SHIH-HUA INVESTMENT CO., LTD v. ZHANG AIDONG AND OTHERS

HCCW 198/2016

[2025] HKCFI 2335

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 198 OF 2016

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BETWEEN

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DECISION ON COSTS

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Introduction

1.  On 12 June 2024, this court, after hearing solicitors for the Petitioner and Counsel for the 1^st and 2^nd Respondents, ordered that:

(1) Leave be granted to the 1^st and 2^nd Respondents to withdraw their Striking Out Summons dated 10 May 2024, subject to argument on costs.

(2) Leave be granted to the Petitioner to discontinue the Amended Winding-up Petition (“A Petition”) as per its Discontinuance Summons dated 6 June 2024, subject to argument on costs.

(3) The parties are directed to file and serve affirmations for the purpose of argument on costs only within 6 weeks.

(4) The parties are directed to fix a date before a judge for argument on costs only, with 2 hours reserved.

2.  This is the hearing of the parties’ submissions on costs.

3.  For the purpose of this 2-hour costs only hearing, Bundles A, B, C prepared by the Petitioner comprising more than 1,400 pages, were lodged with this court. Notwithstanding this court’s indication and the agreement by the parties’ legal advisers at the hearing on 12 June 2024 that, in the circumstances of this case, it would be a waste of the court’s time and resources to delve into the minute details of the merits of the A Petition, the Petitioner had filed extensive evidence on the merits in the 6^th affidavit of Zhong Jie (“Zhong 6”) with close to 700 pages of exhibits, in effect asking this court to conduct an examination on the merits based on affidavit evidence only. While the 1^st and 2^nd Respondents submit, and this court agrees, that this approach is not feasible in view of the seriousness and fact-sensitive nature of the dispute between the parties, nevertheless, they have played along and prepared their own Bundle C of over 200 pages of documents containing their responses to the Petitioner’s allegations. In the end, the hearing lasted less than an hour and neither counsel seriously attempted to analyse the evidence on merits.

Background

4.  In order to understand this Decision, one must start from the beginning.

5.  On 20 June 2016, the Petitioner presented a Petition (“Petition”), on just and equitable grounds, seeking inter alia:

(1) The Court’s directions to investigate the misfeasance and/or breach of fiduciary duties on the part of the 1^st Respondent and/or the affairs and management of the 3^rd Respondent (“Company”) as it deems fit.

(2) An account of what loss and damage has been suffered by the Company as a result of the misconduct of the 1^st Respondent and/or the 2^nd Respondent, and/or the 1^st Respondent’s misconduct done with the condoning of the 2^nd Respondent.

(3) The 1^st Respondent and/or the 2^nd Respondent do pay such damages as shall be found due in sub-paragraph (2) above with interest to the Company.

(4) An order that the 2^nd Respondent do purchase the Petitioner’s shares in the Company at a fair value to be determined by an independent valuer appointed by the Court with a premium to reflect the loss suffered by the Company as a result of the matters of unfair prejudice set out herein and taking into account the amount assessed in sub-paragraph (2) above with interest.

(5) Alternatively, an order that the Company be wound up.

6.  At paras 98 to 104 of the Petition, the Petitioner pleaded that:

“98. In the premises, the affairs of the Company have been and are being conducted in a manner which is unfairly prejudicial to the interests of the Petitioner as a member of the Company, and/or actual or proposed acts or omission of the Company (including one done or made purportedly on behalf of the Company) are or would be so prejudicial to the interests of the Petitioner.

99. Further or alternatively, by reason of the matters set out above, the Petitioner has simply lost faith and confidence in the 2nd Respondent and the relationship of trust and confidence between the Petitioner on the one hand and the 2nd Respondent on the other hand have irretrievably broken down.

100. The Petitioner is prepared to sell its shares in the Company, which has since mid-2014 been made under the sole control of the 1st and 2nd Respondents, at a fair value to be determined by an independent valuer appointed by the Court, pursuant to section 725 of the Companies Ordinance Cap. 622.

101. In fact, the Petitioner through ALP[1] sent letters respectively dated 8 June 2016 and 16 June 2016 to the 1st and 2nd Respondents’ respective solicitors, for the purpose of:-

(1) Reiterating its demand that the 1st and 2nd Respondents do allow the Petitioner’s authorized representatives Mr. Yang or Mr. Zhong, to have access to the relevant accounting, financial and transactional records by allowing an inspection of the Company’s books and records; and

(2) Suggesting and/or offering to sell its shares and invited the 1st and/or 2nd Respondent to propose a fair value or reasonable price which must reflect the true financial conditions of the Company, taking into account the various misconducts committed by the 1st and 2nd Respondents.

102. The Petitioner has not received any constructive reply to-date. Rather, by three letters all dated 10 June 2016, the 2nd Respondent continued to wrongfully challenge the status of the Petitioner’s representatives and the engagement of ALP.

103. The Petitioner continues to have no access to the financial, accounting, and transactional documents of the Company to ascertain the full and true state of the affairs of the Company and/or to otherwise assess the value of the shares of the Company.

104. In the circumstances, the Petitioner cannot resort to the bona fide self-help remedies. Accordingly, the Petitioner humbly invites this Honourable Court to wind up the Company on just and equitable ground pursuant to section 177(1)(f) of the Companies (Winding up and Miscellaneous Provisions) Ordinance Cap. 32 for an independent liquidator to investigate the affairs of the Company.”

7.  There were interlocutory applications and satellite litigation since the presentation of the Petition. In particular, on 17 October 2016, the 1^st Respondent applied for an Order that the winding up relief as contained in paragraph 104 and prayer (5) of the Petition be struck out on the grounds that there was no reasonable prospect of a winding up Order being made and/or the seeking of a winding up Order constituted an abuse of process.

8.  On 19 January 2017, after hearing the parties and 2 Opposing Creditors in an application by the Petitioner to reconstitute the Board of the Company and replace the existing two directors with two suitably qualified independent professionals, A Chan J made an order reconstituting the Board, removing the existing directors and replacing them with 2 professionals (“Reconstitution Order”). A Chan J also made an Order (“2017 Order”) at para 6 that:

“Unless the Petition is amended within 14 days from the date of the written decision dated 19 January 2017 to state the reason(s) why a winding up order is sought in the alternative, paragraph 104 and prayer (5) of the Petition be struck out.”

9.  Pursuant to the 2017 Order, the Petitioner amended the Petition and filed the A Petition on 2 February 2017.

10.  At paras 102A to 105 of the A Petition, the Petitioner pleaded the following. In particular, the Petitioner pleaded in paras 104 and 105 on why the winding up of the Company may be the only practical and/or appropriate relief.

“102A. By letter dated 10 September 2016, the 1^st and 2^nd Respondents purported to make an offer that the Petitioner do buy out the 2^nd Respondent’s shares in the Company on, inter alia, the basis that:-

(1) such a purported offer is in full and final settlement and satisfaction of all the rights, interests and claims which the Petitioner and the 1^st and 2^nd Respondents have had or may have against the other in relation to or arise out of their positions or shareholdings in the Company, whether such rights, interests and claims are present or future; and

(2) any such rights, interests or claims which the Petitioner, the Company and the 1^st and 2^nd Respondents may have or have had or will have against the other is waived upon completion of the purchase of the 2^nd Respondent’s shares in the Company.

103. The Petitioner continues to have no access to the financial, accounting, and transactional documents of the Company to ascertain the full and true state of the affairs of the Company including its genuine financial position, assets and business and/or to otherwise assess the value of the shares of the Company. In particular, the 1^st and/or 2^nd Respondents have not to-date complied with the inspection order made by the Honourable Mr. Justice A. Chan on 14 December 2016 in HCMP2735/2016.

103A. The Petitioner cannot accept the purported offer set out in Paragraph 102A above also in view of the continuous misappropriation and serious or fraudulent breach of fiduciary duties on the part of the 1^st Respondent as set out in Paragraphs 60 to 91 above, especially when the Petitioner is not in the position to fully ascertain the Company’s financial, accounting and business positions.

104. In the circumstances, the 1^st and 2^nd Respondents have no genuine interest to buy out the Petitioner and/or to be bought out, and the Petitioner cannot resort to the bona fide self-help remedies. Accordingly, the Petitioner humbly invites this Honourable Court to wind up the Company on just and equitable ground pursuant to section 177(1)(f) of the Companies (Winding up and Miscellaneous Provisions) Ordinance Cap. 32 for an independent liquidator to investigate the affairs of the Company.

