RE THE NEW CHINA HONG KONG HIGHWAY LTD

HCCW 550/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 550 OF 2009

____________

_____________

_____________

D E C I S I O N

_____________

Application

1.  The Petitioners apply for the sum of HK$2,000,000 paid into court by the Petitioners on 18 September 2009 in compliance with the order of Deputy High Court Judge Toh made ex parte on 16 September 2009 (“order”) to fortify the undertaking given by the Petitioners therein to be forthwith paid out of court to the solicitors for the Petitioners.

Introduction

2.  The background to this matter is summarised in the early paragraphs of my judgment dated 23 February2010.

3.  On 29 September 2009 Kwan J.A. discharged the order. On 5 November 2009 the Petitioners’ solicitors wrote to the Respondents’ solicitors asking for their agreement to release of the money paid into court. The 1^st Respondent’s position was neutral. The 2^nd to 7^th Respondents objected and resist the present application.

4.  The 2^nd to 7^th Respondents argue that the money should remain in court and be available until after the taxation of the 2^nd to 7^th Respondents’ costs incurred as a result of the ex parte application. It follows that the 2^nd to 7^th Respondents contend that that the undertaking covers taxed costs incurred by the 2^nd to 7^th Respondents in contesting the order. This is the issue between the parties and the matter I have to determine.

The Undertaking

5.  The undertaking, which was contained in paragraph 1 of Schedule 2 to the order reads as follows:

“If the Court later finds that this Order has caused loss to any of the Respondents, and decides that any of the Respondents should be compensated for that loss, the Petitioners will comply with any Order the Court may make.”

6.  Except for the omission of reference to “or any other party” after “Respondents” this undertaking is in the form required by Practice Direction 11.2.

The argument

7.  The Petitioners argue that “loss” in the undertaking refers to damages caused by the impact of the order itself not the legal costs incurred in contesting the order. Mr. Samuel Chan who appeared for the Petitioners cited a number of authorities, which consider in different contexts whether or not legal costs are recoverable as damages.

(1)  Quartz Hill Consolidated Gold Mining Co v Eyre (1883) 11 QBD 674;

(2)  Berry v British Transport Commission [1962] 1 QB 306;

(3)  Wong Chun Loong Tony v Jademan (Holdings) Ltd [1991] 2 HKLR 580;

(4)  Fairview Park Property Management Ltd v Lee Yuen Yau [1988] 1 HKLR 290;

(5)  Ho Yuen Ki Winnie v Stanley Ho (HCA 2798/2002, DHCJ To, 1/9/2006);

(6)  Dynasty Line Ltd v Sukamto Sia (FAMV 38/2009, Ribeiro PJ, 26/11/2009)

Mr. Chan argued that these cases demonstrate that legal costs incurred in defending the order do not constitute damages.  In my view these authorities illustrate that a party claiming damage or loss arising from a civil wrong cannot include in his claim legal costs unless the costs are incurred as a natural consequence of the civil wrong.  The legal costs incurred as a consequence of a person having to commence legal proceedings to remedy a civil wrong are dealt with through the separate statutory process for the payment of costs.  In my view the relevance of these cases to the present issue is that they illustrate that when litigators use the term “loss” generally they will not be referring to legal costs.

8.  Neither party was able to find a Hong Kong authority nor text that considered whether or not the word “loss” in the standard undertaking as to damages included the legal costs of applying to have an injunction discharged. In my view it is unlikely that it was intended to include legal costs and it is likely that the large majority of litigators would assume that it did not do so.

9.  Mr. Leong took me to a decision of the Ontario Court of Appeal in James et al v Canadian Trust of the Church of Jesus Christ of the Latter Day Saints et al (1998) 165 D.L.R. (4^th) 226, which considered whether the following undertaking which was given by the plaintiffs when obtaining a mareva injunction extended to solicitor-and-client costs in an appropriate case. The undertaking was given pursuant to rule 40.03 of the Rules of the Civil Procedure, R.R.O 1990, Reg. 194. The undertaking is not quoted in the judgment, but the 2^nd to 7^th Respondents solicitors provided me after the hearing with a copy of the rule 40.03, which reads as follows:

“40.03  On a motion for an interlocutory injunction or mandatory order, the moving party shall, unless the court orders otherwise, undertake to abide by any order concerning damages that the court may make if it ultimately appears that the granting of the order has caused damage to the responding party for which the moving party ought to compensate the responding party.”

I shall assume that the undertaking that was given was in this form.

