MARRAKESH INVESTMENTS LTD v. TANGIERS HOLDINGS LTD AND ANOTHER

HCCW 352/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 352 OF 2016

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D E C I S I O N

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1.  On 3 October 2016 the petitioner issued the petition in these proceedings seeking a winding-up order and other incidental relief. The petition is a just and equitable petition and the underlying dispute is a shareholders’ dispute. The petition was amended on 8 March 2017. Those amendments are not material for present purposes.

2.  On 27 February 2017 the 1^st respondent issued a summons to strike out the petition.  In broad terms the 1^st respondent’s complaint was that there was no realistic prospect of the court making a winding-up order as the dispute between the parties would be resolved by the court, if the matter could not be settled, ordering that one or other of the shareholders buy out the other.

3.  The background to the issue of the petition is unusual.  The petitioner had already issued another petition with an HCCW number.  However, for reasons which were never clear, the petition only sought a buy-out order.  Those proceedings have subsequently been converted to miscellaneous proceedings.

4.  The court was informed on 27 November 2017 that the petitioner agreed to the dismissal of the present petition.  The only issue before the court today is costs.

5.  The petitioner, who is represented by Mr Martin Ho, recognises that my decision in Re Lucky Ford Industrial Ltd [2013] 3 HKLRD 550, paras 14 to 15, establishes that as a general rule where an applicant obtains, by agreement prior to the hearing of an application, substantially what by the application he sought, costs will follow the event, and the court will not be concerned to explore the circumstances in which the respondent to the application came to agree to it when considering who should pay the costs.

6.  Mr Ho referred me to Barma J’s (as he then was) decision in Re Peaktop Technologies (USA) Hong Kong Ltd [2007] 4 HKLRD 207 para 8, which pre-dates my decision, which reads as follows:

“8. Further, it seems to me that where an applicant’s application is doomed to failure by reason not of anything which he has done or not done, but because of an act of the respondent which is within its control and out of the hands of the applicant and is, further, a step which could have been taken either prior to the application being made or at an earlier stage in the application so as either to obviate the possibility of the application being made, or to minimize the costs associated with it, it may well be appropriate to recognize this by an appropriate costs order.”

7.  It is suggested that this demonstrates that the court should have regard to whether or not the costs which have been incurred had been incurred for reasons which are, in the present case, in part the responsibility of the 1^st respondent. 

8.  There will always be unusual cases which may justify a departure from the approach which I described in Re Lucky Ford, however, such cases will be rare and practitioners should be slow, rather than quick, to seek out reasons which may militate against adopting the straightforward and cost effective approach I described in Re Lucky Ford.

9.  In the present case, the petitioner suggests that the correct costs order would be that the 1^st respondent bears the petitioner’s costs on a party-and-party basis, to be taxed if not agreed.  The reason for this suggestion is as follows.

10.  Mr Ho submitted that the reason why the petitioner agreed to the strike-out application was because, in the 1^st respondent’s affirmation in reply dated 13 October 2017, for the first time Mr Jessop states that he has the financial ability to fund the acquisition of the petitioner’s shares and exhibits documents proving this.  As I understand it, it is accepted that once this became clear, the 1^st respondent’s argument that there was no prospect of a winding-up order being made became sufficiently compelling that the petitioner accepted that there was no realistic prospect of a winding-up order being made and, therefore, the winding‑up petition should be dismissed.

11.  This argument, however, presupposes that it was a concern about the 1^st respondent’s ability to finance the purchase of the petitioner’s shares which was the reason, or the principal reason, why the petition was issued in March 2017.  The petition, however, does not state any reason why it was felt necessary, despite a petition seeking a buy-out already having been issued, to seek as an alternative remedy a winding‑up order.

12.  This in itself was a defect in the petition.  It is well established by a series of authorities in Hong Kong which are summarised in my decision in Re Raising Engineering Ltd [2015] 5 HKLRD 22 in para 6.  I say as follows:

“6. There is no dispute between the parties about the principles by reference to which applications of this sort are assessed. These are explained in [4] to [10] of the decision in Re Sun Light Elastic Ltd:[1]

[4] The principles by reference to which such applications are assessed is not in issue and are as follows:

(1) It is assumed that the particulars and allegations in the petition and the supporting affidavits of the petitioner would be established and the conflicts resolved in favour of the petitioner;[2]

(2) The application should be approached with the greatest circumspection and it is only in a plain and obvious case that the court should exercise its discretion to strike out the petition for winding up or the parts complained of;[3]

(3) The burden is on the applicant to show that it is plain and obvious that the petition for winding up would fail on the ground there is an alternative remedy available to the petitioner and that the petitioner is acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy;[4]

(4) Where proposed amendments are put forward in an application to strike out, the court should have regard not only to the allegations in the existing petition but also to matters in the proposed amendments.[5]

[5] Madam Justice Yuen (as she then was) explained in Wong To Yick Wood Lock Ointment Ltd the court’s task as follows:

‘The question in the application before me is whether even at the present stage, assuming that the petitioners prove all the facts in the Amended Petition, there is no real possibility or prospect of a winding-up order being made such that the court should exercise its discretion to strike-out the claim for a winding-up order.’