105. The Petitioner seeks an alternative order to wind up the Company on just and equitable ground pursuant to section 177(1)(f) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance Cap. 32 on the ground that the winding up of the Company may be the only practical and/or appropriate relief:-

(1) By letter dated 13 August 2016, the 1^st and 2^nd Respondents informed the Petitioner that (a) Oriental Energy and Bohua Petrochemical respectively served and intended to serve a notice to terminate its long term contract with the Company and (b) the Company’s solvency is “in serious doubt”;

(2) The sudden indication of “doubtful solvency” and/or “insolvency” of the Company is extremely suspicious in view of the misappropriation and/or serious/fraudulent breach of fiduciary duties on the part of the 1^st Respondent set out in Paragraphs 60 to 91 above but the Petitioner is not in the position to ascertain the same;

(3) By reason of the matters set out in Paragraphs 100 to 104 above, the buy-out negotiation between the Petitioner on one hand and the 1^st and 2^nd Respondents on the other have yielded no result or progress;

(4) Further or in the alternative to sub-paragraph (3) above, any buy-out order made against the 1^st and/or 2^nd Respondents would be difficult to enforce against the 1st and/or 2^nd Respondents in that (a) it is uncertain whether they have the ability to buy-out the Company and/or (b), the 1^st Respondent is a PRC based businessman and the 2^nd Respondent is a BVI company with no apparent or other asset in Hong Kong apart from its shareholding in the Company.

(5) Still further, by reason of Paragraph 103 above, the Petitioner is not in possession of all the necessary information to make an informed decision to seek a buy-out order or the winding up of the Company;

(6) The persistent and serious breaches of fiduciary duties and/or fraudulent conducts on the part of the 1^st Respondent including misappropriation of assets as well as their effect on the valuation of the Petitioner’s shares should be an issue to be determined by the Court. As such, the winding up of the Company remains or may remain the only appropriate and/or practical relief to stop the fraudulent or improper conduct of the affairs of the Company;

(7) The Company is deadlocked and there is a complete breakdown of trust and confidence as between the Petitioner on one hand and the 1^st and/or 2^nd Respondents on the other hand. Paragraphs 12 to 13 and 92 to 95 above are repeated; and/or

(8) In all circumstances and in particular, Paragraphs 28 to 91 above and/or sub-paragraphs (1) to (2) above, there is a need for an independent liquidator to investigate the affairs of the Company.”

11.  Thereafter, the Company was wound up by a Master on 29 August 2018 in another proceedings HCCW173/2018 (“HCCW173”) on the petition of a creditor by reason of its insolvency. HCCW173 was uncontested by anyone, whether the Petitioner or any of the Respondents[2].

12.  As this court sees it, after 29 August 2018, there was little point in carrying on with the present proceedings. It is not legally feasible to wind up a company twice. Seeking a buy out Order would generally be futile given the Company was insolvent and had been wound up, since shares in an insolvent company in liquidation are clearly valueless unless a petitioner can demonstrate his shares would have had a value but for the wrongdoing of a respondent: In re Tobian Properties Ltd [2013] Bus LR at [11], per Arden LJ (as she then was). In view of the 1^st and 2^nd Respondents’ strenuous denial of any wrongdoing, the Petitioner would have had to go to great lengths to demonstrate that to the satisfaction of the court. This however is something which the Petitioner was not prepared to do, as evident from paras 104 and 105 of the A Petition, the history of the proceedings as depicted in its own chronology, its stance as explained in the correspondence exchanged between the parties and ultimately its decision to discontinue the proceedings.

13.  As for the investigation of the alleged misconduct of the 1^st and 2^nd Respondents and the affairs and management of the Company generally, the most cost effective means was to leave it to the joint and several liquidators of the Company. If the Petitioner’s allegations were found to be meritorious, the liquidators could seek whatever relief against the culprit(s) as they saw fit.

14.  Since the A Petition has become academic, the sensible course was for the Petitioner to discontinue it. This the Petitioner eventually did. If necessary, the parties could also engage in negotiation on costs in the event of disagreement. They did so in correspondence but without success.

15.  On the Petitioner’s chronology, it raised this issue of discontinuance on 21 July 2020. The relevant parts of the letter dated 21 July 2020 from the Petitioner stated this:

“The Company was wound up by its creditor Shell. The dispute between the shareholders of the Company became academic after liquidation of the Company. The Petitioner is prepared to consider to discontinue these proceedings upon reaching a satisfactory settlement with the Respondents on legal costs… The Petition was rightly commenced, as can be deduced from the Decision of the Hon. Anthony Chan J. handed down on 19th January 2017.” (emphasis added)

16.  Numerous correspondence ensued. The 1^st and 2^nd Respondents’ legal advisers did not dispute the Petitioner’s assessment that the proceedings had become academic. Suffice it for this court to refer to the 3 letters which followed up shortly after the Petitioner’s letter of 21 July 2020 and which featured in the Petitioner’s chronology.

(1) On 2 September 2020[3], the Petitioner proposed to the 1^st and 2^nd Respondents that the sensible way to deal with the A Petition was for the Petitioner to discontinue these proceedings with no order as to costs.

(2) On 9 September 2020, the 1^st and 2^nd Respondents invited the Petitioner to file a notice of discontinuance of the A Petition failing which they would take it that the Petitioner intended to continue with the proceedings.

(3) On 11 September 2020, the Petitioner stated to the 1^st and 2^nd Respondents that:

“6. Regarding your proposal for the Petitioner to discontinue the action with costs to your clients, we take the view that the Petition was rightly commenced, as can be deduced from his Lordship’s decision handed down on 19 January 2017. Therefore, we do not agree that costs of the Petition should be paid by the Petitioner.

7. We reiterate the Petitioner’s stance: The Petition should not proceed further in view of the Company’s winding up. The issues under dispute are academic. The parties should be sensible in saving further costs and the Court’s precious time. The Petitioner proposes to discontinue these proceedings with no order as to costs.”

17.  Further correspondence was exchanged between the parties on the subject but no agreement could be reached even up to 4 March 2024.

18.  On 1 March 2024, the 1^st and 2^nd Respondents’ solicitors wrote to the Petitioner’s solicitors stating that:

“For the avoidance of doubt, our clients’ stance have always been clear that they do not object the discontinuance of this Petition but insist that the usual costs order shall apply, namely costs of this Petition shall be paid by your client to ours.

Unless your client takes out any appropriate application seeking leave to discontinue within 3 business days (i.e. on or before 5 March 2024), our client will take out an appropriate application to strike out the Petition, and seek costs on indemnity basis against your client.”

19.  In reply, on 4 March 2024, the Petitioner’s solicitors wrote back saying:

“ … the Petitioner was prepared to give consent to discontinue for the purpose of saving costs and the Court’s precious time, on condition that there is no order as to costs of the Petition. Your request for discontinuance with costs to your clients is not acceptable. We reiterate our repeated requests that your clients agree to have a discontinuance with no order as to costs.”

20.  On 10 May 2024, the 1^st and 2^nd Respondents issued the Striking Out Summons for an Order that:

“The Amended Winding Up Petition filed herein on 2 February 2017 be dismissed or struck out on the ground that it constitutes an abuse of the process of the Court and/or for want of prosecution”.

21.  On 6 June 2024, the Petitioner issued the Discontinuance Summons seeking at para 1 thereof “[L]eave be granted to the Petitioner to discontinue the Petition saved that the costs thereof be determined by way of costs only proceedings”. As an alternative, at para 2 thereof, the Petitioner sought leave to continue and proceed with the A Petition for the purpose of deciding on the question of costs.

22.  On 12 June 2024, the two Summonses came before this court.

23.  At the hearing on 12 June 2024, Mr Alex Fan, for the 1^st and 2^nd Respondents, very sensibly and properly conceded that a respondent could not stop a petitioner from discontinuing its own petition. Mr Fan, also very sensibly and properly, confirmed to this court after taking instructions that the 1^st and 2^nd Respondents were not going to proceed with their Striking out Summons.

24.  On the basis of the above, this court granted the Orders mentioned in para 1 of this Decision.

Deliberation

The legal principles

25.  The following legal principles are applicable to costs upon an application for leave to discontinue or withdraw.

26.  First, upon an application for leave to discontinue or withdraw, the starting point is that the discontinuing or withdrawing party will be required to pay the costs of the other party. The burden of persuading the court to depart from the general rule rests on the party who seeks to discontinue or withdraw:Hong Kong Civil Procedure 2025 Vol 1 para 21/5/12A.

27.  A departure from this general rule might be proper where the matter in dispute between the parties has become academic: Hong Kong Civil Procedure 2025 Vol 1 para 21/5/12A; Trend Publishing (HK) Ltd v Vivien Chan & Co. (a firm) [1996] 2 HKLR 227 at 230H-I.

28.  While the court may exercise its discretion on costs to do justice, the fact that the discontinuance had been caused by the issues of the Petition becoming academic does not of itself justify departure from the said starting point. Good reason must be shown: Re China Solar Energy Holdings Ltd unrep, HCCW 108/2015, 1 March 2016 at [16], per DHCJ Le Pichon.

