HUI CHAU HING AND ANOTHER v. HUI CHI SUM WATER D. AND OTHERS

HCMP 1605/2020

[2021] HKCFI 205

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 1605 OF 2020

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BETWEEN

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JUDGMENT

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APPLICATIONS

1.  There are three matters before this Court, namely,

(1) A petition for a buyout order and alternatively a winding up order in respect of Chuen Chun Company Limited which is the 5^th Respondent herein (the “Company”) presented on 29 September 2020 (the “Petition”);

(2) The Petitioner’s Summons for, inter alia, amending the title of the Petition from HCMP 1605 of 2020 to HCCW filed on 21 October 2020 (the “Amendment Summons”); and

(3) The 1^st to 3^rd Respondents’ summons for striking out paragraph 46 and paragraph (2) of the relief in the prayer of the Petition relating to the Petitioner’s pray for a winding-up order against the Company (the “Striking Out Summons”).

MATERIAL FACTS

2.  The Company is engaged in properties investment and carries on the business of leasing out retail shops for rental income. It has a substantial portfolio of properties. In a letter issued by CBRE dated 18 November 2020, CBRE opined that on an asset-based approach, the fair value of 100% equity value of the Company as at 26 September 2019 is HK$93,630,000. It only has an outstanding bank mortgage with Wing Hang Bank Limited in the sum of around HK$2 million in total.

3.  The shareholding of the Company are as follows:

(1)	The 1st Petitioner	20%
(2)	The 2nd Petitioner	10%
(3)	The 1st Respondent	20%
(4)	The 2nd Respondent	20%
(5)	The 3rd Respondent	20%
(6)	The 4th Respondent	10%

4.  There is also no dispute that the Company is currently receiving a monthly rental income in the sum of HK$203,000, i.e., HK$2,436,000 annually.

5.  In the Petition, it is pleaded that the Company’s affairs are being or have been conducted by the 1^st and 2^nd Respondents in a manner unfairly prejudicial to the interests of the Petitioners. However, the Petitioners do not seek a winding-up order as their primary relief. The Petitioners’ primary relief is a buy-out order. In paragraph 19 of the 3^rd Affirmation of Hui Chi Sum Water D., it is stated, inter alia, that:

“…For this reason, when the Petitioners in their pre-action letters alleged that we have violated our fiduciary duties as directors of the Company and demanded us to buy back the 1^st and 2^nd Petitioners’ 20% and 10% shares of the Company at HK$18,000,000 and HK$9,000,000 respectively, such demands were rejected by our solicitors as instructed by us without hesitation. However, as stated in the same letter (exhibit marked “HCH-4” produced under the 1^st Petitioner’s 2^nd Affirmation) our solicitors did invite the Petitioners to provide justification for the valuation of the Company for our consideration.”  (Emphasis added.)

6.  Further, paragraphs 43 to 46 of the Petition read as follows:

“43. On 24^th April 2020, the 1^st Petitioner instructed his solicitors to write to Anthony Hui and Water Hui, offering to sell the 1^st Petitioner’s shares at HK$18,000,000, representing a fair value of his shareholding.

44. On 11^th June 2020, the solicitors representing Anthony Hui, Water Hui and Hui Chi Wa [i.e. the 3^rd Respondent] wrote to the 1^st Petitioner’s solicitors, rejecting the offer.

45. The 1^st and 2^nd Petitioners are prepared to sell their 6 shares in the Company at a fair value to be determined by an independent valuer appointed by the Court pursuant to Section 725 of the Companies Ordinance (Cap.622)

46. The 1^st and 2^nd Petitioners do not have any knowledge as to the financial means of the 1^st to 4^th Respondents. On the assumption that they do not have the financial means to buy the 1^st and 2^nd Petitioners’ shares in the Company, a winding up order would be the only realist relief available.” (Emphasis added.)

7.  The 1^st to 3^rd Respondents’ case is that the Petitioners are acting unreasonably in seeking a winding-up relief when there is a relief of buy-out available and there is no real possibility or prospect of a winding up order being made by the Court.

APPLICABLE LEGAL PRINCIPLES

8.  In Ng Christina v Capella Capital Ltd [2020] 2 HKLRD 274, at §§15-19, this Court has already set out the legal principles on striking out a winding up relief and I repeat the same below:

“15. The legal principles in relation to striking out petitions are well established. In Re Four Twenty Company Limited, HCCW 278/2004, unreported, 6 January 2005, Kwan J (as she then was) at §5 said:

“5. 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 Enterprises 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 would 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).”

