SCANTY INVESTMENT CO AND ANOTHER v. BRILLIANT FUNCTIONS LTD AND OTHERS

HCCW 190/2018

[2021] HKCFI 1273

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 190 OF 2018

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D E C I S I O N

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1.  I have three summonses before me:

(1)  A case management summons;

(2)  A summons for dismissal of the Petition; and

(3)  A summons seeking clarification of the scope of an undertaking given to the court, which I will describe in detail later, or depending on my interpretation, an order releasing the Petitioner from the undertaking.

2.  There is no dispute that the Petition should be dismissed and the Petitioners pay the Respondents costs.  The only issue is whether or not the costs should be paid on an indemnity basis.  It follows that the case management summons does not require consideration and I order it withdrawn and the associated costs be in the cause of the Petition.

3.  The more substantial application concerns the undertaking.  The undertaking is in the following terms and is contained in my order of 26 March 2020, which arose from a strike-out application. My reasons for decision are set out in [2020] HKCFI 498:

“AND UPON undertaking proffered by Senior Counsel on behalf of the Petitioners that in the event that this Court declines to make a winding-up order in these proceedings, the Petitioners would not commence proceedings in the Courts of the British Virgin Islands seeking any relief for unfair prejudice based on the same or similar facts as alleged in the Petition filed herein on 13^th July 2018 as amended pursuant to the Order made by the Honourable Mr. Justice Harris dated 26^th March 2020”

4.  The Petitioners say that the undertaking only extends to proceedings commenced in the British Virgin Islands (“BVI”) for relief of the sort provided for in Part IV of the Companies Ordinance, Cap 622.  I disagree.  The wording is sufficiently wide to cover both a petition to wind up the Company on the just and equitable ground and a petition for some other form of relief.  Both would be relief sought to address unfairly prejudicial behavior.  In the context in which it was given it seems to me clear that it was intended to extend to any proceedings by the Petitioners for any form of relief qua members based on the complaints made in the Petition and, therefore, there is no reason not to give the undertaking its natural reading.  Certainly at the time it appeared that the Petitioners were only intending to proceed in Hong Kong and that is how I understood the undertaking.  It follows that if the Petitioners wish to act inconsistently with that interpretation they need to be released from their undertaking.

5.  Neither the affirmation in support made by a solicitor on behalf of the Petitioners nor Mr Lok’s skeleton argument explain why the Petitioners wish to be released from the undertaking.

6.  The Court has a discretion to release a party from its undertaking [1], but in order to do so the Court needs to have it explained to it the reasons why it should do so in order that it can properly determine how to exercise the discretion.  Buxton LJ summarises the relevant considerations in [54]–[56] of his Lordship’s judgment in Mid Suffolk District Council v Clarke [2]:

“54. Two bases were suggested to the judge and to us. (1) That the alteration or discharge was the appropriate course to take in the interests of justice: this being the way in which the ratio of Kensington Housing Trust is expressed in the headnote to the report at 30 HLR 608. (2) If there has been a material change of circumstances.

55. As to the first of these, while it is no doubt a necessary condition that an order under this jurisdiction, as under any jurisdiction, should be just, I cannot accept that that is a sufficient condition, and cannot accept that this court in Kensington Housing Trust 30 HLR 608 intended so to hold. The judge’s view that he was entitled to do justice without further qualification led him into error in three ways. First, he seems, at his para 7, to have been influenced by the fact that when the undertaking was given Mr Clarke had ‘dispensed with his legal advisers’. That might, on appeal, be a ground for saying that consent had not been full or properly informed, but it cannot be a reason for the alteration of the order by a court of concurrent jurisdiction. Secondly, the judge thought that the original order was ‘demonstrably too Draconian’ (para 13); and that the term ‘or otherwise howsoever’ should not have been included (para 25). In both of these respects the judge impermissibly converted himself into an appellate court. There was no basis for that step, apart from his belief that it was open to him critically to review the justice of another judge’s order.