29.  The approach of the court in determining costs where the issues on liability have become academic has been succinctly stated in Glory Empire Global Ltd v Bateson Investment Limited unrep HCA 866/2017, 17 August 2017, at [44] by A Chow J (as he then was) as follows:

“(1) The judge has a wide discretion not only as to the manner by which the issue of costs is to be determined, but also what evidence should be received and what findings to make.

(2) In a simple case where the issue of liability is clear on the face of the pleadings or existing affidavit evidence already filed, it would be open to the judge to determine the issue of costs without receiving any further evidence.

(3) Where the issue of liability is not so clear, the judge may direct evidence to be filed and the witnesses to be cross examined. The judge may also confine the evidence to be filed, and cross examination of the witnesses, to a particular issue or some particular issues.

(4) In determining the issue of liability for the purpose of deciding costs, the court may adopt a broad brush approach and does not necessarily have to conduct a trial to determine the substantive issues.

(5) Where it is impossible for the court, on the existing materials, to say what the likely outcome would be, the court may, in appropriate circumstances, decide to make no order as to costs.

(6) Ultimately, the objective is to do justice between the parties without incurring unnecessary court time and consequently additional costs.” (emphasis added)

30.  In Du Shui Wing & Ors v Fu Kin Fung & Ors[2023] HKCFI 2016, Linda Chan J at [7] stated her view on costs in certain scenarios:

“(1) Where the parties reached a settlement on the underlying dispute and costs. The court would normally make the costs order as agreed between the parties.

(2) Where the parties reached a settlement on the underlying dispute but unable to agree on costs, they cannot expect the court would agree to determine the question of costs summarily. This is because far from saving time, the court would have to go through the respective cases of the parties and their evidence and come to a view on the merit, without the benefit of being able to see the witnesses and the full submissions of counsel.

(3) Where the proceedings have become academic as a result of the conduct of the parties, the court may take into account the conduct of the party responsible for bringing the proceedings to an end and decides who should be liable to pay costs.

(4) Where the reason for the proceedings coming to an end was the result of subsequent events which are not attributable to the parties, ordinarily there should be no order as to costs as it cannot be said that either party is at fault for bringing about or defending the proceedings.

(5) In the context of an “unfair prejudice” petition, if the petitioner considers the petition has become academic but contends that it should be entitled to costs, it bears the burden of satisfying the court that had the petition proceeded to trial, it would have succeeded in establishing all the complaints and the court would grant the reliefs sought in the petition. This is because even if the petitioner is able to establish the complaints, it would not be regarded as the successful party if the relief sought is not one which the court would grant under s.725 of the Companies Ordinance (Cap. 622) (“CO”).” (emphasis added)

31.  At [9], Linda Chan J made the following further observations on how to approach the merits of a petition which has been discontinued:

“There are 2 further points relevant to the court’s consideration of the merit of the complaints where the petitioner has discontinued the petition:

(1) First, the court would only consider the complaints pleaded in the petition. This accords with the principle that the petitioner’s complaints are defined by and limited to the matters pleaded in the petition (In re Fildes Bros. Ltd [1970] 1 WLR 592 at 597G-598C; Re Tourmaline Ltd [2000] 4 HKC 348 at 354C-D, per Chu J (as she then was)).

(2) Second, the court would only consider the evidence which is not in dispute or is indisputable. It is the petitioner’s own decision to discontinue the petition thereby depriving the respondent the opportunity to challenge its evidence at trial. The petitioner cannot be heard to say that the court would necessarily determine the factual dispute in its favour at trial.” (emphasis added)

32.  While the court should not abdicate from its function of adjudicating on costs merely because there are complicated factual disputes, if it is impossible to come to a conclusion as to the likely outcome of the petition without an investigation the costs of which would be out of all reasonable proportion, the court should accept it is truly impossible to determine the question of costs and the appropriate order is to make no order as to costs. In that scenario, no order probably best serves the justice of the situation and the interests of the parties: In The Matter of of Fook Lam Moon Restaurant Ltd (福臨門酒家有限公司) unrep HCMP438/2010, 8 December 2015, To J at [51].

The parties’ stance – Costs of the Petition and the Discontinuance Summons

33.  These can be dealt with together.

34.  First, the Petitioner’s primary position is to seek costs of the Petition against the 1^st and 2^nd Respondents. This is encapsulated in several paras of Mr Ngan’s skeleton.

35.  At para 17, Mr Ngan submits that since the eventual winding up of the Company in HCCW173 was caused by the 1^st and 2^nd Respondents in having run the Company to the ground, the Petitioner submits that it is entitled to the costs of the Petition which has become academic and unnecessary for the Petitioner to pursue: Re Peaktop Technologies (USA) Hong Kong Ltd [2007] 4 HKLRD 207 at [8].

36.  In this court’s view, the citation of Re Peaktop Technologies at [8] is not entirely fitting but Barma J (as he then was) at [7] did make the observation that the court had a wide discretion as to costs when giving leave to withdraw and if the circumstances were, exceptionally, such that a costs order should be made in favour of an applicant who had obtained leave to withdraw his application, there was no jurisdictional bar to the court in making a costs order in his favour.

37.  The real question, in this court’s view, is whether the present case is truly “exceptional” in that the A Petition is meritorious and on the available evidence the Petitioner can demonstrate that the liquidation of the Company was caused by the 1^st and 2^nd Respondents in having run the Company to the ground.

38.  After para 17, Mr Ngan then made 3 points in support of his contention.

(1) The A Petition was well-founded especially in light of the clear exclusion of the Petitioner from the Company’s affairs and denial of access to its books and records. This was endorsed by A Chan J at para 68 of his decision dated 19 January 2017 (“2017 Decision”) that: “[o]n the above analysis of the evidence, I am satisfied that Shih-Hua[4] has made out at least a good arguable case on unfair prejudice”.

(2) It became unnecessary and academic to pursue the A Petition since the Company was wound up in HCCW173 on insolvency grounds. As such, any further efforts to vindicate the Petitioner’s interests as a member of the Company “fell moot”.

(3) There can be no doubt that the Company’s eventual winding up was caused by the 1^st and 2^nd Respondents. Since the Petitioner’s wrongful exclusion, the Company had at all times been under their sole control. The Petitioner was totally left in the dark in respect of its management and affairs notwithstanding its efforts to try to change the situation.

39.  In conclusion, at para 22, Mr Ngan submitted that “there are exceptional circumstances that justify this Court’s departure from the general rule and costs of this Petition should rightfully be awarded to P.”

40.  On the evidence and in the circumstances of this case, this court is not at all satisfied with the Petitioner’s contention that this is a truly exceptional case in that (i) the A Petition was well-founded or (ii) the Company’s eventual winding up was caused by the 1^st and 2^nd Respondents.

41.  On the question of merits, the evidence relied upon by the Petitioner, principally Zhong 6, can hardly be described as not in dispute or is indisputable – on the contrary, they are seriously disputed by the 1^st and 2^nd Respondents. In effect, the Petitioner is asking this court to (i) accept the A Petition and Zhong 6 carte blanche notwithstanding the 1^st and 2^nd Respondents’ dispute and without giving them an opportunity to test the Petitioner’s case, (ii) make findings in its favour on all allegations contained in the A Petition as well as (iii) conclude that it should grant the reliefs sought in the A Petition. It is simply impossible for this court to entertain that request from the Petitioner and reach the conclusion that had the A Petition proceeded to trial, it would have succeeded in establishing all the complaints and the court would grant the reliefs sought.

42.  This court has not overlooked A Chan J’s 2017 Decision but does not find it as supportive of the Petitioner’s case as it had hoped. Putting in context, A Chan J’s comment that there was a good arguable case on unfair prejudice was merely a preliminary observation in an interlocutory application by the Petitioner to re-constitute the Board of the Company by replacing the existing 2 directors with 2 independent professionals. It does not, to any significant extent, lead this court to arrive at a conclusion on the merits in favour of the Petitioner had the A Petition proceeded to trial.

43.  On the cause of the Company’s insolvency and liquidation, this court is also not satisfied that the Petitioner had demonstrated that the Company’s eventual winding up was caused by the 1^st and 2^nd Respondents. Even assuming there is prima facie evidence of unfair prejudice, it is a quantum leap to conclude without more that this had led to the eventual insolvency of the Company.

44.  The Petitioner’s complaints have been summarized in Zhong 6 at para 14. They were:

(1) First, the Petitioner was gradually and, by around May 2016, totally excluded from the Company’s affairs. The Petitioner was unable to ascertain the Company’s affairs (since as early as January 2014) and it was unable to resort to bona fide self-help remedies, which necessitated the issuing of the Petition (see paragraphs 29 to 37 of the A Petition).

(2) Second, the Petitioner was wrongfully denied of access to the Company’s books and records (see paragraphs 40 – 59 of the A Petition).

(3) Third, the Petitioner’s company chop was forged onto the Company’s purported resolutions and purported audited statements of account for the year ended 31 December 2014 (see paragraphs 61 – 64 of the A Petition).

