RE CIRTEX CO LTD

IN THE COURT OF APPEAL

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J U D G M E N T

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Silke, V.-P.:

1. There are two Notices of Motion for the consideration of the Court. The first in time, filed on 12th May 1988, brought on behalf of Tang Wing Cheung and Hung Jin Mui - the 1st and 2nd Petitioners respectively. It is for a dismissal of the appeal and for a consequential costs order.

2. The second is by the solicitors on record for the appellant China Profit Investment Limited to cease to act.

3. We heard that second Motion first and, having considered that which was said to us by Miss Eu, we granted the order.

4. Shortly, the history of the matter is this: Cirtex Company Limited - "Cirtex" - had as its sole asset a restaurant, the Golden Palace Restaurant. On 21st September 1987 Jones, J., on a petition to wind up the company on the grounds of "just as equitable", the basis being deadlock, made a winding up order. A stay was refused.

5. China Profit Limited appealed that order By an expedited application to another Division of this Court on the same day, a stay pending appeal was granted.

6. The next material matter was on 30th November, the appeal itself, having come on for hearing, was adjourned. Issues had arisen as to the authority of the solicitors who appeared for the 3rd and 4th Petitioners and for a company referred to as Million Reserve Limited to act and as to their getting themselves properly before the Court; and other matters. We continued the stay.

7. On 14th December the Court dealt with a Notice of Motion brought on behalf of the 1st and 2nd Petitioners to discharge the stay. There was a further Notice of Motion by the solicitors then representing the 3rd and 4th Petitioners to cease to act.

8. We discharged the stay and permitted the solicitors to cease to act.

9. On 18th December on a Motion by the official Receiver - present at that hearing being the Official Receiver, counsel for the 1st and 2nd Petitioners and counsel for the appellants with the 3rd Petitioner in person - we gave directions that the Official Receiver be at liberty to close down the business of the Golden Palace Restaurant and to do any act in relation to Cirtex in execution of winding up order notwithstanding the pending appeal.

10. At that hearing we had the benefit of a useful Report in support of the application for direct by the Official Receiver. This showed that the official Receiver had taken control of the assets of Cirtex but without closing down the Restaurant business. From the accounting records which had been seized, the Official Receiver was unable to say if Cirtex was insolvent. He had not wished to close the Restaurant as its fixtures and fittings were the only book value assets of Cirtex and further he wanted to ascertain the wishes of the contributories. He had attempted a settlement but that was not achieved. Cash was running out, the interests of the workers and the suppliers needed to be guarded. In those circumstances we made the order to which we have referred.

11. Costs orders of various nature were made at the several hearings.

12. Since then the appeal has not been proceeded with, hence the Notice of Motion filed on 12th May 1988, this despite a protracted exchange of correspondence to which our attention has been directed.

13. Mr. Ching has asked us today to dismiss the appeal and, should we accede to that application, this would have the effect of causing all outstanding matters, such as the motion to call fresh evidence, motions to file Respondent's Notice out of time, to fall away.

14. Miss Lim who appeared for the 3rd and 4th Petitioners - Million, of course, is not in any way before this Court - does not oppose. As we have said at an ealier stage we permitted the solicitors for China Profit to come off the record. China Profit were aware of that application and they have not sought to appear in any manner before us. We are told today that the winding up proceedings are still in progress.

15. In the circumstances, we will grant the order sought in the 1st and 2nd Petitioners' Notice of Motion and dismiss the appeal.

16. We have been addressed upon costs. We order that China Profit, the appellants, and P3 and P4 jointly and severally to pay the costs of and incidental to the appeal, including all orders reserving costs, save where any contrary order has been made.

17. Subsequent to taxation, the sum lodged in Court as security by China profit is to be paid out of Court and to be set off against the costs order that has been made.

18. Finally the Official Receiver is to have his costs.

Representation:

Charles Ching, Esq., Q.C. & Miss Alice Mok (Edmund W.H. Chow & Co.) for 1st and 2nd Petitioners (Applicant).

Miss Audrey Eu (W.K. To & Co.) for Appellant solicitors on record.

Miss E. Lim (Sammy S. Li & Co.) for 3rd and 4th Petitioners.

E. Lau, Esq. for Official Receiver.

IN THE COURT OF APPEAL

1987, No. 133
(Civil)

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JUDGMENT

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Silke, V.-P.