[6] I am, therefore, to consider the application on the basis that the petitioner’s factual allegations will be established at trial. Before striking out the prayer for a winding up order, I need to be satisfied that it has no realistic prospect of success.

[7] In the present case the factual background is not of itself material, as for present purposes I will proceed on the basis that the complaints of unfair prejudice are made out, and that the petitioner will be found to be entitled to some relief if the matter proceeds to trial.

[8] However, the authorities in Hong Kong have shown some difference of approach in practice with some decisions placing more weight on the undesirability of having an unnecessary winding-up petition hanging over a company on the one hand, and on the other on the difficulty of concluding with sufficient certainty at the early stage of proceedings that a winding-up order would never be the appropriate remedy for the court to grant. In Re Mahr China Ltd,[6] I explained how this divergence of approach should be resolved:

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

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

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

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

[9] In my view what is clear from the authorities is that the court will only grant a winding-up order rather than relief under section 168A if there is good reason to do so. In my view if a winding-up order is to be sought, particularly in the alternative it should only be because the petitioner has a particular reason for doing so. It is not enough simply to say ‘well one never knows what will transpire’. This would be no criteria at all. The petitioner must be able to point to particular matters he is concerned might make a winding-up order the appropriate or only practical relief. It is for this reason that in Sin Chung Yin Ronald and others v Sinodental Investments Ltd[7] I said:

[21] I think it is appropriate to end with the salutary reminder of Madam Justice Yuen in Re Wong To Yick Wood Lock Ointment Ltd [2001] 2 HKC 618 at 623F. There is a Practice Direction in England, (No. 1 of 1990) [1990] 1 WLR 490 reminding practitioners of the undesirability of including as a matter of course a prayer for winding up as an alternative to an order under section 459 of the Companies Act (1985) (equivalent to section 168A of the Companies Ordinance) that:

‘It should be included only if that is the relief that the petitioner prefers or if it is considered that it may be the only relief to which he is entitled.’

[22] It is clear that the prayer for a winding-up order has been included in this case without sufficient thought as to whether or not it is necessary. Practitioners should not automatically include as an alternative relief in a petition presented primarily for relief under section 168A of a prayer for winding up. They should only do so if there is reason to believe that this may be the relief that will be sought at trial, and the facts relied on in forming this view should be set out in the petition and amplified as necessary in the petitioner’s evidence filed in support of that petition.

[10] It seems to me that to require a petitioner to state in his Petition why he has sought in the alternative a winding-up order is not only sensible but consistent with the requirement that a petition must adequately set out the grounds on which relief is sought: Re Fildes Bros Limited [1970] All ER 923.”

13.  Mr Ho took me to the 4^th affirmation of Mr Ng Man Choong on behalf of the petitioner which he suggested did make it clear that the inability of the 1^st respondent to finance the purchase of the petitioner’s shares motivated issuance of the petition.  It was suggested that this is apparent from para 67 which reads as follows:

“Tangiers and Jessop have not shown a strong desire to buy Marrakesh’s shares in JBHK. Tangiers and Jessop made an extremely unrealistic offer. Their offer of HK$3,049,830 represented 16.4% of the surplus cash in JBHK. This would have then given them 100% of JBHK with the balance surplus cash of HK$15,550,170. Jessop would also have known that cash would grow rapidly in the 3 months from May to July and the surplus cash in excess of USD600,000 generated represented more than 1.5 times what was offered for Marrakesh’s 50% interest in JBHK. When the Petitioner’s Offer, which was fair and reasonable, was put forward, they failed to reply by the given deadline and then subsequently rejected the Petitioner’s Offer. Jessop’s assertion that Tangier is a ‘willing and capable purchaser of JBHK’ is a misrepresentation. He was simply trying to use JBHK’s cash to buy out Marrakesh’s interests.”

