RE THE PRUDENTIAL ENTERPRISES LTD

HCCW594/1999, HCA1240/2001
and HCA4225/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO.594 OF 1999

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(HEARD TOGETHER)

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D E C I S I O N

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1. On 31 October 2003, the 6th defendant in HCA No.4225 of 2001 ("D6") issued a summons applying for further extensions of time for the exchange of witness statements and expert reports. At about the same time, D6 also through its solicitors indicated to the other parties in these three sets of proceedings that it had decided not to take part in the trial of the Petition in HCCW No.594 of 1999, and would require witnesses to be recalled at the trial of HCA No.4225 of 2001, which is to be heard after the conclusions of the trials of the Petition and of HCA No.1240 of 2001. This is a hearing for further directions on the conduct of these proceedings.

2. For my part, the starting point is to preserve the trial date that was fixed a long while ago. It is also my starting point to preserve the integrity of court directions and orders, even though they relate only to matters of conduct of the case, as opposed to matters of determination of substantive issues. Unless there are cogent and very good reasons, the direction for sequential trial and the date of 17 November 2003 for the commencement of the first trial should be taken as immovable milestones in case management terms. Other things therefore, would have to be worked around those immovable milestones.

3. Against these observations, I wish to make a couple of responses to the submissions made, which I hope would help to focus all parties' minds in the further conduct of these three sets of proceedings. Before that, I must point out that any case management or directions will only be of value and serve useful purposes if they are met with parties' willingness and readiness to co-operate with a view to bringing the litigation to a speedy, efficient and expeditious resolution.

4. Firstly, on the question of recalling witnesses at the subsequent trials, this is, of course, a possibility that cannot be ruled out by an order for sequential trials. But that does not mean that witnesses are to be recalled irrespective of need. It is important to note that when the order for sequential trial was given in August 2003, we were proceeding on the basis of a clear indication from the D6 that they would participate fully in the trial of the Petition. It is also necessary to point out that whilst there is a possibility of witnesses being recalled, that possibility is not to be taken as an opportunity for any unnecessary or tactical manoeuvres. In my view, the savings of time and costs remain a primary objective of an order for sequential trial.

5. The second matter I wish to respond to is the submissions regarding when the judgment on the Petition would be handed down. It appears from submissions I heard in these two afternoons that counsel considered this to have significant impact on the case management of these three sets of proceedings, at least with regard to the Blue Pool Road action in HCA No.4225 of 2001.

6. Sequential trials means each trial would be adjudicated on the basis of the issues pleaded in that case and the evidence adduced in that case. The court always endeavours to render a judgment expeditiously, but whether the judgment on the Petition is to be handed down before, during or after the third trial, meaning the Blue Pool Road action trial, the judgment on the Petition can only be an adjudication of the dispute and issues in the winding-up proceedings.

7. As to the concern on the uncertainty of when that judgment is available, the so-called uncertainty has always been there. The Decision of 19 August 2003 is not premised upon judgment on the Petition being delivered before or during or after the commencement of the Blue Pool Road trial.

8. The third matter that I wish to comment upon is the participation of the D6 in the trial of the Petition. Leave has been given to the D6 as well as the 2nd third party in HCA No.4225 of 2001 to participate in the trial of the petition. Whether that is to be taken up and to what extent is, of course, entirely a matter for those parties. The court cannot compel them to take any part at the trial of the Petition. However, any decision whether to take part or not to take part, if it should ever result in unnecessary increase in costs and length of the subsequent trial, then the court may review those and bear them in mind, and may well visit the unnecessary steps with costs consequences. And it is for the parties to bear these matters in mind when they decide to take whatever course.

9. With these remarks, I turn to deal with the application for extension of time by D6. As I understand it, three matters has been put forward as recent developments necessitating a third enlargement of time for the exchange of witness statements and the expert report. The first matter is about when judgment on the Petition will be handed down, which I have already dealt with. The second matter is the decision not to participate in the trial of the Petition. That I have also dealt with.

10. The third, and what seems to me to be a crucial point, is this. It is said that the advice of Mr Strachan QC with regard to the expert report and the lay witness evidence have led to a need for more time for their preparations. For my part, I have no reason to doubt what counsel presented to the court and I am quite prepared to accept that more preparations and, in turn, more time is required as a result of counsel's advice. But that, in my view, is not a recent development that cannot have been avoided. Quite the contrary, the course of events since August 2001, and in particular, the stance and position taken by D6 on various directions hearings and on what directions to be given for the preparations of the trials, suggest that this development is a result of late preparations or perhaps late instructions, as counsel has suggested.

11. In my Decision of 19 August 2003, I did say that the D6 could not be said to be guilty of delaying the progress of the preparations of the trial on the basis of the materials then before the court. It was after that Decision that this court has the benefit of being told about the actual progress of D6's preparation with regard to obtaining witness statements and expert reports. I also recalled commenting in that Decision that it was unlikely that D6 would be ready to face a full trial on 17 November 2003. Although the submission I had received on that occasion on behalf of D6 is that it matters not whether there be a sequential or combined trial, the order for sequential trial was made as I took the view that sequential trials would alleviate the pressure D6 would come under as opposed to being ready for a full trial in November 2003.

12. Notwithstanding what I have said, I do recognize that the court does not exist to punish the parties. To the extent that D6 now says it is not ready and genuinely require more time, the court would, without affecting the immovable milestones that I have identified, make provisions for that. D6 has offered to serve the draft witness statements and expert reports by 10 November and to have the final versions of those ready by 18 December. I am prepared to accept this two-stage approach, rather than to shut out D6's completely, notwithstanding I had said on the last occasion that 7 November 2003 was meant to be the final extension. I believe there is really no objection to the drafts coming in on 10 November 2003. What may have caused problems is when the final versions of the expert reports and the witness statements should be made available. In my view, if they were deferred to 18 December 2003, it would cause problems to the trial of the Petition.

13. It is suggested to have all the expert evidence heard in one go and towards the end of the trial. There may be some attractions in that, but this would have the undesirable feature of the factual evidence being led on behalf of the respondents before the petitioners' case is closed. That is an unusual approach and should only be adopted if it is appropriate. I have some reservations as to whether this is an appropriate case to do so. At any rate, both leading counsel for the petitioners and leading counsel for the 1st respondent do not see this as an appropriate course.

14. It is said that D6's expert requires the time up to 18 December to have the final versions ready. I tend to think, however, that people can work faster if they are placed under time constraints. I also bear in mind that this state of play is a matter that could have been avoided if the preparations had been gone in with a degree of intensity appropriate to the complexity of the case at an earlier stage. I would say that there should be a four weeks period after the drafts were served to have the final versions ready. That effectively, means the final witness statements and expert reports should be ready by 8 December 2003.

15. I note Mr Fung's point that the petitioner's team would like to see the drafts before they finalize the Opening. As I have said, I am prepared to accommodate these matters. I would have the date of service of the petitioners' Opening deferred to 12 November 2003. At the risk of contradicting my base line that the trial date is an immovable milestone, I would defer the first day of the trial from 17 to 19 November 2003, just to give the respondents a bit more time to study the Opening before the trial starts. A short delay of two days is something that we can cope with.

16. On the question of the costs of this hearing, it is best answered by asking why do we have to assemble for these two afternoons. One of the reasons is, of course, D6's summons for time. The other is the indication from D6 with regard to its difficulties in meeting the initial timetable and its reservations about taking an active role in the trial of the Petition. I note, of course, that realistic proposals have been put forward today by Mr Strachan QC on behalf of D6. I would have thought that had these proposals come about earlier, we might not need the hearing or certainly not a hearing of this duration.

17. On D6's summons, there's no reason why the plaintiffs should not get the costs against the D6 in any event. That, in fact, is the proposal in the summons itself. Otherwise, as to the costs of yesterday afternoon commencing 3 p.m. onwards and of this afternoon, if one analyses why we have to be here and what effectively are we doing during these two sessions, then the only conclusions must be for all the other parties to have their costs being met by D6 in any event. Hence I order that the costs of the hearings on the afternoons of 3 and 4 November 2003 be to the plaintiffs, the 2nd to 5th defendants, and the 2nd third party in HCA No.4225 of 2001 against D6 in any event.

Representation:

Mr Daniel Fung, SC, Mr Patrick Fung, SC and Mr William Wong, instructed by Messrs Liu, Choi & Chan, for the Petitioners in HCCW594/1999, the Plaintiffs in HCA1240/2001 and HCA4225/2001

Mr Benjamin Yu, SC and Mr Russell Coleman, instructed by Messrs Jones Day, for the 1st, 6th and 7th Respondents in HCCW594/1999, the 2nd, 6th, and 7th Defendants in HCA1240/2001, and the 2nd, 3rd and 5th Defendants in HCA4225/2001

Messrs Herbert Smith, for the 2nd Respondent in HCCW594/1999, the 1st Defendant in HCA1240/2001 and HCA4225/2001, not appearing

The 3rd Respondent in HCCW594/1999 and the 3rd Defendant in HCA1240/2001, appeared in person

Mr Ronny F.H. Wong, SC, instructed by Messrs Deacons, for the 4th Respondent in HCCW594/1999 and the 4th Defendant in HCA1240/2001 and HCA4225/2001

Official Receiver, not appearing

Mr Mark Strachan, QC and Mr Anthony Chan, SC, instructed by

Messrs Richards Butler, for the 6th Defendant in HCA4225/2001

Mr M. George of Messrs Wilkinson & Grist, for the 3rd Third Party in HCA4225/2001

HCCW594/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO.594 OF 1999

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D E C I S I O N O N C O S T S

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1. On 2 April 2003, I handed down the decision on the petitioners' application for appointment of provisional liquidators. I dismissed the application and made an order nisi that the costs of the 1st, 2nd and 4th respondents be paid by the petitioners in any event, to be taxed if not agreed, together with a certificate for three counsel. Subsequently, the petitioners applied to vary the costs order. Hence today's hearing.

The arguments

2. The petitioners' primary position is that the costs of the provisional liquidators application should be made in the cause of the Petition. Alternatively, the petitioners ask that the costs of the application be reserved to the trial judge. As a second alternative, the petitioners seek an order that 50% of the costs be the respondents' costs in the cause with the remaining 50% of the costs to be in the cause.

3. The petitioners' principal arguments are these. Firstly, the interlocutory application only failed on the balance of convenience. It was not a case that it was wholly unjustified for the application to be made in the first instance. Secondly, it is said that the evidence for the provisional liquidators application will be re-used at the trial of the Petition so that there is no wasted expenditure in that regard. In arguing for the costs to be reserved to the trial judge, it is said that since the interlocutory judge will also be the trial judge and there is every likelihood that there would be a trial, the objections to reserving the costs to the trial judge do not exist in this case. As to the second alternative of ordering half of the costs be the respondents' costs in the cause and the remaining half be in the cause, the petitioners' argument is that the application was not an unjustified one so that they should not be penalized in costs for having made the interlocutory application.

4. Both the 1st and 4th respondents opposed the variation sought. In the case of the 1st respondent, it is argued that as a matter of general rule, costs should follow event. Since one of the two pre-requisites for appointment of provisional liquidators had not been made out and that the application should not have been made in the first instance, the respondents should be awarded the costs of the application in any event.

5. As for the 4th respondent, apart from adopting the arguments of the 1st respondent, it is said that the petitioners' application is a tactical move to advance the petitioners' case as opposed to the true interest of the Company. The application is unnecessary and the costs incurred are wasted expenditure. The 4th respondent asks for an interim payment of part of his costs with the balance to be taxed.

The relevant principles

6. Costs is a matter of court's discretion. The underlying principle is to indemnify the successful party and not to penalize an unsuccessful party. Hence the observations of Auld LJ in Bushbury Land Rover Limited v. Bushbury Limited [1997] FSR 709 that a party will only be penalized in costs for making an interlocutory application if there is a measure of unjustifiability in the application over and above the lack of success.

7. In terms of the exercise of the court's discretion, generally speaking, costs should follow the event, except where there are circumstances in the case justifying some other costs order. Order 62, rule 3(2), Rules of the High Court deals with the manner in which the court may exercise its discretion but not the time at which a discretion is to be exercised. The general rule does not cease to apply merely because the successful party has failed in some of his allegations or arguments unless he has thereby caused a significant increase in the length of court proceedings, in which case, he may be deprived of the whole or part of his costs : Re Elgindata Limited (No.2) [1992] 1 WLR 1207 and La Chemise Lacoste SA v. Crocodile Garments Limited [2000] 4 HKC 317. It has been pointed out that where the court considers that the merits and the balance of convenience are finely balanced, the proper costs order is for costs to be in the cause : Steepleglade Limited v. Stratford Investments Limited and Cornelis v. Tetrosyl Ltd [1976] FSR 3 at 5.

8. In the context of interlocutory application that aims at preserving the parties' position pending the final determination of the case, the approach has been to order costs in the cause where the defendant succeeds in opposing the application. In Kickers International SA v. Paul Kettle Agencies Limited [1990] FSR 436 in which the plaintiff abandoned a motion for interlocutory relief, Hoffmann J (as he then was) explained that a costs in the cause order is often made because at the interlocutory stage, the court does not investigate the merits and considers that it would not be fair for a defendant to recover the costs of an interlocutory application unless he succeeded at the trial. Hoffmann J further pointed out that each case has to be dealt with on its own facts and the important question to be asked is whether it would be unfair for the defendant to have the costs of the interlocutory application even if he were to lose at trial. In that particular case, Hoffmann J took into account two factors, namely, whether the plaintiff was justified in launching the motion and, secondly, whatever the outcome of the trial was, whether the motion has put the defendant to a great deal of unnecessary expense. In the end, he ordered the plaintiff to pay the defendant costs in any event.

9. Although an application for appointment for provisional liquidators does not necessarily in all aspects resemble an interlocutory injunction application, I consider the principles and approach as explained and adopted by Hoffmann J are sound and appropriate ones to be applied in the present case. The intrusive nature of a provisional liquidators application is also present in an interlocutory injunction application to hold the ring. In essence, the issue in this application is whether there ought to be a costs order in any event or whether the costs should be made in the cause.

Reasons for decision

10. In the present case, I had concluded that the petitioners had made out a strong prima facie case for the purpose of a provisional liquidators application. The interlocutory relief was refused on the basis that there was on balance no present and urgent need for the court's intervention. Principally, I consider that most of the factual matters relied upon in support of the provisional liquidators application had occurred for some years and the provisional liquidators application was only taken out some 15 months after the presentation of the Petition. Additionally, the evidence of the 1st respondent's expert shows that the risk of dissipation of company assets cannot be said to be high or imminent.

11. In the course of arriving at the view that there is no present and urgent need to appoint provisional liquidators, I had noted that much of the relevant information were only disclosed after the presentation of the Petition and close to the hearing of the provisional liquidators application. I had also commented that the petitioners' desire to have the provisional liquidators appointed because of their lack of confidence in the present management of the Company is understandable. I accept, too, that the analysis on the cashflow and assets position of the Company by the 1st respondent's expert was only presented in the course of the hearing. In my view, viewing the matter objectively, it cannot be said that the petitioners are plainly unjustified in launching the provisional liquidators application or that the application should never have to be made at the first instance.

12. It cannot be disputed that the vast majority of the evidence, both factual and expert evidence, filed in or used at the provisional liquidators application hearing is to be re-used at the trial of the Petition. I accept the petitioners' submission that the costs incurred for the evidence and preparation of the provisional liquidators application cannot be said to be wasted expenditure. Mr Todd, QC, submits that this is relevant only in the context of taxation and assessment of costs, in other words, if there is any duplication of costs, that is a matter for the taxing master. In my view, the issue of whether the whole or part of the costs of an interlocutory application is unnecessary or wasted is relevant to the issue of whether it would be unfair for a successful defendant to have his costs of the interlocutory application even if he were to lose at the trial. The fact that the evidence for the provisional liquidators application is to form part of the evidence at the trial of the Petition suggests strongly that it will not be unfair for the respondents not to have the costs of the preparation for the provisional liquidators application if they were to lose on the Petition at trial.

13. That said, however, it does not mean that none of the costs the respondents were put to in defending the provisional liquidators application was unnecessarily incurred. Plainly, the costs of the 12-days hearing (i.e. excluding 13 December 2001) would not have been incurred but for the petitioners' application. The respondents ought to be able to recover this part of the costs of the application irrespective of the outcome of the trial. This is so even though a substantial part of the hearing was spent in arguments relating to the merits of the application. These arguments need not be ventilated at the interlocutory stage but should have been the proper subject matter at the trial but for the petitioners' interlocutory application.

14. As to the alternative of reserving the costs to the trial judge, this court presently can make a final costs order, hence there is no necessity to reserve it to the trial. Further for the reasons indicated above, there is no need to canvass the second alternative proposed by the petitioners.

Immediate payment of costs

15. The 4th respondent asks for an order of immediate payment of the counsel fee in the amount of $975,000 with the rest of his costs to be taxed, pursuant to Order 62, rule 9A, Rules of the High Court. I note as a starting point that the 4th respondent has not made a cross-application to vary the costs order nisi. An order for immediate payment of costs is the very opposite to an "in any event" costs order. The proper course is for the 4th respondent to apply to vary the costs order nisi instead of only raising it by way of submissions. Nevertheless, considering the fact that the entire costs order nisi is now being re-opened and have to be reconsidered, I will not say that I have no jurisdiction to deal with the 4th respondent's present application.

16. In seeking an interim costs order under Order 62, rule 9A, the 4th respondent has to demonstrate that :

(1) the interlocutory application is frivolous or vexatious; or

(2) for any other reason, it is just in the circumstances of the case to make the order.

Additionally, he will have to put before the court some materials, albeit not in great details, as to the level of costs as incurred by him in defending the application and the components thereof so as to justify the amount of interim payment sought. All that has been put forward in support of the 4th respondent's application is that the 4th respondent is not of unlimited resources and that the petitioners' provisional liquidators application is wholly unjustified. I have already dealt with the latter point in the earlier part of this Decision. As to the first point, there is plainly no evidence of that before the court. Neither is there any material to support the amount sought by way of interim payment.

