HO MAN KIT JOHN v. FUNG CHU KWONG AND OTHERS

HCA 945/2013

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

HIGH COURT ACTION NO 945 OF 2013

___________________________________

BETWEEN
	PEDAGOGIC INNOVATIONS LIMITED	Plaintiff
	and
	HYDROGEN EVOLUTION INCORPORATED	Defendant

___________________________________

AND

HCCW 107/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 107 OF 2012

___________________________________

	IN THE MATTER of Pedagogic Innovations Limited (“the Company”)
	and
	IN THE MATTER of Sections 177(1)(f) and 168A of the Companies Ordinance, (Chapter 32)

___________________________________

BETWEEN
	HO MAN KIT JOHN	Petitioner
	and
	FUNG CHU KWONG	1st Respondent
	HYDROGEN EVOLUTION INCORPORATED	2nd Respondent
	PEDAGOGIC INNOVATIONS LIMITED	3rd Respondent

___________________________________

Before: Mr Registrar K.W. Lung in Chambers (Open to the public)

Date of Hearing: 1 March 2016

Date of Decision: 1 March 2016

_____________

D E C I S I O N
_____________

 

The Application

1.  This is the Petitioner’s (“P’s”) application for the Petition to be consolidated or otherwise heard together with HCA 945/2013.  The 1^st Respondent (“R1”) opposes this application.

2.  The parties are legally represented.[1]

P’s Case

3.  P instituted the Petition for winding up of the company (R3) under sections 177(1)(f) and 168A of the Companies Ordinance, Cap 32 on the ground that it is unable to pay its debts and/or on the ground of unfair prejudice to P and that it is just and equitable to do so.[2]  In the Petition, P also seeks other remedies, which are not relevant for this application.

4.  P relies upon the acts of R1 and the second Respondent (“R2”), controlled by Mr. Mou Yiu Fai Tom (“Mou”), which P says are prejudicial and unfair to him, with the wrongful aim of removing him from the management of the company and misappropriating the company’s assets.[3]

5.  In HCA 945/2013, the plaintiff, who is P instituted the derivative action in the name of the company against Hydrogen Evolution Incorporated (“Hydrogen”), R2 in the Petition, on the grounds that Hydrogen had operated a business with R1 in competition with the company’s business; that it had transferred the company’s trademark to itself without valid authorization of the board of directors of the company; and that it had infringed the company’s trademark by allowing its business with R1 to use the company’s trademark.[4]  P therefore says that there are common issues between the Petition and HCA 945/2013 and both matters should be heard together by the same judge or consolidated.

R1’s Objection

6.  R1 does not dispute the above common issues of facts in paragraph 5 above.  It opposes the application on the following reasons:

a. The company would be wound up after a meeting on 2 March 2016.  It is doubtful if there is anything to be gained in terms of time and costs in continuing with the Petition;

b. There has been delay in the action; and

c. R1 is not a party to the action.  If the two actions were consolidated, R1 would be unnecessarily drawn into the dispute between P and R2 over the conduct of R2 as director of the Company.  Contrary to the views expressed in P’s submission, R1 has no part to play therein and has no intention to testify.   As far as R1 is concerned it is contrary to saving time and costs if the two actions are consolidated.[5]

Discussion

7.  The legal principles are not in dispute.

8.  The Court has a discretion to consolidate two actions under O.4, r.9 of  RHC where:

(a) That some common question of law or fact arises in both of them;

(b) That the rights to relief claimed are in respect of or arise out of the same transaction or series of transactions; or

(c) That for some other reason it is desirable to make an order for consolidation.

9.  The main purpose of the Court to order consolidation is to save costs and time (see para. 4/9/2 of Hong Kong Civil Procedure 2016).[6]

10.  It is obvious that there are common issues of facts between the Petition and the action.

11.  The former legal representatives of the defendants and respondents took the view that these two matters should be tried or heard together.

12.  R1’s argument relates to whether P should pursue the matters because of the consequences of voluntary winding-up of the company, which has nothing to do with the legal principles as set out in O.4, r.9 of RHC.  If P decides to continue with the matter, for whatever reasons, P should take the consequences, including the statutory effects of winding-up of the company under the Companies (Winding Up and Miscellaneous Provisions) Ordinance and costs.  If the matter should proceed, O.4, r.9 should apply and the matters should be tried together before the same judge.  So I order.

Costs and Order

13.  The costs should follow the event and the P’s costs should be assessed summarily under O.62, r.9A at the amount of $44,000 as R1 does not have objection to the costs as set out in the schedule.  Such costs are to be paid by R1 within 14 days from the date hereof.

Case Management Conference

14.  HCCW 107/2012 and HCA 945/2013 shall be heard and tried before the Companies Judge at the same time or to be determined by the Companies Judge.