56.  This jurisdiction should, therefore, be limited to significant change of circumstances. Some guide to the necessary extent of the change is provided by Butler-Sloss LJ in Kensington Housing Trust 30 HLR 608, 613 where she suggested that developments must have occurred which made it no longer proper to punish the undertaker for breach of his undertaking.  It need hardly be said that that requirement is unlikely to be satisfied if, as happened in this case, the contemnor is in one and the same proceedings punished for contempt by breach of the undertaking and also relieved of future liability under the undertaking.  And, quite apart from that, for the reasons given by Lloyd LJ, the stringent standard required to alter an undertaking given in lieu of a final injunction was plainly not met in this case.”

7.  The Court needs to be told, and told with candour, what change of circumstances has arisen that the applicant contends justify being released from the undertaking.  Mr Lok told me that he understood that the Petitioners were contemplating commencing proceedings although a final decision had not yet been made.  This should have been stated clearly in the supporting affirmation.  It was not.  Instead we get the following two paragraphs of Ms Wang:

“18. Subsequent to the Hearing, the Petitioners have sought further advice from Counsel and Senior Counsel and it was after careful consideration, the Petitioners made a decision to discontinue the Petition in Hong Kong.

…

27.  Moreover, we have also taken out the Undertaking Summons so as to seek clarification of the Undertaking and, so far as is necessary, the Court’s indulgence to be released from the same.  I verily believe that the intention of the Undertaking was to ensure that there would be no prejudice to the 1^st – 3^rd Respondents, such that, in the words of the Honourable Mr Justice Harris at §3 of the decision, ‘arguably they are advantaged as if the court cannot be persuaded that this case is one of the few in which a winding-up order is appropriate, as opposed to relief under s725 of the Ordinance, [the Petitioners] will lose’.  The purpose of the Undertaking is to ensure that the 1^st – 3^rd Respondents would not be vexed a second time with the same allegations in another jurisdiction, once/if the Hong Kong Court considers the merits of the Petition and on that basis decides against the Petitioners.  That said, upon further reflection, instead of seeking to persuade the Hong Kong Court to make a winding-up order upon the Petition, the Petitioners would like to withdraw the present Petition (which needs to be dismissed formally) such that relevant proceedings may be pursued in the place of incorporation.  I therefore verily believe that no prejudice would be suffered by the 1^st – 3^rd Respondents, save perhaps as to costs.”

8.  Although these paragraphs suggest that new proceedings will be commenced it is not clear whether any proceedings in the BVI would be limited to the relief available to the Petitioners in Hong Kong or it is intended to seek relief of the sort available in Hong Kong under Part IV. This should have been made clear.  That having been said having heard Mr Lok it is clear what the position is.

9.  The undertaking was given at my suggestion during the course of the one-day hearing.  Following the hearing further thought was given to the implications of agreeing to forego the option of seeking relief under Part IV.  I am not told, as I should have been when this occurred.  However, the language of [16] suggests that it was at the end of last year as the Petitioners proposed to terminate the proceedings in January 2021.

10.  Ms Lee argued that it would be unfair to the Respondents to release the Petitioners from the undertaking as this would result in the work undertaken since my decision was handed down in March 2020 being wasted and her clients being inconvenienced by having to start again in defending new proceedings in the BVI.

11.  Although the situation is unsatisfactory I do think that it is just to release the Petitioners from their undertakings if any new proceedings in the BVI are issued on or before 18 June 2021 and the Respondent’s costs of the present proceedings are assessed on an indemnity basis (including all reserved costs).  If I had dismissed the Petition in March 2020 there would have been nothing to stop the Petitioners issuing new proceedings in the BVI.  The proceedings have only reached the stage of close of pleadings and those documents can be used in the BVI proceedings so the extent of the waste of time and resources resulting from the Petitioners changing their mind at this stage and choosing to terminate these proceedings and start again in the BVI, is limited.

