MEASURE-TECH INDUSTRIAL SUPPLIES CO V. MAHR GMBH AND ANOTHER

HCCW 451/2007

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 451 OF 2007

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J U D G M E N T

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1. I have before me the 1^st Respondent’s summons dated 24 December 2007 for an order that paragraphs 45 and prayer 8 of the petition dated 4 October 2007 be struck out as frivolous and vexatious, alternatively as an abuse of process.  The application first came before me on 22 January 2008 and was adjourned to allow the Petitioner the opportunity to file evidence in relation to it.  The application came on for hearing on 25 March 2008.

2. The petition is issued under sections 168A and 177(1)(f) of the Companies Ordinance, Cap. 32.

3. The Company was formed as a joint venture between the Petitioner and the 1^st Respondent.  As is common in such cases the parties signed a joint venture agreement dated 4 December 1996 to regulate their relationship and the conduct of the affairs of the corporate vehicle through which they were to conduct their joint business venture.  Clause 12 of the joint venture agreement, which is the important clause for the purposes of this application provides as follows:

12.01 At any time after the date of this Agreement, either Shareholder (in this Clause referred to as the “Leaver”) may give six months’ written notice to the other to terminate this Agreement and, upon the expiry of such notice:-

(a)  the provisions of this Agreement shall cease to have effect save as may be necessary to give effect to the remaining

provisions of this Clause or in relation to any antecedent claims which may have arisen between the parties hereto;

(b)  the Leaver shall be deemed to give a transfer notice in respect of its entire holding of Shares pursuant to Article 7 at a price equal to the fair value as determined by the auditors for the time being of the Company;

4. Towards the end of 2006 differences arose between the parties and their relationship began to deteriorate.  By a letter dated 22 June 2007 the Petitioner gave a notice pursuant to this clause.

5. On 14 November 2007 the 1^st Respondent’s solicitors, Chan Tang & Kwok (CTK), wrote to the Petitioner’s solicitors, CS Chan & Co. (CSC), with an offer from their client to acquire the Petitioner’s shares.  CSC replied on 27 November agreeing to the 1^st Respondent’s offer subject to certain amendments to the valuation mechanism for the shares.  It is useful if I summarise the differences.  The first set of quotes are from CTK’s letter of 14 November 2007 the second set of quotes are from the CSC’s letter of 27 November 2007:

   14 November

3   The Shares will be valued by the Independent Valuer at a fair value as between a willing purchaser and a willing seller on a pro rata basis with no discount for a minority holding, and on the basis that the Company is a going concerning.

4   The Shares of the Company shall be valued as at a date to be agreed between the parties.

7   Each party shall have an equal and fair opportunity to make submissions to the Independent Valuer who shall decide the form in which submissions may be made.  However, the Independent Valuer is to act throughout as an expert, not an arbitrator, and shall not give reasons for his decisions including the valuation.

11   The valuation fee payable to the Independent Valuer shall be shared by the Petitioner and the 1^st Respondent in proportion to their respective shares in the Company, unless the Independent Valuer determines that it should be borne in a different way, and such valuation fee shall be paid in advance of the valuation by the parties into their respective solicitors’ stakeholding account.

12   The Petition filed by the Petitioner on 4^th October 2007 will be withdrawn.

13   Each party shall bear its own costs of and occasioned by the Petition.

    27 November

3   The Shares will be valued by the Independent Valuer at a fair value as between a willing purchaser and a willing seller on a pro rata basis with no discount for a minority holding, and on the basis that the Company is a going concern.

4   The Shares of the Company shall be valued as at a date to be agreed between the parties.

7   Each party shall have an equal and fair opportunity to make submissions to the Independent Valuer who shall decide the form in which the submissions may be made.  However, the Independent Valuer is to act throughout as an expert, not an arbitrator, and shall not give reasons for his decisions including the valuation.

11   The valuation fee payable to the Independent Valuer shall be shared by the Petitioner and the 1^st Respondent in proportion to their respective shares in the Company, unless the Independent Valuer determines that it should be borne in a different way, and such valuation fee shall be paid in advance of the valuation by the parties into their respective solicitors’ stakeholding account.