15.  By consent, the matters are adjourned to a date to be fixed to be heard before the Companies Judge, with the following directions for HCA 945/2013:

a. The parties shall within 21 days from the date hereof file and serve the list of documents, followed by inspection within 7 days thereafter;

b. The parties shall exchange the witness statements within 28 days from the date hereof;

c. The parties shall file and serve the Listing Questionnaires for this action at least 7 days before the next Case Management Conference;

d. Liberty to apply;

e. Costs of this Case Management Summons be in the cause.

	(K.W. Lung)
	Registrar, High Court

Ms Connie Lee, instructed by Alvan Liu & Partners, for the petitioner of HCCW 107/2012 and the plaintiff of HCA 945/2013

Mr Wilfred Tsui, instructed by Stephen Lo & P.Y. Tse, for the 1^st respondent of HCCW 107/2012

HCCW 107/2012

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 107 OF 2012

____________

	IN THE MATTER of Pedagogic Innovations Limited
	and
	IN THE MATTER of Sections 177(1)(f) and 168A of the Companies Ordinance, (Chapter 32)

____________

BETWEEN
	HO MAN KIT JOHN	Petitioner
and
	FUNG CHU KWONG	1st Respondent
	HYDROGEN EVOLUTION INCORPORATED	2nd Respondent
	PEDAGOGIC INNOVATIONS LIMITED	3rd Respondent

____________

Before: Hon Harris J in Chambers

Date of Hearing: 8 November 2013

Date of Judgment: 8 November 2013

___________________

J U D G M E N T

___________________

 

1. I have before me an application issued by the Petitioner to stay a winding up of the 3^rd Respondent (“Company”) commenced on 5 August 2013 by a resolution of its director purportedly passed pursuant to s 228A of the Companies Ordinance. The Petitioner was represented by Mr Jose Maurellet and Miss Connie Lee, and the 1^st and 2^nd Respondents by Mr Vincent Lung.

2. The background to the application is this.  On 30 March 2012 the Petitioner issued a Petition pursuant to s 168A and in the alternative seeking relief under s 177(1)(f) of the Companies Ordinance arising from alleged unfair prejudice.  The allegation of the Petitioner and the 1^st and 2^nd Respondents who are the shareholders owning 75% of the Company’s capital and in the case of the 2^nd Respondent, its sole director, have also resulted in leave being granted to the Petitioner to commence a derivative action on behalf of the Company against the 2^nd Respondent and proceedings by the Company, under the control of the 1^st and 2^nd Respondents, against the Petitioner.

3. On 5 August 2013 the sole director, the 2^nd Respondent, caused a resolution to be passed pursuant to s 228A.  Section 228A of the Companies Ordinance provides:

“(1) The directors of a company or, in the case of a company having more than 2 directors, the majority of the directors, may, if they have formed the opinion that the company cannot by reason of its liabilities continue its business, resolve at a meeting of the directors and deliver to the Registrar a statement in the specified form (the winding-up statement), signed by one of the directors, certifying that a resolution has been passed to the effect that–

(a) the company cannot by reason of its liabilities continue its business;

(b) they consider it necessary that the company be wound up and that the winding up should be commenced under this section because it is not reasonably practicable for it to be commenced under another section of this Ordinance; and

(c)      meetings of the company and of its creditors will be summoned for a date not later than 28 days after the delivery of the winding-up statement to the Registrar.”

4. The 2^nd Respondent used the Companies Registry standard form W2 and gave in section 3 the following reasons for winding up the Company under 228A:

“1. The company’s bank account has been frozen by a winding up petition leading to lack of cash for daily operation.

2. Reluctant of shareholders in providing further financial support.

3.    Carrying on business under this situation will prejudice creditors’ interest.”

5. A notice of meeting of creditors dated 9 August 2013 was issued by the 2^nd Respondent stating that a voluntary liquidation was commenced on 5 August 2013 and that Ms Wong Ming Lai was appointed Provisional Liquidator.

6. On 21 August 2013 Ms Wong wrote to the Petitioner’s solicitors.  Ms Wong said, amongst other things, this in her letter:

“In any event, as the Company has gone into liquidation, all matters, including causes of action accruing to the Company or against the Company are to be pursued and conducted by the Liquidators who will be appointed at the creditors’ meeting. I, therefore, expect that:-

1. In respect of HCA 945/2013, no action be taken unless with the express instructions from ourselves as Provisional Liquidators of the Company or from the Liquidators (when appointed);

2. In respect of HCCW 107/2012, as the Company is in winding up already, I expect the proceedings be dismissed or stayed indefinitely; and

3.    In respect of HCA 965/2012, as the Company has been put into liquidation, Section 182 of the Companies Ordinance would prevent the Company disposing of assets.  I request you to give a general stay to the proceedings so that the Provisional Liquidators/Liquidators could assess the matter before responding to you (acting for the Defendants).  If necessary, I shall consider applying for a stay of proceedings.”