12.  I will, therefore, dismiss the Petition. The costs of the proceedings including all reserved costs are to be paid by the Petitioners to the Respondents such costs to be taxed on an indemnity basis.  I will order that the Petitioners be released from the undertaking if by 18 June 2021 they issue proceedings seeking relief for unfair prejudice in connection with the Company on substantially the same grounds as the Petitioners relied on in these proceedings in the BVI.  Costs of the undertaking summons to be paid by the Petitioners on an indemnity basis.  The Official Receiver’s costs shall be paid out the Petitioners’ deposit, the balance of which shall be returned to the Petitioners.

HCCW 190/2018

[2020] HKCFI 1292

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 190 OF 2018

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DECISION ON COSTS

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1.  On the 26 March 2020, I gave my decision in respect of a strike-out application in this matter, it is not necessary for me to repeat what is said in the decision. In paragraph 11, I made a costs order nisi that the Petitioners pay the costs of the Respondents’ summons forthwith with the certificate for two counsel, such costs to be taxed if not agreed. The Petitioners have applied to have that order varied.

2.  The Petitioners have argued for a number of alternatives.  First, the costs be reserved, alternatively that the costs be in the cause and there is a final alternative that the Respondents’ costs be in the cause.  So far as the 7^th Respondent, the Company is concerned that there be no order as to costs.

3.  In short, the Petitioners’ point is that the sole relief that is sought, namely, a winding-up order, has not been struck-out and the matter will proceed to trial.  In the circumstances, it cannot be said the 1^st to 3^rd Respondents were wholly successful, which is the implication of the costs order.  I disagree.  It seems to me apparent from my reasons and the fact that the strike-out application was dismissed against the undertaking referred to in the reasons, which was proffered during the hearing, that the Respondents’ application has in a material respect achieved success.  That success is that it has established that the Petitioners cannot seek unfair prejudice relief in Hong Kong (it should be said that this of itself was not contentious), and that it cannot as a result of the undertaking that it has given seek it in the British Virgin Islands.  The result is that, the Petitioners can only obtain any relief if it demonstrates that this is one of the exceptional cases, in which the findings of the court in a dispute between shareholders concerning the conduct of the affairs of the company justify making a winding-up order rather than, for example, a buy-out order.

4.  This will narrow, in my view, the area of dispute at the trial and constitutes a material, albeit perhaps somewhat tactical, success for the 1^st to 3^rd Respondents.  I will, therefore, not vary that costs order.

5.  So far as the 7^th Respondent is concerned.  It is of course well established that the Company which is the subject of a petition should not take an active role in the substantive dispute. To the extent that the 7^th Respondent was represented for the purposes of a general case management hearing on the 22 November 2019, it seems to me that the appropriate costs order would normally be costs in the cause or that the costs be paid out of the assets of the Company.  It does not seem to me that it was necessary for the 7^th Respondent to take an active role in respect of the strike-out application itself.

6.  I, therefore, agree that in the case of the 7^th Respondent, there should in respect of the strike-out application be no order as to costs. So far as today’s hearing is concerned, I will order that the Petitioners pay the 1^st to 3^rd Respondents’ costs albeit with the certificate for one counsel, and that there be no order as to costs so far as the 7^th Respondent is concerned.

Ms Leong Wai Sum, of ONC Lawyers, for the 1^st and 2^nd petitioners

Mr José Maurellet SC, instructed by Patrick Wong & Co, for the 1^st to 3^rd respondents

Mr Aidan Tam, instructed by Lee Chan Cheng, for the 7^th respondent

HCCW 190/2018

[2020] HKCFI 498

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 190 OF 2018

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D E C I S I O N

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1.  I have two summonses before me. The First is an application by the 1^st to 3^rd Respondents (“Respondents”) to strike-out the Petition on the grounds that there is no prospect of a winding-up order being made. The second is an application by the Petitioners for leave to amend the Petition. The amendment application is not opposed in the event that I dismiss the strike-out summons [1].