14.  It seems to me far from clear from this paragraph that it was a concern about the 1^st respondent’s financial position that motivated Mr Ng to cause the petition to be presented.  As I have already noted there is no reference to this concern in the petition, and no reference to it in the earlier affirmations filed in the proceedings.  Paragraph 52 of Mr Jessop’s 5^th affirmation, in which he goes into some detail about his ability to finance, through the 1^st respondent, the acquisition of the petitioner’s shares was evidence included in order to bolster the argument that there was no prospect of a winding-up order being made rather than in response to a clear statement either in the petition or the petitioner’s evidence that a concern about this motivated presentation of the petition. 

15.  I can, therefore, see no reason not to make an order which reflects the fact that the 1^st respondent has obtained the result that it sought when it issued a strike-out application.

16.  Mr Maurellet SC, who appeared for the 1^st respondent with Ms Sharon Yuen, invited me to go further and to order that the costs be assessed on a higher basis than the normal party-and-party basis.  His argument was this: not only did the petition fail to state the reason why the petitioner thought it necessary to present a new winding‑up petition, but the way in which the petitioner has approached the proceedings he has commenced suggests that the petition was not presented for bona fide reasons but purely to put pressure on the 1^st respondent to increase his offer for the petitioner’s shares.

17.  Mr Maurellet SC pointed to the following matters:

(1)   Mr Ng’s letter of 29 July 2016 which makes no reference to the kind of concerns Mr Ho suggested motivated Mr Ng in causing the most recent petition to be presented, but refers to matters which on their face would seem concerned with interfering with the operations of the company in China and pressuring Mr Jessop into agreeing to improve his offer to purchase Mr Ng’s shares.

(2)   The court has never been given a sensible explanation for the reason why the first petition was presented as a winding-up petition although a winding‑up order was not sought in it.

(3)   Despite the authorities which make it clear that when presented with an application for a validation order in proceedings between shareholders in respect of a solvent company with an ongoing business, a petitioner is expected to cooperate in agreeing an order, the petitioner refused to do so until immediately before the hearing before me.

(4)   As explained in my decision dated 7 September 2017 dismissing the petitioner’s application to appoint an interim receiver, the conduct of the petitioner in respect of the way in which he had dealt with that application, and in particular the undertaking given to Deputy High Court Judge Ismail SC in September 2016, was not only unsatisfactory, but the delay in applying to appoint receivers (in fact the application was listed by the 1^st respondent) suggests that the petitioner’s conduct of these proceedings is driven by commercial strategy rather than a genuine concern that the relief sought is required.

18.  As I have already explained, it is well established that a petition seeking a winding-up order against a solvent company by a shareholder should state why a winding-up order rather than a share buy‑out order may be necessary.  To present a petition which does not do so is prima facie an abuse of process.  Of course there will be occasions in which the failure to include a precise reason for seeking a winding-up order will be an oversight or result from infelicities in the drafting of the petition.  It does not, however, seems to me that this is such a case. 

19.  The problems with the 1^st petition should have focused minds on the criteria which apply to petitions of this sort.  The fact that the present petition makes no reference to, for example, a concern about the 1^st respondent’s ability to buy the shares of the petitioner suggests that there was no motivation in presenting the 2^nd petition other than putting pressure on the 1^st respondent to improve his offer.  The subsequent conduct of the proceedings which I have referred to earlier by the petitioner also points to the conclusion that this, at each stage of the proceedings, is what has motivated the petitioner.  Even the fact that it was not until immediately before the present hearing, and I understand from Mr Ho that he was only instructed yesterday, that the petitioner agreed to the present petition being dismissed suggests that the petitioner’s approach is driven purely by commercial considerations rather than the sort of considerations relevant to the inclusion of a prayer for a winding-up order. 

20.  It does, therefore, seem to me that this is an appropriate case to make not only a costs order against the petitioner with a certificate for two counsel, but also to order that the petitioner pays the costs of the petition on an indemnity basis.

HCCW 352/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 352 OF 2016

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D E C I S I O N

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1.  On 11 October 2016 the petitioner issued a summons seeking the appointment of an interim receiver over the property of the Company, alternatively an interim injunction restraining the 1^st respondent from transferring funds of the Company from its bank account until further order of the court.

2.  At the hearing before me today the petitioner was represented by Mr Richard Khaw SC and Mr Martin Ho and the 1^st respondent by Mr Jose Maurellet SC and Ms Sharon Yuen.