16. Where the company concerned carries on an ongoing and profitable business, is solvent, and has valuable goodwill and know-how, the Court may strike out the winding-up relief in a contributory petition if it considers that there is no prospect of the Court making a winding up order against the company. Yuen J (as she then was) in Re Wong To Yick Wood Lock Ointment Ltd [2001] 2 HKLRD 683 at 686H-688B insightfully and correctly said:

“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….

Notwithstanding the difference in wording, the principle behind both sections is the same – ie 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 at p.466; Re A Company (No 004415 of 1996) [1997] 1 BCLC 479 at p.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 ([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 or 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 claims for a winding-up order and for the relief under s.168A, so there will be little saving in cost 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 the Sword of Damocles.” (Emphasis added.)

17. Where a prima facie case has been shown that the ability of the respondent to finance any buyout is seriously in doubt, it is hardly “plain and obvious” that winding up relief should be struck out at this stage or that it is unreasonable to insist on seeking a winding up relief. In Re T-Hero Industrial Company Limited, HCCW 403/2017, unreported, 29 May 2019, Deputy High Court Judge Le Pichon at §§39-43 said:

“39. Courts may be prepared to order winding up despite the possibility of a buyout, for example, where there is no evidence of the respondents’ financial ability to buyout the petitioners’ shares. In Re Perfect Trade Limited, HCCW 1147/1999 (unreported, 1 June 2001), Chu J (as she then was) considered (at §59) that there is no room for making a buyout order in the absence of evidence as to the respondents’ financial ability.

40. West v Blanchet [2001] 1 BCLC 795 concerned an unfair prejudice petition where a buyout order was sought. The practicality of the offer has to be considered in order to judge whether it is ‘reasonable’. Peter Leaver QC observed (at 803c-d) that:

“It would…be too easy for a party to make an offer…which it had little or no realistic possibility of satisfying. In order to be a reasonable offer, there must be a realistic prospect, a reasonable likelihood, that the offeror will be able to pay the price likely to be decided upon by the independent expert appointed to value the shareholding.”

41. Thus, an offer is not reasonable if the offeror cannot finance it: see French, Applications to Wind Up Companies, 3^rd Edition at §8.234. Where a prima facie case has been shown that the ability of the 1^st respondent to finance any buyout is seriously in doubt, it is hardly “plain and obvious” that winding up relief should be struck out at this stage or that the petitioners are acting unreasonably in seeking winding up.

42. In Re M Kirpalani (HK) Ltd, HCCW 618/2009 (unreported, 23 June 2010), Barma J (as he then was) considered that any uncertainty regarding the question whether or not the respondents would be able to comply with a buy out order depended on the evidence. In the present case, the evidence renders it doubtful whether or not that a buyout, if ordered, could be complied with: see Kirpalani at §§37-38.

43. In my view, it would be invidious to pre-emptively exclude the option of a winding up order that would otherwise be available in the circumstances of this case.” (Emphasis added.)

See also: Re Yung Kee Holdings Limited, HCCW 154/2010, unreported, 21 July2010 per Chung J at §21-24.

18. In Re Sun Light Elastic Ltd [2013] 5 HKLRD 1 at §§8-9, Harris J comprehensively set out the relevant considerations as follows:

“8. However, the authorities in Hong Kong have shown some difference of approach in practice with some decisions placing more weight on the undesirability of having an unnecessary winding-up petition hanging over a company on the one hand, and on the other on the difficulty of concluding with sufficient certainty at the early stage of proceedings that a winding-up order would never be the appropriate remedy for the court to grant. In Re Mahr China Ltd I explained how this divergence of approach should be resolved:

[14] It seems to me that there is a difference between the decisions in Re Ranson Motor Manufacturing Co Ltd and Re Wong To Yick Wood Lock Ointment Ltd on the one hand and Re Prudential Enterprise Ltd, Kinong Group Ltd and Re 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 LJ in Re Copeland & Craddock Ltd [1997] BCC 294, 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 nonetheless 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 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.”

[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 first respondent to purchase the petitioner’s shares at a price and on terms that the Court considers reasonable.