10.  As Mr. Leong accepted it is not entirely clear from the judgment why the Court of Appeal found it necessary to consider the scope of the undertaking. It appears that it was considered relevant to whether or not the motions judge had erred in granting costs to the appellants on a party and party basis rather than on a solicitor-and-client basis when dismissing the action against them: see in particular the issue at the top of page 232 of the judgment. The judgment of the court was delivered by Finlayson J.A., who after reviewing the relevant authorities reached the following conclusion in paragraph 29:

“29.  I am of the opinion that as rule 40.03 is but the codification of equitable practice, it is to be exercised within the bounds of discretion dictated by equitable principles.  Accordingly, in the appropriate case, costs may indeed be awarded under the rubric of damages.  This is such a case.  The appellants endured, for more than five years, the damage to their professional reputation that flows from the serious allegations made here.  In addition, they have borne the expense of defending against the action and the attendant motions.  Simply because they had no stake in the substantive issues that were the basis of the action is no reason to conclude that the interlocutory injunction caused them no damage.  The only issue that remains is the scale on which the costs should be ordered.”

11.  It appears from the judgment that the Court was influenced in reaching this conclusion by the following considerations. First, that in the Court’s view the meaning of the undertaking was to be not assessed by strict construction of the language used rather it should be given an interpretation that gives effect to the rule which requires it to be given: see paragraph 27.

“27.  Second, the B.C. Court of Appeal clearly determined the availability of costs on its reading of the bond as a contract between the two parties.  Had the parties wished to include costs in the bond, they were free to do so.  Such an approach of strict construction may have been correct on those facts, but it is not an appropriate way of interpreting undertakings.  It has been repeatedly held that undertakings do not create a relationship between two parties and are not contractual in nature; see Digital Equipment Corp. v Darkcrest Ltd., [1984] Ch. 512; John F. Renshaw (Canada) Inc. v Captiva Investments Ltd. (1989), 70 O.R. (2d) 458 (H.C.J.).  In our case, what is required is an interpretation of the word “damages” that gives effect to rule 40.03, rather than an approach based in the law of contract.”

Secondly, that undertakings are equitable in origin.  The Court’s reasoning is contained in paragraph 28 in which Finlayson J.A. is giving the Court’s 3^rd reason for concluding that in an earlier decision, Israel Discount Bank of Canada v Genova (1992), 13 C.P.C. (3D) 112 (Ont. Ct. (Gen. Div.)), the court had been wrong in suggesting that damages following the grant of interlocutory relief cannot include a defendant’s costs relying of the court’s interpretation of the British Columbia Court of Appeal’s decision in Deisler v U.S. Fidelity Co., [1917] 3 W.W.R, 214, 36 D.L.R. 29 (B.C.C.A), which considered whether or not a bond to secure the damages that might be recovered in an action included the costs of the action.  The Court of Appeal concluded that it did not.

“28.  Third, the approach that Dunnet J. takes as being suggested by Deisler is incompatible with the equitable origin of undertakings, and unduly limits the discretion that is found both in equity as well as in rule 40.03.  In my opinion, this discretion is wide enough, in the appropriate circumstances, to include an award of costs.  As Spry writes in Equitable Remedies, 5^th ed. (Toronto: Carswell, 1997) at p. 487:

‘… the power of the court … to require an undertaking of any kind from the plaintiff or to impose any condition before granting an interlocutory injunction is very wide, and it is not limited to particular classes of undertakings or conditions … it may be exercised, not only wherever the balance of justice at that time would otherwise be found to incline against the grant of relief, but also if the giving of an undertaking or the imposing of a condition of the kind in question is desirable in order to enable the court more easily to achieve justice between the parties … hence what are the precise conditions or undertakings that are appropriate in any particular case depends on the circumstances in question and, especially, on prospective hardship or prejudice to the parties and such other discretionary considerations as arise.’”

12.  The undertaking that a plaintiff is required in order to obtain an injunction in this jurisdiction arises from Practice Direction 11.2 rather than a specific rule, but in my view nothing turns on this distinction. In my opinion the starting point is to determine what the Petitioners must reasonably have understood themselves to be undertaking in paragraph 1 to schedule 2 of the order. In other words if the question had been asked during the hearing before Deputy High Court Judge Toh whether or not paragraph 1 extended to legal costs of discharging the order is it likely that the Petitioners’ counsel and the Judge would have agreed that it did? If the answer to the question is no it does not seem to me that the fact that an undertaking has its origin in the exercise by the court of its equitable jurisdiction is any justification for interpreting the undertaking as meaning something which at the time it was not understood to mean. Any other conclusion produces the result that the Petitioners are being treated as giving an undertaking that as a matter of fact they did not give. Whilst I accept that as illustrated by the extract from Equitable Remedies appearing in the above quote the court has a wide power to order what it considers are appropriate undertakings in each case, and I accept that the court could require an undertaking that expressly covered the legal costs of applying to set aside an injunction, I do not consider that this provides any foundation for interpreting an undertaking as meaning something that it is unlikely to have been understood to mean by either the party giving it or the court to which it was given.