1. On 30^th November, we adjourned the hearing of an appeal against a winding up order which had been made by Jones J. on 21^st September 1987 and upon which a stay had been placed the same day. The adjournment was in relation to Petitioners three and four getting themselves properly before the Court, in relation to the authority of solicitors and counsel who appeared for them and there were other matters in relation to it.

2. We have for consideration today a Notice of Motion brought on behalf of two of the Petitioners, Tang Wing Cheung and Hung Jin Mui, P1 and P2 respectively, for the stay on the winding up order, which was originally granted on 21^st September 1987 by another Division of this Court and continued by us when that appeal was adjourned, to be discharged or that it be further continued on various alternative terms.

3. There is also a Notice of Motion by the solicitors for Petitioner 3 and Petitioner 4 to come off the record.

4. The background to Mr. Ching’s application is the absence of payment of rent, rates and management fees for the restaurant premises. The rent, at least, is owned to Acegrowth Company Limited the landlord, of which P1 is a director. Some $500,000 odd is due in rent.

5. Our attention has been drawn to In re A. & B.C. Chewing Gum Ltd.(1) Where Plowman J. had for consideration an application to stay a Winding Up Order and he said this:

“As I understand it, the position is this. First of all, as a matter of jurisdiction it is quite clear that I have jurisdiction to grant a stay, because the Act says so. It says I can grant a stay on proof to my satisfaction that the proceedings ought to be stayed. But then there is the question of practice, and as a matter of practice a stay is never granted. The only exception that I think is known to the department is where I myself once went wrong in In re Westbourne Galleries Ltd. [1970] 1 W.L.R. 1378, and not having been alerted to the position, and not knowing it before, I granted a stay, with precisely what consequences nobody has ever told me. But there are very good reasons for the practice of never ordering a stay, and they are these: as soon as a winding up order has been made the Official Receiver has to ascertain first of all the assets at the date of the order; secondly, the assets at the date of the presentation of the petition, having regard to the possible repercussions of section 227 of the Act of 1948; and thirdly, the liabilities of the company at the date of the order, so that he can find out who the preferential creditors are, and also the unsecured creditors.

Supposing there is an appeal and the winding up order is ultimately affirmed by the Court of Appeal, and there has been a stay, his ability to discover all these things is very seriously hampered: it makes it very difficult for him, possibly a year later, to ascertain what the position was at different times a year previously. But assuming a stay is not granted, if the business is being carried on at a profit, as I understand this business now is, no additional harm is done by refusing a stay. As I understand it, if the Official Receiver is given an indemnity, say by the Coakley brothers, who are running this business, he will allow it to be carried on, and the Coakley brothers, in this case, could be appointed special managers and carry on the business as they have been doing. If the business is being carried on at a profit, creditors of the business, after the date of the winding up order, would be paid in priority to the unsecured creditors at the date of the order as part of the expenses of the winding up. Then, if the appeal is allowed, the business is handed back as a going concern, it has not suffered any loss. Of course, if the business can only be carried on at a loss – it should not be carried on at all.”

6. This decision was not drawn to the attention of the earlier Court of Appeal, nor to us on 30^th November when we continued the stay they granted.

7. Some of the complications envisaged by Plowman J. have come to pass here. Miss Eu for the Appellant asks us to give a general dispensation under s.182 of the Companies Ordinance in respect of all trade debts justly due and paid, Mr. Ching as one of his alternatives having asked us to say that ss. 182, 183 and 186 do not apply to Cirtex.

8. She sees no reason why the Appellant personally should pay the rent due.

9. Mr. Chau for the Official Receiver asks us to have regard to the balancing exercise which Re Gray’s Inn Construction Co. Ltd.(2) referred to.

10. The danger is that, validating transactions either for the actual rent, rates and management payments or the general validation which Miss Eu seeks, a pre-liquidation creditor may be paid in full at the expense of other creditors.

11. If there be no stay then, given the business is being run profitably, the Official Receiver can go in and, having ascertained this, continue the business as a going concern in whatever way he thinks fit no doubt bearing in mind that which was said in A. & B.C. Chewing Gum Ltd.(1)

12. If the stay remains the complication which now arise will multiply. How, for example, is the butcher to be paid? Can he sue? Must all individual payments be validated each of themselves?