(4) Fourth, the Company’s contractual interests/profits/business opportunities were diverted away (see paragraphs 65 – 69 of the A Petition).

(5) Fifth, the Company’s money was misappropriated on various occasions from its bank accounts by the Respondents (see paragraphs 70 – 88 of the A Petition).

45.  It can be seen that there is no allegation in that summary at all that the 1^st and 2^nd Respondents’ alleged misdeeds had caused the eventual liquidation of the Company.

46.  Second, knowing the weakness of the Petitioner’s primary case, Mr Ngan has put forward, as a fallback position, that no order as to costs would be appropriate: Mr Ngan’s skeleton at para 23. Essentially, Mr Ngan relied on the principles referred to above viz Hong Kong Civil Procedure 2025 Vol 1 para 21/5/12A; Du Shui Wing at [7];In The Matter of Fook Lam Moon Restaurant Ltd (福臨門酒家有限公司) at [51]. In this regard, Mr Ngan submitted that:

(1) the A Petition had become academic and that was a good reason to depart from the general rule;

(2) that situation was not caused by anything the Petitioner had done; and

(3) it would be impossible for this Court to conclude as to the likely outcome of the A Petition without an unduly lengthy investigation that would involve a totally disproportionate expenditure of both parties’ and this Court’s time and costs. In this regard, justice and fairness and the interests of all parties would be best served with no order as to costs.

47.  Eventually, this fallback position became his ultimate position.

48.  At the ultimate paragraph of Mr Ngan’s skeleton ie para 48, he submitted that the just and appropriate costs orders this should make were:

(1) no order as to the costs of the A Petition; and

(2) the Petitioner should be entitled to the costs of the Discontinuance Summons on an indemnity basis as “discontinuance with no order as to costs” has been repeatedly offered to the 1^st and 2^nd Respondents.

49.  But even that ultimate position in Mr Ngan’s skeleton stood to be revised.

50.  Towards the end of the hearing, upon enquiry by the bench, Mr Ngan at last indicated to this court his “definitive” position[5]: there should be no order as to costs of the A Petition and the same applied to the Discontinuance Summons – the Petitioner no longer sought costs of the Discontinuance Summons against the 1^st and 2^nd Respondents.

51.  The position of the 1^st and 2^nd Respondents on the other hand was that the general rule applied as no good reasons or exceptional circumstances existed to justify a departure from it. Hence, the 1^st and 2^nd Respondents should be entitled to all the costs of the A Petition, no doubt including costs of the Discontinuance Summons.

52.  In this regard, Mr Lai made 3 main points in his skeleton at para 3.

(1) First, the winding up of the Company was not a good reason / exceptional circumstances which justified departing from the general rule. In particular:

(a) The mere fact that the issues in the A Petition had become academic did not justify a departure from the general rule that the discontinuing party was liable to pay costs.

(b) Further, the winding up of the Company did not render the A Petition academic because the Petitioner could still meaningfully seek its relief of buy-out from the 1^st and 2^nd Respondents.

(c) In any event, the winding up of the Company was fortuitous in the sense that the Petitioner’s prayer for winding up as a contributory of the Company was doomed to fail in light of the Company’s insolvency.

(2) Second, there was no basis to suppose that any aspect of the A Petition was bound to win. On the contrary, significant aspects of it were bound to fail. This was because:

(a) The Petitioner did not have any tangible interest to seek a winding up relief as a contributory of the Company by reason of the insolvency of the Company at the material time.

(b) The Petitioner’s allegations of the 1^st and 2^nd Respondents’ wrongdoings against the Company had been confirmed by the liquidators of the Company to be wholly without basis.

(3) Third, there was sufficient basis for the Court to find that the Petitioner issued the present proceedings only for the collateral purpose of seizing control of the Board of the Company, and not with a view to prosecute the A Petition to its completion.

53.  These points can be dealt with very briefly – in this court’s view, none of them have any merits.

54.  On the first point, the Petitioner did not dispute the legal proposition that the mere fact that the issues in the A Petition had become academic did not of itself justify a departure from the general rule that the discontinuing party was liable to pay costs: China Baoli Technologies Holdings Ltd v Orient Equal International Group Ltd & Ors[2021] HKCA 1609 at [17]. The authorities are clear that good reason or exceptional circumstances had to be shown.

55.  But it is a quantum leap for Mr Lai to suggest at para 35 of his skeleton that “[a]ccordingly, P’s contention that it is not liable to pay for the costs of Rs fail [sic] in limine” as though the fact that the A Petition had become academic through no fault of either party could never be a good reason to justify a departure from the general rule. That suggestion is clearly not the law.

56.  Mr Lai contends that the liquidation did not render the A Petition academic because the Petitioner could still meaningfully seek its relief of buy-out. Proceedings were academic if there was no true dispute and the outcome of the proceedings could not affect the parties in any way: China Baoli Technologies at [33]. At most, the present situation was one where the Petitioner might have considered the further prosecution of the A Petition to be undesirable for practical, pragmatic or financial reasons.

57.  This contention was untenable for 2 reasons:

(1) While Barma JA did accept at [33] of China Baoli Technologies the proposition that proceedings were academic if there was no true dispute and the outcome of the proceedings could not affect the parties in any way, this court does not consider the learned Judge as having laid down an absolute rule that was the only circumstance in which proceedings would be regarded as academic. Every case turns on its own facts and this court has no doubt that the learned Judge realized it would be unwise to lay down any such absolute rule.

(2) As this court pointed out earlier, seeking a buy out Order would generally be futile if a company is insolvent and has been wound up, since shares in an insolvent company in liquidation are clearly valueless unless a petitioner can demonstrate his shares would have had a value but for the wrongdoing of a respondent. In the present case, the 1^st and 2^nd Respondents strenuously denied any wrongdoing and the Petitioner would have had to go to great length and at great expenses to demonstrate that to the satisfaction of the court, something which the Petitioner was not prepared to do. In these circumstances, even assuming the Petitioner could theoretically continue with the A Petition to seek the relief of buy-out, it would not be a meaningful exercise. In this court’s view, the A Petition has become sufficiently academic in the circumstances of this case for the purpose of costs.

58.  Lastly, describing the winding up of the Company as fortuitous is little more than another way of saying its liquidation and the subsequent discontinuance of the present proceedings was brought about by events or acts of a third party which cannot realistically be attributable to the fault of either the Petitioner or the 1^st and 2^nd Respondents. This fact does not assist the 1^st and 2^nd Respondents. Rather, it lends support to the Petitioner’s ultimate and definitive position that there should be no order as to costs: Du Shui Wing at [7(4)].

59.  Second, Mr Lai contends that there was no basis to suppose that any aspect of the A Petition was bound to win. On the contrary, significant aspects of it were bound to fail. The so-called significant aspect was a reference to the claim for winding up relief in the A Petition: see section E of Mr Lai’s skeleton.

60.  The Petitioner does not dispute that after the liquidation of the Company in August 2018, there was no prospect of the Petitioner obtaining its winding up relief in the present proceedings. But that was through no fault of the Petitioner – but for the liquidation of the Company in HCCW173, it remained to be determined whether the allegations in the A Petition would justify the winding up of the Company in the present proceedings.

61.  As for the contention that there was no basis to suppose that any aspect of the A Petition was bound to win, the short answer is that it was not necessary for the Petitioner to demonstrate that it was bound to win in order to support its stance that there should be no order as to costs. On the authorities, as long as the A Petition had become academic and a good reason existed, the general rule could be departed from.

62.  Regarding the third and last main point of the 1^st and 2^nd Respondents ie the Petitioner issued the present proceedings only for the collateral purpose of seizing control of the Board of the Company, Mr Lai’s submission consists of 6 short paras in his skeleton. For ease of reference, this court will recite paras 49 - 54 in full below.

“F. P’s Issuance of the Petition for a Collateral Purpose

49. Finally, there is sufficient basis for the Court to find that P issued the proceedings only for the collateral purpose of seizing control of the board of the Company but with a view to prosecute the UP Proceedings[6] to its completion.

50. To start with, as found the Enforcement Decision and affirmed in the 2nd CA Decision, the Reconstitution Order “was not sought for the reasons advanced, but as a tactical device”, and that “its application to reconstitute the Board was directed more to ousting Mr Zhang rather than putting in management that could take over the running of the Company’s affairs” (§§16(1) and 17 of the Enforcement Decision) [A/26/264&266]. This finding is binding upon P.

51. Further, the fact of the matter is that P did not progress with the UP Proceedings after the Reconstitution Order was granted. From the point the Reconstitution Order was granted on 19/1/2017 until the Company was wound up on 29/8/2018, more than 20 months have passed without any steps being taken in the UP Proceedings.