Conclusion

17. For the reasons that I have indicated, I take the view that not all the 1st, 2nd and 4th respondents' costs for the provisional liquidators application should be recovered by them in any event. The 1st, 2nd and 4th respondents should have the costs of the 12-days hearing (i.e. excluding 13 December 2001) in any event. The rest of the costs on the provisional liquidators application should be in the cause of the Petition. I therefore allow the petitioners' application to vary the costs order nisi to the extent that I have indicated.

18. As to the costs of this application to vary the costs order nisi, the general rule is for costs to follow event unless it is appropriate for some other costs order to be made. The fact that a successful party fails with regard to some of the issues or arguments does not mean that the general rule ceases to apply. Applying these principles, the petitioners should have the costs of today as against the 1st and 4th respondents. Exceptions apply in the case of the 2nd respondent, being the Company and the 3rd respondent, being Mr Patrick Lee, because they have taken no part in opposing the application. In short, the petitioners' costs of this application to vary the costs order nisi is to be paid by the 1st and 4th respondents in any event. There is a certificate for two counsel.

Representation:

Mr Daniel Fung, SC, Mr Patrick Fung, SC, Mr Johnny Mok & Mr William Wong, instructed by Messrs Liu, Choi & Chan,for the Petitioners

Mr Michael Todd, QC & Mr Russell Coleman, instructed by Messrs Jones Day, for the 1st Respondent

Messrs Herbert Smith for the 2nd Respondent, absent

The 3rd Respondent, Mr Patrick Lee, appeared in person

Mr Ronny F.H. Wong, SC, instructed by Messrs Deacons,for the 4th Respondent

The 6th and 7th Respondents, represented by Messrs Jones & Day,not appearing

The Official Receiver, absent with leave

HCCW594/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO.594 OF 1999

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D E C I S I O N

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1. This is the petitioners' application by summons filed on 23 September 2003 made pursuant to Order 24, rule 7, Rules of the High Court. Broadly speaking, the petitioners seek specific discovery by affidavit against the 1st respondent in respect of the corporate documents, accounts and banking documents and also documents on acquisitions of certain UK properties of two Guernsey companies, Mount Eden Land Limited ("MEL") and Mount Cook Land Limited ("MCL").

2. The relevance of these documents is not in issue. It has always been the petitioners' case that the 1st respondent beneficially owns and controls MEL and MCL.

3. Previously by summons filed on 15 February 2001 ("the 1st Summons"), the petitioners had also applied under Order 24, rule 7 for discovery by the 1st respondent of similar and more documents of MEL and MCL and another Guernsey company, Interstitial Holdings Limited. These three companies are involved in the Interstitial Scheme, which is one of the petitioners' central complaints in these proceedings. In meeting the 1st Summons, the 1st respondent filed his 10th affidavit in which he stated that he had ceased to be a director of MEL and MCL on 2 January 2001 and no longer controlled the two companies. The 1st respondent further stated that he no longer had access to the documents of the two companies and he had not in his possession custody or power any of the classes of documents sought by the 1st Summons. As a result of what was stated in this 10th affidavit, the petitioners' application could not be taken any further. The 1st Summons was dismissed with the decision being handed down on 10 August 2001.

4. The petitioners present application were prompted by an article appearing in a UK newspaper, Evening Standard, on 13 June 2003, and also three judgments of the English Courts to which MEL or MCL are parties. The 1st respondent is not a party to any of these litigations. He had also not testified in any of them, though there had been unsuccessful attempts to subpoena him. In these three judgments, the judges either found or commented that the 1st respondent was in control of MEL or MCL with regard to certain dealings or activities undertaken by them. In two of the cases, the dealings or activities in question occurred or continued after January 2001. The article in Evening Standard is a coverage of the 1st respondent and his involvement and activities in the London property market. The article made references to the judgments and the judges' findings and comments on the 1st respondent and his role in MEL and MCL.

5. The petitioners contend that the article and the judgments provide new materials and evidence showing that the 1st respondent has remained in control of MEL and MCL, in contradiction to what the 1st respondent stated in his 10th affidavit. On this basis, the petitioners make the present application.

6. The 1st respondent resists the application on two main grounds :

(1)	The newspaper article and the judgments (collectively referred to as "the UK materials') are inadmissible evidence, and
(2)	The present application is an attempt to re-litigate a matter that had been decided by the court, which is not permissible.

Admissibility of the UK materials

7. Under the common law, it has been established in a line of decisions starting from Hollington v. Newthorn & Co. Ltd [1943] 2 All ER 35 that judicial findings are inadmissible as evidence of the facts upon which they were based in subsequent proceedings between one of the parties to the earlier proceedings and a stranger : see a summary of the decisions in Secretary of State v. Bairstow [2003] 1 BCLC 696, at 703-706. In the Bairstow case, it was held that this principle was not confined to cases in which the earlier decision was made in criminal proceedings. The rationale behind the principle is that the findings only represent the conclusions or opinions of the judge in the earlier action. Unlike facts that are evidence, the judge's opinions are not relevant.

8. The parts of the three English judgments that the petitioners seek to rely are clearly the findings or comments of the English judges. On the common law principle set out above, they are inadmissible as evidence in the present action to show that the 1st respondent has remained in control of MEL and/or MCL.

9. In Symphony Group plc v. Hodgson [1993] 4 All ER 143 at 153, Balcombe LJ stated that a departure from this principle is justified if the connection of the non-party with the earlier proceedings was so close that he will not suffer any injustice by allowing this exception to the general principle. Relying on this proposition, the petitioners argue that the present case justifies a departure from the general principle because the 1st respondent was at liberty to take part in the UK proceedings and, at least in one of then, he had deliberately avoided attendance at the trial.

10. I am unable to accept this submission. The general position is that as between a party to the earlier action and a party who is not, judicial findings are inadmissible as evidence of the facts so found. The exception or departure that Balcombe LJ was referring to is a situation where the party who is not a party in the earlier action is so closely connected to the earlier action such that it would be not be unjust for the findings in the earlier action to be admitted in the subsequent action. In the present case, neither the petitioners nor the 1st respondent was a party to the three English proceedings. The exception referred to by Balcombe LJ has no application at all. It is therefore not open to the petitioners to rely on the English judgments as the basis for the present application.

11. As to the article in Evening Standard, plainly that is hearsay materials. Given that the English judgments, on which the article was based, are inadmissible, no weight can be placed on the article.

Attempt to re-litigate?

12. As a matter of general principle, when an interlocutory application was dismissed, whether on procedural ground or merits, it is not permissible to make a fresh application for the same relief and/or on the same ground : Sanyo Electric Trading Co Ltd v. Leung Kwok-hing [1993] 1 HKLR 253. There are, however, recognized exceptions, such as in Order 14 or contempt of court proceedings : see Wong Kam Hong v. Triangle Motors Ltd [1998] 2 HKLRD 330, or in applications to discharge injunctions : Chu Hing Ching v. Chan Kam Ming [2001] 1 HKC 396. The Rules also provide for certain exceptions by enabling applications be made to vary or revoke an earlier order or decision.

13. Another possible exception to the general rule against re-litigating over interlocutory applications will be where there is a significant change of circumstances. In Chanel Ltd v. Woolworth & Co. [1981] 1 WLR 485, at 492H, Buckley LJ in dismissing an appeal against the dismissal of a motion to discharge undertakings given by consent on an interlocutory injunction application, held that :

"The defendants are seeking a rehearing on evidence which, or much of which, so far as one can tell, they could have adduced on the earlier occasion if they had sought an adequate adjournment, which they would probably have obtained. Even in interlocutory matters a party cannot fight over again a battle which has already been fought unless there has been some significant change of circumstances, or the party has become aware of facts which he could not reasonably have known, or found out, in time for the first encounter."

14. The petitioners' present summons involve the consideration of two issues :

(1)	Whether the 1st respondent has remained in control of MEL and MCL after 2 January 2001 when he ceased to be director of the companies, and
(2)	Whether the 1st respondent has possession custody or control of the documents of MEL and MCL.

15. Both these issues had been considered and adjudicated upon under the 1st Summons. Insofar as the petitioners rely on the UK materials as amounting to new evidence or circumstances, I have already ruled that they are inadmissible to prove the 1st respondent's role in or control of MEL and MCL.

16. Irrespective of the admissibility of the UK materials, the present application is effectively an attempt to contradict the statement and assertion the 1st respondent made in his 10th affidavit. As stated in my Decision of 10 August 2001, this is generally not permissible. Attempt to contradict an affidavit of documents will only be permitted if it can be shown by admissions in pleadings or the contents of the affidavit itself or documents referred thereto that the affidavit is insufficient : Jones v. Monte Video Co. (1880) 5 QBD 556 at 558. The UK materials, even if admissible, will not entitle the petitioners to challenge the veracity of the 1st respondent's assertion that he no longer has and does not have the documents sought.

17. Mr Mok submits that discovery is an ongoing process such that if fresh evidence comes to light, then it is only logical that the petitioners are entitled to make a fresh application for specific discovery. In my view, if there is fresh evidence that shows the existence or relevance of documents previously sought but refused, then there can be no doubt that a renewed application for discovery is permissible. But where, as the petitioners contend here, fresh evidence arises casting doubt on the assertion on oath by the party from whom discovery is sought that he does not have the documents asked for, then the applying party cannot make a renewed discovery application on the basis that the responding party has not been truthful in his assertion on oath.

18. Additionally, the 1st respondent has, in response to the present application, made his 16th affidavit in which he again stated that he no longer had and did not have any of the classes of document sought in his possession custody and control. At this interlocutory stage, this affidavit has to be accepted as conclusive, and the petitioners cannot seek to challenge or contradict it.

Conclusion

19. For the reasons given above, the petitioners' summons is dismissed. There will also be an order nisi that the petitioners pay the 1st respondent's costs of the application, to be taxed if not agreed.

Representation:

Mr Patrick Fung, SC and Mr Johnny Mok, instructed by Messrs Liu Choi & Chan, for the Petitioners

Mr Benjamin Yu, SC and Mr Russell Coleman, instructed by Messrs Jones Day, for the 1st Respondent

HCCW594/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO.594 OF 1999

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D E C I S I O N

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1. There are before the court three summonses ("the three Summonses") issued by the 1st, 6th and 7th respondents in HCCW594/1999 ("the Winding-Up Petition"), the 2nd, 6th and 7th defendants in HCA1240/2001 ("the Interstitial Action") and the 2nd and 5th defendants in HCA4225/2001 ("the BPR Action"), each applying for an order under Order 4, rule 9, Rules of the High Court that the three actions be tried together or one after another. The summonses were previously adjourned at the request of the 6th defendant in the BPR Action, Andrew Ma & Company. The summonses are heard together with the pre-trial review of the Winding-Up Petition, the trial of which has been scheduled to commence on 17 November 2003 and to last for 60 days.

Order 4, rule 9 application

2. The Prudential Enterprise, Limited ("the Company"), who is a nominal party in the three actions, takes no position on the application. The represented parties in the three actions agree in principle to an Order 4, rule 9 order, but disagree as to whether the three actions should be tried together or sequentially.

3. For the applying parties, they ask for all the actions to be tried together. Mr Samathur Lee, who is the 4th respondent in the Winding-Up Petition and the 4th defendants in the other two actions, takes the same position. The petitioners and plaintiffs in the three actions, on the other hand, ask that the actions be tried one after another. Specifically, they ask that the Interstitial Action be tried after the conclusion of the Winding-Up Petition, to be followed upon its conclusion, by the BPR Action, with gaps of three and two weeks in between.

4. Andrew Ma & Company is neutral on whether the actions should be tried together or sequentially. It has however expressed reservations as to whether it can prepare in time for a full trial in November this year. In its solicitors' letter dated 5 August 2003 to the solicitors for the represented parties, it was indicated that it would amend its defence and that it was also considering an application on the ground that it was improperly joined to the BPR Action. It also pointed out that discovery and exchange of witness statements and expert reports in the BPR Action have yet to be done. The letter suggested adjourning the application to after 10 September to await the return of leading counsel to Hong Kong.

5. The 3rd third party in the BPR Action, SH Leung & Co., agrees that the application should be adjourned to mid-September to enable the parties to have some agreement as to the further conduct of the proceedings. Its solicitors also indicated in correspondence that it was considering making a striking out application.

6. The unrepresented parties in the three actions have not indicated their views on the application.

7. It is not in dispute that an order under Order 4, rule 9 is desirable. Clearly, there is substantial overlapping of issues between the Winding-Up Petition and the Interstitial Action, and between the Winding-Up Petition and the BPR Action, and to a lesser extent between the two writ actions. Although the parties are not exactly the same, the 8th to 10th defendants in the Interstitial Action, who are not involved in the other two actions, had not entered appearances. Andrew Ma & Company and SH Leung & Co. are the only parties who are involved in only one of the three actions. Given the substantial overlapping of issues and parties, it is desirable that the disputes in the three actions be resolved on one occasion and by the same judge. But as to whether the three actions should be tried together or one after another, the matter has to be approached from the perspective of case management rather than principles of law.

8. In making case management decisions, the court is primarily concerned with savings of time and costs, and also with the avoidance of unnecessary delay, undue complexity and overloading of issues. In the present context, the main merit of having the three actions tried together is that the common witnesses will be saved the inconvenience of having to testify on more than one occasion and to repeat some of their evidence. This is of particular significance to some of the petitioners and plaintiffs who are resident abroad and also to some of the respondents and defendants, who are busy businessmen and professionals. The same will apply to some of the common experts.

9. That said, however, I am not confident that trying the three actions together necessarily achieve a great deal of savings in time and costs. Although there is substantial overlapping of issues between the actions, the breadth and depth of the evidence of the common witnesses, both factual and expert, do vary. Take, for example, the Blue Pool Road settlement and the subsequent allotment of shares in the Company, while they are common issues in the Winding-Up Petition and the BPR Action, the latter has a wider dimension in that there are also issue of conspiracy and claim of negligence involving Andrew Ma & Company. A combined trial will mean that these extended issues will also need to be covered when the witnesses testify.

10. On the other hand, the inconvenience of having witnesses repeating their evidence in different trials can be minimized through the adoption or admission in the subsequent trials of their evidence given on the earlier occasion.

11. In my view, a combined trial of the three actions suffers from two drawbacks. Firstly, it has the distinct and real risk of losing part or all of the currently reserved trial dates. Both Andrew Ma & Company and SH Leung & Co. have expressed reservations about their being ready for trial in November 2003. Independent of their reservations, the objective fact is that, apart from service of pleadings, the other pre-trial interlocutory steps in the BPR Action have not been undertaken. Even with regard to pleadings, Andrew Ma & Company is contemplating amendment of its defence. It is rather unlikely that the pre-trial preparations can be accomplished in the three months leading to mid-November. The improbability increases when the summer vacation and availability of counsel and expert are taken into account. It must not be assumed that because most of the parties in the BPR Action are already involved in the Winding-Up Petition, discovery and the exchange of witness statements and expert reports can be done very expeditiously. One must give due acknowledgement to the fact that Andrew Ma & Company and SH Leung & Co. have no involvement in the Winding-Up Petition, which has been underway since 1999. The allegations they face in the BPR Action are serious ones and their professional reputation is at stake. They will need the time normally afforded to parties in civil litigation to get their discovery, witness statements and expert reports done. In addition, in order that they can meaningfully and fully participate in a combined trial, they will have to familiarize themselves with the discovery and evidence in at least the Winding-Up Petition. The amount of catching-up work is considerable.

12. Mr Wong, SC, refers to the fact that a similar application had been made in October 2002 such that Andrew Ma & Company and SH Leung & Co. had been forewarned. It may well be that the present application comes as no surprise to them. But the reality remains that the BPR Action has some mileage to make before it is ready for trial. On the basis of the materials before the court, it cannot be said that Andrew Ma & Company and SH Leung & Co. have been guilty of delaying the progress in getting the case ready for trial.

13. Mr Yu, SC, appears to suggest that if by November, Andrew Ma & Company and SH Leung & Co. are indeed not ready for trial, then the court may accommodate them by some structuring of the trial and of the sequence of witnesses. I am not sure whether this is indeed feasible and, even if feasible, whether it is a fair and appropriate course to take. If a case is not ready for trial or if the parties to it, through no fault of their own, are not fully prepared for trial, it will not be right for the court to press ahead with the trial, hoping that the case or the parties will in due course become ready. Certainly this is not the right approach with regard to the BPR Action, given the gravity of the allegations and the complexity of the issues.

14. The risk of losing the November 2003 trial dates is a matter not to be taken lightly. The Winding-Up Petition was started four years ago. The Company is an active ongoing concern. Considerable amount of assets are involved. At least one of the petitioners, Mr T.Y. Lee, is in his advanced age and does not enjoy good health. The Petition should be resolved as soon as possible. If the commencement of the trial has to be deferred, it will cause great inconvenience to the court diary and other hearings may have to be vacated. Worse still, the trial may have to go part heard. In the worst-case scenario, the trial may have to be re-fixed. Given the length of the trial and the busy court diary, this will result in another year's delay, if not more.

15. Secondly, the issues and evidence, both factual and expert, in the Winding-Up Petition are both complex and voluminous. The trial bundles are expected to be no less than 50 in number. The complexity will be intensified with a combined trial of the three actions. This is particularly so with regard to the conspiracy and negligence claims in the BPR Action and the defence of the defendants. Additionally, there are multiple parties, some of whom are unrepresented, with differing degree of familiarity with the facts and issues involved. A combined trial is, in the circumstances, difficult to manage and is not conducive to effective resolution of disputes.

16. Having regard to the aforesaid matters, I am of the view that the appropriate course is for the trials of the three actions to take place one after another with directions that will minimize the repetition of evidence. To this end, there will be directions that the evidence in the Winding-Up Petition, insofar as it is relevant, to stand as evidence in the Interstitial Action. Similarly, the evidence in the Winding-Up Action and the Interstitial Action, which is to be tried after the Winding-Up Petition, insofar as it is relevant, will stand as evidence in the BPR Action.

17. Mr Wong, SC, submits that the evidence in the BPR Action should also stand as evidence in the Winding-Up Petition and the Interstitial Action. He argues that, without such directions, his client will be prevented from advancing his defence in the BPR Action in the other actions. In my view, the directions Mr Wong, SC, proposes effectively means a combined trial, which is contrary to an order that the trials of the three actions should be heard one after another, albeit close in time and on one occasion. The prejudice he identifies is unreal. If his client's defence in the BPR Action is relevant to and has been raised or pleaded in the Winding-Up Petition and/or the Interstitial Action, there is nothing to prevent his client from putting it forward in the Winding-Up Petition and/or the Interstitial Action. But if it is irrelevant and/or has not been raised or pleaded, then irrespective of the directions on evidence, the defence cannot be put forward in the other actions.