2.  The gravamen of the Respondents’ application is shortly stated.  The 7^th Respondent, ACE International (B.V.I.) Limited (“Company”), which is the subject of the Petition, is incorporated in    the British Virgin Islands (“BVI”).  It is solvent and carrying on business.     If a dispute arises between shareholders of a solvent, active company     the normal relief that is granted is a buy-out order pursuant to Part 14, Division 2 (ss723-725) of the Companies Ordinance, Cap 622 (“Ordinance”).  Section 180(1A) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32, provides:

“Where the petition is presented by members of the company as contributories on the ground that it is just and equitable that the company should be wound up, the court shall not refuse to make a winding-up order on the ground only that some other remedy is available to the petitioners unless it is also of opinion that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.”

The authorities are clear [2] : the presumption is against winding up a solvent company with an ongoing business.  As the Company is incorporated in the BVI and does not have a place of business in Hong Kong the relief under Part 14 is not available to the Petitioner.      In these circumstances even if the Petitioners can demonstrate that there is sufficient connection between the Company and Hong Kong to justify this Court exercising jurisdiction over it (and it is not in dispute that they can), it should not do so as it can obtain a buy-out order under the BVI equivalent of Part 14.

3.  During his address Mr Wong offered an undertaking on behalf of the Petitioners that in the event that this Court declined to make a winding-up order the Petitioners would not commence proceedings in the BVI seeking relief for unfair prejudice.  This took most, if not all, the force out of Mr Maurellet’s argument as clearly there is no need to strike out or stay the Petition on the grounds that the Petitioners should pursue what is in substance an unfair prejudice claim in the place of incorporation in which the type of remedies the Hong Kong Court   would normally grant is available. In the light of the undertaking Mr Maurellet’s clients are in no way prejudiced by the Petitioners’ decision to seek relief in Hong Kong; arguably they are advantaged as if the court cannot be persuaded that this case is one of the few in which a winding-up order is appropriate, as opposed to relief under s725 of the Ordinance, they will lose.  For this reason I will not strike-out the Petition. However, it still remains necessary to consider the substantive argument because costs have to be determined and it also will be useful for practitioners, who may find themselves faced with the same issue in the future.  I do not consider it necessary to consider some of the more detailed arguments raised initially about, for example, the ability of the Respondents to buy out the Petitioners.

4.  In recent years the courts of Hong Kong have considered in a number of authorities the principles that govern the circumstances in which the discretion given to the court to wind up a foreign incorporated company should be exercised.  They have culminated in the decision of the Court of Final Appeal in Kam Leung Sui Kwan v Kam Kwan Lai [3] (“Yung Kee”), which concerned a solvent company.  In summary the principles that emerge from the decision are as follows:

(1)     The starting point is that the most appropriate jurisdiction to wind-up a company is its place of incorporation [19].

(2)      Three core requirements should usually be satisfied before the Court will exercise its exorbitant jurisdiction [20–21]:

(a)   there has to be a sufficient connection with Hong Kong, but this does not necessarily have to consist in the presence of assets within the jurisdiction;

(b)   there must be a reasonable possibility that the  winding-up order will benefit those applying for it; and

(c)   the court must be able to exercise jurisdiction over one or more persons in the distribution of the company’s assets.

(3)     In a shareholders’ petition, it is necessary to establish     a “sufficient connection” between the company and Hong Kong, which requires a multi-factor analysis.  Important factors include:

(a)   The whereabouts of the shareholders [30] and the directors [32(5)];

(b)   Where the company’s subsidiaries are incorporated [32(3)];

(c)   Where the underlying assets (including the assets of its wholly-owned subsidiaries) of the corporate group are situate [32(2)];

(d)   Where the company derives its income from [32(4)]; and

(e)   Where the operations of the Company took place [32(7)].

(4)    It is essential that there is a real likelihood that the petitioner will derive some benefit from the winding-up order [35].