13.  It follows from what I have said in paragraph 9 that in my view the undertaking cannot fairly be read as extending to cover the legal costs of the application to set-aside the order. I do not agree with the Ontario Court of Appeal’s reasoning to the extent that it suggests that notwithstanding my view of what the undertaking must have been intended to mean when it was given it is open to the court now to give it a wider interpretation. It follows that I also do not think as suggested by the 2^nd to 7^th Respondents that the criticisms of the application for the order made by Kwan J.A. when setting aside the order provide any basis for interpreting the undertaking as extending to legal costs.

Conclusion

14.  I, therefore, order that the sum of HK$2,000,000 paid into court by the Petitioners on 18 September 2009 in compliance with the order of Deputy High Court Judge Toh made ex parte on 16 September 2009 to fortify the undertaking given by the Petitioners therein be forthwith paid out of court to the solicitors for the Petitioners. I also make an order nisi that the costs of and occasioned by the application in paragraph 2 of the Petitioners summons dated 16 December 2009 be paid by the 2^nd to 7^th Respondents forthwith. The costs order will become absolute within 14 days of handing down of this judgment unless the court receives written notification from either party that it wishes to challenge the order.

HCCW 550/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 550 OF 2009

____________

_____________

_____________

D E C I S I O N

_____________

The Application

1.  The 2^nd Respondent applies to strike out paragraph 82 of the Petition on the grounds that it discloses no reasonable cause of action, or is scandalous, frivolous, vexatious or otherwise an abuse of the process of the Court.

Background

2.  The 1^st Respondent is a company incorporated in the British Virgin Islands. The 1^st and 2^nd Petitioners are shareholders in the 1^st Respondent owning 26.19% and 12.30% of its issued shares respectively. The 2^nd Respondent owns 57.38% of the issued shares. The Board of the 1^st Respondent has 7 directors; 5 appointed by the 2^nd Respondent and 2 appointed by the 1^st Petitioner. The 1^st Respondent has not registered under Part XI of the Companies Ordinance, but it appears to be common ground that its principal place of business is located in Hong Kong and that it is subject for the purposes of the Petition to the jurisdiction of this court.

3.  The 1^st Respondent is a special purpose vehicle incorporated on 29 December 1993 for the sole purpose of participating in a joint venture with the Sichuan Highway Construction and Development General Corporation (“PRC partner”) to construct and operate an expressway in Sichuan. On 18 March 1994 the 1^st Respondent and the PRC partner entered a joint venture agreement for the formation of a Sino-foreign co-operative joint venture, Sichuan Xin Chuan Expressway Company Limited (“joint venture company”), which was to construct and operate the expressway. The joint venture agreement was subsequently amended on 2 occasions (“joint venture agreement”). The amendments are not material to this application. The 1^st Respondent and the PRC party own 60% and 40% of the joint venture company respectively.

4.  The joint venture company is operating the expressway profitably and consequently the 1^st Respondent is profitable.

5.  Prior to 27 August 2008 the joint venture company had 9 directors. Five were appointed by the 1^st Respondent and the remaining 4 directors by the PRC party. Two of the 5 directors appointed by the 1^st Respondent had been nominated by the Petitioners. One of the complaints made in the Petition is that subsequently directors nominated by the 2nd Respondent replaced the Petitioners’ 2 nominees without the Petitioners’ agreement.

6.  The Petitioners complain that since the change of ownership of the 2^nd Respondent in August 2008 the 2^nd Respondent through its nominee directors of the 1^st Respondent and the joint venture company has engaged in a course of conduct designed to exclude the Petitioners from the management of the 1^st Respondent and the joint venture company and to advance the 2^nd Respondent’s interests and those of its nominee directors at the expense of the Petitioners.

7.  The Petitioners assert that the conduct of which they complain unfairly prejudices their interests and that they have lost trust and confidence in the 2^nd to 7^th Respondents. Paragraphs 63 and 64 of the Petition more specifically assert that:

“The Need for Relief

63.  By reason of the matters set out in this Petition, the affairs of NCHK are being conducted in a manner which is unfairly prejudicial to the interests of the Petitioners.  The Petitioners have justifiably lost their trust and confidence in Bantam and its controlling directors or shareholders. The Petitioners have come to the conclusion that continuing the present arrangement is clearly not in the best interests of NCHK as a whole.  The principal reasons may be summarised as follows:

63.1  NCHK Chengdu’s appointed directors have been precluded by Bantam from exercising any control as directors over the management of NCHK and of its assets;

63.2  Significant parts of the income of NCHK is and are to be paid to Yiu and Goh, both Bantam directors, in breach of the dividends policy referred to in paragraphs 47 to 50 above and their fiduciary duties to NCHK; and

63.3  In the absence of assistance from the Court, there is every indication that the unjust and unsatisfactory arrangement will last indefinitely.