18. I will further grant leave to Andrew Ma & Company and SH Leung & Co. to take part in the trial of the Winding-Up Petition, if they so wish. Mr Harrington says that the prejudice Andrew Ma & Co. suffers from having to face a full trial in November 2003 will not be lessened by an order for sequential trials with leave for it to take part in the trials of the other two actions. I cannot agree. Evidently, the amount of preparations required for meeting a full trial and that for taking part in related proceedings is different. Secondly, though leave to participate in the other trials is granted, it is up to Andrew Ma & Company to decide whether to take part and, if so, whether actively.

19. As to whether there should be gaps between the three trials, I take the view there should be short breaks of say, a week or so, between the trials for the purpose of consolidations and preparations. Further to preserve flexibility, it is more appropriate to give an indicative period of trial dates instead of fixed dates for the second and third trials. A period of eight weeks from the scheduled conclusion date of the trial of the Winding-Up Petition is therefore reserved for the trials of the two writ actions.

Orders on the three summonses

20. Accordingly, I make the following orders on the three summonses :

(1) The trial of HCA1240/2001 to commence after the conclusion of the trial of HCCW592/1999 with the estimated length of trial being two weeks.

(2) The trial of HCA4225/2001 to commence after the conclusion of the trial of HCA1240/2001 with the estimated length of trial being three weeks.

(3) A period of eight weeks immediately after the scheduled conclusion date of the trial of HCCW594/1999 be reserved for the trials of HCA1240/2001 and HCA4225/2001.

(4) The evidence in the trial of HCCW594/1999, insofar as it is relevant to the issues in HCA1240/2001 and HCA4225/2001, do stand as evidence in the trials thereof.

(5) The evidence in the trial of HCA1240/2001, insofar as it is relevant to the issues in HCA4225/2001, do stand as evidence in the trial thereof.

(6) Leave to the 6th defendant and the 3rd third party in HCA4225/2001 to take part, if so advised, in the trials of HCCW594/1999 and HCA1240/2001.

(7) There is an order nisi that the costs of the three summonses, including half of the hearing time on 8 August 2003, be in the cause of the respective proceedings.

Directions on trial of the Winding-Up Petition

21. With regard to the directions to be made for the trial of the Winding-Up Petition, I must point out that the parties already have four years to plan and prepare their case and evidence. There had also been many applications and contested hearings on discovery and evidence. I consider that, given the multiplicity of parties and issues involved, the court has to insist on strict observance of the procedural rules and court directions so as to ensure that the trial does not get out of hand. Unless consented to by the opponents, new affidavits and expert reports cannot be introduced for the trial without prior leave of the court. Additionally, leave will not be granted for further factual or expert evidence in the absence of very cogent reasons for it not to be introduced earlier.

22. As for the logistics of the trial such as the layouts of the trial bundles and the number of bundles to be kept in court, the legal representatives of the parties, with their experience and in the spirit of co-operation, ought to be able to agree on them. I do not consider it necessary to make any direction in this regard.

23. The directions I make for the trial in the Winding-Up Petition are as follows :

(1) The time for filing expert reports under paragraph 1 of the Order made on 31 October 2002 is extended to 4 September 2003.

(2) Leave to the parties to file and exchange, if so advised, supplemental expert reports in reply to expert reports served on 31 July 200 and to be served on 4 September 2003.

(3) The 1st respondent is to serve on the petitioners his draft final affidavit.

(4) If the petitioners do not give notice of objection within 14 days of being served with the 1st respondent's draft final affidavit,

(a) the 1st respondent will have leave to file his said final affidavit and to rely on it at the trial; and

(b) the petitioners will have leave to file and serve by 30 September 2003 their affidavit(s) in reply.

(5) The affidavits filed in support of and in opposition to the Petition and its amendments do stand as evidence in chief of the deponents at the trial, unless otherwise directed at the trial.

(6) The deponents of the affidavits do attend trial for cross-examinations, failing which his affidavits will not be admitted as evidence of the trial.

(7) The petitioners do have leave to adduce in evidence the 1st, 2nd and 3rd affidavits of Lee Chai Cheong without calling him to attend trial for cross-examination, the said deponent having died on 29 February 2000.

(8) The petitioners and the respondents do before 10 September 2003 exchange a list of factual and expert witnesses to be called by them at the trial, and a list of the affidavits filed in the interlocutory applications, or the parts thereof, that they intend to adopt as evidence of the trial.

(9) The petitioners do before 15 September 2003 lodge with the court and serve on the parties the pleadings, affidavits and exhibits bundles for the trial.

(10) The petitioners do before 30 September 2003 lodge with the court and serve on the parties the rest of the trial bundles.

(11) An agreed list of issues is to be lodged with the court by 15 October 2003. Failing agreement, the parties are to lodge with the court their respective lists of issues by 15 October 2003.

(12) The petitioners do lodge with the court and serve on the parties their opening submissions by 7 November 2003.

(13) Live Notes be arranged for the trial with the costs involved to be shared by the parties in such proportions to be agreed between them.

(14) There is an order nisi that the costs of the pre-trial review, including half of the hearing time on 8 August 2003, be in the cause of the petition.

24. As for the summons issued by the 1st respondent on 5 August 2003 under Orders 33, 35 and 39 of Rules of the High Court, as requested by the 1st respondent, it will be adjourned for argument on an early date to be fixed with half a day reserved, and with the costs of the summons reserved.

Directions for the Interstitial Action

25. As for the Interstitial Action, I make the following directions :

(1) The time for the exchange of witness statements under paragraph 2 of the Order dated 6 March 2003 be extended to 22 August 2003.

(2) The witness statements do stand as evidence-in-chief at the trial, unless otherwise directed.

(3) The plaintiffs do lodge with the court and serve on the defendants the trial bundles that are additional to the trial bundles for HCCW594/1999, no later than seven days before the commencement of the trial.

(4) The plaintiffs do lodge with the court and serve on the parties their opening submissions no later than three clear days before the commencement of the trial.

(5) Live Notes be arranged for the trial with the costs involved to be shared by the parties in such proportions to be agreed between them.

(6) There be liberty to apply for further directions.

Directions for the BPR Action

26. Additionally, there are the following orders and directions for the further conduct of the case :

(1) The parties in the main action (save the 1st defendant) do exchange their lists of documents by 29 August 2003. Inspection of documents to take place within seven days thereafter.

(2) The time for the exchange of lists of documents between the 2nd, 3rd and 5th defendants and the 3rd third party under paragraph 13 of the Order dated 16 December 2002 is extended to 29 August 2003.

(3) The parties in the main action and in the third party proceedings do exchange their witness statements by 3 October 2003.

(4) Leave to the parties in the main action and in the third party proceedings to exchange expert reports on valuation of PEL shares by 24 October 2003.

(5) Leave to the parties in the main action and in the third party proceedings to exchange, if so advised, supplemental expert reports in reply to expert reports exchanged under paragraph (4) above.

(6) The witness statements do stand as evidence-in-chief at the trial, unless otherwise directed.

(7) The plaintiffs do lodge with the court and serve on the defendants the trial bundles that are additional to the trial bundles for HCCW594/1999 and HCA1240/2001, no later than seven days before the commencement of the trial.

(8) The plaintiffs do lodge with the court and serve on the parties their opening submissions no later than three clear days before the commencement of the trial.

(9) Live Notes be arranged for the trial with the costs involved to be shared by the parties in such proportions to be agreed between them.

(10) There be liberty to apply for further directions.

Representation:

Mr Daniel Fung, SC, and Mr Johnny Mok, instructed by Messrs Liu Choi & Chan, for the Petitioners in HCCW 594/1999 and the Plaintiffs in HCA1240/2001 and HCA4225/2001

Mr Benjamin Yu, SC, and Mr Russell Coleman, instructed by Messrs Jones Day, for the 1st, 6th and 7th Respondents in HCCW594/1999, the 2nd, 6th and 7th Defendants in HCA1240/2001 and the 2nd and 5th Defendants in HCA4225/2001

Miss Eleanor Cheung of Messrs Herbert Smith, for the 2nd Respondent in HCCW594/1999 and the 1st Defendant in HCA1240/2001 and HCA4225/2001

Mr Ronny Wong, SC, instructed by Messrs Deacons, for the 4th Respondent in HCCW594/1999 and the 4th Defendant in HCA1240/2001 and HCA4225/2001

Mr David Harrington of Messrs Richards Butler, for the 6th Defendant in HCA4225/2001

The Official Receiver in HCCW594/1999, not appearing with leave of the court

The 3rd Respondent in HCCW594/1999 and the 3rd Defendant in HCA1240/2001 and HCA4225/2001, unrepresented, absent

The 5th Respondent in HCCW594/1999 and the 5th Defendant in HCA1240/2001, unrepresented, absent

Messrs Wilkinson & Grist, for the 3rd Third Party in HCA4225/2001, not appearing

The 8th to 10th Defendants in HCA1240/2001, unrepresented, absent

HCCW594/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO.594 OF 1999

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D E C I S I O N

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1. This is the petitioners' application for the appointment of provisional liquidators under section 193 of the Companies Ordinance.

BACKGROUND

2. In 1958, The Prudential Enterprise, Limited ("the Company") was formed by Mr Lee Man Wa ("MW Lee") and Mr Lee Chai Cheong ("CC Lee"), who were cousins. The 1st to 4th petitioners and the 1st respondent are the children of MW Lee. Until his death, CC Lee was also one of the petitioners. The 7th to 14th petitioners are the children, brothers, sisters and sister-in-law of CC Lee. The 15th petitioner is a company founded by the late fathers of WM Lee and CC Lee in 1929. The 3rd to 6th respondents are the children of the 1st respondent. The 7th respondent, N & L Investment Limited ("N & L") is the nominee company of the 1st respondent.

3. The Company is essentially a family company. There are a number of shareholders in the Company. For ease of reference, the shareholding can be grouped as follows :

(1) the 1st to 4th petitioners;

(2) the estates of MW Lee and his wife, Ng Chan Wah;

(3) the estate of CC Lee and the children and the extended family members of CC Lee;

(4) the 15th petitioner;

(5) former employees of the Company and other relatives; and

(6) the 1st, 3rd to 7th respondents.

4. The shareholdings of these groups of shareholders, have evolved over the years, and the position since 1995, according to the records filed with the Company Registry, can be summarized as follows :

5. At its incorporation, the board of directors of the Company comprised MW Lee and CC Lee, who were the permanent managing directors. After the death of MW Lee, Madam Ng Chan Wah was appointed a permanent managing director in 1979. The 1st petitioner was appointed a director in 1959. Since 1978, the 1st respondent has been a director of the Company. In 1985, CC Lee and the 1st petitioner resigned from their directorship. N & L was appointed a director in 1985 and has remained so since then. Between 1989 and 24 September 1997, the 3rd respondent, Patrick Lee ("Patrick") was a director. Since 30 March 1995, the 4th respondent, Samathur Li ("Samathur") has become a director of the Company. It is fair to say that since 1985 the Company has been managed and controlled by the 1st respondent and his children and nominee company.

6. In these proceedings which were commenced on 3 July 1999, the petitioners petition for a winding-up order based on just and equitable ground and for relief under section 168A of the Companies Ordinance, including an order that their shares be bought out. A variety of complaints have been made on the petition, to which I shall return later. By a summons issued on 5 October 2000, the petitioners applied for the appointment of provisional liquidators to take over the assets and undertakings of the Company.

THE RELEVANT PRINCIPLES

7. Under section 193(1) of Companies Ordinance, the court may appoint a liquidator provisionally after a winding-up petition has been presented. The authorities have established, and counsel are in agreement, that there are two relevant considerations in the exercise of the power. The first is whether upon a provisional view, a good prima facie case for a winding-up order has been made out. Secondly, if a good prima facie case has been made out, whether in the circumstances of the case, it is right that provisional liquidators be appointed : Re Union Accident Insurance Co. Ltd [1972] 1 All ER 1105, applied in Re Five Lakes Investment Co. Ltd [1985] HKLR 273.

8. The court's power under section 193 is a general power and its exercise is not restricted to any particular circumstances : Re Five Lakes Investment Co. Ltd, SFC v. Mandarin Resources Corporation Ltd [1997] HKLRD 405. Generally speaking, jeopardy to assets, misappropriation of company assets, proof of insolvency are reasons for appointment of provisional liquidators, but there is no hard and fast rule governing the exercise of discretion. It all depends on the particular circumstances of the case. Matters such as the commercial realities, the degree of urgency and need and the consequences of appointment of provisional circumstances are also relevant in determining the balance of convenience. The various commonwealth authorities that had been referred to by counsel serve to demonstrate the wide and general nature of the power. As said in Re Club Mediterranean Pty Ltd, 1 ACLR 36, commercial realities are infinitely various, the circumstances justifying appointment of provisional liquidators therefore do vary.

9. With these principles in mind, I turn to examine the issues involved in the application.

GOOD PRIMA FACIE CASE

10. The petitioners have raised a number of allegations of impropriety against the respondents in their management of the Company's affairs and funds. In considering whether there is a good prima facie case on the petition, it is necessary to look at the core complaints and to assess their prospect of success. I do not however regard it appropriate to conduct a minute and detailed analysis of the evidence on the affidavits or to undertake a mini-trial of the allegations involved. A provisional view of the issues in question will be sufficient at this stage. Central to the petitioners' complaints in these proceedings are the Interstitial Scheme, the Rights Issue and the Wyatt Estates Limited ("Wyatt") loan transaction. I will deal with them in turn.

(1) Interstitial Scheme

11. This concerns three Guernsey companies called Interstitial Holdings Limited ("IHL") and Mount Eden Limited ("MEL"), both incorporated on 26 November 1993, and Mount Cook Limited ("MCL"), incorporated on 4 September 1998.

12. Two sums of $174.17 million and $615.35 million were paid by the Company to IHL on 25 January 1994 and between 19 December 1996 and 16 May 1997 in return for the allotment of preference shares in IHL. The first payment was derived mainly from the proceeds of the sale in the end of 1993 of listed shares held by the Company. The second payment was partly financed by a $500 million loan from HSBC to the Company secured on the core assets of the Company, being a mall and a hotel, and partly from resources with the Company. A total of 65,161,500 preference shares at ￡1 each were issued by IHL to Prudential (BVI) Limited, a wholly owned subsidiary of the Company. The total amount of $789.52 million paid into IHL was lent to MEL as unsecured loans in return for Eurobonds issued by MEL in favour of IHL. The money together with contributions from Wyatt and the 1st respondent's family members were used for the acquisitions of five lots of London properties initially held in the name of MEL. A substantial part of the properties had since been transferred to MCL. The respective contributions from the funds said to be from the Company, Wyatt and the 1st respondent's family to the purchase price of the five lots of properties are in the proportions of 75%, 14% and 11%. The petitioners' expert estimates these properties to worth about ￡279.5 million in September 1998.

13. In terms of rights, essentially the preference shares held by Prudential (BVI) Limited in IHL were to rank pari passu with each other as regards repayment of capital, and in priority to the ordinary shares in IHL as regards income. They carry the right to a non-cumulative preferential dividend at the rate of 1.5% above LIBOR per annum and the right on winding-up to the repayment of the nominal capital paid up on the preference shares. They carry no right to vote unless the dividend most recently payable has not been paid in full, or unless in relation to a resolution to vary or abrogate the rights under the preference shares. The preference shares confer no other right to participate in the profits or assets of IHL, or to the issue of bonus shares or shares issued by way of capitalization of reserves, or the surplus assets of the Company upon winding-up. They are redeemable only at the option of IHL after the third anniversary of the date of allotment. At redemption, an equity kicker will be given in lieu of their non-convertibility to ordinary shares and for the risk exposure in terms of security of the preferential shares. The equity kicker is defined as "equal to twice the premium of the net asset value of [IHL's] ordinary shares standing at the time of redemption calculated by the generally accepted international accounting practice supported by independent professional valuation of the assets of [IHL]." It is unclear from the evidence filed what the terms of the Eurobonds held by IHL are.

14. The petitioners' case is that the three offshore companies, IHL, MEL and MCL, are beneficially owned and/or controlled by the 1st respondent and his immediate family members and their nominee companies. They contend that through the Interstitial scheme, the respondents had channelled substantial funds out of the Company in furtherance of their own investments and benefits. In so doing, the respondents are said to have misappropriated funds of the Company, placed themselves in a position of conflict, and acted in breach of their fiduciary and/or other duties as directors.

15. In particular, the petitioners says that the respondents had deliberately refrained from obtaining the approval of the shareholders. As to the two board resolutions passed on 9 July 1993 and 17 July 1996 authorizing the two payments of $174.17 million and $635.35 million, the petitioners contend that they are invalid for failure to comply with Article 92 of the Company's Articles and Association. The article prohibits a director from voting on a contract or arrangement in which he is interested in, and further provides that his vote is not to be counted. By reason of the interest the 1st respondent, Patrick, Samathur and N & L had in the three offshore companies and the acquisition of the London properties, the petitioners say that none of them was entitled to vote at the board meetings such that the two resolutions were not validly passed.

16. Secondly, the petitioners say that the terms of the preference shares are prejudicial to the interests of the Company. By contrast, they are to the considerable benefit of the holders of the ordinary shareholders, being the nominee companies of the 1st respondent and his immediate family. It is said that the preference shares suffer from the drawbacks of not being able to be converted into ordinary shares, being illiquid in nature and lacking in security. It is considered to be no better than an unsecured lending. At the same time, the equity kicker is criticized as being unclear, ill-defined and incomprehensible such that no value can be placed on it. More specifically, contrary to professional advice available to the board of the Company, the equity kicker does not confer any option to subscribe to the ordinary shares in MEL. It is the petitioners' case that neither the preference shares nor the equity kicker is related to the value of the underlying property assets and the Company has no prospect of benefiting from the capital appreciation of the London properties.

17. Thirdly, the petitioners also complain that the costs of investment, notably the interests payable to HSBC on the $500 million facilities, is much higher than the dividend income from the preference shares. It is also pointed out that the declarations of dividends had been irregular and the substantial payment in 1998 was made only to enable the 1st respondent to participate in the Rights Issue. It is also the petitioners' case that the rights to receive dividends or to demand redemption, being at the option of IHL, is under the control of the 1st respondent and his family members.