7. On 30 August 2013 a meeting of creditors took place and Ms Wong Ming Lai and Mr Leung Chung Yin were appointed the joint and several liquidators of the Company.

8. The Petitioner challenges the commencement of the voluntary liquidation on 2 grounds.  First, that the s 228A procedure was improperly invoked and this of itself justifies staying the winding up.  Secondly, that s 228A has been misused, it is, says the Petitioner, an attempt to avoid a trial of the Petitioner’s complaints, and points to Ms Wong’s letter of 21 August 2013 as demonstrating what must have been appreciated by the 1^st and 2^nd Respondents to be the disruptive consequences of a winding up.

9. I will deal with the 2 objections in reverse order.  It is clear that as the 1^st and 2^nd Respondents control the board of the Company and could pass a resolution of members to put the Company into liquidation, that whatever flaws there may have been in the use of s 228A they could lawfully seek to achieve the same result that they purported to achieve through s 228A.  Mr Maurellet argued that if the Petitioner had received notice of an extraordinary general meeting to pass a resolution to put the Company into liquidation, his client could have applied to enjoin the Company.  I have some difficulty seeing how this would have been the correct course as it would have been possible to continue with the unfair prejudice petition.  The derivative action could have either been continued by the liquidator or leave sought to continue it under s 186A which, if there was any doubt about the desirability of leaving the matter with the liquidator, could have been granted in order to ensure that the Petitioner’s complaints were not stifled by the liquidation.

10. It follows from what I have said above that it was open to the 1^st and 2^nd Respondents to put the Company into voluntary liquidation by a resolution of shareholders. 

11. Perhaps paradoxically, given the argument I have just addressed, this is the basis upon which the Petitioner says that s 228A was improperly used.  Section 228A(1)(b) provides that:

“(b) they consider it necessary that the company be wound up and that the winding up should be commenced under this section because it is not reasonably practicable for it to be commenced under another section of this Ordinance; …”

If it was reasonably practicable for a member’s resolution to be passed the 2^nd Respondent could not, if properly advised have thought that s 228A(1)(b) was satisfied.  Mr Maurellet took me to Bozell Asia (Holding) Ltd v CAL International Ltd & Anor [1997] HKLRD 1; SEG Investment Ltd v SEG International Securities (HK) Ltd & Ors HCMP 4211/2003 (Unrep) 14 October 2005; SEG Investment Ltd v SEG International Securities (HK) Ltd & Ors CACV 369/2005 (Unrep) 6 February 2008, which he submits establishes that s 228A is only to be used where there is no reasonable practical alternative procedure to wind up the Company not simply because the directors think that it is more convenient.

12. Mr Lung very fairly accepted at the outset both that an extraordinary general meeting could have been convened and a member’s resolution passed and that it could not be fairly suggested that the need to wind up the Company was so urgent that the swifter procedure provided by s 228A was necessary.  He argued that in the present case it was quite clear that the majority wanted the Company wound up and that any defect in using s 228A was purely technical.  This is not, he said, a case like SEG in which the board deprived the shareholders of the opportunity to decide the matter.

13. I accept that if the decision to wind up the Company had been left to the shareholders the result would have been the same.  However, it seems to me that the following are determinative of the matter.  First, s 228A, uses very clear language and it is to be applied strictly.  Unless a genuine reason exists for using its procedure rather than convening an extraordinary general meeting, it cannot be used.  If it is wrongly used the resulting liquidation has been wrongly commenced.  Secondly, it is important that the requirement for a company to hold meetings of members to decide important issues is respected. Members are entitled to be informed of important matters affecting a company’s affairs (and there can be nothing more important than the suggestion that a company be wound up) asking directors’ questions and exercising their voting rights.  Mr Lung’s submission amounts to a suggestion that those rights can be ignored if the views of the majority are known and immutable.  I disagree.

14. For these reasons in my view the resolution passed on 5 August 2013 was defective and the liquidation wrongly commenced.  I will, therefore, order that the winding up commenced on 5 August 2013 be stayed.

	(Jonathan Harris)
	Judge of the Court of First Instance
	High Court

Mr Jose Maurellet and Miss Connie Lee, instructed by Alvan Liu & Partners, for the petitioner

Mr Vincent Lung, instructed by S.T. Cheng & Co, for the 1^st and 2^nd respondents

Attendance of the Joint & Several Liquidators, Wong Ming Lai and Leung Chung Yin, was excused

The 3^rd respondent: Pedagogic Innovations Limited, was not represented and did not appear