64.  With a view to bringing an end to the matters complained of, relief is sought to ensure proper control over the activities of Bantam and the Bantam directors who have participated in the wrongful and oppressive course of conduct, and to recover the excessive directors’ emoluments improperly paid, or alternatively, to seek the winding up of NCHK on the just and equitable ground.”

8.  Paragraphs 65 to 81 of the Petition contain an extensive list of orders, which are designed to remedy the conduct of which the Petitioners complain including, to give one example, amendments to the 1^st Respondent’s Articles of Association to require the 1^st Respondent in general meeting to fix by special resolution (as opposed to ordinary resolution, which is what is currently provided for) directors emoluments.

9.  I asked Mr. Peter Ng S.C. who appeared for the Petitioners, to confirm what is stated in paragraph 14 of the Petitioners’ skeleton submissions for the application, namely, that they are not seeking a buy-out under section 168A. He confirmed that they are not.

10.  Paragraph 82 seeks in the alternative an order:

“That the 1^st Respondent be wound up by the Court under section 327(3)(c) of the Companies Ordinance.”

11.  The 2^nd Respondent objects to the inclusion of this alternative claim for a winding-up order, which it says gives the PRC partner the opportunity to determine the valuable joint venture agreement. It has offered to purchase the Petitioners’ shares in the 1^st Respondent at a fair value. Liquidating the 1^st Respondent would realise less for the Petitioners than they will receive if they sell their shares. Thus, argues the 2^nd Respondent, even if the Court finds the Petitioners’ complaints proved, but is not willing to grant the orders sought in paragraphs 65 to 80 of the Petition there is no prospect of the court winding up the 1^st Respondent as it will apply section 180(1A) of the Companies Ordinance. Its concerns are not merely technical argues Mr. Ho. There is a concern that the existence of a winding-up petition may enable the PRC party to treat the joint venture agreement as discharged pursuant to clause 15.2 of the joint venture agreement, which provides “This Contract may be discharged prior to its expiration under any of the following conditions (the Co-operative Enterprise would also be dissolved prior to its expiration under such conditions): …………… (3) When one party to the Co-operative Enterprise voluntarily declares or is forced to declare bankruptcy, receivership and/or liquidation procedure ………”.

12.  Similarly, the 2^nd Respondent argues, there is a risk that the joint venture company may be dissolved by virtue of the presentation of a winding-up petition. Article 57 of the joint venture company’s articles provides that “The CJV may be dissolved prior to the expiration of the term under any of the following conditions …….: (3) Either party declares bankruptcy, or either party is forced to commence a proceeding of bankruptcy, reorganisation and/or liquidation ……”

13.  The 2^nd Respondent has produced expert evidence that these provisions may be interpreted as operating once a winding-up petition is issued rather than when a winding-up order is made. The Petitioner has also filed expert evidence dealing with this point. Mr. Huang Xiuhua of King & Wood does not expressly agree with the 2^nd Respondent’s experts, but neither does he suggest that their conclusion is wrong. If I have read his opinion correctly he says that he does not know enough about the genesis of the agreements or Hong Kong insolvency law to be able to express with any confidence an opinion as to whether or not a Mainland court would take the view that presentation of a winding-up petition is sufficient to trigger either clause. He does point out that dissolution of the joint venture company prior to the expiration of its term is subject to the approval of the authority that originally approved its establishment and that an application for such approval must be supported by a resolution passed unanimously by the board of the joint venture company (see paragraph 18 of the Opinion). Mr. Ng points out that as the 3^rd to 7^th Respondents control the board the Respondents can prevent such a resolution being passed, although I note that Mr. Huang points out that in the event of disagreement between the directors the dispute can be referred to arbitration and the arbitration award could be relied on if a resolution is not available.

14.  For present purposes it seems to me that I should assume that the inclusion of paragraph 82 might trigger a right to dissolve either the joint venture company or joint venture agreement, but that it is unclear how great a problem this might pose in practice to the parties’ interests in the 1^st Respondent.

15.  For the reasons I have described above the 2^nd Respondent says that paragraph 82 should be struck out.

The reason for the inclusion of paragraph 82

16.  The Petitioners argue that the alternative remedy of winding-up has been included for good reason. First, they argue that they have good reason to be concerned that the 2^nd Respondent may not have the means to pay a fair value for the Petitioners’ interest in the 1^st Respondent. Secondly, they argue that it may be in their legitimate commercial interest to seek a winding-up order. They may, for example, take the view that it is in their interests to bid for the acquisition of the 1^st Respondent from a liquidator. Mr. Ng S.C. relied on the observations of Dillon L.J. at page 300A of Re Copeland & Cradock Ltd. [1997] BCC 294 and also those of Rogers V.P. at page of 7 of the unreported judgment of the Court of Appeal in Re Tai-Ao Aluminium Group Ltd. (CACV 391 of 2005) as demonstrating that this would be a legitimate motive in seeking a winding-up order.