18. Fourthly, the petitioners complain that the preference shares were invalidly created and confer no benefit on the Company. It is said that no valid members resolution had been passed or registered with the Guernsey Greffe for the increase of capital of IHL, as required under Guernsey companies law, and that the board resolution approving the increase of preference share capital of IHL only came into existence in 2000, but dated back to 18 January 1994, and was only filed with the Guernsey Greffe on 9 September 2000.

19. The 1st respondent's response to the petitioners' complaints is that the Company's investment into IHL is a perfectly proper one and made for perfectly proper and legitimate reason. Firstly, it is said that the opportunity to acquire Langham Estate, which is the first lot of London Properties, was an opportunity that came to the 1st respondent personally and he made available the opportunity to the Company. Secondly, the 1st respondent says that he and/or his companies had sufficient finance to purchase the Langham Estate. It is pointed out the sale of the listed shares by the Company took place before the Langham Estate deal was completed. Thirdly, the 1st respondent says that professional advice had been obtained by the Company before undertaking the investment, which takes the form of preferential shares in IHL. Fourthly, the 1st respondent says that the investment was part of an asset protection plan and a tax efficiency scheme for the Company in the years leading up to the change of sovereignty in July 1997.

20. As to the terms of the preference shares, it is pointed out it was never intended that the Company should have a direct investment in the London properties because that could not be done in a tax efficient way. Additionally, because of the term of HSBC's borrowing that restricts alienation of the beneficial ownership of the 1st respondent and his direct family and the creation of ordinary shares in MEL, it was not possible for the equity kicker to be structured in the form of an option to subscribe or purchase shares in MEL. Despite these, the 1st respondent points out that expert evidence shows the return by way of dividends between 1994 and 2001 had been in line with the returns that other investments in UK property would have achieved. It is also emphasized that the intention was always that the equity kicker should relate to the capital appreciation in the underlying real estate.

21. On the Article 92 point, the 1st respondent says that on an analysis of the directorship and shareholding of IHL, MEL and MCL at the material times, Patrick and Samathur had no relevant interest or were not interested in the transactions before the board of the Company when the two resolutions of July 1993 and July 1996 were passed. Finally, the 1st respondent says that the irregularities involved in the creation of the preferential shares are insubstantial and capable of rectification and would have been rectified on the assumption that the registration with the Guernsey Greffe is being effected.

22. As for the 4th respondent, it is said that the first payment for the preference shares was made at a time when he was not yet a director of the Company. It is also said that there was no conflict of interest nor breach of fiduciary duties when analysing the various contracts underlying the whole scheme. Unlike the 1st respondent, the 4th respondent does not accept that the terms of the kicker are unclear or unenforceable and relies on the fact that the terms were drafted by solicitors. It is further said that by comparing with returns from UK property investment, the decision of the board is commercially justifiable.

23. In my view, there are several apparently disturbing features of the Interstitial Scheme. Firstly, the evidence does suggest that the 1st respondent, his children and direct family, whether individually or collectively, were and are beneficially interested in the investments and properties underlying the Interstitial Scheme. There are the Heads of Terms between HSBC and MEL dated 23 December 1993 and the HSBC's letter dated 21 January 1994 to the 1st respondent, which refer to MEL being beneficially owned by a private trust whose main beneficiaries are members of the 1st respondent's family and that the 1st respondent and his family interests beneficially owned all the ordinary shares in MEL. Until his fifth affidavit, the 1st respondent's position on the affidavits was that he and his family were beneficially interested in the ordinary shares of IHL. Despite the correction made in the fifth affidavit to the effect that he had by January 1994 disposed of his entire interest in IHL, the 1st respondent in his subsequent affidavits continued to refer to his family interests and his own involvement and interest in the acquisition of the London properties. The position taken by the 1st respondent at the hearing of the application is that IHL, MEL and MCL are owned and controlled by his son Christopher. It is therefore fair to say that prima facie, conflict of interests on the part of the board did exist at the time when the steps were taken and the resolutions passed approving the taking of preference shares in IHL. There is substance in the Article 92 argument of the petitioners. The 4th respondent's reference to the different underlying contracts as indicating no conflict of interest, in my view, is an over-simplistic approach to the matter and has ignored the relationship between the various companies in terms of their beneficial ownership and directorship.

24. Secondly, the facts that the opportunity to acquire Langham Estate was initially the 1st respondent's opportunity and/or that he and his family could have acquired Langham Estate on their own resources are irrelevant or of no significance. On the 1st respondent's case, the opportunity to acquire Langham Estate came to him at a time when the Company was also looking to making offshore investments, albeit in the USA. It may be said that the 1st respondent in the proper exercise of his fiduciary duties would in any event have to offer or make available the opportunity to the Company. It is not said that the opportunity is one which the Company would intrinsically reject or was unlikely to be interested in. It may well be that the 1st respondent and his companies could have financed the acquisition on their own, but the reality is that the Company, on the board's decision, did participate in the investment and on the stated intention that the Company is to benefit from the capital appreciation of the London investment.

25. Thirdly, having regard to the apparent conflict of interests, it would be a counsel of prudence to refer major decisions to the members. There is no perceivable reason for not communicating to the members the asset protection and tax efficiency scheme, and also the professional advice received.

26. Fourthly, to the extent that the professional advice had been sought on the terms of participation by the Company in the investment, it would be incumbent for the board, who was in a potential conflict, to observe the advice as closely as possible and only to depart from it unless on strong grounds. I do not intend to dwell into the details of the advice received from the solicitors, tax advisers, accountants and bankers that had been put before the Court. It is sufficient to say that they were cautious advice and the emphasis had been to ensure that the terms of the Company's investment were commercially justifiable, if not attractive. Against the declared intention at the July 1993 board meeting of enabling the Company to share in the capital gain of the London properties, it cannot be seriously denied that the preference shares and the equity kicker do not achieve this intention.

27. Admittedly, the purpose of the kicker was to improve the return which the preference shareholders would get over and above the returns by dividends because the dividend right is not sufficiently attractive to an investor. Evidently, the equity kicker does not serve the purpose of an additional inducement. The 1st respondent's own experts clearly do not think much of it in terms of its worth. The 4th respondent's argument that the preference shares and kicker confer defined rights is undermined by the 1st respondent's experts who had said that the terms were "poorly drafted", "unclear and could not be understood by accountants, corporate financiers and others": see the respective reports of Mr Hasan and Mr M itchell. Among the various advice received, Miss Agnes Wong of Banque DeGroof had advised MEL to grant to IHL an option to subscribe its shares, which could be assigned to the Company as the kicker for the preference shares. The 1st respondent explains that the option was not granted because of the restriction in the convenant MEL gave to HSBC, as advised by the tax adviser, Miss Brenda Coleman of Messrs Herbert Smith. Quite apart from whether this is the only means of enabling the Company to benefit from the capital appreciation of the London Properties, the explanation does not explain why the board of the Company should nevertheless proceed with the transaction when the stated intention could not be met. It also does not explain why the board did not consider it necessary to and did not as a matter of fact refer the matter to the shareholders for a decision at a general meeting. It is suggested that Miss Coleman's advice came very close to the completion date and there was a time constraint with regard to the first payment of $174.17 million in 1994. Such a suggestion will be no answer to the 2nd payment of $615.35 million in 1996. The inadequacy of the equity kicker was not even discussed in the July 1996 board meeting. Given the admitted purpose of the kicker and the inability to attain the purpose, a fact that must be apparent to the board in 1994, the failure of the board of the Company to address the structure and terms of the preference shares and kicker in approving the 2nd payment in 1996 is prima facie a failure in the directors' duties.

28. Mr Todd SC says that the 1st respondent accepts that the issue has to be addressed now to ensure that the benefit of capital appreciation is available to the Company. But he emphasizes that back in 1996, there was no reason for the board to be unduly concerned with the problem since the 1st respondent and his family members were on amicable terms. The term used is that "peace and love existed in 1996 within the nuclear S.T. Lee family". That however misses the point. This is not a case of the 1st respondent dealing with his or his family's companies and affairs. The subscription of the preference shares in IHL is an investment of the Company and the board had to take care of the interests of all the shareholders. There are shareholders other than the 1st respondent and his immediate family and nominee company. While there may be harmony and trust within the 1st respondent's family, the 1st respondent had not been on amicable terms with the other shareholders for a long period of time. He, if not the board, should be very weary not to give cause for further dissention.

29. Mr Todd SC also says that it is always possible for the matter to be put right now because the directors of IHL in 1996 were and are Prudential (BVI) Ltd, Wyatt, which is the 1st respondent's company, and Octaland Holdings Ltd, controlled by Christopher, and there is a close relationship between the 1st respondent and Christopher. It is to be noted that Christopher has not entered appearance in these proceedings, and that the 1st respondent stated on previous affidavit that he does not and cannot control Christopher. Even acting on the assumption of Mr Todd SC's submission, it still does not lessen the complaints the petitioners make on the inadequacies of the terms and the structure of the investment.

30. It is also submitted that there is no evidence of improper motive and the investment into IHL was a commercial decision which the board was entitled to make, provided that the correct steps and advice had been taken. I accept that on the affidavits there may not be direct evidence as to motive. I also agree that it is within directors' power to undertake commercial decisions, including investment decisions, for the company. What is at the crux of the issue must be whether the decision on an objective assessment gives cause for concern as to the propriety of the directors' conduct and the decision. The evidence on the investments into IHL in my view does give rise to a good prima facie case for drawing adverse inferences against members of the board at the material time. Among other things, effectively IHL was acting as a financier to MEL in the acquisitions of the London properties. In acting as the financier, IHL was in turn financed by the Company. Despite that, the Company does not presently stand to benefit directly or indirectly from the appreciation of the properties. There is additionally the point that the preference shares were not created properly and in compliance with the legal requirements of the Guernsey law. Irrespective of whether, as a matter of law, the irregularities can be and have been rectified, the failure in the first instance is not a matter to be lightly ignored, when viewed against the other complaints made on the investments.

(2) Rights Issue

31. This is associated with the issue of 8,126 new ordinary shares at HK$31,721 by the Company in October 1998. The shares were offered to all the shareholders and the open offer was underwritten by the 1st respondent in full. Despite objections from a number of shareholders, including the petitioners, the shares were allotted to the 1st respondent, the 6th respondent, Annabell Lee ("Annabell"), Christopher, Samathur and N & L. As a result of the allotment, the total shareholding of the 1st respondent, his children and N & L increased from 26.86% to 68.75%, and they together became the controlling shareholders of the Company.

32. The petitioners' complaint on the Rights Issue is manifold. Firstly, they say the offer price of $31,721 was based on a gross undervalue of the shares in the Company. Secondly, it is said that the manner in which the open offer was made is oppressive, having regard to, inter alia, the short notice given, and the fact that some of the shareholders were resident overseas and that the 1st respondent had instituted winding-up proceedings against the corporate shareholders and other proceedings against some other shareholders. Thirdly, according to the 1st respondent, on 12 October 1998, MEL declared ￡20.12 million dividend in favour of Millport Investments Limited ("Millport"), which was beneficially owned and controlled by Christopher. Christopher had made an advancement of ￡20.12 million to the 1st respondent. The money was used to underwrite the new shares. The petitioners say that the subscription money was in fact funds of the Company, but had been siphoned off to MEL through IHL under the Interstitial Scheme. The allotment is therefore said to contravening section 47A of the Companies Ordinance. The petitioners further complain that given it was a declaration of dividend by MEL, the money had gone out of reach. There is effectively a dissipation of the assets belonging to the Company.

33. The 1st respondent disagrees with the suggestion that the purpose of the Rights Issue is for him and his family to acquire a controlling shareholding in the Company. Primarily the exercise was said to be occasioned by the need for the Company to strengthen its capital base consequential upon pressure from HSBC, and also the need for acquiring working capital to develop the Blue Pool Road Project. The board had obtained and relied on independent advice with regard to the valuations of the shares. As to the funding for the Rights Issue, it is contended that there is no evidence that the funds for the dividend declared and paid by MEL to Millport came from IHL. The evidence also does not show financial assistance being given by the Company or its subsidiaries in the acquisition of the Company's shares in the Rights Issue, hence a contravention of section 47A of the Companies Ordinance. It is pointed out that neither IHL nor MEL is a subsidiary of the Company within the meaning of the Ordinance.

34. I accept that issue as to undervaluation is a matter that can only be resolved at the trial. Similarly, it may be right that the ultimate source of the ￡20.12 million dividend declared in favour of Millport, which Christopher then advanced to the 1st respondent for underwriting the 8,126 shares, can only be fully investigated and determined at the trial. But the objective circumstances surrounding the Rights Issue, as identified by the petitioners on affidavit and in Mr Fung SC's submissions, do prima facie give rise to concern as to whether the 1st respondent and/or the board had acted even-handedly in making the Open Offer. The fact that the tax voucher relating to the declaration of dividend by MEL in favour of Millport was only effected two days before the commencement of the hearing, some three years after the Rights Issue had taken place, is also a matter that calls into doubt the true genesis of the funds involved.

(3) Wyatt

35. This relates to a loan made by the Company in 1985 to Wyatt, which was and is owned and controlled by the 1st respondent. In August 1985, Wyatt was indebted to Wardley in the sum of $40 million and the indebtedness was secured by a first mortgage over its assets. The board of the Company approved a loan of $4.5 million to Wyatt on terms that included an option to exchange the whole or part of the capital and unpaid interest into Wyatt's share at $7 per share, to be exercised within three years. At an EGM of the Company held on 23 October 1985, a resolution was passed approving a loan to Wyatt to be secured by a second mortgage over its assets, despite protests and objections from the members of the CC Lee branch. The board of the Company was empowered by the resolution to fix the details of the loan, including the amount and terms and conditions thereof. Eventually on 16 July 1986, the Company made a loan of $7 million to Wyatt secured by a second charge on its assets. In 1989, the board of the Company resolved to extinguish the loan (totalling over $8.8 million) by subscribing for 276,621 shares in Wyatt at $32.04 each. Subsequently, the Company was allotted 276,621 shares in Wyatt. Then in January 1994, two ordinary shares were created by Wyatt and allotted to the 1st respondent and Wyatt Estate (BVI) Limited. Further the ordinary shares held by the Company were converted into non-voting 5% deferred shares of $10 each, carrying restrictions in terms of the entitlement to dividends and return, including the return of capital upon winding-up. The restrictions were introduced by Article 35A to the Articles and Associations of Wyatt, which was passed at the same time as the conversion of the Company's shares. Under the Article, the deferred shares' entitlement to dividend is non-cumulative and fixed at 5%, and subject to the directors' resolution and only when the net profits available for dividend in any financial year exceeds $10 billion. Further, there will be no return of capital to the deferred shareholders unless and until $10 billion has been distributed to the two ordinary shareholders, being the 1st respondent and Wyatt Estate (BVI) Limited.

36. The petitioners' main complaints are that the conversion of the loan into shares in Wyatt was not in accordance with Wyatt's proposal put before the board and at the EGM and was not in the best interest of the Company. The petitioners complain that there was an under-allotment of some 980,000 shares. It is further said that the Company's shareholding in Wyatt has become practically worthless in terms of income and capital return as a result of the conversion into non-voting 5% deferred shares and having regard to the restrictions.

37. The 1st respondent's arguments are that firstly, the side letter from Wyatt containing the proposal that was put before the board and at the EGM was only to demonstrate a basis on which the share value of Wyatt would be calculated. It was not something contractual and did not set out the final terms of the loan. Secondly, the conversion was considered by the board at the time to be in the interests of the Company. The shares which the Company had taken in extinction of the debt had greatly increased in value. Thirdly, it is said that there is an incomplete understanding of the 1989 tax efficiency and asset protection scheme, in which Wyatt was also involved. The scheme resulted in shares in Wyatt being converted into an identical shareholding with similar rights in the offshore holding company, Wyatt Estate (BVI) Ltd. It is further pointed out that the Wyatt loan had twice been approved at general meetings.

38. I am of the view that the Wyatt loan prima facie is unfairly prejudicial to the Company in two respects. Firstly, when the board of Wyatt proposed by notice dated 20 October 1988 to its shareholders to allot new shares at $17.50 per share, a discount of 35% was adopted in arriving at "a fair net asset value". Similarly, the further offer to subscribe for new shares at $20.82 per share made in the notice dated 8 March 1989 also adopted a 35% discount. Yet, the shares offered to the Company to extinguish the loan was at the undiscounted price of $32.04 per share. It is not a subscription at "cheap bargain value" as put to the shareholders of the Company. It also does not appear that the matter of discount had been made known to the shareholders when the 1st respondent dealt with questions on the Wyatt transaction at the AGM held on 6 December 1991. Secondly, having regard to the restrictions in Article 35A of Wyatt's Articles and Association, the conversion of the shares held by the Company is on rather unfavourable terms.

39. In short, I take the view that there is a strong prima facie case on the merits of the petition. The 1st respondent has submitted that the petitioners' primary relief is for a buy-out of their shares. That being the case and bearing in mind that the Company is solvent and the 1st respondent had been offering to purchase the petitioners' shares, there is no realistic prospect of a winding-up order being made. I am unable to agree with this submission. The fact that the section 168A relief was pleaded before the relief of a winding-up order in the body of the petition appears to me to be more a matter of drafting style than a positive indication that the petitioners only want to have their shares bought out. The 1st respondent's offer to purchase the petitioners' shares had been rejected, and his attempt to strike out the proceedings on the basis of the offer had also failed.

40. As to the suggestion that not all the shareholders are before the court and the wishes of the non-aligned shareholders have to be taken into account, the short answer is that none of the other contributories has applied to be joined for the purpose of opposing the petition. While the court will have regard to the interests and wishes of the contributories, it does not mean that the court should refuse a winding-up order where there are non-aligned shareholders when they have not chosen to take a stance or make their stance known.