12   The Petition filed by the Petitioner on 4^th October 2007 be withdrawn.

13   Each party shall bear its own costs of and occasioned by the Petition.

6. After receipt of the letter of 27 November 2007 the 1^st Respondent’s focus moved towards persuading the Petitioner to voluntarily withdraw paragraph 45 and prayer (8) to the petition, which seek a winding-up.  In CTC’s letter of 12 December 2007 it is argued that as the parties have agreed to a sale and that all that requires determination is the price, which if needs be can be determined by the court there is no justification for the petitioner continuing to pursue a winding-up with the attendant disadvantages for the Company, which has an extant business that the 1^st Respondent wishes to continue.  The Petitioner’s position is that it will agree to a stay of the winding-up petition, but its withdrawal is premature until such time as an agreement is concluded or the court has finally determined the matter.  The Petitioner has also expressed concern in its evidence that the 1^st Respondent is dragging its feet in reaching an agreement in order to better its negotiating position and that a premature withdrawal of the winding-up petition, will only encourage it to do continue to do so.

7. Mr. Lam, who appeared on behalf of the 1^st Respondent, argued as follows:  The Petitioner has through its Counsel confirmed to the Court that its preference is for a buyout.  It is in any event bound by the consequences of serving a termination notice under clause 12 of the joint venture agreement.  The consequences are that it is bound to sell its shares in the Company to the 1^st Respondent at the market price.  In these circumstances there is no prospect of the Court winding-up the Company and the maintenance of the claim for a winding-up is unnecessary and an abuse of process.

Applicable Principles

8. Mr. Lam submitted that the principles on which the Court acts when determining an application to strike-out a winding-up petition are as summarised in the decision of Recorder Fok S.C. in Man Po Lo Paul v Cheung Kang Wah HCCW 478/2006 unrep. 8 February 2007 at paragraph 8:

8.  The principles on which the Court acts on an application to strike out a winding up petition are well established and have not been in dispute in this application.  They are clearly summarised in the judgment of Kwan J in Doneur HK Limited v. Four Twenty Company Limited & Anor., unrep., HCCW 278/2004, 6.1.05 at §5 as follows:-

“There is no dispute as to the approach and principles to be adopted in the strike out application and they may be summarised as follows:

(1) It is assumed that the particulars and allegations in the petition and the supporting affidavits of the petitioner would be established and the conflicts resolved in favour of the petitioner (Re Forecast Nominee Limited [1996] 4 HKC 12 at 18C; Re Prudential Enterprise Limited [2001] 2 HKC 687 at 692D-E).

(2) The application should be approached with the greatest circumspection and it is only in a plain and obvious case that the court should exercise its discretion to strike out the petition for winding up or the parts complained of (Re Wong To Yick Wood Lock Ointment Limited [2001] 2 HKC 618 at 623I).

(3) The burden is on the applicant to show that it is plain and obvious that the petition for winding up would fail on the ground there is an alternative remedy available to the petitioner and that the petitioner is acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy (section 180 (1A) of Cap. 32; Re Wong To Yick Wood Lock Ointment Limited, supra. at 622I to 623F and 623H and on appeal at [2003] 1 HKC 484 at 487H to 488B).

(4) Where proposed amendments are put forward in an application to strike out, the court should have regard not only to the allegations in the existing petition but also to matters in the proposed amendments (Re Prudential Enterprise Limited, supra. at 692D).”

9. I did not understand Mr. Chan, who appeared on behalf of the Petitioner to dispute that this was an accurate statement of principle; which in my view it clearly is.  Where a disagreement does arise is in how this principle is to be applied in cases in which it is likely that a buy out will take place either by agreement or at the order of the Court.  In paragraph 31 of his judgment in Man Po Lo Paul v Cheung Kang Wah Recorder Fok S.C. when considering whether the prayer for a winding-up in the petition before him should be struck out quoted the following passage from a judgment of Yuen J. (as she then was):

The applicable law to be applied was clearly set out in the judgment of Yuen J (as she then was) in Re Wong To Yick Wood Lock Ointment Limited [2001] 2 HKC 618 at 622G-624B:-

“I shall set out briefly the law to be applied.  First a contributory petitioner’s claim for a winding-up order is not doomed to fail by reason only that alternative relief has been sought in the petition.  However, the Court would at the hearing (a) take into account the fact that there is alternative relief, and (b) assess the reasonableness or otherwise of the petitioner’s action in seeking an order for winding-up instead of the alternative remedy.  This approach is prescribed by statute. In Hong Kong, s. 180(1A) of the Companies Ordinance 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’.

The wording of that section (enacted in Hong Kong in 1978) is slightly different from s. 125(2) of the 1986 Insolvency Act (formerly s.225(2) of the Companies Act 1948), which provides:-

‘If 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, if it is of opinion – (a) that the petitioners are entitled to relief either by winding-up the company or by some other means, and

 (b) that in the absence of any other remedy, it would be just and equitable that the company should be wound up, shall make a winding-up order but this does not apply if the court is also of the opinion both that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy’.