17.  Mr. Ambrose Ho S.C., who appeared for the 2^nd Respondent, argued that both of these points are illusory. The 2^nd Respondent is, so Mr. Ho argued, able to finance the acquisition of the shares at the price, which the Petitioners contend they are worth. The reality is that it makes no commercial sense to liquidate the Company. It is unclear whether if the Company were to be wound up it would be possible to sell its interest in the joint venture company.

18.  The 2^nd Respondent’s principal objection to the inclusion of paragraph 84 is that it creates the risk that the PRC party will attempt to terminate the joint venture. That risk grows if a winding-up order is made and it is not clear how the Company’s interest in the joint venture company could be realised. I have already referred to this above.

19.  Mr. Ng accepted that the prospects of the Petitioners seeking a winding up was small, but I accept his submission that it is not fanciful for the Petitioners to suggest that by the end of the trial it may become apparent that the Petitioners’ best interests are served by a winding-up order. It seems to me that it is not entirely unlikely that after trial the court will conclude that a sale of the Company by a liquidator would result in a higher price per share than a sale of a minority interest in the Company. It is also not entirely unlikely that the 2^nd Respondent will be unwilling or unable to pay the Petitioners a price for their shares that reflects the premium that would attach to the sale of the entire of the Company’s interest in the joint venture company.

20.  In my view I should proceed to assess the application on the basis that there is a small possibility, but a possibility all the same, that the Petitioner will seek and obtain a winding-up order. I should also assume that there is a possibility that at some time between now and the trial the PRC partner may, if circumstances make it commercially expedient for it to do so, use the presentation of the Petition as a pretext for terminating the joint venture agreement and the joint venture company.

The correct approach to assessing the application

21.  The 2^nd Respondent accepts that in assessing this application I should assume that all the allegations in the Petition and the supporting evidence are true and on this assumption I should consider whether or not there is any real possibility or prospect of a winding-up order being made having regard to section 180(1A) of the Companies Ordinance: Re Wong To Yick Lock Ointment Ltd [2001] 2 HKC 618 per Yuen J (as she then was) at 623H-624B approved by the Court of Appeal at [2003] 1 HKC 484 per Le Pichon J.A. at 487H. Section 180(1A) provides that the court shall not refuse to make a winding-up order on the grounds that some other remedy is available unless it is of the opinion that the petitioner is acting unreasonably in seeking to have the company wound up instead. It follows that I should strike out the petition if I consider that there is no real prospect of the court making a winding-up order. In assessing whether or not this is the case I should, as with an application to strike out a pleading (which the Petition is technically not), bear in mind that it is only in a plain and obvious case that a petition or part of it should be struck out.

22.  The difficulty in applications such as the present lies not in identifying the general principle by reference to which the application should be assessed and determined. As I said in Re Mahr China Ltd [2008] 4 HKLRD 141 it lies in applying this principle in cases, such as the present, in which a winding-up order is sought as an alternative remedy. In paragraphs 8 to 13 of my judgment in Re Mahr China Ltd I considered the decisions in Re Ransom Motor Manufacturing Co Ltd [2007] 1 HKLRD 751, Re Wong To Yick Wood Lock Ointment Ltd [2001] 2 HKC 751, Re Prudential Enterprise Ltd [2002] 1 HKLRD 267, Kinong Group Ltd [1999] 4 HKC 100 and Re a Company (00225671982) [1983] 1 WLR 927. In paragraphs 14 to 16 I concluded this review as follows:

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

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

It has been often and rightly said that the court’s jurisdiction to strike out a claim advanced by a plaintiff or a claimant or a petitioner is to be exercised very sparinglyand only where the clearest grounds are shownfor doing so. The reason for this practice is clear. Although a court may at a preliminary stage regarda claim as tenuous and having a negligible chance of success, the claimant is nonetheless entitled to the court’s adjudication on it on the merits unless it is a claim which the court is satisfied cannot succeed. In this case the judge clearly regarded the plaintiff’s claim to wind up this company as one which was unlikely to succeed, but he did not feel that the claim was so manifestly unarguableas to justify him in striking it out ... I share the judge’s view that this claim is unlikely to succeed.  I am indeed persuaded that the case is very close to the borderline where striking out would be appropriate.  But I am not quite persuaded that the claim is unarguable whatever comes out relevant to the petition on discovery and in the course of oral evidence. (Emphasis added.)

