the scheme of things which go to make up a case either for or against the relief sought.

8. If the parties and their legal advisors bear these matters in mind, that would reduce the time used for the hearing with corresponding savings in costs for the parties. That would also be in the interests of the public as it would free court time for other cases.

Principles guiding court considering amendment application

9. I now come to consider the principles that would guide the Court in the exercise of its discretion whether to grant an amendment of a petition. In my view, the principle to be applied when considering an application for an amendment of pleadings should apply with equal force to an application for leave to amend a petition.

10. Generally the court would allow all issues between parties to be litigated no matter how late these issues have arisen, subject to three considerations which are relevant to the case here.

11. First, the Court has to see if the amendment has been properly particularised. It is no answer for an applicant to say that he will provide particulars later. If a party cannot get his tackle in order in the proposed amendment, there will be no purpose in a court granting an amendment in an incomplete state. Having said that, perfection is not demanded, nor would the Petitioner have to show at this stage that he would succeed in his allegations at the end of the day, so long as the proposed amendment is not capable of being struck out on the basis that the allegation is bound to fail.

12. Secondly, the Court has to consider whether the Respondents would suffer any prejudice which could not be compensated by costs. If the Company's business is still in operation, it would be more likely for the Court to find that there would be such prejudice, because clearly it would be unsatisfactory for a company to have to operate when its fate is uncertain.

13. Thirdly, the Court has to protect its own process to make sure that when time is available for a hearing, that that time is used for a case which is ready for hearing, and not wasted by starting a case only to find that that case has to be postponed because it is not ready due to amendments that have to be made.

Petition in original state

14. I now turn to the present Petition in its original, i.e. unamended, state.

15. A number of complaints are set out in the Petition. First of all, there is an allegation that the Petitioner has not been notified of board meetings. Secondly, he complains of a reduction of the proportion of his shareholding in the Company due to various allotments of shares which had been made to other shareholders. Thirdly, he complains of exclusion from the management of the Company and of its subsidiary in Xiamen (which I will refer to as "the Xiamen Company") and fourthly, he complains of a failure to repay initial contributions to him.

16. However, the more controversial complaint in the present case starts at paragraph 27. Paragraph 27 of the Petition, in its original state, complains about a failure to establish or maintain a proper accounting system and a failure to keep true and accurate accounts. This is followed in paragraph 29 by a complaint about irregularities in the Company's auditor's report. Paragraph 30 then sets out these irregularities:- (a) there is a complaint of a loss of $9m which is said to be "dubious"; (b) other purported business expenses are said to be "questionable"; (c) paragraph 31 contains another complaint of an irregularity in the calculation of the Company's consolidated loss; and (d) there is a complaint in paragraph 32 of a "serious discrepancy between two figures".

17. Returning to paragraph (a) above, in relation to a loss alleged to have been made by the Company, the Petitioner alleges that that was because the Company had been selling goods to Fujiseiko Engineering Limited, an associate company of the 2nd Respondent, Fuji Seiko Company Limited, "at or below cost", and because the Company was buying goods from the 3rd Respondent, Fuji Seiko Honsha Company Limited (although I note that it has not been suggested that the acquisition of goods from Honsha was at anything other than a proper cost).

18. In relation to (d) above, the allegation is of a "serious discrepancy between two figures". This is part of the allegation as to irregularities in the accounts. The two figures are the value of materials that Honsha supplied to the Company and the value of the materials that the Company supplied to the Xiamen company, it being alleged by the Petitioner that the Company had no requirement for any surplus materials. And there this allegation was left:- as a "serious discrepancy between the two figures", this discrepancy being in the amount of about $15m, as part of an allegation of irregularities in the Company's account.

19. It would, therefore, be seen that the focus of the Petition was on the issue of irregularities in the Company's account with the four specific allegations (a) to (d) that I have referred to above.

20. It should, however, be noted that in the Petition itself at paragraph 30, the factual allegation had been made that the Company had been selling goods to Fuji Seiko Engineering Limited, an associate company of the 2nd Respondent "at or below cost", and at paragraph 32 the difference between the 2 values, i.e. the $15m referred to above, had been highlighted. I now come to consider the proposed amendment.

