LAI YUET CHUN v. SUPER DELUXE INTERNATIONAL LTD AND OTHERS

HCMP 3140/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF APPEAL

MISCELLANEOUS PROCEEDINGS NO. 3140 OF 2003

(ON APPEAL FROM HCCW NO. 186 OF 2001)

_________________________

_________________________

_________________________

REASONS FOR JUDGMENT

_________________________

Hon Rogers VP:

1. I agree with the reasons given by Le Pichon JA.

Hon Le Pichon JA:

2. This was an application for leave to appeal the order for costs in favour of the petitioner in the proceedings below. Leave was refused for reasons to be reduced into writing later which we now do.

Background

3. The proceedings below arose out of the petition presented by the petitioner to wind up Super Deluxe International Limited ("the company") on the just and equitable ground, alternatively for relief under section 168A of the Companies Ordinance that the petitioner's shares be purchased by the 2nd , 3rd and 4th respondents (collectively "the respondents"). On 11 February 2002, the petitioner, her husband Mr Ng and the respondents entered into a deed of settlement by which the respondents agreed to purchase the petitioner's shares at the price of $309,811 and to procure the company to repay the petitioner's loans in the sum of $439,998 that had been advanced by her to the company. Costs of the proceedings remained an outstanding issue. These related to:

(a)	The costs of an application by the respondents that the petition or alternatively, the prayer for winding up be struck out or stayed (the strike out summons);
(b)	The costs of the petitioner's application for specific discovery (the discovery summons);
(c)	The costs of the petition generally other than the costs set out in (a) and (b) above which have not been awarded to any party.

4. The judge below ruled on the question of costs after determining the petitioner's entitlement to the relief sought in the petition. For this purpose, the judge received evidence to resolve the factual disputes between the parties.

5. For present purposes, the relevant facts may shortly be stated as follows. Mr Ng and the 2nd respondent who had known each other since 1985 are both experienced in the retail trade for golf equipment. They decided to acquire a company for that purpose and approached the 3rd respondent to join in the business venture. The petitioner who is a housewife took no part in the discussions. Of the six shares issued in the company, the petitioner held two of the shares, the 2nd respondent held another two and the 3rd respondent held one share by himself and another share held through the 4th respondent who is his wife and who was not involved in the business of the company.

6. Mr Ng participated in setting up of the two shops and he was jointly responsible with the 2nd respondent in running the business. One of the main areas of dispute between the parties was whether the company had been formed on the basis of an understanding that Mr Ng would have a right to participate in the management and control of the company. The respondents contended that he was merely an investor.

7. On 4 December 2000, the 2nd respondent served a notice on behalf of the company dated 2 December 2000 terminating Mr Ng's employment with immediate effect. Prior to the presentation of the petition on 22 February 2001, the petitioner had, on 13 and 22 December 2000 and 8 January 2001, offered to sell her shares to the respondents or to purchase their shares at a price to be agreed. The respondents failed to respond to the petitioner's proposals. The petition was presented on 22 February 2001. On 2 April 2001 the respondents offered to purchase the petitioner's shares.

The judgment below

Costs of the strike out summons

8. The judge considered that the respondents would not succeed in striking out unless they were to show that their offer was plainly reasonable and that the petitioner had acted unreasonably in refusing to accept the offer and in continuing with the litigation. In considering the reasonableness of the respondents' offer, the judge applied the principles as set out in O'Neill v Phillips [1999] 1 WLR 1092 at 1107D - 1108B. She concluded, having regard to the fact that there were changes in the offers between 2 April and 29 September 2001 and revised offers made in November 2001, a month or so after the date of the striking out summons, that the offer made by the respondents which had altered over the course of negotiations was not shown to be plainly reasonable. It followed that the respondents' application to strike out or stay the entire proceedings was not well founded.

9. As to the respondents' application to strike out the winding up prayer only, the question there was whether it was reasonable for the petitioner to have sought a winding up order as an alternative to section 168A relief. The respondents, relying on the Wong To Yick Wood Lock Ointment Limited [2001] 2 HKC 618 and [2003] 1 HKC 484 had contended that as the company was solvent and profitable and the petitioner was willing to sell her shares and the respondents willing to purchase them, there was no real interest in the petitioner in having the company wound up.