13. When the stay was originally granted it was thought, and on the papers rightly so, that the Appeal would come on in a short compass of time. This has now changed. Further, deadlock may reinstate itself if P3 and P4 drop out of the proceedings. One at least is a limited company which must appear by counsel and solicitor and the indications are that there is a lack of funds.

14. In all the circumstances as now brought to our attention we consider that the stay should be discharged and we so order.

15. We would also grant Haldane Midgley & Cheung’s application to come off the record, given their undertaking to serve in the usual way. The costs of that application to be borne by P3 and P4.

16. We shall hear counsel as to the costs of the main Notion of Motion.

Having heard counsel

17. Costs of the Notice of Motion to be costs in the appeal.

IN THE COURT OF APPEAL

No. 133 of 1987
(Civil)

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JUDGMENT

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Hunter, J.A.:

1. This is an unfortunate dispute. Cirtex Co. Ltd. was incorporated in 1984 by two groups of people now represented by the appellants and the respondents. The issued capital was $6 million divided equally between the two groups. Things did not go well between them. Litigation followed, as did an application to wind up the company on the grounds of deadlock and it being just and equitable so to do. That petition came before Jones J. on 21^st September last. He made a winding-up order.

2. The appellants, China Profit Ltd., the owners of one moiety of the shares have appealed that order. The respondents have retaliated by making an application for security for costs under O.59 r.10(5). This reads:

“The Court of Appeal may in special circumstances order that such security should be given for the costs of an appeal as may be just.”

The note to the White Book 59/10/18 starts off with these words:

"It is the settled practice to require security for costs to be given by an appellant who would be unable through impecuniosity to pay the costs of the appeal, if unsuccessful, without proof of any other special circumstances.”

3. We have inherited in this Court, the 19^th century practice of Court of Appeal in England, to give security for costs where the appellant is impecunious.

4. The first question which arises here is whether China Profit is in fact impecunious within the meaning of that principle. What is said against it is this. It was incorporated at about the same time as Cirtex Ltd. with a capital of $.5 million. It then borrowed $2.5 million. Those two sums combined enabled it to acquire its $3 million worth of shares in Cirtex Ltd. Therefore all its assets have been invested in Cirtex. It has no other free assets which have been revealed to this Court. The only prospect of getting any money back is if the winding up order is confirmed and that produces a surplus. There has been a good deal of dispute in the court below, with the parties arguing then respectively the converse of what they wish to argue this morning, as to whether or not a surplus will arise at all in that eventuality.

5. In those circumstances it seems to me inescapable that this company is in fact impecunious. There may be some surplus in the liquidation if the appeal fails, but of what sum one knows not, and they are only a 50% shareholder in the company. There simply is not a shadow of evidence put before the Court as to whether they have any other assets available at all. So there is no escaping the conclusion that this is prima facie a case for making an order for security.

6. Next problem arises is this. Miss Eu for the appellants asserts that I should go into the merits of the appeal itself. She wishes to challenge in this Court the finding of the trial judge that the petitioners acted bona fide, and were not guilty of misconduct and came to the Court with clean hands. She advanced to me the arguments that she will no doubt wish to advance hereafter to the full Court on the hearing of the appeal. She submits that this is a factor which I should take into account on this application. Indeed she invited me to apply all the reasoning to an application in this Court which is to be found in Sir Lindsay Parkinson v. Triplan Ltd.(1), a decision on the security before trial.

7. I cannot accept that submission. There seems to me to be a fundamental distinction between security pre-trial, when one of the matters which the Court has to consider is the likelihood of success or failure in relation to both parties; and an application for security post-trial were one party has won and the other has lost. Prima facie it seems to me that I should not go behind the conclusions of the trial judge on this type of application. That seems to be the tenor of the somewhat sparse authorities upon this subject at the Court of Appeal level.

8. What the Court should be doing is to have regard to the closing words of the rule which are “as may be just”, and to seek to exercise its discretion in a way which will not be oppressive to the actual appellants and may have the result of precluding them from continuing with the appeal. The only way that can do that is to look rather carefully at the figures put before the Court in support of the application for security and to have regard to the fact that the principle to be applied is that the security should not exceed a reasonable estimate of the tax costs on the appeal. If there is a lurking doubt about oppression the security should be perhaps reduced to a point at the lower end of such estimate.