52. Whilst P refer to Section B of Zhong 6th [A/23/198+] to submit that it has taken active steps to prosecute the matter, the said evidence does not address the question of why from 19/1/2017 to 29/8/2018, no active steps were taken to further prosecute the Petition. Even taking into account the fact that there was an appeal against the Reconstitution Order, such appeal was dismissed by April 2017, and therefore remains a 16-month gap between the dismissal of the appeal (in April 2017) and the winding up of the Company (in August 2018).

53. The truth of the matter is that there is no evidence from P as to why this is the case. In the absence of a proper explanation (and there is none), the compelling inference is that P has commenced the UP Proceedings solely for the collateral purpose of ousting R1 from the Board, such that once that objective was achieved P had no intention to bring the UP Proceedings to its completion.

54. For this additional reason, it is submitted P should pay for the costs of Rs.”

63.  The Enforcement Decision referred to in para 50 of Mr Lai’s skeleton was a reference to a decision of Harris J dated 25 February 2022 in the present proceedings: [2022] 1 HKLRD 1376. It was an application by the Respondents seeking an order that the Petitioner’s undertaking as to damages given to A Chan J, as contained in Schedule 1 to the 2017 Order, should be enforced. Harris J eventually ordered an inquiry.

64.  Para 16(1) of the Enforcement Decision referred to above was a repetition of counsel William Wong SC’s submissions which in turn repeated para 39 of an earlier decision of Harris J dated 4 June 2018, not in the present proceedings, but in a different, albeit related, common law derivative action ie HCA2682/2016 (“HCA2682”) commenced by the Petitioner against the Respondents and others. [39] of that earlier decision of Harris J read:

“39. It would seem to me that SH[7] has dealt with this matter in a disingenuous way. It would appear that its application to reconstitute the Board was directed more to ousting Mr Zhang rather than putting in management that could take over the running of the Company’s affairs including the prosecution of the Action[8] …”

65.  In para 17 of the Enforcement Decision, Harris J, after reciting counsel’s submission, referred back to what he said in [39] of HCA2682 and apparently concluded that the Reconstitution Order made by A Chan J had been improperly obtained which eventually led to his Order for an inquiry.

66.  It is absolutely deplorable that Mr Lai had failed to provide this court with the essential context in para 50 of his skeleton before asserting his concluding remark that “This finding is binding upon P.”

67.  The long and short of it all is that this court had not been apprised of the evidence before Harris J at the relevant hearing in HCA2682 or at the hearing which led to the Enforcement Decision in the present proceedings. This court can only act on the evidence before it and on the meagre evidence referred to by Mr Lai in those 6 short paras of his skeleton, this court is simply not satisfied that it should draw the inference that the Petitioner had commenced the present proceedings solely for the collateral purpose of ousting the 1^st Respondent from the Board of the Company and had no intention to bring the proceedings to their completion.

68.  That is sufficient to dispose of Mr Lai’s last main point which in this court’s view is pure speculation.

Conclusion :Costs of the Petition and the Discontinuance Summons

69.  To conclude, this court rejects Mr Lai’s submission and accepts Mr Ngan’s submission that (i) the A Petition had become academic without any fault attributable to the parties and that was a good reason to depart from the general rule on costs and (ii) it would be impossible for this court to conclude on the likely outcome of the A Petition without an unduly lengthy investigation that would involve a totally disproportionate expenditure of both parties’ and this court’s time and costs.

70.  In the circumstances, this court is of the view that justice and fairness and the interests of all parties would be best served by making no order as to costs of the A Petition, including the Discontinuance Summons.

Costs of the Striking Out Summons

71.  The costs of the Striking Out summons can be dealt with briefly.

72.  As stated earlier, the Striking Out Summons was put on the basis that the A Petition constituted an abuse of the process of the Court and/or for want of prosecution.

73.  At the hearing on 12 June 2024, it was after this court had given the Petitioner leave to discontinue the A Petition that Mr Fan for the 1^st and 2^nd Respondents very sensibly indicated, after taking instructions, that they were not going to proceed with the Striking Out summons. Hence, leave was given by this court for them to withdraw.

74.  Notwithstanding the general rule as to costs of withdrawal and what was submitted in Mr Ngan’s skeleton that the general rule should be adhered to, the “definitive” position of the Petitioner, upon enquiry from the bench at the end of the hearing, was that there should be no order as to costs.

75.  On the other hand, the 1^st and 2^nd Respondents’ position was that they should get costs because they were the “effective winner”. In Mr Lai’s skeleton, he submitted that:

(1) The 1^st and 2^nd Respondents had forewarned the Petitioner that they intended to strike out the present proceedings for want of prosecution prior to the issuance of the Striking Out Summons by a letter from Jun He Law Offices to Alvan Liu & Partners dated 1 March 2024. This court notes that the letter did not state the grounds of the proposed application at all. It certainly did not state the ground would be confined to “want of prosecution”.

(2) Notwithstanding the forewarning, the Petitioner only applied to discontinue the present proceedings after the Striking Out Summons had been issued.

76.  From the correspondence, it would appear that from 21 July 2020 onwards, the parties were ad idem on the desirability of discontinuing the A Petition but, notwithstanding protracted negotiations, could not agree on the costs thereof. This court had earlier referred to the last 2 letters exchanged between the parties’ solicitors dated 1 March and 4 March 2024. What happened next was the issue of the Striking Out Summons.

77.  It would appear that on the evidence, since the winding up of the Company on 29 August 2018, no serious steps had been taken by the Petitioner to prosecute the A Petition as such, but rather, it was actively seeking to negotiate a settlement of the proceedings by way of discontinuation, at least since July 2020. That seems to this court perfectly understandable. As this court sees it, it is really the insistence of the 1^st and 2^nd Respondents on seeking costs which posted the biggest obstacle to an early settlement.

78.  As it turns out, the 1^st and 2^nd Respondents do not get their costs of the A Petition.

79.  If this court were to actually adjudicate on the Striking Out Summons, it would have difficulty in granting it, whether on the basis of “abuse of process” or for want of prosecution. The 1^st and 2^nd Respondents could not claim to be the “winner” simply because they had forewarned the Petitioner that they would issue the Striking Out Summons. They had to demonstrate that they would have succeeded if that Summons had proceeded to its completion. For these reasons, Mr Lai’s submission that his clients were the “effective winner” is wholly misconceived. They had not succeeded in making good their Striking Out application. Nor have they demonstrated that they would have succeeded had the application proceeded to its completion.

80.  All that happened, taking their case to the highest, is that they had succeeded in prompting the Petitioner to issue the Discontinuance Summons which in turn prompted their withdrawal of their Striking Out application. This is clearly not the same as the 1^st and 2^nd Respondents having succeeded in making good their Striking Out application for abuse of process or want of prosecution.

81.  Given that the 1^st and 2^nd Respondents are the withdrawing party, costs would usually be ordered against them. However, in this court’s view, this is a situation where the general rule should be departed from. This is because the Striking Out Summons had only been rendered academic by the liquidation of the Company which eventually led the Petitioner and the 1^st and 2^nd Respondents to agree to a discontinuance of the A Petition, subject to negotiation on costs.

82.  While the 1^st and 2^nd Respondents blamed the Petitioner for not issuing the Discontinuance Summons much earlier, a similar argument could be made against the 1^st and 2^nd Respondents that they should have agreed to “no order as to costs” of the A Petition much earlier, which is the eventual result as determined in this Decision. In that event, there would have been no need for the issue of the Striking Out Summons at all.

83.  To conclude, it seems to this court that justice and fairness and the interests of all parties would be best served by making no order as to costs and this court shall so order.

Disposition and costs order nisi

84.  Subject to what is ordered in the next paragraph, this court makes no order for costs on the A Petition, the Discontinuance Summons and the Striking Out Summons, including all costs reserved, particularly the costs of the hearing on 12 June 2024.

85.  Regarding the costs of this hearing, this court has only accepted part of the Petitioner’s conclusion at para 48 of its skeleton concerning no order as to costs of the A Petition, albeit it has come to a decision in line with the ultimate definitive stance of the Petitioner, which stance was taken rather late in the day. This court has however rejected all the submissions of the 1^st and 2^nd Respondents on costs. To reflect the above, on a nisi basis, this court is prepared to and hereby orders that 1/3 of the costs of this hearing be to the Petitioner, to be taxed if not agreed, and paid by the 1^st and 2^nd Respondents forthwith, certificate for counsel.