3.  The Company is owned equally by the petitioner and the 1^st respondent.  They in turn are owned or controlled by Mr Robert Ng and Mr James Jessop respectively.  Jessop & Baird was founded in the United Kingdom in 1923 by Mr Jessop’s grandfather.  It is apparently a leading specialist in hot-melt lamination and moulding manufacturing.  One of its customers is Marks & Spencer (“M&S”). M&S were interested in about 2003 in expanding its business in the mainland of China (“Mainland”) which Mr Jessop saw as an opportunity for Jessop & Baird to establish a factory in the Mainland.  It was during his investigations of the business opportunities that Mr Jessop came to meet Mr Ng.  As a consequence, they established the Company with a view to exploiting the business opportunities Mr Jessop thought existed in the Mainland.  Jessop & Baird would provide the technical know-how and the machinery and Mr Ng would be an investor and assist in setting up the factory and providing local know-how.

4.  The Company had one bank account in Hong Kong with HSBC.  Mr Jessop and Ms Neo Hwee Khim were appointed directors. Ms Khim represented Mr Ng’s interests. 

5.  The relationship between Mr Jessop and Mr Ng began to deteriorate in around April 2016.  There is a dispute between the parties concerning how certain monies were dealt with. 

6.  On 19 July 2016 Mr Jessop prevailed upon Ms Khim to resign her directorship leaving him as the sole director of the Company. The petitioner says Ms Khim was coerced.  Mr Jessop says she agreed to resign because he persuaded her that if she did not she would get drawn into the dispute between him and Mr Ng.

7.  On 20 July 2016 Mr Jessop changed the bank mandate so that the only signatories on the account were himself and his nominee Mr Hatim Allam.  On 4 August 2016 HSBC froze the Company’s bank account because Ms Khim had told them her resignation was invalid.  On 12 August 2016 the Company commenced HCA 2100/2016 against, inter alia, Mr Ng and Ms Khim seeking access to account records and return of US$950,000 Mr Jessop believed had been misappropriated.

8.  On 15 August 2016 Mr Jessop wrote on behalf of the Company to one of its customers, Eastside Holdings Limited (“Eastside”), asking it to make future payments to a company called Fully Plan Limited (“Fully Plan”) which is owned by Mr Jessop and his son.  This came to the attention of Mr Ng who, through his solicitors P C Woo & Co, demanded an explanation.  Mr Jessop’s then solicitors replied on 19 August 2016 saying:

“To avoid any over-reaction by your client, our client confirms that all payments received from the Company’s customers to Fully plan Limited are held on trust for the Company (the ‘Interim Payment Arrangement’). The reason for the Interim Payment Arrangement was due to the following reasons…”

9.  On 31 August 2016 the petitioner presented a petition number HCCW 307/2016 seeking as its principal relief a buy-out order.  Despite being presented as a winding-up petition, it did not seek a winding-up order.  Consequently this was converted into Miscellaneous Proceedings at the end of September, but on 3 October 2016 the petitioner issued a further petition seeking a winding-up order: HCCW 352/2016. 

10.  On 1 September 2016 the Company commenced HCMP 2296/2016 against HSBC for an order that the account that had been frozen be reactivated and operated in accordance with the most recent mandate. Mr Ng and Ms Khim applied to intervene.  On 23 September 2016 Deputy High Court Judge Ismail SC adjourned the Company’s application against Mr Ng and Ms Khim’s undertaking to apply for the appointment of a receiver within one week and also their agreement to the release of US$718,169.17 to order to allow the Company to make necessary payments.  The application was not made and on 30 September 2016 the DHCJ granted an order in similar form to a validation order and criticised Mr Ng and Ms Khim for failing to comply with their undertaking.

11.  On 30 September 2016 DHCJ Ismail SC granted an interim injunction in HCA 2572/2016 for delivery up of the Company’s property.  It was continued by Au-Yeung J on 14 October 2016.  On 9 November 2016 I granted a validation order as I was satisfied that the Company is solvent and has an ongoing business.

12.  Before turning to the petitioner’s grounds for seeking a receiver it is helpful if I address the principles by reference to which the court assesses applications such as the one before me.  In Re Zealot & Co Limited[1] Kwan J (as she then was) says this:

“The principles for the appointment of interim receivers are well established. I apply by analogy the principles for granting interlocutory injunctions in American Cyanamid Co v Ethicon Ltd [1975] AC 396. I need to consider if there is a serious case to be tried, if there is proper basis for appointing receivers such as a jeopardy to assets, and where does the balance of convenience lie.”

Kwan J was persuaded to appoint receivers because she was satisfied, to quote §40 of her Ladyship’s judgment, “that a case is made out that there may be a risk of dissipation of assets.  I am persuaded there is a need to preserve and protect the assets of the Company pending the resolution of the ownership dispute.”