THE COURT'S DISCRETION

41. I turn now to deal with the question of whether it is right for the appointment to be made. This involves the court balancing a number of factors, including the reasons and necessity for the appointment and the consequences of an appointment on the Company. As a starting point, it must be recognized that the appointment of provisional liquidators is a drastic step that usually carries with it serious commercial consequences : Re Yick Fung Estates Limited and Shui Hing Investment Company Limited [1986] HKLR 240. There will also be some effect on the goodwill and reputation of the company, especially in the case of a solvent and active company. The appointment will also interfere with and intrude upon the constitutional arrangements of a company. The power should therefore only be exercised when it is necessary, just and expedient in all the circumstances of the case.

The reasons and necessity for an appointment

42. The principal grounds upon which the petitioners base their application are that :

(1) There is a need to ascertain the nature and whereabouts of the funds and assets of the Company, with particular reference to the Interstitial Scheme. It is said that the rights and assets associated with the Company's investment in IHL are obscured and ill-defined such that provisional liquidators are required to ascertain the position, to safeguard the Company's interests and to bring the assets back into responsible hands.

(2) There is a need to guard against further dissipation of assets given that the Company's assets are in jeopardy. Reliance is placed on the fact that Christopher, whom the 1st respondent says is how in control of the London properties, has not appeared in these proceedings so that there is an immediate need to fix the problems relating to the preference shares and the kicker. It is further pointed out that there is a continuous dissipation of assets arising out of the large interest payments attributable to the loan from HSBC. The petitioners also rely on the belated disclosure of the declaration of ￡20.12 million dividend by MEL in favour of Millport and the large amount of consultancy fee paid out of IHL as indications of the funds of the Company being in jeopardy.

(3) There is a justifiable lack of confidence in the present directors of the Company in view of, what the petitioners regard as, a pattern of misconduct in the management of the Company's affairs. It is contended that there is a strong possibility that without the appointment, the Company's affairs may be conducted for the benefit of the directors and not in the interests of the Company as a while. Particular reliance is placed on the conflict of interest that exists between the directors and the Company and the utilization of company funds for the Rights Issue. It is said that the appointment of provisional liquidators would enable proper investigations to be conducted into the matters complained of.

43. That one or more of the reasons advanced by the petitioners may in principle support an appointment of provisional liquidators cannot be doubted : Re Five Lakes Investment Co. Ltd, International Westminster Bank plc v. Okeanos Maritime Corp [1987] BCLC 450, Re Latreefers Inc [1999] 1 BCLC 271, Re Nerang Investment Pty Ltd, 1 ACLR 36, Re San Imperial Corporation Ltd [1980] HKLR 649 and Montgomery Windsor (NSW) Pty Ltd v. Ilopa Pty Ltd (1984) 2 ACLC 224.

44. What I find disturbing in the present case is the fact that nearly all of the factual matters relied upon as supporting the need for an appointment either occurred years ago or have been in existence for a considerable period of time. The Interstitial Scheme, for instance, started in 1993. The Rights Issue took place in 1998. The Wyatt loan transaction had started in 1985 with the conversions of shares occurring between 1994 and 1997. In this regard, I am conscious of the petitioners' argument that the relevant information had not been disclosed or fully disclosed to them until after the commencement of these proceedings, and that further discovery was only made near to the hearing of the application. That said, it remains a fact that at least some of the petitioners had in the past raised concerns and objections to some of the affairs and transactions now in issue. It seems to me that it cannot be said that they were totally ignorant of these matters, although I have no hesitation accepting that a better and clearer picture of the Interstitial Scheme, the Rights Issue and the Wyatt transaction only came about after the presentation of the petition herein.

45. It is further to be noted that the present application was only issued some 15 months after the petition was presented. The lapse of time is not necessarily fatal nor is it an absolute bar to an appointment. It is however relevant when assessing the claim of risks of imminent irrepairable injury, hence the necessity for an interlocutory relief. In the present case, I note Mr Fung SC's submissions that the petitioners had adopted a cautious approach and had carried out thorough preparations before embarking on the application. That however does not distract from the fact that the lapse of 15 months operates to mitigate against the suggestion that there is a present and urgent need for intervention.

46. There is at the same time the evidence of Mr Hague on the asset position of the Company and its subsidiaries. It is pointed out that the major assets of the group, being the mall, the hotel and the Blue Pool Road development, are all illiquid assets. This is an aspect of the present case that distinguishes it from the case of Okeanos. As to the other assets of the Company, they comprise essentially shares in private companies that include Wyatt and IHL. Secondly, the likelihood of further financing by the group is limited in view of the restriction imposed under the terms of the HSBC's borrowing, namely, the consent of HSBC is required. Thirdly, in terms of cash flow, the Company and its subsidiaries remain obliged to meet repayment and interest payment commitments owed to HSBC. In view of these considerations, the risks of dissipation of assets of the Company cannot be said to be high or imminent.

47. No doubt the petitioners will find considerable comfort in the appointment of independent third parties to oversee the affairs of the Company, given their distrust of the present board, which is understandable in view of their position of apparent conflict. That however only means that it is desirable for the interlocutory relief to be granted, but does not of itself points to a present need for the appointment, having regard to the other considerations identified above.

48. For the reasons indicated, I am not persuaded that the petitioners have demonstrated a present and urgent need for provisional liquidators to be appointed.

CONSEQUENCES OF APPOINTMENT OF PROVISIONAL LIQUIDATORS

49. As to the likely consequences attendant upon an appointment, the petitioners and the 1st respondent had filed very substantial expert evidence on the matter. The experts are in agreement that the appointment would be an event of default under the HSBC's terms of borrowing. Mr Hague, the 1st respondent's expert and a practicing insolvency practitioner, points out that upon an appointment being made, there are three possible scenarios :

(1) HSBC will freeze the Company's existing lines of finance and appoint receivers to the two subsidiaries, namely, Prudential Mall (BVI) Limited and Prudential Hotel (BVI) Limited, which hold two of the principal assets of the Company;

(2) HSBC will freeze the Company's lines of finance but does not appoint receivers; and

(3) HSBC will continue to provide finance under the existing facilities.

50. In Mr Hague's view, scenario (2) is likely to be the initial reaction of HSBC, who would adopt a wait-and-see approach. It is postulated that HSBC would not advance any further facilities and this would impact on the cashflow position of the Company. This in turn would affect the prospect of the completion of the Blue Pool Road construction project undertaken by Dorfit Properties Limited ("Dorfit"), the Company's subsidiary. It is said that Dorfit may be put into liquidation if it were unable to meet its payment obligations. There would be a forced sale of the Blue Pool Road development and the Company would stand to suffer economically. In time, the situation could deteriorate into scenario (1) in the event the Company and its subsidiaries fail to meet the interest payments or should HSBC consider that its security was at risk. Mr Hague estimated the likely loss to the Company and its subsidiaries under the three scenarios to be $234 million to $578 million, $214 million to $234 million and $58 million to $78 million respectively.

51. The petitioners' experts, Mr Hudson and Mr Robinson, a merchant banker and an insolvency practitioner respectively, do not consider that HSBC would jump to scenario (1). They are of the view that HSBC is well covered by the security it holds and that even if HSBC were to withdraw its lines of finance, it will not be difficult for the Company to obtain alternative financing arrangements with other banks or financial institutions. Evidence was produced to show that Bank of East Asia is prepared to offer bridging and alternative finance to cover the needs of the Company.

52. In considering what is the likely reaction of HSBC, the court has to act on the assumption that HSBC will act reasonably and with a sense of commercial pragmatism. In an analysis of the Company's assets and financial position and its lending arrangement with HSBC, I am in agreement with the observation that HSBC's position is well covered in view of the back-to-back deposit of $1.3 billion and the charge over the mall and the hotel. It is submitted HSBC has attached considerable importance to the 1st respondent being in control of the Company and its subsidiaries and that the removal of the 1st respondent from the management of the Company upon an appointment may give HSBC cause for concern. In my view, any concern as to changes in the management of the Company must be viewed against the basis of these proceedings. HSBC has been fully informed of these proceedings and will no doubt appreciate that the petition was brought on just and equitable grounds, and that any appointment of provisional liquidators is not based on insolvency of the Company. To any commercial banker, the ability of the borrower to repay or meet his interest commitments must be its primary concern. The removal of any individual from the key position in the management should not be the paramount or only concern.

53. As to the impact on the cashflow position of the Company and the effect on the Blue Pool Road construction project, much of the weight of Mr Hague's concern that Dorfit might fail in its commitments resulting in the loss of the group's key project is lost by the fact, lately unearthed by the petitioners, that the occupation permit for the building had been issued on 21 June 2001. Mr Fung SC had criticized the 1st respondent's failure to draw this fact to the attention of Mr Hague and the court. It is a well justified criticism. Indeed no explanation has been offered as to why such an important information was not forthcoming even in the update given to the Court during the hearing. The materials adduced by the petitioners also show that the building had been actively marketed for tenants. While it is true that the issue of occupation permit does not mean that Dorfit has no other financial commitment to meet, the risk of a forced sale of Blue Pool Road even before completion is clearly less real, if not unreal.

54. On the disruption to management, the appointment of provisional liquidators will undoubtedly bring about changes in the senior management level of the Company. For one thing, the directors will be suspended from their power. This is a situation that invariably arises on an appointment of provisional liquidators. Afterall, the Company is a holding company not a trading company. The disruptions to the day-to-day operations of the Company which are carried out through the subsidiaries and their management cannot be over-stated.

55. At the same time, experienced professionals are presumed to act rationally and have regard to the best interests of the Company. Save for good reasons, the provisional liquidators, if appointed, will not remove the entire management team of the mall and the hotel and have them substituted by completely new personnel.

56. In short, I do not regard the evidence as pointing overwhelming to grave consequences and risks to the Company upon an appointment being made. I accept however there are possible risks of HSBC withholding further advances to the Company, in which case the Company will need to find alternative financing.

Cross undertaking as to damages

57. The petitioners had initially offered a cross undertaking in damages but withdrew it subsequently on correspondences, on the basis that it is not required.

58. In Highfield Commodities Ltd [1985] 1 WLR 149, Megary J pointed out that the general practice is for an undertaking as to damages to be given upon an ex parte application for provisional liquidators, but that such an undertaking would not be required on an inter partes application. In Clemada Pty Limited v. Hire It Pty Limited (No.2) [1990] 3 ACSR 202, Yeung J after referring to Highfield Commodities Ltd observed that the practice in the Equity Division of the New South Wales Supreme Court is to require an undertaking as to damages even on an inter partes hearing. In Zempilas v. JN Taylor, 3 ACSR 518, King CJ said however (at 522) that there appears to be no requirement of law or practice to extract such an undertaking as a condition to the appointment of provisional liquidators.

59. I am not aware that in Hong Kong there is a similar practice of requiring an undertaking on an inter partes application, although in ex parte application, an undertaking would be required by reason of the risks associated with the fact that only one party has been heard : see also Atkin's Court Form (1999 Issue) Vol.9(2), para.45. I am also not aware of authorities pointing to the requirement as a matter of law. In my view, the availability or otherwise of an undertaking is only a factor to be taken into account in weighing the balance. There may well be cases where it is necessary to extract an undertaking on an inter partes application. Equally there will be cases where an undertaking is clearly not necessary. In the case of a thriving and successful company, when deliberating over the need for an appointment and assessing the risks or harm to the company attendant upon an appointment, the undertaking as to damages will be a relevant consideration.

60. As to the issue of the fees and disbursements of the provisional liquidators in the event no winding-up order is made or the proceedings are stayed, I am of the view that the court does have power to order that the costs of the provisional liquidators be met otherwise than by the assets of the company. Rule 28(3) of the Companies (Winding-up) Rules provides that the provisional liquidators' entitlement to be paid out of the property of the company, is "subject to any order of the court". It recognizes and confers on the court the power to order, for instance, that the applicant indemnifies the Company for the costs and loss arising out of the appointment of provisional liquidators in the event that the appointment proves to be wrongful. The Company will not be left with no recourse even in the absence of an undertaking as to damages.

Undertakings offered by the respondents

61. Five sets of undertaking from the 1st respondent, Christopher, MEL, MCL and IHL had been offered to the Court, the petitioners and to the 1st respondent on the basis of no appointment of provisional liquidators. I do not propose to set them out. It is sufficient to note that they are not accepted by the petitioners for the various reasons indicated by Mr Fung, SC. Difficulties of policing and enforcement resulting from the ousting of the Hong Kong Court's jurisdiction are the principal objections. Given the reservations expressed and the fact that they had been rejected, I do not consider it necessary for me to deal with them in determining the exercise of the discretion.

62. Having regard to the matters discussed above, in the absence of a present and urgent need for the intervention by provisional liquidators, I am of the view that the discretion will have to be exercised against the appointment of provisional liquidators.

CONCLUSION

63. The petitioners' application is therefore dismissed with an order nisi that the costs of the 1st, 2nd and 4th respondents be paid by the petitioners in any event, to be taxed if not agreed. There is a certificate for three counsel.

Representation:

Mr Daniel Fung, SC, Mr Patrick Fung, SC and Mr Johnny Mok, instructed by Messrs Liu Choi & Chan, for the Petitioners

Mr Michael Thomas, SC, Mr Michael Todd, QC and Mr Paul Shieh, instructed by Messrs Jones, Day, Reavis & Pogue, for the 1st Respondent

Mr Lewis of Messrs Herbert Smith, for the 2nd Respondent

The 3rd, 6th and 7th Respondents, represented by Messrs Jones, Day, Reavis & Pogue, not appearing

Mr Ronny Wong, SC and Miss Mairead Rattigan, instructed by Messrs Deacons, for the 4th Respondent

The 5th Respondent, unrepresented, absent

The Official Receiver, not appearing

HCCW594/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO.594 OF 1999

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D E C I S I O N

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1. There are before the court two applications for specific discovery made pursuant to Order 24, rule 7, Rules of the High Court. The first is the petitioners' application against the 1st respondent contained in the summons filed on 15 February 2001. The second is the 1st respondent's application by way of two summonses issued on 15 February and 30 June 2001 against the petitioners.

2. In these proceedings, the petitioners seek a winding-up order be made in respect of The Prudential Enterprises, Limited ("the Company") on just and equitable ground and alternatively relief under section 168A of the Companies Ordinance. The background of the Company and of these proceedings have been set out in my earlier Decision on the 1st respondent's application to strike out the petition, which was handed down on 3 May 2001. I will not repeat them here.

Principles applicable to Order 24, rule 7 applications

3. Before dealing with the applications, it will be helpful to summarize the principles applicable to Order 24, rule 7 applications. The starting point is to recognize that while the entire Order 24 relates to discovery, the different rules under it deal with different aspects of discovery and set out different considerations for the court to take into account : Innovisions Ltd v. Chan Sing Chuk & Ors [1992] 1 HKC 348.

4. Order 24, rule 7 is fairly narrow in its scope. It only covers an order requiring the making of an affidavit to cover the documents or class of documents specified in the application. It does not, for instance, deals with the production of documents, which is covered by section 13.

5. In an Order 24, rule 7 application, the applying party has to prove by affidavit evidence that the documents claimed are, firstly, relevant to the matters in question and that, secondly, in the opinion of the deponent, the other party has or has had in his possession, custody or power, the documents claimed. The other party may object the application by establishing to the court's satisfaction that the discovery sought is unnecessary : Order 24, rule 8.

6. The court may grant the order upon a prima facie case as to relevance and possession is being made out and upon being satisfied that the discovery sought is necessary. The making of the order does not preclude the other party from deposing in the affidavit that he in fact does not have the documents in his possession, custody or power. The affidavit in answer is conclusive at the interlocutory stage so that the applying party cannot seek to contravene the statements or assertions made in the affidavit either by way of a further contentious affidavit or by applying to cross-examine the deponent : Hong Kong Civil Procedure 2001, para.24/7/1.

7. In the old case of Jones v. Monte Video Co. (1880) 5 QBD 556 at 558, Brett CJ laid down the rule as follows :

"Either party to an action has a right to take out a summons that the opposite party shall make an affidavit of documents : When the affidavit has been sworn, if from the affidavit itself, or from the documents therein referred to, or from an admission in the pleadings of the party from whom discovery is sought, the master or judge is of opinion that the affidavit is insufficient, he ought to make an order for a further affidavit; but except in cases of this description no right to a further affidavit exists in favour of the party seeking production. It cannot be shewn by a contentious affidavit that the affidavit of documents is insufficient. This was the practice observed in the Court of Chancery, and the orders and rules under the Judicature Acts were made in imitation of it. It may be urged that a party seeking production may be injured by the wrongful withholding of the document, and that an affidavit in contradiction ought to be admitted under supervision. But this mode of proceeding cannot be allowed : the affidavit of documents must be accepted as conclusive. Another remedy, however, may be used by the party seeking production. He can administer interrogatories; and interrogatories properly framed may force a person to disclose what documents he has in his possession, and the party requiring the production will thereby avoid committing any breach of the practice as to affidavits of documents."

8. The rule and the passage of Brett LT were considered and adopted by Kaplan J. in John Baptist Wu v. Tsoi Kay & Anor. (unreported) HCA 4983/1987. In the latter case, Kaplau J. set aside an order of the master directing for cross-examination of the deponent of an affidavit made pursuant to Order 24, rule 7.

9. As to when a party is regarded as having a document in his "power", it was held in Lonrho Ltd v. Shell Petroleum [1980] 1WLR 627 that a document is within a person's power if he has a presently enforceable legal right to obtain inspection of the documents from these companies or from whoever actually holding them without the need to obtain the consent of anyone else.

10. In the context of corporate documents, normally dominance in the running of a company's business does not necessarily mean that the person has the requisite degree of control so that he can access the corporate documents without obtaining the consent of anyone else: Innovisions Ltd v. Chan Sing Chuk & Ors at p.354. On the other hand, if the company is the alter ego of such a person so that he has unfettered control of the company's affairs, he may be regarded as having power over the documents in the possession of the company: B v. B [1978] Fam. 18. Each case, however, must depend upon its own facts.

11. Having stated the applicable principles, I now turn to look at the applications.

The petitioners' application

12. Broadly speaking, the documents sought by the petitioners fall into two categories:

(1) Documents relating to the Guernsey Companies involved in the "Interstitial Scheme", namely, Mount Eden Land Limited ("MEL"), Mount Cook Land Limited ("MCL") and Interstitial Holdings Limited ("Interstitial"), and

(2) Documents relating to the Rights Issue exercise in October 1998.