Proposed amendment

21. The proposed amendment at paragraph 30 can be dealt with shortly. The proposed amendment is to plead that goods were also sold by the Company to Fuji Seiko Security Equipment Limited, which was also an associate company of the 2nd Respondent and Mr Choi who controls the 9th Respondent. It has not been suggested that that amendment in itself would lead to any substantial delay or prejudice.

22. Further, paragraph 30 is proposed to be amended by the addition of a table of "questionable expenses". The reasons why the expenses are said to be questionable appear in brackets at the end of each item in the table. In my view, that could have been formulated in a better way, but it contains a sufficiently clear explanation of the "questionable" aspects of that particular item of expense. Further, the particular items in the table had been referred to in the Petitioner's affirmations. That does not mean that it need not have been in the Petition itself, but at least the Respondents have had the opportunity to consider these specific items.

23. I now turn to paragraph 32 to 32L. These paragraphs contain amendments which allege a scheme by the corporate Respondents to, in Mr Whitehead's words, "milk" the Company and to divert its profits.

24. The difference in the values in the original paragraph 32, i.e. the $15m, is now asserted as a factual foundation for the allegation that either the Company did not acquire materials to the value of $15m from Honsha so that the accounts were not true or accurate, or if the materials were acquired, their utilisation has not been accounted for.

25. Further, as to the allegation that the Company was selling goods to Fuji Seiko Engineering and Fuji Seiko Security Equipment Limited, associate companies of the 2nd Respondent at or below cost, this allegation is now asserted as a factual foundation for an allegation of diversion of profits from the Company to Engineering and Security.

26. As part of this diversion of profits case, it has also been alleged that the Respondents caused the Company to prohibit the Xiamen company from selling its products in the domestic mainland market, thereby making profits distributible by way of dividends for the Company.

27. Mr Chain, counsel for the Petitioner, accepts that the focus of the case has shifted from irregularities in the Company's accounts to diversion of the Company's profits. Some of those facts may have been alluded to before in the Petition but in my view, the shift is nevertheless a drastic one. To now say that there was a scheme to divert profits from the Company when previously the Petitioner was only saying that there were irregularities in that Company's accounts is, in my view, to assert a new case.

28. No explanation has been offered by the Petitioner other than that there has been a change in the perception of his case. That change must have been very close to the start of the hearing because only one week prior to that, the Petitioner's solicitors had indicated to the Respondents' solicitors that no amendment to the Petition was necessary. The Court cannot emphasise more strongly the need for the parties and their legal advisers to focus on the question of what they perceive the issues to be well in advance of the hearing.

29. Having found that the amendments are putting forward a new case, the question is whether the Court should grant the amendment in light of the principles that I have referred to above.

30. First, in my view, the proposed amendment is not capable of being struck out on the basis that the allegations are bound to fail. If there had been an internal contradiction in the Petition as Mr Ronny Wong, SC had submitted, there might have been something in it, but there is some evidence to support the Petitioner's allegations whether or not they can be explained away at the end of the day, and the Court cannot take a view of the credibility of evidence at this stage especially when such allegations are based on documents emanating from the Company itself or from public authorities.

31. Secondly, I have considered the prejudice to the Respondents. Of course, they would now have to meet a new case. That would lead to more effort, delay and expense but they are respondents only and there is nothing in the nature of a counterclaim. Mr Whitehead SC had said that some staff had been laid off but there is no evidence that the relevant staff would no longer be available. Moreover, an allegation of diversion of profits is an allegation against executives rather than operatives such as staff members. And I note that there is no suggestion that any of the directors is no longer available.

32. I would note, in particular, that the Company is no longer trading. I dare say that if the Company were trading at the present time, such a drastic change in the focus of the Petition would, in my view, not have been permitted.

33. Thirdly, I note that the case may have to be postponed because of the amendment, and time required for the Respondents to file any evidence in answer if they wish to. I will hear the parties as to this. However, at the end of the day, the Court's duty is to adjudicate on all issues properly placed before it by the parties. The importance of these new allegations to the Petitioner's case is such that, in my view, it would be unjust if the Court were not to allow the Petitioner to raise them. It is, therefore, with great reluctance that I have to grant leave to amend. I will now hear the parties as to any ancillary orders.