9. In my view what is clear from the authorities is that the court will only grant a winding-up order rather than relief under s.168A if there is good reason to do so. In my view if a winding-up order is to be sought, particularly in the alternative it should only be because the petitioner has a particular reason for doing so. It is not enough simply to say “well one never knows what will transpire”. This would be no criteria at all. The petitioner must be able to point to particular matters he is concerned might make a winding-up order the appropriate or only practical relief….” (Emphasis added).

19. Every case depends on its own facts. There might well be cases where there are advantages to the Petitioner in seeking a winding up order. In Re Tai-Ao Aluminium Group Limited, CACV 391/2005, unreported, 22 June 2006, the Court of Appeal at §§15-16 said:

“15. In the present case although the judge had started the consideration on the basis that he followed the approach prescribed in section 180(1A) of the Companies Ordinance by considering (assuming the allegations made in the petition to be true) whether there was any real possibility or prospect of a winding-up order being made, he, in effect, tried to decide the matter then and there. That should only be done when the prayer for a winding-up will clearly not succeed. So long as it may succeed, as in any other type of claim, the petitioner is clearly entitled to pursue his claim.

16. Whilst it might be said that the petitioner was not apparently opposed to a buyout, it is not possible, at the moment, to say that he would be acting unreasonably to insist instead on a winding-up of the Company. Indeed, winding-up the Company might well be to his advantage. The Company itself is a holding company. Taishan is quite obviously a going concern and any liquidator of the Company would be in a position to dispose of Taishan. Indeed the petitioner may well wish to buy Taishan from the liquidator. That would be a different proposition than buying out the shareholders of the Company. Again the judge took the view that there would be a significant risk that a sale by a liquidator would produce a less satisfactory price. That may well be a legitimate consideration when it comes to the final order to be made on the hearing of the petition but, again, at least so far as this case is concerned it is far too early a stage on a strike out to take such a view. It cannot be said that the petitioner’s claim for a winding-up order is clearly unsustainable or that he is unreasonable in making such a claim.” (Emphasis added.)

See also Re Yung Kee Holdings Limited HCCW 154/2010, unreported, 21 July2010 per Chung J at §§18-20.”

9.  Depending on the facts of the case, it is not always necessary for a respondent to adduce evidence in detail as to how they can raise finance to buy out a petitioner in the event that a buy-out order is made by the Court. In Re Chun Yip Holdings Limited, HCCW 463-470 of 2012 and HCMP 1685, 1686 & 2153, 2154, 2567-2569 of 2009, unreported, 26 March 2015, Harris J. at §§59-60 said:

“59. So far as payment is concerned, I accept that [the respondents] have provided no evidence of how they anticipate raising finance to pay [the petitioner] in the event that the Court orders them to buy his shares. However, I also accept that given the financial position of the various companies it is likely that they would be able to raise the finance to buy him out. However, in my view a stronger objection is the fact that if the Court orders them to buy [the petitioner’s] shares and they do not pay the price once the valuation is complete, [the petitioner] will be able to look to their interest in the Group, which will in practice be 100%, to satisfy the judgment. I see no realistic prospect in these circumstances in [the petitioner] being left with an empty personal judgment. On the contrary [the respondents] will have every reason to raise the finance to pay him.

60. In conclusion, in my view the prayers in the winding-up Petitions have no realistic prospect of success and I make orders in terms of the Respondents’ summonses.” (Emphasis added.)

10.  In Re Wong To Yick Wood Lock Ointment Ltd (supra), Le Pichon JA at §16 said:

“The 1^st respondent owns 45% of the total shareholding of the company. There was uncontradicted evidence that the company is a going concern, solvent and in a sound financial position. For the year ended 31 March 1999, the audited accounts show net assets of over $51 million with a net profit after tax of $20.9 million. The audited accounts for the year ended 31 March 2000 show net assets of over $69 million with a net profit after tax of $22 million. In the circumstances, any suggestion that the 1^st respondent would not be able to fund a purchase of the petitioners’ shares would appear to be lacking in merit.” (Emphasis added.)

ANALYSIS

11.  Applying the above legal principles to the facts of the present case, I am of the view that there is no realistic prospect that even if all the allegations in the Petition were proved to be accurate after trial, the 1^st to 3^rd Respondents would not be able to buy out the Petitioners’ shares if so ordered by the Court to do so.

