KOY HOLDINGS CORPORATION v. SPIDER KNITTERS LTD AND ANOTHER

1997, No. MP-3105

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H E A D N O T E

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Whether S.168A proceedings should be allowed to proceed notwithstanding a duly passed resolution to wind up a company and the existence of a derivative action.

1997, No. MP 3105

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS

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D E C I S I O N

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1. This is an application to strike out a petition on the grounds that it is an abuse of the process of the court.

2. The brief facts of this case are as follows. The company involved was a weaving company. It had a small number of shareholders. The Petitioner was a minority shareholder who had interests in another company. According to the petition, the Petitioner complains that the majority shareholders and directors caused the business of the company to be run down and diverted to another company which they are now running.

3. The petition brought under section 168A of the Companies Ordinance was presented on 22 September. A derivative action has also been launched by the Petitioner and an application has been made for a Mareva injunction.

4. To even up the record a bit, at this stage it is right to say that the company itself, under the direction of the majority, has also brought an action against the present Petitioner, alleging what are apparently corresponding wrongs by the Petitioner. At this stage it is unnecessary and, indeed, undesirable for me to go into the details of the matter any further.

5. There was a resolution to wind up the company which was passed on 10 November this year. This application is made as a result of that. It is said that the basis for the petition under section 168A has gone. It is said that section 168A, which reads as follows:

"(1) Any member of a company who complains that the affairs of the company are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of some part of the members (including himself) or, in a case falling within section 147(2)(b), the Financial Secretary, may make an application to the court by petition for an order under this section.

(2) If on any petition under this section the court is of opinion that the company's affairs are being or have been conducted in a manner unfairly prejudicial to the interests of the members generally or of some part of the members, whether or not such conduct consists of an isolated act or a series of acts, the court may, with a view to bringing to an end the matters complained of-

(a) make an order restraining the commission of any such act or the continuance of such conduct;

(b) order that such proceedings as the court may think fit shall be brought in the name of the company against such person and on such terms as the court may so order;

(ba) appoint a receiver or manager of the whole or a part of a company's property or business and may specify the powers and duties of the receiver or manager and fix his remuneration;

(c) make such other order as it thinks fit, whether for regulating the conduct of the company's affairs in future, or for the purchase of the shares of any members of the company by other members of the company or by the company and, in the case of a purchase by the company, for the reduction accordingly of the company's capital, or otherwise."

6. The range of orders which could thus be made under subsection (2) seems to me to be very broad. It is said on behalf of the applicants that this section looks to regulating the company and its affairs for the future and attention is specifically drawn to the words "bringing to an end the matters complained of". I should point out, however, that the section also refers to the possibility of the commencement of a petition where the act complained of consists of an isolated act and it seems to me that the section may also be contemplating righting a wrong or righting any conduct which has been unfairly prejudicial which has happened in the past and which constitutes merely an isolated act.

7. It is also said on behalf of the applicants that the remedy which the Petitioner would obtain should be achieved, if at all, under the derivative action which has also been commenced. Furthermore, it is said that there would be a complicated basis of assessment of the value of shares, as that is what is sought on the present petition, because of the derivative actions and the action by the majority and the difficulties that might arise in assessing the true worth of the shares.

8. It seems to me that the derivative action is quite different from an action founded on a petition under section 168A of the Ordinance. First, a derivative action is an action for damages on the part of the company for a wrong committed to the company. On the other hand, a petition under section 168A is not a petition for a wrong committed to the company; it is in respect of conduct which is unfairly prejudicial to the members generally or some part of them.

9. Just pausing there for a moment, I would add that a winding-up in situations where the conduct is said to be unfairly prejudicial is sometimes also a remedy. The value which would be obtained would often of course only be on a break-up basis, unless the business of the company could be sold.

10. Under a derivative action, it seems to me that the assessment of the damages might be limited in this case by the fact that, in the circumstances, the majority directors could not have been forced to proceed further with the conduct of the company and, hence, it may well be that the court would say that the damages for any wrongful acts which they have committed might be limited to the precise damages which they have caused the company but that the future damages are simply speculative because they would be dependent upon the wrong-doers themselves having continued to run the company.

11. If a purchase of shares were to be ordered under section 168A(2)(c), the valuation of the shares of the company can be awarded on a going concern basis as between a willing buyer and willing seller, without regard to the fact that the shareholding in question is a minority shareholding.

12. It has been suggested to me that a likely quantification of that amount is possibly parlous since it is often in the hands of accountants who are not overly generous in estimating the value of a company. Be that as it may, the value of a company on a going concern seems to me to have to take into account its potential earning power and it is often on a basis of a multiple of its present earnings.

13. It is true that in this case the derivative action has been based on precisely the same facts as the section 168A petition, but it seems to me that it is a possibility which cannot be ruled out that the court could find conduct as being unfairly prejudicial which does not amount to a wrong to the company. It is unnecessary and, indeed, as I have said, undesirable for me to go further into the matter at this stage.

14. It seems to me that on 22nd September this year, when the petition was presented, the Petitioner had an accrued right of action, which cannot be taken away by causing the winding-up of the company.

15. One of the things that the court could do under section 168A is to order that proceedings may be brought in the name of the company and, given the wide powers that there are under section 168A, I see no reason at the moment why that could not be done on the basis that it is the company that is ordered to fund the costs of the action. I should, however, say that in this case it is Mr Poon SC's case that there is plenty of money which has already been distributed or available for distribution which would amply cover even the costs of legal proceedings.

16. It is said on the part of the applicant that if by winding up the company the cause of action is defeated, then so be it. There is no agreement to keep this company going forever, and companies are conducted by majority rule and it can be wound up at any time if it is done in accordance with the Ordinance.

17. I do not consider that the court should allow a potentially present accrued and expressed cause of action to be defeated in this manner and the Petitioner deprived of what is possibly a simple remedy. Here one bears in mind the history and genesis of section 168A, which is precisely to provide remedies which are simple and effective, as opposed to the derivative actions which have always been complicated and seem these days to have become even more complicated.

18. I leave open at this stage for decision on another occasion the question of whether a section 168A petition could be presented after a winding-up has been commenced. In my view, therefore, this is by no means a plain and obvious case where this petition is unsustainable and I do not accede to the application.