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

23.  Mr. Ho agreed that the question posed in paragraph 16 of the abovequote isthe correct question to ask, but he argued that it had to be considered in the factual context of each case and mindful of the provisions of section 180(2). He referred me to a number of authorities to illustrate how he contended the material before the court should be assessed. In Re a Company No. 001363 of 1988 (1989) 5 BCC18 concerned an application to strike out a contributory’s petition for the winding-up of a company on the just and equitable ground. Warner J. said this at page 24 G “I heard a good deal of argument as to whether sec. 459 could apply at all, in S-J’s case. I will assume that it does and that S-J could apply, if he chose, for relief under that section either instead of or as an alternative to a winding-up order. The question remains whether it is reasonable for him to do so.” As I understood Mr. Ho’s argument, he submits that even if the court concludes that, although unlikely, there may be grounds at the end of trial for a petitioner to seek a winding-up order in preference to an alternative remedy if the court also concludes that it would order the alternative remedy on the grounds that it would be unreasonable for the petitioner to insist on having the company wound up the court should strike out the claim for a winding-up order. This approach places emphasis on the reasonableness or otherwise of the inclusion of the claim for a winding-up order. Mr. Ho cited as what he suggests is a further examples of this approach Re Wong To Yick Wood Lock Ointment Ltd in which Yuen J referred at page 645D to there being no “substantive benefit they would gain for a winding-up order which they would not from a buy out order. There is no evidence that a winding-up order is the preferred remedy for any of the petitioners, and reason given for any preference”. In the Court of Appeal Le Pichon J agreed that this was a legitimate consideration: see page 489F-G.

24.  I accept that if I were able to conclude at this stage that it would be unreasonable of the Petitioner to insist on having the Company wound up if it is successful at trial it would be appropriate to strike out paragraph 82. This means that I need to be satisfied at this stage that there is plainly no realistic prospect of the Company being wound up. I do not read the cases that Mr. Ho relies on as saying any more than this and providing illustrations of circumstances in which a court will conclude that it is appropriate to strike-out a claim for a winding-up order. In my view the correct approach to balancing the uncertainties present when assessing early in proceedings what relief might reasonably be sought at trial is demonstrated by the following passage from the judgment of Rogers V.P. in Tai-Ao Aluminium Group Ltd CACV 391/2005 (unreported 22 June 2006) (paragraph 16):

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

25.  In the present case the Petitioner accepts that it is unlikely that it will seek a winding-up order, but it has put forward an explanation for including paragraph 82, which in my view has sufficient substance that it cannot be said that there is plainly no prospect of the court every making an order that the Company be wound up. I accept that the case is close to the line that divides the plainly unrealistic from the unlikely, but in my view it sits on the latter side of the border.

26.  I do not accept that having reached this conclusion there is any justification for striking-out paragraph 82 because of the risk that exists that the PRC partner might try and argue that it is a basis for terminating the joint venture company or the joint venture agreement. In my view the fact that it gives rise to a possible risk should be treated as an example of the reason why the court will strike-out a claim for a winding-up order if there is no realistic prospect of such an order being made having regard to the provisions of section 180(1A), but having decided that the court may be persuaded that a winding-up order is the appropriate remedy the risk does not provide a justification in itself for striking-out.

Conclusion

27.  I dismiss the 2^nd Respondent’s Amended Summons dated 30 September 2009 and order that the costs of and occasioned by the application are paid by the 2^nd Respondent to the Petitioner.

HCCW 550/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 550 OF 2009

____________

____________

____________

_____________

D E C I S I O N

_____________

1.  This is an application by the petitioners for continuation of an ex parte order they obtained before the Duty Judge on 16 September 2009 and an application by the 2^nd to 7^th respondents for discharge of the ex parte order.  The 1^st respondent is The New China Hong Kong Highway Limited (“the Company”), being the subject of the petition for winding up and for relief under section 168A of the Companies Ordinance, Cap. 32.

2.  The petition was presented on 15 September 2009.  In the late afternoon of the same day, the petitioners’ solicitors issued a letter to all seven respondents at an address at Lippo Centre giving notice of intention to apply for an ex parte injunction with a draft order attached.  The respondents were required to reply by 5 pm on 16 September if they would give an undertaking in terms of the draft ex parte injunction.  In the morning of 16 September, the petitioners’ solicitors served a revised draft ex parte injunction at the Lippo Centre address.  In the late afternoon of 16 September, the parent company of the 2^nd respondent replied by letter to the petitioners’ solicitors stating that except for the 1^st respondent, none of the other respondents are using the Lippo Centre address to receive legal documents and the parent company declined to handle the documents purportedly served on other respondents in any way.

3.  Armed with this letter, the petitioners’ solicitors contacted the Duty Judge after court hours and requested an ex parte hearing.  The hearing took place in the evening of 16 September and ex parte injunctions of a prohibitory and mandatory nature were granted.