13.  Mr Khaw SC argued that the rationale underlying these principles is as explained by Harman J in Re a Company (No 596 of 1986) [2]:

“ In a partnership dispute it is almost as of course for the court, where the partners have fallen out and there has to be a dissolution, to order the appointment of a receiver, on motion, at an early stage of the partnership action. That is done to hold the ring, to ensure that the partner or partners who happen to be in possession of the partnership trading assets do not obtain advantage, nor damage the partnership assets to the harm of the dissenting partner, nor siphon them away or otherwise maltreat the partnership affairs. It is done without any judgment of the rights or wrongs in the partnership action or any attempt to take a view as to why the partnership has broken up. It is simply designed to hold the ring and ensure that the status quo of the assets is preserved, that the value of the business is there, so that the whole thing may best be realised for the advantage of all partners in due course. That is particularly the case where there is a business with a going concern and a goodwill.

That analogy seems to me to have considerable, though by no means total, aptness to this case and indeed to almost all cases of private companies formed on a basis of quasi-partnership between two sides both having substantial shares in the equity and having come together with a view to all being involved in the trading of the company. The analogy cannot be perfect because a company is a separate legal creature for which statutory remedies of winding-up petitions, petitions under sec. 459–461 and so forth are provided; and the dissolution of the company does not automatically follow on a falling-out of the corporators as the dissolution of a partnership, certainly at will, would inevitably follow on the falling-out of partners. Thus the analogy is not perfect. Yet, in my view, it provides a correct and desirable base from which to approach the whole matter.

The reasons which apply to cause the court almost as of course to appoint a receiver in a partnership dispute have considerable similarities to, and are in my judgment properly applicable as guides to the court in a company of this sort. The decision which I myself made and which I cited in the motion by Mrs. Jeska to have a receiver appointed under her debenture, which was the decision, again in a case called In Re a Company, that the important thing was that while a sec. 75 of the old Act (sec. 459–461 of the 1985 Act) petition proceeded it was of great importance to preserve the status quo, to hold the ring, to ensure that the assets remained undiluted, undiverted and properly administered; so that, if the court came to the conclusion, as it frequently does, or if the parties reached a sensible decision that one should buy out the other as a matter of compromise, the assets would be capable of specific valuation in much the same state as they had been before the breakdown had taken place. It seemed to me in the original case In Re a Company, and it seemed to me on Mrs. Jeska’s application in this case, that such a doctrine is a sound approach and, in my view, such a doctrine supports the idea that in a case like this, acting by analogy with partnership, the court might well think fit to appoint a receiver.”

This passage is repeated in the judgment of Kwan J in Re HK Sindy Footwears Limited[3].

14.  The way in which Mr Khaw SC framed his submission interpreted these passages as suggesting that the court would commonly be justified in appointing receivers in the case of shareholders disputes in order to ensure the status quo ante is preserved.  Insofar as this is what in Re a Company holds I would respectfully disagree that this is a correct statement of general principle.

15.  The appointment of receivers over an ongoing business has considerable and generally adverse effect.  First, it is expensive and depletes the assets of the company.  Secondly, it is generally damaging to businesses such as that of the present Company, which involves manufacturing and sale of items, as opposed, as was the case in Re a Company, to a more static business such as letting commercial or residential property. This is recognised in a number of Hong Kong decisions.  In Wong Luen Hang and Tsui Kowk So v Chan Yuk Lung and others [4]DHCJ Le Pichon says this in §§74 and 90:

“74. I bear in mind that there must be ‘solid evidence’ of the risk of dissipation. A receivership order is a serious infringement of rights and is only justified on appropriately clear and strong facts and risks. The standard of proof of the real risk of dissipation is relatively high: see Colman J in Laemthong International Lines Co Ltd v Artis [2005] 1 Lloyd’s Rep 100 at §60 citing Thane Investments Ltd v Tomlinson [2003] EWCA Civ 1272. That standard is applicable to all applications whether inter partes or ex parte.

…

90. Moreover, that the appointment of receivers is likely to impact adversely on the reputation of a company is a view that is widely held and a reality in the commercial world.  It creates a negative impression and is generally not well perceived.  How severe the impact is likely to be in any particular case is necessarily fact-sensitive.”

Madam Justice Chu (as she then was) is to similar effect in Re Full Billion Shipping Limited[5] in §48:

“48. I accept that it is probable that the appointment of receivers may be misunderstood by people dealing with Lishui as indicating that Lishui is financially or otherwise in trouble. As observed by Ferris J in Jaber v Science & Information Technology Ltd [1992] BCLC 764 at p.789G, it is inevitably difficult for people in the outside world to clearly differentiate between receivers appointed on grounds of insolvency and receivers appointed on other basis. In Floydd v Cheney [1970] Ch 602 at p.610F–H, Megarry J further observed that:

… I do not think that it can be denied that news that a receiver of a business or a professional practice has been appointed is news that may well cause members of the general public to hesitate in resorting to that business or practice. It may indeed be that some of the inferences that the public would draw from the appointment of a receiver would be quite wrong; but one cannot expect the public to have a precise appreciation of every aspect of the institution of receivership.”