Mr Ronald Ngan, instructed by M/s Alvan Liu & Partners, for the Petitioner

Mr Lai Chun Ho, instructed by M/s Jun He Law Offices, for the 1^st and 2^nd Respondents

The Official Receiver was absent

HCCW 198/2016

[2022] HKCFI 567

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 198 OF 2016

________________

________________

________________

D E C I S I O N

________________

1.  On 20 June 2016 the Petitioner, Shih-Hua Investment Co. Ltd (“Shih-Hua”), issued the present unfair prejudice petition seeking an order that the 2^nd Respondent to purchase its shares in the Company, alternatively that the Company be wound up. The Petition was amended on 2 February 2017 (“Petition Proceedings”). On 4 and 5 January 2017 Anthony Chan J (“Chan J”) heard an application by the Petitioner to reconstitute the Board of the Company and replace the existing two directors with two suitably qualified independent professionals or alternative relief, which included continuing an injunction granted by me on 20 July 2016 restraining disposal by the 2^nd Respondent of the Company’s money other than in accordance with the normal course of business and not exceeding HK$2 million each month. Chan J made an order on 19 January 2017 reconstituting the Board, removing the existing directors and replacing them with David Bennett of Grant Thornton Recovery & Reorganisation Limited and Tong Piu of Grant Thornton Advisory Services Limited. Chan J ordered the costs of the reconstitution summons be paid by the 1^st and 2^nd Respondents with a certificate for two counsel (“Reconstitution Order”).

2.  The 1^st and 2^nd Respondents (“Respondents”) issued a notice of appeal on 8 March 2017.  On 31 March 2017 the Respondents’ solicitors Jun He wrote to the Court of Appeal stating:

“Since the appointment of the New Directors to the Board, our clients have met with them on numerous occasions in order to provide assistance to them for the purposes of advancing the interests of the Company. Notwithstanding ad clients’ initial (and considerable) concerns relating to their appointment, our clients are presently satisfied with the New Directors’ performance and believe they have a genuine desire to act in the Company's best interests.

In the premises, we are instructed that the 1^st and 2^nd Respondents do not desire to proceed with the hearing of the Appeal.”

3.  Jun He requested that the appeal be dismissed and that their clients pay the Petitioner’s costs of the appeal.  On 5 April 2017 the Court of Appeal made an order that the appeal be dismissed and the Respondents pay the Petitioner’s costs of the appeal.  There were no further steps taken by the Parties in the present petition.

4.  On 29 August 2018 Master Lai made an order winding up the Company on the Petition of a creditor, Shell Eastern Trading (PTE) Ltd, issued on 25 June 2018 in HCCW 173/2018.  The Petition was not contested when it came on before Master Lai.

5.  In these circumstances it might be thought strange that on 24 November 2020 the Respondents and two interveners, Everglory Petrochemical Limited and Everglory (Macau) International Co., Limited, issued a summons (“24 November 2020 Summons”) seeking an order that the Petitioner’s undertaking as to damages given to Chan J (as contained in Schedule 1 to his order dated 19 January 2017) should be enforced.  The reason why the application was made has to do with the progress of an associated High Court Action: HCA 2682/2016 (“Action”).

6.  The Action was a common law derivative action issued on 14 October 2016.  It is not necessary for me to discuss in any detail the background to the Petition proceedings and the Action as this has been explained in Chan J’s judgment and my reasons for decision in the Action dated 4 June 2018, to which I refer later in this paragraph.  In short, the Petition proceedings and the Action sought relief in respect of the same complaints.  In the Action Shih-Hua obtained an ex parte injunction dated 25 October 2016 from Lok J and a further ex parte injunction from DHCJ Kent Yee on 22 November 2016.  On 25 and 26 July 2017 I heard an application by the Respondents (the 1^st and 4^th Defendants in the Action) to strike out the Statement of Claim in the Action and discharge the injunctions.  I did strike out the Statement of Claim and discharge the injunctions.  The primary ground for doing the former was that Shih-Hua could not bring itself within the exceptions to the Rule in Foss v Harbottle because as a consequence of the reconstitution of the Board the 1^st Respondent was no longer in control of the Company.  This disposed of the application to discharge the injunctions, but in case I was wrong in my finding on the strike out application I found, in the alternative, that I would have set aside the injunctions on the grounds of material      non-disclosure and would not have re-granted them.  Of particular relevance to this application are my findings in [57] and [61]:

“57. In the evidence before me was a report prepared by Briscoe Wong Advisory Ltd (‘BW’) dated 24 November 2016 which was not before Lok J, DHCJ Yee or Anthony Chan J. This report analyses the conclusion reached in the RSM Report…

61. On the basis of the evidence that I have read I consider it doubtful whether SH is able to demonstrate a prima facie case of a material breach of duty by Mr Zhang let alone any scheme to defraud the Company, which is the import of SH’s claim. However, assuming for present purposes that a prima facie case has been demonstrated:

(1) I am not satisfied that the evidence shows that unless enjoined Mr Zhang and the entities he controls will divert future payments. I am made more confident in reaching this conclusion by the appointment of independent directors. There is nothing to suggest that Mr Zhang currently intends to divert any monies due to the Company to his own entities now the directors have been appointed and they have obtained control of the Company’s bank accounts.

(2) I am certainly not satisfied that there is sufficient risk of loss to the Company and consequently to SH to make it unjust to refuse to re-grant the Orders as a penalty for what I have found to be a serious failure to make full and frank disclosure of material matters before Lok J and DHCJ Yee.”

7.  The reference in [57] to the report not being before Chan J, was a reference to the hearing before him on 4 and 5 January 2017 not a reference to the only other hearing before him referred to in my decision, namely, the application for a validation order, which was heard on 20 July 2016 and is referred to in [9].  As can be seen from [9]–[10]  Shih-Hua also sought to make an application for appointment of provisional liquidators on 19 July 2016, but Chan J declined to hear it.  Shih-Hua then sought to make an urgent ex parte application before me, which is described in detail in [10] of my decision.  It has become clear to me on reading the papers and hearing counsel that I probably proceeded on the mistaken assumption that Chan J did not have the 24 November 2016 BW Report.  It appears that for all practical purposes we had the same evidence before us.  I simply reached a different conclusion on some of the factual matters common to both applications[1].

8.  Shih-Hua appealed my decision.  The appeal was dismissed on 21 January 2021.  In her judgment with which the other members of the court agreed, Yuen JA says this at [11.1]:

“On 25 and 26 July 2017, Harris J heard (amongst other applications) a summons issued by the defendants to strike-out the CLDA. It should be noted that by this time, there was available to the judge a forensic report by Briscoe Wong Advisory Ltd dated 24 November 2016 which post-dated the applications before Lok J or DHCJ Yee, but which had also not been placed before Anthony Chan J in January 2017. This report analyzed and rebutted a number of matters set out in a report from RSM Corporate Advisory (Hong Kong) Ltd on which SH had relied[2].

9.  Yuen JA understandably assumed that what I had stated in [57] was correct.  It appears that I was wrong.

10.  On 24 November 2020, the Respondents and the Interveners issued a summons seeking an inquiry as to the amount of damages suffered by them as a result of the granting of the two injunctions in the Autumn of 2016 to which I have referred.  On 10 September 2021 I ordered an inquiry before a Master into what loss resulted from granting the two injunctions.

11.  In their skeleton argument, the Respondents and the Interveners argue that it follows from the findings in the Action that (1) the Reconstitution Order was wrongly granted; (2) that it is probable that loss resulted; (3) consequently, the court should order an inquiry into what that loss should be and that (4) the inquiry should take place at the same time as the inquiry in the Action before the same Master.

12.  The Respondents and Interveners argue that if an injunction is found to be wrongly granted the enjoined party is entitled to, subject to what I say in the next paragraph, an inquiry into damages.  It is not necessary for the order to have been set aside or for a trial to have taken place.  The undertaking given by the Petitioner is in general terms: “If the Court later finds that paragraph 1 and/or paragraph of this Order has caused loss to the 1^st and/or 2^nd Respondents or any other party and decides that the 1^st and/or 2^nd Respondents or that other party should be compensated for the loss, the Petitioner will abide by any order which the Court may make as to damages.”  As Richards J states in Abbey Forwarding Ltd (in liquidation) v Revenue and Customs Commissioners[3] this form of wording gives the court a discretion to order an inquiry when it is of the opinion that it has caused loss.  I agree with Richards J view in [100] that “Whether an inquiry as to damages should be ordered would be an issue independent of the result at trial and could well be a matter to be decided at a separate hearing either before or after the trial”.

13.  It is common ground between the Parties that the determination by the court has two stages.  The first which I have just explained concerns whether or not an order was wrongly granted.  The second is whether it caused loss.  Issues of causation and quantum are normally to be dealt with by a Master.  At the present stage of the process what is required is that the Respondents and the Interveners adduce some evidence to show an arguable case that they have sustained loss falling within the undertaking.  The court should not allow a protracted argument on whether the suggested loss will be recoverable[4]. The court is concerned to determine whether there is evidence which demonstrates that an inquiry will serve some purpose and would not be an exercise in futility[5].

14.  Shih-Hua frames the first issue thus:  the relevant question is whether the Respondents and Interveners are entitled to an inquiry as to damages.  They refer to the judgment of Neill LJ in Cheltenham & Gloucester Building Society v Ricketts and Others[6]:

“The undertaking, though described as an undertaking in damages, does not found any cause of action. It does, however, enable a party enjoined to apply to the court for compensation if it is subsequently established that the interlocutory injunction should not have been granted”

“It is important to underline the fact that the question whether the undertaking should be enforced is a separate question from the question whether the injunction should be discharged or continued”.