5.  The Respondents have filed an affidavit of Nigel Meeson QC explaining to the court the relevant statutory  provisions of the BVI Business Companies Act 2004 and in particular Part XI Members’ Remedies.  Mr Meeson explains (and this is not in dispute) that s184I of the Act provides that if the court is satisfied that a member has, qua member, been unfairly prejudiced it may order by way of relief, amongst other things, that the company or any other person acquire the shareholder’s shares.  Although the provisions are not identical to Part 14 of the Ordinance they are substantively the same.     As a consequence if the Petitioners had issued a petition in the BVI they would have been able to obtain the type of order that I would expect most commonly to be ordered in Hong Kong in the event that court is satisfied that they had been sufficiently prejudiced to justify relief being granted.

6.  In Yung Kee the Court of Final Appeal held that the court had no jurisdiction to make an order under the predecessor provisions to Part 14 (s168A of the Companies Ordinance, Cap 32) if the company did not have a “place of business in Hong Kong”, which Yung Kee did not [4] .  The Company does not.

7.  The Respondent in Yung Kee did not argue at first instance (before me) or in the Court of Appeal that that it was unreasonable for the petitioner to proceed in Hong Kong and seek exclusively a winding-up order (and possibly leave open if unsuccessful seeking relief under s184I) and this was a factor to take into account when the court came to decide whether to exercise its jurisdiction over a BVI incorporated company.  The issue was raised for the first time in the course of submissions  in the Court of Final Appeal.  In their joint judgment Ma CJ and Lord Millet NPJ considered it far too late to raise such a point, which they state ought to have been raised at the earliest opportunity.  Their Lordships say this at [61]:

“61. It is correct that s.327(3)(c) provides only for the remedy of winding-up if the court is of the opinion it is just and equitable to do so. We are however not aware of any case in which after trial a court has, despite being of the view that it is just and equitable to wind up, refused to do so merely on the basis that there is another jurisdiction which may be able to grant what may be regarded as more appropriate relief. If such a point is to be taken at all, it ought to be taken at the earliest possible opportunity, whether on a strike-out application or some other form of preliminary application. In the present case, it is far too late to take such a point. It surfaced for the first time in the course of submissions before this Court. Further, given the spectre of yet another hard fought hearing in the BVI even before any relief can be considered, this possibility must be rejected.”

8.  I am also unaware of any case in which in closing submissions, (in a case in which the petitioner has sought the winding-up of a solvent company with an active business incorporated in another jurisdiction with provisions substantially the same as our Part 14) a respondent has sought to avoid a winding up order on the grounds that the place of incorporation offers a more appropriate remedy.  However, I find this unsurprising.  Lawyers alive to the question and with a client, who wishes the point taken, would be likely to take it early as Mr Maurellet’s client has done.

9.  The Court of Final Appeal give no indication of how they consider this issue impacts on the resolution of the jurisdiction issue before the court.  It seems to me that it is a matter of considerable weight. In my view unless it can be demonstrated that the respondents would be unlikely to be able to finance the purchase of the petitioner’s shares or there is some other compelling reason not to require the petitioner to litigate his complaint in the place of incorporation, the petitioner should be required to do so.  In my view it would generally be unreasonable     for a shareholder, who has agreed to participate in a business using a foreign incorporated company to insist on seeking relief in Hong Kong,      which would not normally be granted for the reasons explained in      Re Wong To Yick [5].

10.  Generally, it will be consistent with the philosophy underlying Hong Kong’s own legislation, that a shareholder dispute should be resolved in a jurisdiction which can grant either a buy-out order or a winding-up order.  It follows that if a company is incorporated in a jurisdiction such as the BVI, which has a similar unfair prejudice regime to Hong Kong and the company does not have a place of business here generally the dispute between shareholders should be litigated in the place of incorporation, because the petitioner is behaving unreasonably in seeking exclusively a winding-up.

11.  I will dismiss the Respondent’s application against the undertaking proffered by Mr Wong and order nisi that the Petitioners pay the costs of the Respondents’ summons forthwith with a certificate for two counsel, such costs to be taxed if not agreed.  I will make an order in the terms of the Petitioners’ summons of 26 November 2018.