16.  Thirdly, in cases such as the present where clearly the principal relief sought is a buy-out, it will generally be desirable commercially that the business is operated by the persons likely to take control of it if they are ordered to purchase the petitioner’s shares or a price is agreed voluntarily.  It is recognised in a number of authorities that where a petitioner seeks a buy-out the courts are reluctant to make an order that keeps the petitioner involved in management against the wishes of the prospective purchaser: see §17of my decisionin Re Roeders (China) Limited [6]and the authorities referred to in footnote 2.

17.  It seems to me that a similar logic applies in the case of receivers.  If a petitioner seeking a buy-out order wishes to appoint a receiver, he has to demonstrate that there is sufficient risk to the economic value of the company to justify such an intrusive order.  There is not some form of presumption that if the petitioner is excluded from management he is entitled to have a receiver appointed.  In practice the court will have to balance the evidence of the risk of dissipation of assets or general damage to economic value against the disadvantages of appointing receivers.  Each case will depend on its facts.

18.  In the present case the petitioner points to two matters to suggest that there is a risk to the assets of the Company, and the accounts of the Company being so unreliable that a future valuation will be difficult.

19.  First it points to the initial correspondence in August 2016 after the petitioner found out that Mr Jessop had written to Eastside.  Oldham, Li and Nie (“OLN”) clearly stated, Mr Khaw SC argued, that money received by Fully Plan will be held by it on trust for the Company. However, subsequently in the evidence he has filed, Mr Jessop says that in fact Fully Plan did not receive any such payment and that such cheques as were received were paid into the Company’s account.  Mr Khaw SC argued that this is inconsistent with the wording of the letter sent by OLN and that it is also difficult to believe as there were periods between September and 9 November 2017 when cheques could not be deposited into the Company’s account. What happened to the money, he asked rhetorically.

20.  I accept that the language of OLN’s letter suggests money had been received. However, Mr Jessop’s evidence is clear and I can see no reason to conclude that he is lying rather than that whatever tense OLN may have used in their letter, what they were in fact intending to state was an intention rather than record a fact that had occurred.

21.  The second is a payment made on 2 June 2017 to Fully Plan from OLN for US$295,200.  The petitioner became aware of this as it is detailed in the statement and supporting documents provided to the petitioner for the June 2017 period pursuant to the validation order I granted in November 2016.  The petitioner has not written asking for an explanation for this payment, which was clearly not hidden from it.  It may be that it was a reimbursement of part of the sums Mr Jessop says he paid on behalf of the Company when its account was frozen.  I do not know, largely because the petitioner has not raised it in its evidence.  I do not think that it provides any basis for concluding that there is sufficient risk to assets to justify appointing receivers.

22.  There is a final point raised by Mr Maurellet SC which I should address.  The summons was issued pursuant to the undertaking given to DHCJ Ismail SC in September 2016.  It was, however, set down for hearing by the 1^st respondent not the petitioner.  Mr Khaw SC argued that the delay was attributable to the 1^st respondent’s delay in filing evidence in opposition.  I find this explanation unconvincing. Clearly in September what was envisaged was an expedited hearing.  The petitioner has, however, never sought an expedited hearing and the present hearing has, as I have mentioned, been fixed at the 1^st respondent’s instigation.  This is inconsistent with a genuine concern on the petitioner’s part that it is necessary to appoint a receiver as opposed to a tactical application made out of a combination of necessity, given the undertaking that was given to the DHCJ, and a general commercial motive.

23.  I dismiss the application to appoint the receiver. I can see no justification for granting the injunction that is sought in the alternative given the effect of section 182 and the terms of the validation order.

Costs

24.  Mr Maurellet SC has asked for an order that the 1^st respondent’s costs of the application are paid forthwith by the petitioner. 