4.  On 18 September, the 2^nd to 7^th respondents made an ex parte application before me to stay paragraph 2 of the ex parte order, which contained mandatory injunctions, until the return date of the ex parte order.  That application was made on notice to the petitioners’ solicitors.  The petitioners’ solicitors wrote a two-page letter to the respondents’ solicitors and requested their letter to be placed before me.  They did not attend the hearing and I have no explanation why they did not do so.

5.  I granted an interim stay of paragraph 2 of the ex parte order to today.

6.  It must have been clear to the petitioners’ solicitors the ex parte application relates to a companies matter and the application should be made to a Companies Judge, not to the Duty Judge.  I have had no explanation from counsel or solicitors why they chose to make the application to the Duty Judge instead.  I regard this as wholly unacceptable.

7.  The Practice Directions are very clear.  In Practice Direction 3.1 issued in June 2002, it is clearly stated that any urgent application relating to a winding-up list matter shall be made to the Companies Judge, not the Duty Judge, and only if the application is so urgent it cannot wait until a Companies Judge is available should an application be made to the Duty Judge.

8.  Mr Ng, SC submitted on the petitioners’ behalf that under paragraph 17 of the new Practice Direction 11.1 which came into effect in April 2009, the Duty Judge may in his discretion hear the application himself or direct the application to be made to the Companies Judge instead and as the ex parte application was entertained by the Duty Judge, the Duty Judge must have considered it so urgent to warrant not referring this to the Companies Judge.

9.  These submissions are ill-founded.  It should be very clear from the terms of Practice Direction 3.1 and Practice Direction 11.1 paragraphs 13 to 17 that the obligation is squarely on those making an urgent application to apply to a Companies Judge.  The fact that the Duty Judge has discretion to hear them in a very urgent situation is immaterial.

10.  I do not propose to give the background to these proceedings and matters said to give rise to the application for interim injunctions, save to say that I have borne them in mind.

11.  It is pertinent to note these matters.

12.  Firstly, the dispute between the two camps of shareholders in the Company has been brewing since August 2008, when the respondents gained control of the board of the Company.  The petitioners’ complaints regarding the management of the Company and the Sichuan CJV dated back from August 2008.

13.  Secondly, regarding the complaint of excessive directors’ emoluments to the 3^rd and 4^th respondents, which is one of the major complaints in the petition and a material ground for ex parte relief, the petitioners had already learned of the amount of directors’ emoluments to be paid at a board meeting on 28 July 2009.

14.  Thirdly, there were discussions as to buy out since February 2009 and a written offer was put forward by the 3^rd to 7^th respondents to the 1^st petitioner on 29 July 2009.

15.  Fourthly, although the petitioners had allegedly learned of the removal of their two directors on the board of the Sichuan CJV (the exclusion from management being the other of the petitioners’ major complaints in the petition) on 31 August 2009 and 2 September 2009, they were told that on 25 March 2009 these directors had been removed and replaced by the 5^th and 6^th respondents.

16.  I see no basis for an ex parte interlocutory injunction of a prohibitory and mandatory nature.  The letter of the petitioners’ solicitors on 15 September requesting for an undertaking in the terms of the ex parte order was just a tactical move.  In my view, no real urgency was made out in this matter at all.

17.  The respondents seek discharge of the ex parte order on the ground there is no urgency for an ex parte application and for material non-disclosure.

18.  The petitioners had submitted to the Duty Judge very substantial sums are involved as Sichuan CJV (in which the Company holds 60% interest) has cash reserve of RMB 160 million according to the audited accounts for 2008, and the 3^rd and 4^th respondents are effectively in control of the bank accounts of the Company and those of Sichuan CJV as the latter’s chairman and general manager.  One of the petitioners’ directors deposed to a belief there was real risk of dissipation of the Company assets by the 2^nd to 7^th respondents.

19.  It was submitted by Mr Ho, SC on behalf of the 2^nd to 7^th respondents there are three matters constituting material non-disclosure.  The disclosure obligation applies not just to matters known by the petitioners but extends to matters which the petitioners or their agents would have known had they made all reasonable enquiries before they applied to court.

20.  Firstly, regarding the control of the bank accounts of Sichuan CJV, it is untrue to say that the respondents’ camp has control of these accounts.  The money in the bank accounts of Sichuan CJV can only be withdrawn by joint signatures of a representative from the Chinese partner and a representative from the Company’s side.  This was laid down in a board meeting of Sichuan CJV on 4 March 2005, the meeting was attended by the petitioners’ directors then sitting on the board or by their nominated representatives.

21.  This is a misrepresentation to the court.  And it is material to the weighing exercise whether an injunction should be granted to restrain disposal of the assets of the Company and of Sichuan CJV.