15.  Shih-Hua argued in its skeleton argue that:

(1)  It has not been established that the Reconstitution Order was wrongly granted.

(2)  The Respondents had the opportunity to establish that the Reconstitution Order had been wrongly granted in the appeal that they commenced, but they chose to abandon it.

(3)  The finding in my decision that had I not struck out the Statement of Claim I would not have ordered a regrant, cannot constitute a finding that the Reconstitution Order was wrong granted.

16.  Having read the skeleton arguments and the papers to establish whether or not I had been wrong about my understanding that Chan J and I did not have the same evidence before us, when the hearing commenced I informed Mr Wong that I did not think that I could properly proceed on the basis, which had been assumed in his skeleton argument (I should note that the Respondents and Interveners team of counsel for this application had no previous involvement with either the Petition Proceedings or the Action and were, therefore, unfamiliar with what had taken place at earlier hearings), namely, that I had reached a different conclusion to Chan J because I had additional expert evidence.  As a consequence Mr Wong stream-lined his case.  He made the following five submissions in support of his Clients’ case that an inquiry should be ordered:

(1)  As I explain in [38]–[39] of my decision having procured the appointment of independent directors to manage the affairs of the Company Shih-Hua failed to put them in funds to do so and, in particular, proceed with the claims against the Respondents advanced in the Action.  No explanation has ever been provided for this.  In [39] I conclude that “It would seem to me that SH has dealt with this matter in a disingenuous way.  It would appear that its application to reconstitute the Board was directed more to ousting Mr Zhang rather than putting in management that could take over the running of the Company’s affairs including the prosecution of the Action.”  Mr Wong argued that if Chan J had been told this he would have been unlikely to have made the order.  As Chan J recognises in his decision it is unusual for the court to make such an order as the court is slow to interfere in the management of a company: see [32] of Chan J’s judgment.

(2)  It is clear from [57]–[61] of my decision that I had concluded having read the evidence that it did not support Shih-Hua’s case that there had been diversion of assets.

(3)  In the appeal from my decision Yuen JA makes the following findings with which Lam VP and Kwan JA agree:

“21.1. The crucial point is that whatever alleged claims there are in the Action, they are theCompany’s (not SH’s) claims. In normal circumstances, it is for the board of directors of the Company to decide whether there is any substance in them, and even if there is substance, whether to pursue them or not. A board may properly decline to pursue claims if it thinks it is in the best interests (legal or financial) of the Company not to do so.

21.2. The CLDA was commenced by SH on the ground that the then board was not able or willing to protect the Company’s interests because ZAD was in control. But it transpired that even when independent professional persons (who were appointed to fulfil the duty to protect those interests) were placed in charge of the Company, they did not consider it appropriate to prosecute the claims in the Action.

21.3. In the case of the Reconstituted Board, its solicitor appeared before Harris J on 25- 26 July 2017, informing the court that as SH had not put it in funds, the Board was not in a position to continue with the Action[7]. That was a proper reason for the Board ’s decision not to pursue the claims in the Action. SH has not explained why it did not put the Company in funds so that the Board could investigate and pursue whatever claims it (the Board) considered the Company had. SH was apparently only prepared to expend funds to pursue the claims by itself, when the alleged claims are clearly claims belonging to the Company which was now in the hands of professional independent persons.

…

22. In the present case, it is significant that the Liquidators had said in their report that they do not intend to pursue the claims for 2 reasons: not only because of insufficient funds, but also as they have not been able to gather relevant information regarding the claims because the books and records of the Company are incomplete and allegedly false.

23. In other words, both sets of independent professionals controlling the Company at different times have decided not to pursue the claims in the Action. In this respect, it is important to note that the Liquidators are officers of the Court, and the reasons for their decision is not only financial, but also because of a lack of objective materials to substantiate the alleged claims. It is pertinent that SH has not complained that it has in fact provided sufficient materials to the Liquidators, but that the latter have refused, neglected or failed to appreciate the effect of such materials. If that were the case, SH could have applied to court under s.200(5) Companies (Winding Up and Miscellaneous Provisions) Ordinance Cap 32, as a person aggrieved by an act or decision of liquidators. It has not done so.

24. That being the case, the appeal should not be allowed just because SH, a contributory, wished to pursue it contrary to the Liquidators’ decision not to do so.  Even if the request in SH’s submissions is treated as an application by summons for the court to grant it leave to pursue the appeal (and presumably the Action, if successful), the Court would have refused it. As noted earlier, whatever alleged claims there were in the Action, they were the Company’s claims, not SH’s claims, and the Liquidators have decided, without challenge, that these claims are not objectively substantiated by reason of the lack of proper documentary evidence. For that reason, the court ‘acting as a filter against any totally wrong-headed action’ (Fargro p.374) would not have directed SH to pursue the Action for the Company.  To allow a contributory to pursue the appeal (and the Action), in the light of the Liquidators’ views that there is no sufficient and reliable documentary evidence in support, would be tantamount to permitting an abuse of process.”

This clearly indicates that the Reconstitution Order was unnecessary.

(4)  In so far as Shih-Hua argues that the application cannot properly be advanced until the Reconstitution Order has been set-aside or discharged, this was the substantive effect of the winding up order.

(5)  In so far as Shih-Hua argues that the Petition is academic, it is only academic, because it has chosen not to prosecute it.  The primary relief sought by Shih-Hua was a buy-out order and this it could still seek if its wished to despite the Company being wound up[8]. Shih-Hua has chosen not to prosecute the Petition or withdraw it.  That cannot be a reason not to determine whether the Reconstitution Order was wrongly grant and, if so concluded, order an inquiry as to damages.

17.  Mr Sherry’s response to these submissions focused on the fact that there had been no determination as to the correctness of the Reconstitution Order in the Petition Proceedings and, so he argued, the views of the new Board not to prosecute the Action should be given little weight because they had not been given the funds fully to investigate the matters of which Shih-Hua complains.  I would note that despite Mr Wong emphasising in his oral submissions (A) that at no stage has Shih-Hua explained why it had not funded the new Board as it had agreed and (B) Shih-Hua could prosecute the Petition and seek a buy-out order despite the winding up order, Mr Sherry did not address either issue. I infer that is because the answer would be unhelpful to Shih-Hua and support what I say in [39] of my decision.  This in itself would suggest that the Reconstitution Order was improperly obtained.

18.  Mr Sherry referred to a report to the court prepared by the liquidators, Duff & Phelps, dated 18 December 2020.  Mr Sherry submitted on the basis of section 2 of the Report that the new Board’s position was most accurately characterised as being unable to take an informed view on what potential claims might be available due to the limited funds at their disposal to investigate them and they had not been provided with a complete set of the Company’s documents by the Respondents.  The latter point is disputed as can be seen from page 4 of the Report.  However, presumably Shih-Hua was not inhibited in anyway in providing such assistance as the new Board needed.  The position is that the liquidators do not appear to have been provided with any information from which they felt able to support the claims made by Shih-Hua.

19.  It seems to me that there is considerable force in Mr Wong’s argument.  I think that I can properly conclude that on the evidence now before the court the Reconstitution Order was wrongly granted and was sought not for the reasons advanced, but as a tactical device.

20.  Shih-Hua argues that the Respondents and the Interveners have not filed evidence that demonstrates that they have suffered loss.  I disagree.  All that is required at this stage is evidence that suggests a sufficient possibility of loss having been caused as to justify an inquiry and that it is unlikely to prove a futile waste of the parties’ and the court’s resources.  At this stage the court is not concerned to deal with questions of causation or the adequacy of the evidence.  In my view this test has been met.  I can deal with this issue quickly.  Part of the claim that concerns the Interveners is the alleged loss of profit from the reselling of ethylene and propylene, the 1^st Intervener being unable to proceed with its deals with Strong Hero and Trust Bridge to purchase the same from them following the termination of funding by the Company to the 1^st Intervener. Shih-Hua takes issue with this claim contending that no such funding arrangement had been agreed by the Company and the 1^st Intervener or, if I understand Shih-Hua’s case correctly, in the alternative any such agreement was not properly authorised by the Board.

21.  The Respondents have ledgers produced by F.S. Li & Co., (a firm of accountants) in 2016, which show that the Company advanced significant sums to both the Interveners during 2016 and received payments from them.  The ledger ends with an advance to the 1^st Intervener dated 26 June 2016 of US$9,746,578.65. The total debits and credits for the period shown in the ledgers (which commences with an advance to the 2^nd Intervener of US$520,000 on 6 January 2016) is US$122,826,766.81 and US$145,926,161.82 respectively showing a net amount owed to the Company of US$304,673.12.  Cleary the Company was advancing considerable amounts to the Interveners until Shih-Hua took action, which brought it to a halt.  I am not concerned to determine whether or not either the advances were properly authorised, the consequences if they were not or whether there were any other profitable transactions of which the Interveners were prevented concluding because of the impact of the Reconstitution Order.  That is a matter for a Master.  The position is the same in respect of the other objections raised by   Shih-Hua. They may need to be addressed before a Master and Shih-Hua may prevail on some or all of them.  That is not a matter for me to determine.