13. The relevance of these documents to these proceedings is not disputed. What the 1st respondent has done to meet the application is to file an affidavit and also served a supplementary list of documents consisting of 703 documents on 29 June 2001. In this 10th affidavit, the 1st respondent exhibited also a Schedule of Replies to the request for specific discovery. Essentially, the 1st respondent says that he has, with the supplemental list, made full discovery with respect to the Interstitial Scheme and the Rights Issue exercise. In relation to the documents concerning the Guernsey companies involved in the Interstitial Scheme, the 1st respondent's replies are that he is not a shareholder of MEL and MCL and that after his resignation as director of these companies on 27 January 2001, he no longer has entitlement to access the documents of these companies, and he does not now have them or copies of them in his possession, custody or power. As for some of the other documentation on the loans and acquisition of properties and the accounts of these companies, and the documentation of the Guernsey registered trust companies holding the ordinary shares in Interstitial, the 1st respondent says that they are the documents of these companies and he has no entitlement over them.

14. The petitioners do not accept the 1st respondent's assertions that it is not within his power to access the documents of the offshore companies involved in the Interstitial Scheme. The petitioners point to the fact that the 1st respondent's resignations as directors were made just two weeks after the petitioners made requests for discovery of documents. It is submitted that the resignations are mere attempts to thwart their effort to seek discovery from him. The petitioners also refer to the various affidavits filed in these proceedings to show that the 1st respondent is both the "originator or promoter" and the person in control of the Interstitial Scheme. In particular, the petitioners point out that the 1st respondent had stated in his 1st affidavit that he is able to control the board of Interstitial, a statement which he subsequently sought to correct on oath.

15. For the 1st respondent, it is argued that given the replies to the requests as verified in the 10th affidavit, there has been a sufficient compliance with the relief sought in the petitioners' summons such that there is no room for an order under Order 24, rule 7.

16. It is a permissible way of dealing with an Order 24, rule 7 application to file an affidavit in answer such as the 1st respondent's 10th affidavit, although the usual practice is to argue the matter without an affidavit: Hong Kong Civil Procedure 2001, para.24/7/1. At this interlocutory stage, the 1st respondent's 10th affidavit will be conclusive as to whether or not he has or has had any of the documents specified in the schedule to the petitioners' summons, other than those already disclosed, unless it is shown to be insufficient by its content or by admissions made in these proceedings. In such a case, a further affidavit may be ordered.

17. The 1st respondent says that he is neither a shareholder nor a director of Interstitial, MEL and MCL. I accept that it does not necessarily follow from this that the 1st respondent has no power to access the documents of these companies or that the documents sought are not within his power. It depends on whether it can be said that the affairs of these companies are controlled by the 1st respondent to the extent that the companies can be regarded as his alter ego.

18. In the case of Interstitial, the 1st respondent had stated in his 1st affidavit that "Interstitial is owned by entities in which members of my family and I are interested", and that "the Company and I are able to control the board of Interstitial." On the strength of this, it would appear that the documents of Interstitial are within his power. However, in his 5th affidavit filed on 25 September 2000, the 1st respondent stated that "this statement was not completely correct", that by January 1994, he had already disposed of his entire interest in Interstitial and he had also ceased to be a director as from 17 January 1994. He had, therefore, stated on oath that he no longer controls the board of Interstitial. As for MEL and MCL, the evidence filed in these proceedings shows that the 1st respondent was a director of the companies at their incorporations in 1993 and 1998. The 1st respondent has, however, stated both in his 9th and 10th affidavits that he ceases to be a director of the two companies after 2 January 2001. On the other hand, there are other parts of the 1st respondent's previous affidavits which suggest that his family is beneficially interested in the Interstitial Scheme and the companies involved in it.

19. I have no difficulty agreeing with the submission that the 1st respondent's current assertion that he has no control over Interstitial, MEL and MCL, and that he is unable to access their documents does not sit well with some of his assertions made in the affidavits hitherto filed. I can also see the force of the comment on the timing of the 1st respondent's resignations as directors, that it came just two weeks after the petitioners' request for discovery. But it must be borne in mind that in considering whether the 10th affidavit is insufficient having regard to the other affidavits filed so far, this court is not conducting a mini-trial on the affidavits. The court must also not lose sight of the fact that the issues of whether there is a failure to make full disclosure and of whether the 1st respondent is the person in control of Interstitial, MEL and MCL are not only issues at this interlocutory stage, but are also part of the complaints on which the petition is based. The court should, therefore, refrain from making any interlocutory finding which may or may be seen to pre-judge these issues. The court should not conclude that the 1st respondent was untruthful and that these companies are indeed his alter ego by just comparing the affidavits and before the evidence may be completed.

20. Therefore, notwithstanding the submissions made by Mr Fung SC and his observations on the apparent contradictions between the 1st respondent's assertions in the 10th affidavit and his earlier affidavits, I am not prepared to conclude that 1st respondent's 10th affidavit is insufficient to answer the petitioners' Order 24, rule 7 application. Accordingly, the petitioners' summons is dismissed.

The 1st respondent's applications

21. The documents of which specific discovery is sought from the petitioners can be categorized into eight groups, namely,

(1) Documents relating to the formation of the Company (Item 1 of the 1st summons)

(2) Documents relating to the business of the Company (Items 2 - 4 of the 1st summons) and (the Schedule to the 2nd summons)

(3) Documents relating to an investigation by the ICAC against the Company in about 1984 or 1985 (Items 5 - 8 of the 1st summons)

(4) Documents relating to the resignations of T.Y. Lee and C.C. Lee as directors of the Company (Items 9 - 12 of the 1st summons)

(5) Documents relating to the 1995 Blue Pool Road Settlement (Items 13 - 17 of the 1st summons)

(6) Documents relating to the Rights Issue (Items 18 - 23 of the 1st summons)

(7) Documents relating to the communication passing between the 1st respondent and the petitioners, particularly the 1st petitioner, on the entreaties to the 1st respondent on resolving the differences between him and other family members (item 24 of the 1st summons)

(8) Documents relating to the communications between the C.C. Lee branch of the Company and its advisers on the loan made by the Company to Wyatt Estates Limited (Schedule to the 2nd summons).

22. Save in relation to a few of the items that are directed to some of the petitioners only, the discovery is sought against all the petitioners.

23. The petitioners dispute the relevance of items 16, 20 and 21 of the 1st summons. Item 16 concerns the financial position of the shareholders of Greenhill Enterprises Limited ("Greenhill") and the sources of income and liabilities of the 8th to 11th, 13th and 14th petitioners in the period between November 1989 and September 1995. Items 20 and 21 relate to the tax liabilities of the 1st to 4th petitioners in USA arising from the payment of the Special Dividend in 1998. Items 20 and 21 are further objected to on the basis that the discovery sought is unnecessary and oppressive.

24. The petitioners also dispute the existence of such classes of documents as notes, records and memoranda of meetings and discussions. For documents relating to the formation of the Company, the petitioners say that no prima facie case has been made out as to possession, custody or power. With respect to item 19 of the 1st summons, the petitioners say that it is privileged.

25. Similar to what the 1st respondent had done in the petitioners' application, the 1st and 8th petitioners had also filed affidavits deposing that the 1st to 6th , 8th to 14th petitioners had made full discovery of the relevant documents. Mr Lee Hon Fai, one of the executors of the estate of C.C Lee and one of the 7th petitioners, had also filed an affidavit to the effect that the executors have recently come into possession some old papers of C.C. Lee, who died last year, and that further disclosure will be made. On this basis, Mr Coleman indicated that the 1st respondent would be prepared to adjourn the applications in so far as they relate to the 7th petitioner. I agree that this is a prudent course to take and I shall deal with the 1st respondent's applications on that basis.

26. Item 16 arises out of paragraphs 50 to 58 of the 3rd affirmation of C.C. Lee made herein before his death. The paragraphs refer to an oral agreement for the demolition of the building on Nos.5 and 7, Blue Pool Road and partition of the land. There, C.C. Lee stated that the 1st respondent's failure to honour the agreement resulted in considerable hardship to some members of Greenhill, who depended on dividend incomes for their living. Since the building had been left vacant attracting no income since 1989, it was said that "the situation for shareholders of Greenhill was very grim" by 1995 and that "they had been starved of income from Greenhill for over six years." Under item 16, the 1st respondent seeks discovery of documents relating to the financial position and the sources of income and liabilities of the shareholders of Greenhill for the years between 1989 and 1995.

27. In my view, the expressions used in C.C. Lee's 3rd affirmation may have been exaggerating. However, reading the several paragraphs therein, the point that was made is simply that for some shareholders who depended indirectly on the rental income received by Greenhill, the non-availability of such income in the years after 1989 had brought hardship to them. This aspect of the case has been made clear by the 5th affidavit of Lee Chai Kwong. What is in issue is not so much the financial position or means of the shareholders of Greenhill, but rather whether it is prejudicial conduct by not demolishing the building and partitioning the land resulting in no rental income for Greenhill, which in return, affects the dividend incomes of its shareholders. The discovery sought is therefore not relevant to the matters in issue. At any rate, the disclosure of the audited accounts of Greenhill and its rental income for the relevant period are sufficient to deal with the matter. Further discovery is not necessary.

28. As to items 20 and 21, they arise out of paragraph 3 of the 2nd affidavit of T.Y. Lee, which stated that the 1st respondent was aware that the 1st to 4th petitioners, being residents of the USA, were liable to pay tax on the amount of Special Dividend received. The points made are that, firstly, the 1st respondent himself was not subject to such tax liability and, secondly, he knew that the 1st to 4th petitioners were not in a position to apply the full amount of the Special Dividend to subscribe for the Rights Issue. In the 3rd affidavit of Eleanor Sin Chee Lam filed in support of the discovery application, the request for items 20 and 21 is justified on the basis that the tax liabilities of the petitioners in the USA is in issue. Mr Coleman in his submissions explained the relevance on the basis that the petition has averred that the petitioners were precluded from taking up the Open Offer to subscribe for the 8126 new Ordinary Shares of the Company by reason of their financial position.

29. I accept that the tax liability on the Special Dividends is prima facie relevant as to whether the 1st to 4th petitioners could have made use of the entire amount of the Special Dividends to subscribe for the new shares. But the 1st to 4th petitioners had made discovery of the US tax advice they received from Casner & Edwards which confirms such liability. The correctness of the tax advice is not disputed. Although the tax advice indicates that the precise extent of tax liability varies, depending on the individual's filing status and other tax position, that does not put the extent of the tax liability of the 1st to 4th petitioners in issue. What is relevant is their tax liability, and not the extent of such liability. The discovery sought is further unnecessary for determining the issue as to whether the petitioners could have applied the Special Dividends to subscribe for new shares or whether they were financially constrained and could not take up the Open Offer.

30. Turning to item 19, it concerns communications passing between the petitioners and/or their advisers on the Special Dividends and the Rights Issue. The petitioners had disclosed a report on the valuation of the shares of the Company as at October 1998. The petitioners object to the disclosure of communications between them and their legal advisers on the basis that they were connected with and in contemplation of legal proceedings to be instituted against the Company and/or its directors' and are therefore privilege. T.Y. Lee has confirmed this in his 5th affidavit and his assertion is conclusive on an Order 24, rule 7 application.

31. I turn then to the requests for attendance notes, memoranda and records of various meetings and discussions. I do not consider that the 1st respondent has made out a prima facie case that such documents exist. It is apparent from the 3rd and 10th affidavits of Eleanor Sin Chee Lam in support of the applications that the belief as to existence of such documents is largely premised upon the 1st respondent's own habit of writing up attendance notes and memoranda. Such habit of the 1st respondent and the fact that he is very meticulous have been commented upon by Le Pichon J (as she then was) in HCCW 275/98 and HCCW 467/98. There is no evidence that the petitioners are meticulous persons like the 1st respondent. Nor is there evidence to show that the petitioners share the habit of taking notes, writing attendance notes and records and making out memoranda of meetings and discussions, whether formal or purely personal ones. In my view, the belief as to the existence of such documents held in the supporting affidavits have no proper basis and are no more than conjectures and speculations.

32. As for documents relating to the formation of the Company, it was said in the 3rd affidavit of Eleanor Sin Chee Lam that the 1st respondent believed that other than the documents that were kept by the Company, there were further relevant documents held by M.W. Lee and C.C. Lee, hence their executors. Apart from pointing out that M.W. Lee had spent considerable time deliberating over the Memorandum and Articles of Association of the Company, the basis for such belief was not in any way substantiated. It has not been made out that the petitioners have these documents in their possession, custody or power.

33. Finally, as to the remaining items, the affidavits made by T.Y. Lee and Lee Chai Kwong make it plain that full discovery had been made. At this interlocutory stage, the affidavits are conclusive. For the 1st respondent, it has been argued that not every petitioner has gone on oath to depose that full discovery had been made, and that the number of documents disclosed by the petitioners thus far is much less than that disclosed by the 1st respondent. I am unable to agree with the submission that each of the 14 petitioners should file a list of document and be required to make an affidavit as to documents. In my view, a collective list of documents suffices. On the strength of the affidavits made by T.Y. Lee and Lee Chai Kwong, I also see no necessity to require each petitioner to make an affidavit to depose to or to verify the positions stated in T.Y. Lee and Lee Chai Kwong's affidavits.

34. In short, I do not accept that the affidavits filed in answer to the applications to be insufficient so that an order under Order 24, rule 7 is required. For these reasons, the 1st respondent's summonses, save in relation to the 7th petitioner, are dismissed.

Conclusion

35. In the premises, the petitioners' summons and the 1st respondent's summonses, save in relation to the 7th petitioner, are dismissed. The 1st respondent's summonses, as against the 7th petitioner are adjourned sine dine with liberty to restore. I do not consider that any of the summonses was issued improperly, although requests on some items of documents could not be justified. An order under the summons was rendered unnecessary as a result of the affidavits filed by the opposing parties. I therefore consider that an appropriate costs order is for the costs to be in the cause. Accordingly, there will be an order nisi that the costs of and incidental to the summonses be in the cause, save that as between the 1st respondent and the 7th petitioner, the costs of the 1st respondent's summonses is reserved.

Representation:

Mr Patrick Fung SC and Mr Johnny Mok, instructed by Messrs Liu Choi & Chan, for the Petitioners

Mr Russell Coleman, instructed by Messrs Jones Day Reavis & Pogue, for the 1st Respondent

Remarks:
Appeal by the Petitioner to the Court of Appeal. Appeal dismissed. Please refer to the Appeal Judgment CACV000865/2001.

HCCW594/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 594 OF 1999

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Decision

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1. In these proceedings, the petitioners seek a winding-up order on just and equitable ground and alternatively relief under section 168A of the Companies Ordinance, cap. 32, including an order that their shares in The Prudential Enterprise, Limited ("the Company") be purchased at a price to be determined. The petition was presented on 3 July 1999 and amended on 26 July 2000. Trial dates have yet to be fixed. In the meantime, a number of interlocutory applications had been taken out. The petitioners' applications for appointment of provisional liquidator and for specific discovery are scheduled to be heard on 21 May and in July 2001. The present hearing concerns the 1st respondent's summons to strike out or stay the petition and the petitioners' summons for re-amendment of the petition, joinder of parties and for leave to use the documents disclosed in these proceedings for other related proceedings.

Background

2. Briefly stated, the Company was formed in 1958 by Mr Lee Man Wa ("MW Lee"), the late father of the 1st to 4th petitioners and the 1st respondent, and Mr Lee Chai Cheong ("CC Lee"), the uncle of the 1st to 4th petitioners and the 1st respondent. Until his recent death, CC Lee was one of the petitioners herein. The Company is essentially a family company. Its shareholding can be divided into six groups:

(1) the 1st to 4th petitioners, who are the brother and sisters of the 1st respondent,

(2) the estates of MW Lee and his wife,

(3) the estate of CC Lee and the children and brothers of CC Lee,

(4) HY & HT Company Ltd ("HYHT"), another family company founded in 1929 by the late father of MW Lee and the late father of CC Lee,

(5) Former employees and other relatives, and

(6) The 1st respondent, his children and his nominee company, N & L Investment Ltd.

Prior to a settlement agreement dated 26 September 1995, the respective shareholdings of the six groups are 21.25%, 12.17%, 38.24%, 9.56%, 13% and 5.78%. By October 1998, the shareholding of the 1st respondent, his children and nominee company increased to 68.75% whereas those of the other 5 groups were reduced to 7.05%, 4.04%, 12.68%, 3.17% and 4.31% respectively. Since 1978, the 1st respondent has been a director of the Company. After the resignations of the 1st petitioner and CC Lee as directors in 1985, the Company is effectively managed and controlled by the 1st respondent. Currently, he and his children and nominee company constitute the board of directors.

3. Between 1990 and 1995, the 1st respondent and his children on the one hand and CC Lee and his family members on the other hand were involved in a number of litigation which cumulated in the settlement agreement of September 1995. As a result of this settlement agreement, the shareholding of the 1st respondent and his children and nominee company increased from 5.78% to 26.86%. The circumstances surrounding the settlement agreement and the allotment of shares thereunder form part of the petitioners' complaints herein.

4. In the petition as amended, the petitioners raise a number of allegations of impropriety against the 1st respondent. Principally, they relate to the valuation and allotment of shares under the 1995 settlement agreement, the decision to change the domicile of the Company to BVI, manoeuvres by the 1st respondent to acquire majority shareholding in the Company through the allotment of 8,126 shares to himself in October 1998 ("the Rights Issue Exercise"), misappropriation of company funds through an offshore company called Interstitial Holdings Limited ("the Interstitial Scheme") and improper use of company funds to finance the Rights Issue Exercise.

5. The Interstitial Scheme and the use of company funds to finance the Rights Issue Exercise are also subject matter of a derivative action commenced by the petitioners and HYHT on 19 March 2001 against the 1st respondent, his children and his nominee company and also Interstitial Holdings Limited in HCA No. 1240 of 2001 ("the Derivative Action").

6. By the proposed re-amendment, the petitioners sought to introduce further complaints relating to the Interstitial Scheme and concerning improper lending to a Wyatt Estates Limited at a time when it was wholly owned by the 1st respondent.

The Application to Strike out or Stay the Amended Petition

7. The 1st respondent's application to strike out or stay the Amended petition is made on the basis that the continued pursuit of the petition is an abuse of the process of the court in view of the open offer made by the 1st respondent to settle the matter.