9. The sums involved are set out in a draft bill of costs put before me by the respondent/applicant. I have been invited to deal with that in this way. The bill ends up with a total made up of disbursements all to counsel of $325,000 and of profit costs of $142,900. The profit costs I have been invited to reduce to one third of $142,900 which for convenience I will round up $50,000.

10. Then the issue really arises as to what is the appropriate sum to provide by way of security for counsel’s fees. This is a rather more difficult and delicate subject upon which counsel had been understandably reticent. The only guidance that I have clearly got is that certain of the items which are claimed for, all day conferences for counsel, do seem to me to err on the side of generosity. As far as the more substantial matter of brief fees to leading counsel and junior counsel are concerned, I have been left with euphemistic criticisms of the figures, without an awful lot of positive assistance. Doing the best I can in this somewhat sensitive area, if I add to the $50,000 I minded to allow for the profit costs, a sum of just over double that for counsel, namely $125,000, I hope that I arrive at a figure which is

(a) not oppressive, and

(b) not all that far removed from what might be recovered upon a hostile taxation at the end of the hearing.

That produces a grand total of $175,000.

11. That is the figure which I order to be provided by way of security. I am happy to hear counsel on the form of the order. Whether it is thought sufficient simply to say by way of security, or security to the satisfaction of the registrar, is the open question. In the meantime there should be a stay of proceedings on the appeal until provision of the security which I am ordering. In default the appeal is to stand dismissed with costs.

IN THE COURT OF APPEAL

1987, No. 133
(Civil)

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JUDGMENT

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Cons, V-P delivered the judgment of the Court:

1. These proceedings concern a company incorporated in 1984 to run a restaurant, the actual business commencing in 1985. The shares of the company are held equally between the four Petitioners on the one side and 'China Profit Investment Limited' on the other. China Profit has been represented throughout the proceedings below by two individuals, referred to by the trial judge as the 1st and 2nd Respondents. These two gentlemen have been responsible since the commencement of business for the day-to-day running of the restaurant.

2. Since September 1986 at least feelings have been running high between the two sides. It is not necessary to recount in detail what happened at various acrimonious meetings. It is sufficient to say that in the course of time the Respondents took action in the High Court to restrain the 1st Petitioner from acting as Chairman of the Company, and in due course the petitioners took similar action against the Respondents. Both actions were consolidated and set down for trial in May of this year.

3. The day before the trial the Petitioners presented a petition to wind up the Company and obtained a stay of the High Court proceedings. The petition was based on the just and equitable ground. When it came to be heard Jones, J., in a reserved decision delivered this morning, concluded there was deadlock within the Company and made an order. We understand that he was asked to give a stay of 21 days pending consideration of an appeal to this Court, but that he refused; he gave no reason for his refusal other than to say it was a matter for the discretion of the Court. We have taken the matter this afternoon as a matter of urgency. China Profit, through their counsel Mr. Rogers, have given the usual undertaking as to damages.

4. The basic grounds of the appeal - a Notice which the Respondents have undertaken to file has been drafted - are that the judge was wrong to find deadlock and that he overlooked a number of equitable factors which should have influenced his discretion not to grant an order for winding up.

5. Having regard to the necessarily short arguments presented to us, we are not persuaded that the appeal is unarguable. Nevertheless Miss Mok, for the Petitioners, argues against a stay on the ground that the application now requested - a stay pending appeal - is different from that sought from the judge. We do not see that as any significant distinction. The fact of the stay itself is the matter of primary importance.

6. Alternatively she suggests that as running a restaurant is very much a cash business there is the possibility that the Respondents, having the day-to-day running of the business under their control, may improperly deal with the cash to the detriment of the Company. It is sufficient to say that we have no reason to think so.

7. An affirmation had been filed on behalf of the Respondents setting out in simple language what might well be termed "the irreparable damage" that will be done to company if the winding up order is permitted to continue and the Official Receiver take immediate possession. It has been read to us and we do not propose to repeat it. In any event the circumstances speak for themselves.

8. For these reasons we take the view that, providing the appeal can be expeditiously heard, it is proper that there should be a stay of execution pending the hearing thereof, and we so order.