Notwithstanding the difference in wording, the principle behind both sections is the same – i.e. that the remedy of winding-up on a contributory’s petition is a remedy of last resort (Re San Imperial Corp. Ltd. (No.2) [1980] HKC 463, 466; Re a Company (No.004415, 4416 and 4413 of 1996) [1997] 1 BCLC 479, 487) and would not be granted if the petitioner was acting unreasonably in insisting upon it instead of pursuing an available alternative remedy.

The onus is however on the parties opposing the petition to show that there was an available alternative remedy and that the petitioner was acting unreasonably in not pursuing it.  That is the position at the hearing of the petition.  However, there is a Practice Direction in England [No.1 of 1990] ([1990] 1 WLR 490) reminding practitioners of the undesirability of including as a matter of course a prayer for winding up as an alternative to an order under s.459 of the Companies Act 1985 (equivalent to s.168A of the Companies Ordinance) and that ‘it should be included only if that is the relief that the Petitioner prefers of if it is considered that it may be the only relief to which he is entitled’.

The question in the application before me is whether even at the present stage, assuming that the Petitioners prove all the facts in the Amended Petition, there is no real possibility or prospect of a winding-up order being made such that the Court should exercise its discretion to strike out the claim for a winding-up order. 

As with all applications to strike out, this application must be approached with the greatest circumspection. It is only in a plain and obvious case that the Court should exercise its discretion to strike out a claim before it has gone to a full hearing. Further, in the present case, the same facts are relied upon by the Petitioners to justify the claim for a winding-up order and for the relief under s. 168A, so there will be little saving in costs or time should the application succeed. 

Having said that, if it is clear that there is no real possibility or prospect of a winding-up order being made at the hearing by a court applying s.180(1A), it cannot be just for a company to have the threat of a winding-up order hanging over its head like a Sword of Damocles.” (emphasis added)

10. This passage and the way in which Recorder Fok S.C. applied it suggests that in the case of a petition seeking relief under section 168A or a winding-up, even if the court is not satisfied that the allegations in support of that part of a petition seeking a winding-up are unarguably bad if the court is persuaded that it is highly likely that it will order a buy out, the claim for a winding-up should be struck out.

11. Mr. Chan argues that this approach contrasts with the more cautious one taken by Cheung J.A. in Re Prudential Enterprise Ltd. [2002] 1 HKLRD 267.  In that case the petitioners applied to wind-up the company on the just and equitable ground and also asked for relief under section 168A of the Companies Ordinance, which included an order that a shareholder should purchase the petitioners’ shares.  The shareholder made an open offer on terms, which he contended could not reasonably be rejected.  They were rejected and he applied to strike-out or stay the petition on the grounds that it was an abuse of process.  In paragraph 14 of Cheung J.A.’s judgment 6 principles are identified as being relevant to the application to strike-out.  They are as follows:

Mr. Todd QC, Counsel for ST Lee, has very helpfully identified the relevant principles.  They are not in dispute and are as follows:

(1)  A winding-up order is a remedy of last resort: Re Company (No 004415 of 1996) & Others [1997] 1 BCLC 479 at pp. 487H-488D.

(2)  What the petitioners really want on petitions such as this, is not to have the company wound-up, but to be paid a proper price for their shareholding: Ebrahimi v. Westbourne Galleries Ltd. [1973] AC 360 at p. 385E -F.

(3)  Both the reliefs sought under s. 168A and an open offer, are alternative remedies available to the petitioners, other than a winding-up order: Re Company [1983] BCLC 151 at pp. 158, 159A.

(4)  The Court is concerned to exercise active case management and to ensure the crucial issues between the parties can be determined as expeditiously and as inexpensively as possible: Thermawear Ltd v Linton (unrep. The Times, 20 October 1995), Re Company (No 005685 of 1988) (No 2) [1989] BCLC 427 at pp. 436I-437G.

(5)  Where the crucial issues between the parties and their effect on the valuation of the petitioners’ shares involve questions of mixed facts and law, then they should be determined by the court, not by an accountant: North Holdings Ltd. V Southern Tropics Ltd. [1999] 2 BCLC 625 at pp. 637D-G and 639A-C; Yeung Bun v Brio Technology International Ltd. & Another [2000] 2 HKLRD 218 at p. 225D-H, sub nom Re Brio Technology International Ltd. [2000] 3 HKC 536 at p. 541F-I.