25.  Mr Khaw SC brought to my attention the decision of the Court of Appeal in King Fung Vacuum Limited v Toto Toys [7].  Rogers V-P explains the normal practice in respect of costs of applications for interlocutory injunctions, which Mr Khaw SC submitted, applies equally to an application to appoint interim receivers.  In §27 the V-P says this:

“The final matter is the matter of costs. The Judge made an immediate order as to costs and there was an application to set that aside. By reason of the judgment which I have already given, that order, of course, has gone. But I will say this as to the question of costs. The traditional order on interlocutory injunctions has been that the successful party in any application for an interlocutory injunction would have his costs in the cause. Following the American Cynamid decision, the practice has frequently been to make both parties’ costs, costs in the cause. There is no justification if one applies American Cynamid principles for giving the successful party his costs in any event, or worse still an immediate order as to costs, unless of course, that party has acted improperly or is in some way to be penalised. It could be, for example, that if a plaintiff seeks an interlocutory injunction and the application is totally baseless and does not even establish, for example, that there is a matter fit to be tried, that the Court would then consider that such an order might be made. But those would be very special circumstances. Normally an order of either costs in the cause, or perhaps the successful party’s costs in the cause would be appropriate.”

On the strength of this passage, Mr Khaw SC sought an order that the 1^st respondent’s costs of the application be the 1^st respondent’s costs in the cause. I queried whether this still represented the practice of the court in the light of the Civil Justice Reform (“CJR”). 

26.  Mr Maurellet SC referred me to a judgment of Mr Justice Johnson Lam (as he then was) in Midland Business Management Limited v Lo Man Kui (No 2)[8]. In §§1 to 8 of the decision, Lam J discusses the authorities relevant to the incident of costs prior to CJR, and then says as follows in §§9 to 11:

“9. Under Civil Justice Reform, the court is encouraged to order immediate payment of costs of interlocutory proceedings and if possible by way of summary assessment of costs. The objective is to discourage unnecessary and disproportionate interlocutory applications. It is recognised that the lack of immediacy of orders to pays costs ‘in the cause’ or ‘in any event’ weakens costs as a sanction against unwarranted applications or resistance, see paras.529–536 of the Final Report of the Chief Justice’s Working Party on Civil Justice Reform.

10. By reason of O.62 r.5(1)(aa), the court should take into account the underlying objectives in O.1A r.1 in the exercise of its discretion. The objectives in r.1(a), 1(c) and 1(d) are particularly relevant in the present context. In my view, the approach recommended by the Working Party should be adopted in furtherance of these objectives. Unwarranted interlocutory applications should normally be sanctioned by an immediate costs order.

11. In so saying, I must not be taken as saying that an immediate costs order should be made against every unsuccessful party in an interlocutory application. I can readily see that there are cases where such a party may have a proper justification for making an interlocutory application even though he fails at the end of the day. There could also be cases where the court considers that it would be more appropriate to make an order ‘in any event’ or ‘in the cause’ or to reserve costs.”

What Lam J’s observations recognise is that the current practice of the court is to treat interlocutory applications as being discrete, and there is a greater readiness to make orders that the costs of an interlocutory application are paid immediately.  This, in part, represents a recognition that it will commonly be appropriate for a successful party to recover payment immediately, rather than have to wait until the end of a case.  It also represents an attempt to incentivise litigants to approach interlocutory applications in a responsible way and not to make unnecessary or speculative applications. 

27.  In practice, it may be that there is not a significant difference between the approach described by Rogers V-P and that described by Lam J.  There may now be a greater willingness to make immediate costs orders in respect of interlocutory applications.  But that does not necessarily mean that the reasons for the approach traditionally adopted when dealing with interlocutory injunctions cease to be relevant, as their justification would appear to be a recognition that whatever the view taken of the relevant evidence by the judge hearing the interlocutory application may be, it is possible that the way in which matters develop at trial will demonstrate that it would be inappropriate for the unsuccessful party to the interlocutory application to have to bear the costs.

28.  What, however, does seem to me to be important is that it is clear what the approach of the court is, in order that a party’s legal advisors can give comprehensible and reliable advice as to the likely consequences of an application being unsuccessful, in order that the prospective applicant can weigh whether or not it considers it appropriate to make the application and risk an immediate adverse costs order. 

29.  My own preference is for a robust and clear approach.  It seems to me generally that when faced with an application such as an application for the appointment of interim receivers, the position will be that if the application is unsuccessful, the applicant will pay the costs, and pay the costs forthwith unless it can be demonstrated that there is reason to think that at the conclusion of the proceedings, the trial judge may be persuaded that that is an unfair order to make. 

30.  In the present case, it does not seem to me that the application falls into the speculative category, although, as will be apparent from my reasons, it seems to me that the application should have been seen long before this hearing to be weak.  In the circumstances, therefore, I will order that the petitioner pays the 1^st respondent’s costs forthwith.

HCCW 352/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING‑UP) NO 352 OF 2016

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D E C I S I O N

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1.  I have before me an inter-parte summons issued on 3 November 2016 for a validation order in respect of the payments and dispositions of property which the company (which is the subject of the present unfair prejudice petition) says that it needs to make in order to carry on business. In addition, a validation order is sought in respect of the legal costs of continuing with certain actions to which the company is a party.