22.  I will, therefore, order an inquiry.  It is common ground that if I do so it should take place at the same time as the inquiry in the Action and also that the release of security summons dated 3 July 2020 should be adjourned sine die until after that inquiry.  I will reserve the costs of the 3 July 2020 summons.  I will make a costs order nisi that the costs of the 24 November 2020 Summons be the Respondents’ and the Interveners’ costs in the inquiry as to damages with a certificate for two counsel.  So far as the summons issued on 23 December 2021 by the Shih-Hua to adduce further evidence, which was withdrawn, is concerned, I order that it be withdrawn and that Shih-Hua pays the Respondents’ and the Interveners’ costs in any event.

HCCW 198/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 198 OF 2016

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D E C I S I O N

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1.  I am unable to see any merit in this application for interim stay. It should be noted that the issue of any irremediable prejudice which might be suffered by the 1^st and 2^nd Respondents (Respondents) if the Reconstitution Application[1] was granted was considered by the court (see para 67 of Decision dated 19 January 2017 (Decision)), and none was demonstrated.

2.  The “prejudice” which is being argued now is, primarily, the suggested damage to Zhang’s reputation if he is removed from the Board.  Apart from being a new point, I find the suggestion illusory and lacking in particulars.  The 2-day hearing where allegations of impropriety on Zhang’s part were ventilated was open to the public.  The Decision is available to the public.  Zhang is of course entitled to appeal the Decision, but I can see no reason or logic that he should be treated differently to any litigant who has lost his case and launched an appeal.  The losing litigants can always say that their reputation has been tarnished. 

3.  Further, Zhang’s eagerness to protect his reputation does not sit well with the fact that the Company’s fortune has apparently collapsed under his management, and he was perfectly prepared to have PL taking it over. 

4.  On the other hand, Shih-Hua is a 50% owner of the Company and entitled to an equal say in its management.  For too long, Zhang has been trampling upon the rights of Shih-Hua.  The affairs of the Company have been kept entirely dark.  With respect, I am unable to see much substance in the proposed appeal. 

5.  In the premises, this application is dismissed. I also decline the application for an interim stay pending an application by the Respondents to the Court of Appeal for such a stay.   

6.  The parties are in agreement that the Respondents’ application for leave to appeal and stay pending appeal as per their Summons filed on 2 February 2017 should also be dismissed by the court following this determination so that the matters can then be pursued before the Court of Appeal.  Accordingly, that Summons is dismissed.

7.  I shall hear the parties on costs.

HCCW 198/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 198 OF 2016

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__________________

__________________

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D E C I S I O N

________________

1.  This is the application of the 1^st Respondent (“Zhang”) by Summons dated 15 July 2016 (“Summons”) for a validation order under s.182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 (“Ordinance”) in respect of the following categories of payments or dispositions by the 3^rd Respondent (“Company”) on or after 20 June 2016, the date of presentation of the Petition herein (“Petition”) :

(1) payments or other dispositions of property by the Company in the ordinary course of business;

(2) repayments of loans or debts by the Company in the ordinary course of business, including the loans from the Petitioner (“SHI”), Zhang and the 2^nd Respondent (“Motivi”) or any of their associated companies; and

(3) payments of all reasonable legal expenses by the Company in these proceedings.

2.  The Company was incorporated in Hong Kong in August 2012.  Its principal business is trading in liquefied petroleum gas.

3.  SHI and Motivi are the 2 shareholders of the Company, each holding 50% of its shares.  The Company’s board of directors comprises of SHI and Zhang, who is the majority owner and controller of Motivi.

4.  The Petition was presented by SHI pursuant to s.177(1)(f) of the Ordinance and ss.723 to 725 of the Companies Ordinance, Cap 622.  Under the Petition, SHI seeks, inter alia, an order that Zhang do purchase its shares in the Company at a fair value, or alternatively, that the Company be wound-up on the just and equitable ground.      

5.  For the present purpose, it is unnecessary to go into the details of the complaints in the Petition.  It suffices to say that very serious allegations have been made by SHI against Zhang and/or Motivi concerning, inter alia, misappropriation, forgeries, exclusion of SHI from management, making unauthorized transactions, denying SHI of access to the books and accounts and breach of fiduciary duties. 

6.  The first hearing of the Petition has been fixed for 24 August 2016.  Zhang has indicated in the evidence filed in support of the Summons that the Petition will be opposed. 

7.  There is no real dispute that the Company is solvent and has an on-going business.  The evidence is that it has a profitable business and the draft financial statements of the Company for the year ended 31 December 2015 show that it had bank and cash balance in excess of HK$441 million. 

8.  SHI complains about the short notice for this hearing.  It proposes that an interim validation order in restrictive terms be put in place to allow the Company to meet its pressing financial obligations, pending a substantive hearing for the determination of the Summons.  Meanwhile, directions for the filing of further evidence should be given by the court.

9.  SHI cannot be surprised by this application.  It is legally represented all along.  It is inconceivable that an application for validation order could have escaped SHI’s mind.  Further, before the issuance of the Summons, letters have been written by Zhang’s solicitors to those representing SHI to try to elicit an agreement on a validation order to be made by the court.  Regrettably, such efforts were in vain.   

10.  There is no argument on the applicable legal principles, which are trite.  Where a company is solvent and has an on-going business, the court will normally grant a validation order to enable it to continue to trade.  To do otherwise would not only stifle its business, it is likely to be harmful to the interest of its creditors. 

11.  In this case, it would be inconsistent with the stance taken by SHI in these proceedings to stifle the Company’s business in any way. 

12.  The court has repeatedly said that this kind of application should not be treated as normal adversarial litigation (see Re Emagist Entertainment Ltd [2012] 5 HKLRD 703 and a summary of the authorities in Re Raising Engineering Ltd, HCCW 318/2014, unrep, 29 May 2015, §§3-9).  Regrettably, such advice is consistently ignored.  It befalls upon the court to try to encourage a change of litigation culture for this type of application.  

13.  It is the duty of the court to discourage unnecessary satellite litigation: see Re K&A International Co Ltd, HCCW 317/2013, unrep, 27 November 2013, §6.  Also, the court should guard against an application of the present type being used as leverage in an adversarial tussle. 

14.  Instead of making an interim order as suggested by SHI, I shall make the order which is warranted on the evidence.  The parties are free to make an application subsequently to vary the order if it is properly justified. 

15.  Subject to adequate safeguard, I see no good reason not to grant the order sought in para 1 of the Summons, save that the repayment of loans from the parties or any of their associated companies should be excluded.  The exclusion is justified given the allegations of misappropriate of the Company’s assets by Zhang and/or his associates.  Further, I am not satisfied about the urgency in making those repayments. 

16.  As regards the disagreement over the payment of salaries in the sum HK$50,000 per month to Zhang as the Company’s managing director, I see no proper reason to exclude it from the scope of the validation order given the evidence that he is the only director managing the Company: see Re Mi Fung Beads Co Ltd, HCCW 224/2004, unrep, 19 April 2004, §§23 and 24.

17.  I confine the payment of the Company’s legal expenses sought in para 2 of the Summons to “necessary legal expenses incurred by the Company for the compliance of this order”.  It is well-established that where a company is a nominal party to a petition which involves the dispute between shareholders, its money should not be spent on such dispute save for proper costs incurred on, eg, giving discovery or an application for validation order, and such further costs as may be expedient and necessary in the interest of the Company as a whole: see Re Wah Ying Cheong Co Ltd, HCCW 225/1996, unrep, 14 March 2003, §16.

18.  In respect of safeguard, in light of the serious nature of the allegations made in the Petition, I order that the Company do report to SHI on a monthly basis by way of a schedule setting out the date, amount, payee and nature of payment made by it out of its bank accounts in the previous month.  In addition, SHI be at liberty to inspect the documents supporting or evidencing these payments.   

19.  I should say that the resistance to allowing inspection of the supporting documents is quite unmeritorious in light of the fact that SHI is a director of the Company and has the right to inspect its books and accounts.  It has been suggested that there is no authority for making such a provision in a validation order, and in Re Sellen International Ltd, HCCW 436/2012, unrep, 25 January 2013, §12 (a case relied upon by SHI), the order for inspection was made with agreement by the parties.  I do not believe that there is any legal inhibition on the appropriate safeguard which can be imposed by the court in making a validation order.  It is a matter of proper exercise of discretion, which must be case specific.  

20.  I grant liberty to apply and the abridgement of time sought in para 4 of the Summons.

21.  I shall hear the parties on costs.