(6)  The Court may be concerned, if the petitioners were left with nothing more than a personal remedy, if the petition was to be struck-out: Re Kinong Group Ltd. [1999] 4 HKC 100 at pp. 104F-105G.

12. It will be noted that the final principle is that the Court is concerned that the petitioner is not left with a personal remedy only.  Le Pichon J. (as she then was) expressed a similar concern when sitting at first instance in Kinong Group Ltd. [1999] 4 HKC 100 at page 105B.  This type of concern is echoed by Vinelott J. in In re a Company (No. 002567 of 1982) [1983] 1 WLR 927:

“In insisting on a winding up order he is, in effect, asking that the respondents should either buy out his shares at the price he chooses to place on them, or face the disruption of a winding up order and that notwithstanding the fact that at least until July of last year they continued to run the company in the expectation that a price, or a fair machinery for ascertaining the price, could be agreed and exposed themselves to a continuing liability under a guarantee to the company’s bankers in order to do so.  In these

 circumstances, in my judgment, T. is not entitled to the order he seeks.  However, I think it would be wrong to dismiss the petition forthwith with the possible consequence that if some unforeseen difficulty arises in formulating a detailed agreement governing the machinery for ascertaining the value of the shares, T. will have to start all over again.  I will, therefore, stand over this petition to enable the parties to agree the terms of a submission to arbitration or to an expert; in the meantime, all further proceedings on the petition will be stayed.  The matter can be mentioned to me if an agreement can be reached and at that stage the petition will be dismissed.  If there is any disagreement as to the terms of the submission I will hear further on argument on the question.”

13. Mr. Chan says that the Petitioner has no objection to the winding-up claim being stayed.  It would, however, be wrong to strike-out that part of the Petition thus leaving the Petitioner with only a prospective personal claim against the 1^st Respondent.  It would certainly be wrong, so Mr. Chan’s submission develops, to strike-out rather than stay the winding-up claim in the absence of evidence of prejudice to the 1^st Respondent that goes beyond that which inevitably results from presentation of a winding-up petition: Re Kinong Group Ltd. at 105D.

14. It seems to me that there is a difference between the decisions in Man Po Lo Paul v Cheung Kang Wah and Re Wong To Yick Wood Lock Ointment Limited on the one hand and Re Prudential Enterprise Ltd., Kinong Group Ltd. and In re a Company on the other.  The former places more emphasis on the generally recognised undesirability of having a winding-up petition hanging over the head of an ongoing business and the Court’s reluctance to wind-up companies if some other remedy is available.  The latter recognises the possibility that although at the time an application to strike-out is made it may appear that a purchase of shares is the inevitable result of the proceedings unforeseen events may intervene and lead the Court ultimately to be persuaded that a winding-up order is the appropriate remedy.  For this reason the correct approach is to stay rather than strike-out the claim for a winding-up.

15. In my view the way to resolve this difference is to return to the accepted test by which a strike-out application is determined.  This was explained as follows by Bingham L.J. in Re Copeland & Craddock Ltd. [1997] BCC 294 at page 300:

“It has been often and rightly said that the court’s jurisdiction to strike out a claim advanced by a plaintiff or a claimant or a petitioner is to be exercised very sparingly and only where the clearest grounds are shown for doing so.  The reason for this practice is clear.  Although a court may at a preliminary stage regard a claim as tenuous and having a negligible chance of success, the claimant is none the less entitled to the court’s adjudication on it on the merits unless it is a claim which the court is satisfied cannot succeed.  In this case the judge clearly regarded the plaintiff’s claim to wind up this company as one which was unlikely to succeed, but he did not feel that the claim was so manifestly unarguable as to justify him in striking it out … I share the judge’s view that this claim is unlikely to succeed.  I am indeed persuaded that the case is very close to the borderline where striking out would be appropriate.  But I am not quite persuaded that the claim is unarguable whatever comes out relevant to the petition on discovery and in the course of oral evidence.” (emphasis supplied)

16. I, therefore, ask this question: am I satisfied at this stage of the proceedings and on the evidence before me that the claim for a winding-up cannot succeed?  I am not.  I cannot rule out the possibility that it will prove impossible to require the 1^st Respondent to purchase the Petitioner’s shares at a price and on terms that the Court considers reasonable.

17. I dismiss the 1^st Respondent’s application and make a costs order nisi that the 1^st Respondent pays the Petitioner’s costs forthwith such costs to be taxed if not agreed.  The costs order shall become absolute if neither party applies to vary it within 14 days of the date of handing down of this decision.

18. I shall order that paragraphs 45 and prayer (8) of the Petition are stayed sine die with liberty to both parties to apply.