8. The 1st respondent's open offer was first set out in a letter dated 14 February 2001 from his solicitors ("JDRP") to the petitioners' solicitors ("LCC") in which the 1st respondent offered to purchase the petitioners' shares in the Company at a price to be valued by an independent chartered accountant and subject to the terms stated therein. Certain amendments to the offer were made by a letter dated 1 March 2001 from JDRP. By letter dated 14 March 2001, LCC replied by making various comments on the offer and indicated that the petitioners were prepared to discuss further on the matter of settlement. On 15 March 2001, JDRP replied and offered to make 2 amendments to the offer relating to the identity of the valuer and to costs. By a letter dated 19 March 2001, LCC pointed out that the offer as amended did not address the comments previously made and highlighted certain areas of concern. There were further exchanges of correspondence. Eventually, a revised offer was made by the 1st respondent, the terms of which were set out in the Appendix to a letter dated 30 March 2001 from JDRP ("the Revised Offer"). For the purpose of the present application, we need only be concerned with the terms of the Revised Offer.

9. The principal features of the Revised Offer and which are relevant to the determination of the application to strike out or stay the Amended petition are as follows:

(1) The 1st respondent offers to purchase or procure the purchase of the petitioners' shares at a value to be determined by an independent valuer from a chartered accountant firm of international standing: paragraph 1.

(2) The valuer is to act as an expert and not as arbitrator, and his decision and valuation are final and binding: paragraphs 7, 13 and 19.

(3) The valuer shall not give reasons for his determination on the valuation: paragraphs 12 and 18.

(4) The method of valuation is for the valuer to determine in his discretion: paragraph 15.

(5) The parties are entitled to make submissions to the valuer as required by the valuer: paragraph 8.

(6) The valuer will have free access to every book and record of the Company. If the valuer requires submissions from the parties on any point affecting the value of the petitioners' shares, the Company shall provide to the parties the information relevant to the point. An independent committee of the Company is responsible for giving effect to this arrangement: paragraph 9.

(7) The valuation is on the basis that the 8126 shares allotted pursuant to the Rights Issue Exercise have not been allotted: paragraph 6.

(8) The valuer is to take account of the liability of the Company to the 1st respondent for $257.8 million paid by the 1st respondent to the Company as subscription money for the 8,126 shares, if he considers appropriate: paragraph 10. The Revised Offer initially also provides for the valuer to give credit to the 1st respondent for the interest and other financing return on the said sum of $257.8 million, but that was "waived" by leading counsel for the 1st respondent in the course of his reply submission.

(9) In the event the final determination of the Derivative Action is in favour of the petitioners and results in an increase in the value of the Company, the 1st respondent agrees to pay the petitioners the proportion of the increase which the petitioners' shares bear to the aggregate issued capital of the Company (on the basis that the Rights Issue Exercise had not taken place) ("the Adjustment"): paragraph 2. And the valuer will be asked to value the Adjustment: paragraph 17.

(10) The sale of the petitioners' shares are to be in 2 tranches. The first tranche covers all the shares of the petitioners save as to one share for each of the petitioners. The purchase of the first tranche of shares is to take place within 60 days after the decision of the valuer is delivered, and therefore does not take account of the Adjustment. The second tranche covers the remaining one share of each of the petitioners with the Adjustment as the price for the shares. Completion shall take place within 90 days after the valuer's determination on the Adjustment is sent to the parties: paragraphs 14 and 20.

(11) In the event the purchase of the shares is not completed due to a failure on the 1st respondent's part to act in good faith to carry out his obligations under the agreement, the 1st respondent agrees not to oppose the making of a winding-up order. If the petitioners fail to make free and unencumbered title to any of their shares or have acted to prevent completion of the purchase, the 1st respondent reserves the right to oppose a winding-up order: paragraph 25.

10. The Revised Offer was stipulated to be open for acceptance until 12 noon on 24 April 2001, being the day prior to the hearing of the 1st respondent's summons. At the hearing, leading counsel for the 1st respondent indicated that it is open for acceptance until 48 hours after the decision on the application is given.

11. It is common ground that in determining the 1st respondent's application, the Court should have regard not only to the allegations in the Amended petition, but also the matter pleaded in the proposed re-amendment. It is also common ground that for the purpose of the striking out or stay application, it is to be assumed that the pleaded allegations would be established and the conflicts are resolved in favour of the petitioners: North Holdings Ltd v. Southern Tropics Ltd [1999] 2BCLC 625, 633d & 635e.

12. The basic principle and approach adopted by the Court towards application of the kind has been stated by Judge Weeks QC (sitting as a deputy judge of the High Court) in Re a Company (No. 00836 of 1995) [1996] 2BCLC 192, at p.197f-g to be as follows:

"The basis on which the courts have exercised their jurisdiction to stay such petitions is ... that an offer has been made which gives the petitioner all the relief he could realistically expect to obtain on his petition, and that it would therefore be an abuse of the process to continue to litigate matters just for the sake of having a day in court."

13. The rationale for this approach is explained by Hoffmann J in Re a Company (No. 006834 of 1988) (1989) 5BCC 218, at p.221C to be that:

"... fairness requires that the minority shareholder should not have to maintain his investment in a company managed by the majority with whom he has fallen out. But the unfairness disappears if the minority shareholder is offered a fair price for his shares. In such a case, s. 459 was not intended to enable the court to preside over a protracted and expensive contest of virtue between the shareholders and to award the company to the winner."

See also the judgment of Lord Hoffmann in O'Neill v. Phillips [1999]1WLR 1072, at p.1107C.

14. At the same time, section 180(1A) of the Companies Ordinance provides that:

"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 the opinion that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy."

15. The important questions to be asked are therefore whether a suitable or reasonable offer has been made by the 1st respondent, and whether the petitioners have acted unreasonably in refusing to accept the offer. In making the application, the 1st respondent assumes the burden of showing that it is plain and obvious that the Revised Offer is a suitable and reasonable offer and that the petitioners have been acting unreasonably in rejecting it. In this connection, the 1st respondent has argued that the "plain and obvious" test is only relevant to striking out applications per se and not to the kind of striking out application under consideration. For my part, I do not see a distinction between the present type of striking out applications and other striking out applications. A common thread that runs through the cases cited by counsel in this application is that the court should only strike out a petition where a plain and obvious case for striking out has been made out: see O'Neill v. Phillips, supra, per Lord Hoffmann at p.1107C, Re Copeland & Craddock Ltd [1997] BCC 294, at pp. 297 & 300 and Re Fan Ling Theatre Limited [1991] 1HKC 362 at p.369b.

16. As to what counts as a reasonable offer, in O'Neill v. Phillips, supra, at pp.1107D-1108B, Lord Hoffmann observes that a reasonable offer should possess the following features:

(1) The offer must be to purchase the shares at a fair value.

(2) The offer should provide for the value, if not agreed, to be determined by a competent expert.

(3) The offer should be to have the value determined by the expert as an expert. The objective should be economy and expedition, even if this carries the possibility of a rough edge for one side or the other compared with a more elaborate procedure.

(4) The offer should provide for the equality of arms between the parties. Both sides should have the same right of access to information about the company which bears upon the value of the shares, and both sides should have the right to make submissions to the expert.

(5) The offer should make suitable provisions for the question of costs.

17. The 1st respondent's case is that the Revised Offer is a reasonable one in that it gives to the petitioners all the relief that they can reasonably expect to obtain on the Re-amended petition. Mr Thomas SC summed up the advantages of the Revised Offer to be consisting of savings in terms of the court's time and legal costs, dispensing with the need to investigate into the 1998 Rights Issue Exercise, removing from the Company the threat of a winding-up order and delivering to the petitioners within weeks the relief they seek, namely, the cash for the purchase of their shares.

18. For the petitioners, it is argued that the Revised Offer does not give them all that they can reasonably expect to get on the Re-amended petition, that it does not provide for "equality of arms", that there is insufficient safeguard against the failure to complete the purchase and that the present case is not an appropriate case to be dealt with by a straightforward valuation by an expert.

19. It is more convenient to begin with the last of the objections of the petitioners. There are two central complaints in this case. The first is the Rights Issue Exercise and the second is the Interstitial Scheme. Both of them have an effect on the value of the petitioners' shares. On the Rights Issue Exercise, the petitioners' case is that the 1st respondent presented and carried out the exercise in such a way that he managed to have the shareholding of his group increased from 26.86% to 68.75% by the allotment of 8,126 shares at gross under-value. It is also the petitioners' case that the subscription money, the sum of $257.8 million, was either funds of the Company or funds attributable to the Company and generated from the Interstitial Scheme. As for the Interstitial Scheme, the petitioners' complaint is that funds of the Company in the sum of $789 million had been channelled through Interstitial Holdings Limited into other offshore companies beneficially owned by the 1st respondent and his family. These offshore companies currently hold very substantial assets, including various properties in London. The petitioners say that the 1st respondent and his children have acted in breach of their fiduciary duties as directors and hold the fruit of the breaches in constructive trust for the Company.

20. In meeting these allegations, the Revised Offer provides for the valuation to be on the basis as if the Rights Issue Exercise had not taken place. Consequently, the 8,126 shares allotted as a result of the Rights Issue Exercise will be disregarded in reckoning and valuing the shareholdings of the parties. At the same time, however, the Revised Offer provides that the valuer may, if he considers appropriate, take account of the liability of the Company to the 1st respondent for the $257.8 million subscription money. In relation to the Interstitial Scheme, the 1st respondent acknowledges that it is not a matter for the expert valuer to decide. The Revised Offer is made on the basis that the disputes relating to the Interstitial Scheme are to be resolved in the Derivative Action. The petitioners' shares are to be valued on their present value. As and when the petitioners succeed in the Derivative Action, the valuer will be asked to adjust the valuation to reflect any increase in the value of the Company, and a further payment based on the adjustment will be paid to the petitioners.

21. It is common ground that not all petitions for section 168A relief can be suitably dealt with by referring the matter to an expert for valuation of the share price and by having the petitioner's shares bought out at the value determined by the valuer. There might be cases where the impropriety on the part of the respondent had so affected the value of the shares in the Company that it is inappropriate for the matter to be dealt with by a straightforward valuation: per Hoffmann J in Re a Company (No. 006834 of 1988), supra, at p.221G-H, see also North Holdings Ltd v. Southern Tropics Ltd, supra, at pp. 635c-d & 639c.

22. In my judgment, the present case is clearly one of those cases which cannot be resolved by a straightforward valuation of the shares. Both the Rights Issue Exercise and the Interstitial Scheme involve complicated issues of facts and law which an expert valuer lacks the proper machinery to adjudicate upon. In recognition of this fundamental obstacle, the Revised Offer takes the form of a hybrid solution by having the valuation to be undertaken by an expert valuer while leaving he resolution of the disputes to the court. This gives rise to a number of unsatisfactory features, despite that the Revised Offer was obviously carefully thought out and structured.

23. Firstly, in terms of case management, the Revised Offer does not present any comfort to the court. The court is not relieved of the task of a trial on the complaints raised by the petitioners. The Derivative Action will go on. Judicial resources remain to be spent and the parties will still have to incur costs on investigations of the finance of the Company and on examinations of the complicated and elaborated transactions concerning the Interstitial Scheme. The rejection of the Revised Offer does not bring about unnecessary proceedings. A trial will not be avoided by the acceptance of the Revised Offer. The argument that it is an abuse of the court process to insist on pursuing the petition therefore has no application here. There is no question of an abuse of process by insisting on having a day in court. The petitioners will have their day in court whether they reject or accept the Revised Offer. There is likewise no question of the 1st respondent being oppressed in being dragged to the court.

24. Leading counsel for the 1st respondent has submitted that the Revised Offer, if accepted, will dispense with the hearing on the application to appoint provisional liquidator to the Company, due to be heard in 3 weeks' time, and will also close down the other complaints raised in the Amended petition and the proposed re-amendment. I cannot agree. The other complaints pleaded by the petitioners are not so separate and distinct from the issues of misappropriation of funds and the Interstitial Scheme that they are irrelevant to the Derivative Action. It is highly probable that they will be alluded to in the trial of the Derivative Action as affording the background to the disputes therein. There will also not be any substantial savings of judicial time and legal costs by dispensing with the hearing on the appointment of provisional liquidator. Leading counsel for the 1st respondent has further pointed out the undesirability of subjecting the Company, which is a successful and thriving one, to the threat of a winding-up petition. This, however, is not a relevant factor for considering whether efficient administration of justice requires that the petition be struck out or stayed where the petition is not otherwise an abuse of the process.

25. Secondly, it is inappropriate to leave it to the valuer to decide on whether to take the $257.8 million subscription money into account in determining the value of the Company and of the petitioners' shares. In as much as an expert valuer is not equipped to resolve the complicated issues involved in the Interstitial Scheme, an expert valuer is in no position to adjudicate on the source of the funding for the subscription money and to decide whether the $257.8 million originated from the Company or from the 1st respondent. This issue is also closely intertwined with the Interstitial Scheme, such that there is no good reason for leaving it to the valuer when the 1st respondent has accepted that the Derivative Action is the best forum for resolving the disputes relating to the Interstitial Scheme. It has been suggested that the valuer can leave out the $257.8 million if he is unable to form a view on it, and that the matter will be referred to him again after the determination of the Derivative Action for the purpose of making adjustment to the valuation. This is not a satisfactory answer. It does not remove the fundamental objection of leaving a dispute of this nature to the valuer. Further, the valuation process is rendered unduly cumbersome and does not achieve the objectives of economy and expedition. It is also to be noted that given that the method, basis and reasons for the valuation will not be made known, the parties will not know whether the valuer has taken the subscription money into account in arriving at the valuation for the first tranche of shares. In my view, the problems associated with the subscription money and paragraph 10 of the Revised Offer highlight the impracticable and unsatisfactory nature of having an expert valuation before a court adjudication on the factual and legal disputes, and in turn the hybrid approach adopted by the Revised Offer.

26. Thirdly, the Revised Offer contains a major shortcoming in that it does not provide for "equality of arms" between the parties. In O'Neill v. Phillips, supra, Lord Hoffmann observed that both sides should have the same right of access to information about the company which bears upon the value of the shares, and that both sides should have the right to make submissions to the valuer. The terms of the Revised Offer, however, only enables the petitioners to have information relevant to any point on which the valuer requires submissions from the parties. Also, the petitioners can only make submissions to the valuer when required and called upon by the valuer. The 1st respondent argues that the Revised Offer does not fall short of the requirement of "equality of arms". It is submitted that "equality of arms" does not mean that the petitioners are to be given full and unlimited access to the books and records of the Company. If the "equality of arms" is to be understood as affording the petitioners unlimited access to company documents and records, then there will be an inherent tension between this requirement and the objectives of economy and expedition as stated by Lord Hoffmann in O'Neill v. Phillips, supra. In addition, ordinarily members of a company have no right to access company books and records. Accordingly, the 1st respondent says that the only way to go about the question of information relating to the Company is to accept that the valuer is an expert and assumes an inquisitorial role, so that it is for him to go through whatever books and records of the Company as he sees fit. As and when he requires assistance from the parties, there will be equality of arms in that both sides will be provided with the relevant information.

27. The submissions of the 1st respondent have taken a very restricted view of the judgment of Lord Hoffmann in O'Neill v. Phillips, supra, and is plainly contrary to the views expressed in other cases. In Re a Company (No. 003843 of 1986) (1987) 3 BCC 624, Lord Millett considered that the offer before the court was a sufficient one in that it ensures that "both sides will have an opportunity to have access to all the company's books and papers and to make whatever representations they wish to make to the independent accountants". This part of Lord Millett's judgment was cited and adopted by Hoffmann J in Re a Company (No. 00834 of 1998), supra, at pp.221H-222C. See also the case of Re a Company (No. 00836 of 1995), supra, at p.202h in which the open offer, considered suitable by the court, clearly enables the petitioner to have full access to the books and records and documents of the company for the purpose of enabling the petitioners' accountants to make such representations as to value as they consider appropriate.

28. In the present case, the mechanism envisaged by the Revised Offer only affords the petitioners a limited opportunity to make representations on the value of the Company and also limited access to company information. That is hardly fair and sufficient given the petitioners' complaint that the 1st respondent has been practising a scheme of manipulating the company funds and assets. With the limited right to make representations, the petitioners will not be able to draw to the valuer's attention matters or areas of concern. On the other hand, it has throughout been the petitioners' complaint that the 1st respondent has withheld and suppressed information relating to the Company so that the picture of the Company in terms of finance and movements of assets is far from clear. Without free access to the books and accounts of the Company, the petitioners will not be able to make meaningful representations to the valuer on matters or areas of concern. The limited rights to access company information and to make representations are therefore insufficient to address the unfairness and prejudice complained of by the petitioners or to ensure that the petitioners will be given a fair price for their shares.

29. Leading counsel for the 1st respondent argues that observation of Lord Hoffmann on equality of arms is no more than a guidance to practitioners. Reference was made to Re Taipao Resins Chemical Company Limited (unreported) HCCW 590/1998 in which le Pichon J. (as she then was) only ordered that the valuer be given full access to the company books accounts and documents. There are however significant differences between the two cases. The order in Re Taipao Resins Chemical Company Limited was made after a full trial, so that discovery would have been completed. The order was also made after the court had made findings and determinations on the disputes between the parties, including whether a brand name or trademark forms part of the company asset. In the present case, not only had discovery not been completed, but also there have been allegations of suppression of information and documents on the 1st respondent's part. In addition, the central complaints had yet to been determined.