10. It would appear from paragraphs 37 to 39 of the judgment that the judge considered that there were factors which differentiated the present case from the Wong To Yick case in that the evidence suggested that the financial position of the company could not be regarded as very strong. It had only been trading for about a year and its net assets as at 30 April 2001 was just under $500,000. Losses had been suffered in January, February and April 2001 and the net profit in March had been of the order of only $12,300 odd. There was also the potential problem of the petitioner recovering shareholder's loans from the company. It was not until 12 November 2001, well after the issuance of the strike out summons, that the respondents accepted that in the event of a buyout under section 168A, a condition could be imposed requiring the repayment of the loans to the petitioner. Had they not done so, winding up the company was an alternative means of recovering the shareholder's loans. Based on these considerations, the judge came to the conclusion that the petitioner had not acted unreasonably in seeking a winding up order as an alternative to section 168A relief. It was on that basis that she exercised her discretion and ordered the respondents to pay the petitioner's costs in relation to the strike out summons.

Costs of the discovery summons

11. The petitioner issued this summons for specific discovery in relation to 13 items of documents. With the exception of two items, the judge found that the rest related to one or more of the issues arising from the petition. The petitioner's discovery summons was found to be justified and on that basis she awarded the petitioner the costs involved in any event.

Costs of the petition generally

12. The respondents' position was that as the petition was doomed to fail, the petitioner should not be entitled to any costs. Alternatively, there should be no order as to costs as the petitioner would not have succeeded in establishing the majority of her complaints. In the further alternative, it was contended that she should be awarded costs up to 2 April 2001, alternatively, 7 September 2001 because of the offers made by the respondents.

13. This last alternative did not find favour with the judge as she had already found that the offers made by the respondents in April and September 2001 did not constitute reasonable offers.

14. The judge went on to make findings of fact. She found that the company had been set up on the basis of personal relationship and trust between Mr Ng and the 2nd and 3rd respondents and that there had been an understanding or agreement that the three of them were to participate in the management of the company's business. Further, she rejected the respondents case that there had been proper justification for terminating the employment of Mr Ng and excluding him from the management of the company. Having found that the petitioner had established her entitlement to the relief claimed, she awarded the petitioner the costs of the petition.

This application

15. The respondents sought leave to appeal the costs orders made by the judge. Whilst there were essentially two principal grounds of appeal in the draft notice of appeal, the first being premised on winding up relief being "unnecessary" and that section 168A relief alone was all that was required, at the hearing of the leave application it became apparent that Mr Barlow's contention was centred round the second, namely, that the judge ought to have awarded the petitioner costs up until 2 April 2001 or alternatively 29 September 2001 and thereafter costs should be in favour of the respondents. He submitted that if in a hybrid petition, an offer is made giving s.168A relief which encompasses everything raised in the petition and subsequently the petition is compromised, the Calderbank principle should be the guiding principle on the question of costs.

16. Mr Barlow's attention was drawn to paragraph 37 of the judgment which suggested that it was not until 12 November 2001 that the respondents accepted the petitioner's contention regarding the repayment of the loans that, as shareholder, she had made to the company. His response was that as the question of the repayment of shareholder's loans had not been specifically raised in the petition, it was not a matter that needed to be taken into account by the respondents in making their buyout offer. He referred to a passage in Lord Hoffmann's speech in O'Neill v Phillips at 1106F:

"... If the petitioner was offered everything to which he has been held entitled, the respondent may, as in the case of a Calderbank letter (Calderbank v. Calderbank [1976] Fam. 93), be entitled to say that the costs after the date of that offer should be borne by the successful petitioner, who ought to have accepted the offer and brought the litigation to an end. ..."

I am unable to see how that passage assists the respondents. There Lord Hoffmann was referring to what the petitioner has been held entitled. In the context of a minority buyout which is intended to achieve a clean break, it is unimaginable that the status of the petitioner's shareholder's loans would not be a matter that would have to be addressed. Indeed, in response to the respondents' buyout offer made in April 2001, the petitioner's solicitors wrote on 26 April 2001 stating, inter alia, that the petitioner's loan account would have to be repaid on completion. The petitioner's 'entitlement' in a buyout would, in my view, encompass the question of repayment of shareholder's loans. For these reasons, I do not consider that the respondents' main point is arguable.

17. As to the first draft ground, I need say no more than that that ground is a challenge to factual findings made by the judge and which formed the basis upon which her discretion was exercised. Given the factual premise upon which the judge had proceeded, I fail to see how it could be said that the exercise of her discretion was wrong such as to warrant interference by an appellate court.

18. I should add that this court was also invited to consider the correctness or otherwise of the judge's decision that this court's decision in Ta Tung China & Arts Limited v Fontana Restaurant Limited [1999] 1 HKLRD 404 governed her adjudication on the costs issues. Given that the procedure adopted was with consent of both parties, I do not consider it appropriate for this court to review the approach that had been adopted in the present case.