12.  First, the Company is a going concern, solvent and has substantial net assets in the region of HK$70 million to HK$90 million. If the Court were to make a buy-out order against the 1^st to 3^rd Respondents, apart from the 1^st to 3^rd Respondents’ own personal assets, their shareholding in the Company is also of sufficient value. I do not see they would have any difficulties to raise finance to comply with any buy-out orders that the Court might make. Mr Pun for the 1^st to 3^rd Respondents submitted that the Company could sell some of its properties or raise finance by mortgages and make distributions amongst its shareholders so that the 1^st to 3^rd Respondents would have sufficient cash to comply with any buy-out orders. I agree.

13.  Mr Hui for the Petitioners submitted that the retail properties are illiquid assets and the Company might have difficulties to sell them in the market within a relative short period of time. Whilst that may be true, I do not see there will be any difficulties for the Company to secure finance on the back of its substantial property portfolio. The Company has only got an outstanding mortgage in the sum of about HK$2 million. The Petitioners’ estimate of the value of their 30% shareholding in the Company is about HK$27 million. I find it hard to believe that the Company will have any difficulties to raise sufficient finance so that the Petitioners’ shares could be bought out by the 1^st to the 3^rd Respondents.

14.  In any event, as Harris J. said in Re Chun Yip Holdings Limited (supra), the Petitioners will be able to look to the 1^st to 3^rd Respondents’ interest in the Company to satisfy any buy-out orders. Hence, I see no realistic prospect, in these circumstances, in the Petitioners being left with an empty personal judgment.

15.  Mr Pun also submitted that the Company is receiving HK$203,000 rental income every month, with very few expenses. All the shareholders were paid by the Company every month over a long period of time. Additionally, in 2020, the Company could manage to pay the 1^st Petitioner and the 4^th Respondent HK$700,000 each.

16.  Thirdly, the 1^st to 3^rd Respondents have made it clear that “if at the end of the day a buyout order was made by this Honourable Court, we will respect such order and will strive to comply with the order.”

17.  There is no evidence as to why liquidation of the Company is the preferred option or that it would be more advantageous to the Petitioners as shareholders of the Company.

18.  Fourthly, Mr Hui for the Petitioners submitted that the 1^st to 3^rd Respondents have not demonstrated willingness to buy out the Petitioners. In fact, they have rejected the Petitioners’ offer for their shares to be bought out. However, I agree with Mr Pun for the 1^st to 3^rd Respondents that the 1^st to 3^rd Respondents’ position is that the Petitioners’ complaints are denied and therefore the Petitioners have no rights to demand their shares to be bought out but if so ordered by the Court after trial, they are ready and willing to buy out the Petitioners’ shares.

19.  On the facts of the present case, importantly, in view of the financial and assets position of the Company, I do not see a realistic prospect that the 1^st to 3^rd Respondents will not be able to buy out the Petitioners’ shares if so ordered. In the circumstances, there is no need for a winding up petition to be hanged over the head of the Company unnecessarily.

DISPOSITION

20.  For all the reasons stated above, I make the following orders:

(1) An order in terms of the Striking Out Summons.

(2) A costs order nisi that the Petitioners do pay the costs of and occasioned by the Striking Out Summons forthwith to the 1^st to 3^rd Respondents, on a party to party basis, to be taxed if not agreed.

(3) The Amendment Summons is dismissed.

(4) A costs order nisi that the Petitioners do pay the costs of and occasioned by the Amendment Summons forthwith to the 1^st to 3^rd Respondents, on a party to party basis, to be taxed if not agreed.

(5) The above costs orders nisi will be made absolute within 14 days of the orders herein unless the parties take out an application to vary the same within the 14 days period.

(6) On the Petition, I make the following directions:

(a) The Petitioners and the Respondents do file and exchange their respective list of documents within 28 days;

(b) There be inspection of documents within 7 days thereafter;

(c) The Petitioners and the Respondents do file and exchange witness statements within 28 days after inspection of documents;

(d) The Petition be adjourned for substantive hearing to a date to be fixed but not earlier than 1 June 2021.

21.  Finally, it remains for me to thank Mr Hui and Mr Shek for the Petitioners and Mr Pun for the 1^st to 3^rd Respondents for their helpful assistance.