30. In the circumstances, it cannot be said that the Revised Offer is plainly a suitable and reasonable one. It follows that it is not unreasonable for the petitioners to refuse to accept it. There is in addition another objection to the Revised Offer, namely, that it is not available to HYHT. The 1st respondent has argued, and I agree, that when the initial offer to buy-out was made, HYHT was not a party to the proceedings and there was no application to join it as a party. Accordingly, the 1st respondent cannot be criticised for not including HYHT in the initial offer. The 1st respondent, however, further argues that the Revised Offer should not be made available to HYHT for the reason that HYHT had no real cause for complaint and that the application to join as a petitioner is a tactical move to try to obtain a benefit out of the 1st respondent's offer to buy-out. In my view, the question to be asked is whether HYHT has a genuine cause for complaint. Although it was not a party to the petition as amended, HYHT had been referred to in the petition as amended as having raised objections to the Rights Issue Exercise: paragraphs 78, 91-92 of the Amended Petition. Given the background of this case, including the 1st respondent's previous unsuccessful attempt to wind up HYHT, it is not a case where one can say confidently that HYHT has or can have no genuine cause for complaint, so that the petitioners' desire to include HYHT in the Revised Offer is merely attempt to enable HYHT to gain a benefit which it has no prospect of achieving under section 168A. This case is therefore to be distinguished from Re Astec (BSR) plc [1998] 2 BCLC 556, at p.592a-c where the petitioners were seeking advantages for other shareholders who had not even sought to be joined as petitioners. While I appreciate the submission that to extend the Revised Offer to HYHT will involve adding a substantial financial burden on the 1st respondent, I do not accept that the petitioners have been acting unreasonably in seeking to have the Revised Offer made available to HYHT.

31. A further objection raised by the petitioners is that there is insufficient safeguard against the failure to complete the purchase. One of the petitioners' concern is that the Revised Offer only provides that the 1st respondent will not oppose a winding-up order if the purchase is not completed due to a failure on his part to act in good faith to carry out his obligations under the agreement, and does not cover the situation where the third party procured by the 1st respondent fails to complete the purchase. Indeed the plain wording of the Revised Offer does not make provision for such eventuality. However, Mr Todd QC in his submission indicated that the 1st respondent accepts that he will be obliged to complete the purchase where the third party fails to complete. This clarification, although not apparent from the terms of the Revised Offer, sufficiently addresses the concern of the petitioners in this regard. The other concern of the petitioners relates to the part of the Revised Offer which provides that the 1st respondent reserves his right to oppose to a winding-up order in the event that the petitioners fail to give free and unencumbered title to any of their shares. The petitioners' worry is that this will pave way for the 1st respondent to renege on the agreement to purchase the shares by challenging the ownership of the petitioners' shares in that the 1st respondent has only undertaken not to challenge the shares of his 3 sisters, but not that of HYHT. The 1st respondent had in the past challenged the rights of his sisters to the shares in the Company as well as the 450 shares held by HYHT. Although I do not necessarily agree with the petitioners that the Revised Offer presents a "trap" in this regard, I will not dismiss the petitioners' concern and worry as being fanciful. Having regard to the many tedious litigation between the parties that preceded these proceedings, I do not consider that it is unreasonable for the petitioners to adopt such a cautious attitude and to look for more safeguards.

32. For the above reasons, I do not agree that the 1st respondent has made out a plain and obvious case that it is an abuse of the court process for the petitioners to pursue the winding-up petition, having regard to the terms of the Revised Offer. Accordingly, the 1st respondent's summons for an order striking out or staying the Amended petition is dismissed.

The Petitioners' Summons

33. The 1st respondent has indicated that if he is unsuccessful on his summons, he will not oppose the petitioners' summons insofar as it relates to joinder of respondents and leave to use the documents disclosed herein for the Derivative Action and other related proceedings. The 1st respondent also does not oppose the re-amendment save in relation to paragraphs 121A to 121H. The only objections to the petitioners' summons are on the application to join HYHT as a petitioner and paragraphs 121A to 121H of the proposed re-amendment.

34. On the application to join HYHT, the 1st respondent's objections are that the application was made too late and it was made with an ulterior motive of benefiting from the 1st respondent's offer to buy-out. The pertinent question to be asked in determining the application is whether HYHT is a proper party to the petition. I have in the earlier part of this Decision observes that HYHT it cannot be concluded with certainty that HYHT has no real cause for complaint. The complaints of HYHT have further been expanded and elaborated under paragraphs 121I to 121K of the proposed re-amendment. It follows that it cannot be said that HYHT has no genuine cause of action and is not a proper party to the petition. Although HYHT was not made a petitioner at the initial or earlier stages of the proceedings, it is not suggested that the 1st respondent suffers any irreparable prejudice occasioned by the late joinder of HYHT as a petitioner. I am of the view that the application to join HYHT as a petitioner should be granted.

35. As to paragraphs 121A to 121H of the proposed re-amendment, the 1st respondent's objection is that they are not matters of unfair conduct in the operation of the Company. I agree. The petitioners' allegations in these paragraphs relate to the 1st respondent's failure and refusal to make full discovery herein of documents concerning the Interstitial Scheme. They are not proper allegations to be included in a petition. Paragraphs 121A to 121H of the proposed re-amendment are therefore disallowed.

Conclusions

36. To sum up, the orders that I make are as follows:

(1) The 1st respondent's summons to strike out or stay the Amended petition is dismissed with costs to the petitioners together with certificate for 2 counsel.

(2) There be an order in terms of paragraphs 1 and 2 of the Petitioners' summons filed on 26 March 2001.

(3) The Petitioners do have leave to re-amend the petition in the manner as shown in green in the draft Re-amended petition annexed to the Petitioners' said summons save and except paragraphs 121A to 121H thereof.

(4) The Re-amended petition be filed and served on the 3rd to 7th respondents within 7 days from the date of this Order. Service on the 1st and 2nd respondents is dispensed with.

(5) There be an order in terms of paragraph 4 of the petitioners' said summons.

(6) The costs of the petitioners' said summons and the costs of and occasioned by the Re-amended petition be to the 1st respondent against the petitioners in any event.

HCCW594/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING UP PROCEEDINGS NO.594 OF 1999

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D E C I S I O N

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1. Before me is an application by summons on the part of Samuel Tak Lee ("Mr ST Lee") who is the 1st Respondent to the petition for the winding-up of Prudential Enterprise Limited ("PEL") for an order that I do recuse myself from participating in any further proceedings concerning or arising from the PEL petition. That petition would, in the normal course, be heard by me, being the companies judge. In summary, the basis of the application is that in previous proceedings I had formed and expressed such strong adverse views about Mr ST Lee, his character and motivation that there is now a real danger that I would be unable fairly and justly to resolve the issues arising from the PEL petition.

2. The earlier proceedings referred to are two winding-up petitions concerning two family companies, namely HY and HT Lee Brothers & Company Limited and MW Lee & Sons Enterprises Limited. Mr ST Lee was the petitioner in each of those petitions. They were heard during the months of September and October 1999. The judgments dated 13 October and 29 October 1999 respectively are both under appeal.

3. Leading counsel for Mr ST Lee submitted that the grounds for recusal arise from what I had said in those judgments and in my having made orders on 16 November 1999 in an action (HCA 9522 of 1997) brought by Mr ST Lee and two of his children against the executors named in the will of Mr ST Lee's mother who are his elder sister and brother and in associated caveat proceedings (No.358 of 1995) (collectively "the probate proceedings"), inter alia, that they be heard by me. Those orders are also under appeal.

The applicable law

4. In determining an application for judicial recusal, the approach adopted by the English courts is the "real danger of bias" test laid down by the House of Lords in R. v. Gough [1993] AC 646 :

"... I think it unnecessary, in formulating the appropriate test, to require that the court should look at the matter through the eyes of a reasonable man, because the court in cases such as these personifies the reasonable man; and in any event the court has first to ascertain the relevant circumstances from the available evidence, knowledge of which would not necessarily be available to an observer in court at the relevant time. Finally, for the avoidance of doubt, I prefer to state the test in terms of real danger rather than real likelihood, to ensure that the court is thinking in terms of possibility rather than probability of bias. Accordingly, having ascertained the relevant circumstances, the court should ask itself whether, having regard to those circumstances, there was a real danger of bias on the part of the relevant member of the tribunal in question, in the sense that he might unfairly regard (or have unfairly regarded) with favour, or disfavour, the case of a party to the issue under consideration by him; ..."

See per Lord Goff at 670 D-F. That test was recently applied by the English Court of Appeal in Locabail (UK) Limited v. Bayfield Properties Limited [2000] QB 451 where (at 480) observations were made as to when a real danger of bias might be thought to arise :

"... or if, in a case where the credibility of any individual were an issue to be decided by the judge, he had in a previous case rejected the evidence of that person in such outspoken terms as to throw doubt on his ability to approach such person's evidence with an open mind on any later occasion; or if on any question at issue in the proceedings before him the judge had expressed views, particularly in the course of the hearing, in such extreme and unbalanced terms as to throw doubt on his ability to try the issue with an objective judicial mind (see Vakauta v. Kelly (1989) 167 C.L.R. 568); or if, for any other reason, there were real ground for doubting the ability of the judge to ignore extraneous considerations, prejudices and predilections and bring an objective judgment to bear on the issues before him. The mere fact that a judge, earlier in the same case or in a previous case, had commented adversely on a party or witness, or found the evidence of a party or witness to be unreliable, would not without more found a sustainable objection. ..."

5. As the English Court of Appeal was bound by the Gough test laid down by the House of Lords, the observations made could not and did not in any way alter or quality the Gough test. The mere fact that the evidence of a person may have been rejected in "outspoken" terms does not ipso facto throw doubt on the judge's ability to approach such person's evidence with an open mind on a later occasion. Implicit in the use of the prefix "such" to the phrase "outspoken terms" is the notion of proportionality. In my judgment, unless the outspoken terms used were out of all proportion to or not commensurate with the circumstances before the court, they could not of themselves give rise to a real danger of bias. Further, the effect of the terms used cannot be determined out of context but has to be gauged against the facts and matters particular to the case and which gave rise to those remarks.

6. The Australian approach is markedly different. In Vakauta v. Kelly [1989] 167 CLR 568, the test applied was whether the remarks would have excited in a fair-minded observer or lay person a reasonable apprehension that the judge might not bring an unprejudiced mind to the resolution of the matter before him. Leading counsel for Mr ST Lee accepted that, having regard to Cheung Francis v. Insider Dealing Tribunal (No.2) [2000] 1 HKC 437 in which the Court of Appeal adopted the English approach as laid down in Gough and Locabail, the correct approach in Hong Kong is the English rather than the Australian approach.

7. I dwell on the different approaches for good reason. Under the English test, the court, personifying the reasonable man, needs first to ascertain "the relevant circumstances from the available evidence". A lay observer on the other hand, would not necessarily have such knowledge. It would follow that if the remarks complained of were amply justified or warranted by the evidence before the court, it is hard to conceive that those very same remarks could give rise to a real danger of bias. The evidence or conduct may be such as to merit strong remarks. Judges should not be inhibited from making honest evaluations of the merits of contentions advanced by the parties, or frank assessments of a party's or witness's evidence and/or conduct and, if the circumstances so warrant, to call a spade a spade. It would be a different matter altogether if the evidence before the court did not justify the type of remark made.

Applying the law to the facts

8. Turning to the 10 examples extracted from my earlier judgments, it has to be borne in mind that the remarks were not casual or gratuitous observations made during the course of a hearing. Rather, the remarks were made in reasoned judgments in which the bases for the conclusions reached are fully stated. Having had my attention drawn to those remarks, I have looked at them again in context. Suffice to say that in my judgment the objections taken are devoid of merit : viewing the matter objectively, I see no reason for resiling from any of those remarks.

9. If the remarks were justified, that leaves only the fact that on 16 November 1999, I ordered, inter alia, that the probate proceedings be heard by me. But the submission of leading counsel for Mr ST Lee was to the effect that the remarks complained of having been made, coupled with my orders in the probate proceedings gave rise to "a reasonable apprehension of bias" as regards future litigation. I have some difficulty with that submission. If the remarks do not of themselves, in the words of Mr Dykes SC, "contaminate", I do not see how they can be prayed in aid of the orders made in the probate proceedings as, cumulatively, giving rise to a real danger of bias. Again, one must ask the question whether the facts before me warranted the making of the orders in the probate proceedings. If they did, it is not immediately obvious how or why the making of those orders would give rise to a real danger of bias on my part.

10. It was suggested that Mr ST Lee was somehow deprived of a procedural step. On 16 November 1999, there were various summonses before me not only in the probate proceedings but also in HCMP 457 of 1999 and HCMP 299 of 1999. The summons in relation to the probate proceedings was issued by the executors named in the will of Mr ST Lee's mother, being the defendants in HCA 9522 of 1997 and evidence was filed in support. Mr ST Lee was not taken by surprise. He was represented by counsel and I had the benefit of written submissions from both sides. It was therefore not the case that he was in any way deprived of the opportunity to make representations as to why such orders should not have been made. The complaint appears to be that the application should have been made to Yam J who had been dealing with the probate proceedings and that I should not have heard the summons. But this does not explain why, upon notice of the summons, Mr ST Lee did not take steps to have the matter brought before Yam J, whether before or after 16 November.

Order

11. Applying the test stated in Gough and Locabail to the present application, I have no hesitation in dismissing the application. I would respectfully echo the views expressed by Mason J in Re JRL, ex p CJL (1986) 161 CLR 342 cited in the judgment of Mayo JA in the Francis Cheung case at 445 B-C :

"Although it is important that justice must be seen to be done, it is equally important that judicial officers discharge their duty to sit and do not, by acceding too readily to suggestions of appearance of bias, encourage parties to believe that by seeking the disqualification of a judge, they will have their case tried by someone thought to be more likely to decide the case in their favour."

12. As to costs, I make an order nisi in favour of the petitioners with certificate for two counsel.

HCCW 594/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 594 OF 1999

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D E C I S I O N

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The Application before me is on behalf of the Company seeking validation orders for certain proposed payments: firstly to the Hongkong & Shanghai Banking Corporation under a loan agreement dated 18th July 1996 made between the Company and the Bank; secondly, certain obligations pursuant an Interest Rate Swap Agreement dated 26th June 1997, again with the HSBC and thirdly, payment of rent due under a lease made between the Company and the Hong Kong Land Property Company Limited. Validation is also sought for payment of an amount not exceeding $50,000.00 per month to meet the recurrent expenses of the Company incurred in the ordinary course of its business.

2. The Petitioner has indicated that there is no objection to a validation order for rental payments under the existing lease which expires on the 1st June 2000. The Official Receiver, however, points out that it will be unsatisfactory if a validation order is given in blank, as it were, in relation to such further lease as might be negotiated after expiry of the present lease. This would be the effect of the Order presently sought in the summons. On this aspect of the Application, I will make a validation order in respect of rental payments but limited to the existing lease.

3. In relation to the other payments, the Petitioner objects to any validation order being made at the present time. I am invited by Mr. Cheung, who appears for the Petitioner, to adjourn the matter to enable full argument to be heard on this issue. He points out that there is no urgency because the payments in question do not fall due until the end of September 1999.

4. Three grounds of objection have been raised. The first is that the Company has refused and failed to disclose the source of the funds that would be used for repayment of the sums mentioned to the Bank. It is said that the Company has only shown a potential ability to pay but that there has been no disclosure of the bank accounts from which the monies will actually come.

5. In my judgment there is nothing in this point as the evidence has indicated that the Company is in receipt of regular income from dividends and other payments from subsidiaries and intends to make such payments from its internal resources deriving from its usual sources of income. I do not see that this is a sound objection to a validation order.

6. The second objection taken by Mr Cheung relates to the treatment of the Company's financial statements by its auditor. As Mr Cheung points out, for the year ended 31st January 1997, the Company's auditors attached a qualification to the accounts. However, as Mr. Godwin, who appears for the Company, points out, this qualification had disappeared in the year ended 31st January 1998. Nonetheless, in respect of the latter year, Mr. Cheung points out in his skeleton that the auditors included the following words which he describes as a qualification:-

"In our opinion, there is insufficient information concerning the subsidiaries and the associated companies in these financial statements to give a true and fair view of the state of affairs of the Group as at January 31, 1998 and of its results and cash flows for the Group as a whole for the year then ended."

In my view, as these words themselves suggest, this statement is merely a qualification as to the extent of the audit. They make it clear that the scope of the audit relates to the Company and not to the Group and that, up to the date of the audit opinion, the auditors do not have sufficient information to express a view as to the position of Group as a whole. They do not suggest any doubts as to the financial position of the Company itself. Accordingly, I do not regard the audit opinion as a ground for objecting to a validation order in the present case.

7. The third ground of opposition is that the Company has refused to disclose the purpose of the underlying loans from the Bank. This is one of the issues substantively raised in the Petition, complaint being made as to the level of information available regarding the underlying purposes of the loans. This appears to be Mr. Cheung's primary objection to the validation order.

8. With respect to Mr. Cheung, the purpose of the underlying loans is a matter that is to be canvassed and investigated at the hearing of the Petition as a substantive issue therein. It does not appear to me relevant to the exercise of my discretion in relation to the present validation order application. What is at stake here is validation of loan repayments to be made pursuant to existing contractual obligations entered into by the Company, whatever the underlying purposes may have been.

9. The Court is faced primarily with a shareholders' dispute and relief is sought under Section 168A and on a winding-up on the just and equitable ground. The object of a validation order is to maintain the status quo and to avoid the Company suffering from additional problems in what one might describe as its present vulnerable state resulting from presentation of the Petition. To maintain the status quo it seems to me that it is in the interests of all parties that the repayments be validated to avoid a default being incurred on the contracts of loan and the interest rate swap contracts in question. It has been pointed out that these are secured by assets of the subsidiaries and it would be in nobody's interests if either cross-defaults were triggered or if enforcement action was taken against assets of trading subsidiaries because of the default.

10. In such circumstances, I will make an Order in terms of the summons in respect of paragraph 1(a), (b), (c) (i) but not (c)(ii). I also make Orders in terms of paragraph (d) as well as paragraph of 2.

11. I ought to mention that the Official Receiver has expressed reservations about a validation order permitting regular payments in discharge of the said contractual obligations and it was suggested that it may be desirable to make a validation order only in respect of the immediately payable or the next payable instalment, requiring the parties to return each time an instalment falls due. In my judgment, this is an unnecessary procedure since, in the absence of any new circumstances, one would anticipate merely a rehearsal of exactly the same arguments as were raised today on each occasion.

12. Liberty to apply is given to all the parties and if new circumstances arise casting doubt on the desirability of the validation orders being continued in respect of future payments, then the Petitioner, the Official Receiver and anyone else interested is free to come back to the Court to raise any difficulties met and to invite the Court if necessary to review the orders made today.

13. I will hear the counsel as to costs.

Representation:

Mr. Kelvin K.W. Cheung of M/s. Liu, Choi & Chan for Petitioner

Mr. Peter Godwin of Herbert Smith for 2nd Respondent

Miss Kitty Tsui for Official Receiver