2.  When the matter came on before me today the petitioner and the 2^nd respondent had agreed the terms of the validation order, which is in the terms of the appendix attached to this decision.  The only issue that arose for decision concerns the incidence of costs. Mr William Wong SC, who appeared for the 2^nd respondent, seeks an order that the petitioner pay the costs of the summons on an indemnity basis.  In order to understand why that application is made, it is necessary to understand the background to the application.

3.  On 7 September 2016, the 2^nd respondent's solicitors wrote to the petitioner's solicitors seeking a validation order other than for the request that a validation order be agreed in respect of the legal costs of other proceedings to which I have referred.  What was sought was in conventional terms.

4.  As I made clear in my decision in Re Emagist EntertainmentLimited [2012] 5 HKLRD 703, 706-707, where the company which is the subject of an unfair prejudice petition is solvent and has an ongoing business, I expect the petitioner and the company to agree the necessary validation order or at least those parts of it which I would normally expect to be uncontentious, and to avoid the necessity of an urgent application being made to the Companies Court.

5.  In the present case the petitioner's solicitors did not reply to the initial letter.  On 14 September 2016 they finally replied after receiving a chasing letter from the 2^nd respondent's solicitors saying they were not prepared to agree the 2^nd respondent's proposal.  Correspondence continued between the 2^nd respondent and the petitioner's then solicitors PC Woo & Co, with the petitioner's position remaining intransigent and objecting to any validation order 

6.  On 7 November 2016 after the inter-parte summons had been issued, the petitioner changed solicitors and instructed Tanner de Witt, who in turn instructed Mr Richard Khaw SC and Mr Martin Ho.  I assume as a result that change of legal team, the petitioner was advised (or at least advised in terms which he found more convincing than those he had previously received) that it was appropriate to agree to a validation order.  As a result this morning proved to be uncontentious.  It did, however, require the preparation of fairly extensive evidence on the part of the 2^nd respondent and result in the court's time being wasted in having to read the documents in support of an application which should not have been necessary. 

7.  I accept Mr Khaw's submission that generally, the costs order in respect of an application for a validation order should reflect the possibility that the petitioner's complains will be upheld and as a result the petitioner will be able to argue credibly that, to the extent that there has been much in the way of legal costs incurred in dealing with the validation order, he should not be penalised by having to pay them, but this does not seem to me to be a normal case.  I am not inclined to order that the costs are paid on an indemnity basis, but I will order that the costs of the application are paid to the 2^nd respondent forthwith.

8.  I will emphasise again that I expect practitioners to recognise that when an unfair prejudice petition contains a prayer for a winding-up order as alternative relief, it is incumbent upon the petitioner to try and agree the terms of a validation order with the company if there is no sensible ground for disputing that the company is solvent and carrying on business.  In future I might be more inclined to make a cost costs order against a petitioner who proves to be uncooperative on an indemnity basis.

Appendix

1.   Notwithstanding the presentation of the Petition dated 3 October 2016 (the "Petition"), unless otherwise ordered by the Court, any payment or other disposition of property made on or after 3 October 2016 in the ordinary course of the business of the 2^nd Respondent (the "Company") shall not be void by virtue of section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance ("CWUO") (Cap.32);

2.   Without prejudice to the generality of paragraph 1 above, the payments made into or out of the bank account of the Company maintained with the Hongkong and Shanghai Banking Corporation Limited ("HSBC") (account no. 491-385563-838) in respect of expenses occurred in the ordinary course of business be sanctioned;

3.   The bank in paragraph 2 above shall be under no obligation to verify for itself whether any transaction through the Company's bank account is in the ordinary course of business;

4.   Notwithstanding the presentation of the Petition, the payment of reasonable legal expenses incurred by the Company in High Court Actions (i.e. HCA 2100/2016 and HCA 2572/2016) and payment of necessary legal expenses reasonably incurred by the Company for the compliance of this order shall not be void by virtue of section 182 of CWUO;

5.   The Company shall provide to the Petitioner and the 1^st Respondent respectively within 14 days of the end of each calendar month, a statement of accounts summarising the expenses and payments (including legal costs and expenses) of the Company (with the date, amount, payee and nature of payment) for the relevant calendar month;

6.   The Petitioner be at liberty to inspect the documents supporting or evidencing the above payments;

7.   There be liberty to apply;

8.   The costs of this application be paid by the Petitioner to the Company forthwith, to be taxed if not agreed.