22.  The petitioners sought to explain this error in counsel’s submissions was made inadvertently.  It was said that the 1^st petitioner’s director (he did not deny knowledge of the minutes of the board meeting on 4 March 2005) could not be reached by the petitioners’ solicitors to give instructions on this matter shortly before the ex parte application was made.  The other director of the 2^nd petitioner, who was reached by the solicitors of the petitioners, was under the erroneous impression the 3^rd and 4^th respondents were in a position to control the bank accounts by virtue of their positions in Sichuan CJV and was not aware of the minutes of the board meeting dated 4 March 2005.

23.  The petitioners are clearly in breach of their duty to make material disclosure.  It is not necessary to find if there was any deliberate attempt to mislead the court.

24.  Secondly, regarding the control of the bank accounts of the Company, the petitioners have not drawn the attention of the Duty Judge to the fact that the petitioners’ directors sitting on the Company’s board had signed and approved the draft minutes of a board meeting on 4 September 2008 recording the resolution to change the authorised bank signatories of the Company and that the signatories’ arrangement was approved by the petitioners’ nominated directors.  There was no or no satisfactory explanation why the petitioners now feel that the signatories’ arrangement could lead to a real risk of dissipation of assets by the respondents’ camp.

25.  I regard this also as material non-disclosure, as the control of the Company’s bank accounts by the respondents was relied on by the petitioners to justify the urgency they claimed for interlocutory relief.  The fact that the respondents were in control of the Company’s bank accounts for a year, and with the approval of the petitioners’ camp, is a material consideration whether urgent interim relief should be granted.

26.  Thirdly, in the petition the petitioner relied on a statement in a placement memorandum attached to a subscription agreement dated 15 October 2004 to say there is a dividend policy forbidding the payment of directors’ emoluments.  The petitioners did not draw the attention of the Duty Judge to another part of the placement memorandum which provided that the directors may, by resolution, fix the emoluments of directors regarding services rendered or to be rendered to the Company.

27.  The payment of excessive directors’ emoluments contrary to the alleged policy that the Company would distribute most if not all of its cash received from Sichuan CJV as dividends to shareholders is a major complaint in the petition and an important ground for granting interlocutory relief to restrain the payment of directors’ emoluments to the 3^rd to 7^th respondents.  I rule this is also material non-disclosure.

28.  For the reasons there was no real urgency and for material non-disclosure, the ex parte order must be discharged.

29.  I have discretion whether to grant an interlocutory injunction having discharged the ex parte order.

30.  In the hearing today, Mr Ng sought interlocutory injunctions in more moderate terms.

31.  The 2^nd to 7^th respondents are prepared to agree not to procure the Company to pay any directors’ emoluments until the determination of the petition.  Mr Ho has confirmed that an undertaking in these terms would be offered by these respondents to the court.

32.  The 4^th respondent has deposed that there is no resolution of the board of the Company approving any directors’ emoluments and no directors’ emoluments have in fact been paid to the 3^rd or 4^th respondent.  The documents put before the board meeting of the Company on 28 July 2009 relied on by Mr Ng would appear to be just a proposal to the board, as borne out by the draft audited accounts of the Company for 2008.  There is no need to grant an injunction in terms of paragraphs 1(a), 2(a) and (b) of the ex parte order.

33.  Excessive directors’ emoluments is the only money matter in the complaints raised in the petition.  I cannot see any basis for an interim injunction to restrain the respondents from procuring any disposal of assets of Sichuan CJV exceeding RMB 3 million or assets of the Company exceeding $50,000, without the prior written consent of the petitioners or an order of the court, proposed by Mr Ng in substitution of paragraphs 1(b) and 2(c) of the ex parte order.

34.  As for reinstatement of the petitioners’ nominated directors on the board of Sichuan CJV (paragraphs 1(c) and (d) and 2(e) and (f) of the ex parte order), these directors had been removed and replaced since 25 March 2009.  I am not satisfied on the balance of convenience interim injunctions of a prohibitory and mandatory nature should be granted.

35.  Lastly, the petitioners seek to be provided with various information regarding the Company and Sichuan CJV (paragraphs 2(g)(ii) to (viii) of the ex parte order).  Paragraph 2(g)(i) is not pursued as the audited financial statements for 2008 have not been signed and the respondents have produced the draft audited accounts.  As shareholders of the Company, the petitioners would be entitled to such information they are entitled to under Cap. 32.  And if financial and other documents are relevant to the matters in issue in these proceedings, they would be disclosed on discovery.  I see no urgency to make a mandatory order requiring discovery now.

36.  For the above reasons, I discharge the ex parte injunctions granted on 16 September.  I accept the undertaking of the 2^nd to 7^th respondents mentioned earlier and dismiss the inter partes summons of the petitioners for continuation of the ex parte order.

37.  I will hear the parties on costs of these two summonses and the other summonses listed before me.