David Golan v. Janek Davitashvili Bsd (HK) Ltd

HCCW 255/2016

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING‑UP) PROCEEDINGS NO 255 OF 2016

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REASONS FOR JUDGMENT

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1.The two summonses for determination were issued by David Golan (“the petitioner”) on 28 July 2016 and 29 August 2016 respectively for the appointment of provisional liquidators (“the PL summons”) and for the production of corporate documents (“the document summons”) (collectively “the summonses”). At the conclusion of the hearing both summonses were dismissed. My reasons appear below.

Background facts

2.On 28 July 2016 of the petitioner issued a petition pursuant to sections 724 – 725 of the Companies Ordinance (Cap 622) and section 177(1)(f) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) seeking an order for a buyout and, in the alternative, a winding up order on the just and equitable ground.

3.The petitioner and Janek Davitashvili (“the 1^st respondent”) are the only shareholders and directors of BSD (HK) Ltd (“the Company”), each owning 50% of its issued share capital.  ‌The Company is the 2^nd respondent to the petition.

4.The Company was incorporated on 7 June 2007.  It has three direct subsidiaries, namely, Bergner Impex (India) Private Limited (“Bergner India”) with substantial operations in India, BSD Bergner Israel Ltd (“Bergner Israel”) in the process of shutting down and BSD Luxembourg SARL (“BSD Lux”) a holding company, respectively incorporated in 2007, 2009 and 2013.

5.Through BSD Lux the Company owns three wholly owned sub-subsidiaries: Bergner Europe GmbH (“Bergner Germany”) and Bergner Home AT GmbH (“Bergner Austria”) and Bergner Europe SL (“BESL”) incorporated in 2010, 2014 and 1997 respectively.  Bergner Germany is currently in voluntary liquidation and Bergner Austria has taken over its operations.  BESL carries on business in Spain and is the largest company within the BSD Group by turnover.  It was acquired by the Company in stages from 2012 and transferred to BSD Lux by the Company on 28 January 2015.

6.The Company is part of a larger group of companies (“the Larger Group”) engaged in the business of trading in household goods and kitchenware worldwide (“the Business”) and was incorporated a decade after the establishment of the Business.

7.It is the petitioner’s pleaded case (Points of Claim dated 16 December 2016 at §§4 – 6) that the Larger Group consists of:

(1) “the BSD Group” comprising the Company, its 3 subsidiaries (Bergner India, Bergner Israel and BSD Lux) and (through BSD Lux) 3 sub‑subsidiaries; and

(2) 4 non‑BSD entities: (i) LLC Bergner RUS (“Bergner Russia”); (ii) LLC Royalton Group (“Royalton Russia”); (iii) Bergner Ukraine Ltd (“Bergner Ukraine”); and (iv) Bergner (HK) Ltd (“Bergner HK”).

The Appendix shows the composition of the Larger Group.

8.Save as otherwise appears, the history of the Business as set out below is undisputed:

(1) The Business was a family business started by the petitioner’s grandfather (“Grandfather”) and the 1^st respondent in 1997.

(2) Grandfather was responsible for sales in Hungary and the 1^st respondent for sourcing products in China.  Profits were shared equally.

(3) The petitioner, who is a cousin of the 1^st respondent, joined the Business in 1999 and was based in Hungary.

(4) There was:

(i) a common understanding between Grandfather, the petitioner and the 1^st respondent (the “Common Understanding”) that the petitioner “would participate in the management of the Business and in particular managing and overseeing operations in Russia and Ukraine” and “would receive reasonable return for his share in the Business according to the agreed proportion”.  Profits were divided among Grandfather, the petitioner and the 1^st respondent (collectively referred to as “BDJ”) in the ratio of 30:30:40: Petition §§6 – 7.

(ii) the Common Understanding still existed despite Grandfather’s death: Petition §20.

(5) After joining the Business the petitioner moved to Moscow to develop the market in Russia.  (Whilst the parties disagreed as to whether that occurred in 1999 or 2001, the date is not material for present purposes.)

(6) The 1^st respondent moved to Hong Kong in 2003 to be better based for sourcing goods from China.

(7) The Business prospered and in 2004, several years prior to the incorporation of the Company, BDJ who were in quasi partnership decided to incorporate the various operations conducted in Russia, Ukraine and Hong Kong.  As a result, the Business came to comprise the 4 non‑BSD entities identified in §7(2) above respectively operating in Russia, Ukraine and Hong Kong. Bergner HK supplied the products sourced from China to the Russian and Ukrainian Operations.

(8) Profits of the 4 non‑BSD entities were shared with other partners: Zaza (Russia), Murtaz, (the petitioner’s father) and Izik Dvir (the petitioner’s cousin) (Ukraine) and Umesh Ramchandra Gupta (“Umesh”) (Hong Kong).

(9) Parties privy to the profit sharing arrangement are referred to as “Participants”.  Profits of the Business were shared as follows:

Operation	BJD’s share of Profits	Other Partner’s share	Shareholders on Incorporation in 2004
Russia (Bergner + Royalton)	80%	Zaza    20%	P’s wife 50%    Zaza 50%
Ukraine	65%	Murtaz    20% Izik Dviv    15%	Murtaz
HK	80%	Umesh    20%	R1 95%    Umesh 5%

(10) BDJ’s share of the accumulated profits generated from its established markets (in particular in Russia and Ukraine) was deployed to expand the Business to new markets.

(11) The Company was incorporated three years later and in the same year Bergner India was incorporated as a wholly owned subsidiary of BSD Lux.  As such BSD Lux was a holding company.  

(12) BDJ’s income thereafter comprised BDJ’s share of profits from each of the 4 non‑BSD entities as stated above and the profits of the BSD Group.

(13) Grandfather died in 2010.  After his death the agreed profit share became 50% for the 1^st respondent, 45% for the petitioner and 5% for Dennis (the petitioner’s cousin) until Dennis’ death in 2013 after which date the petitioner’s share became 50%.

(14) The petitioner became a shareholder and director on 14 June 2010 when the 1^st respondent’s wife transferred her shares to him.

Agreed modus operandi of the Business

9.It is the petitioner’s case as pleaded in the Petition that:

(a) the Business was treated as one single economic unit and conducted on the basis of the Common Understanding which continued even after the death of the Grandfather (Petition §§7 and 20);

(b) there remained little formal corporate governance between the petitioner and the 1^st respondent as they continued to adopt the mode of operations back in the days before Grandfather’s death.  Very few, if any, formal board or shareholders’ meetings were ever held between the 1^st respondent and the petitioner.  The “finance and accounts” of the Company and the entire Business were delegated to the 1^st respondent, Pratheep Viswanathan (hereinafter referred to as “Pradeep”) and George Anto (“Anto”): Petition §21; and

(c) from time to time, spreadsheets in Microsoft Excel format which summarised the financial position of the Business and/or show the profit drawings made by the petitioner and the 1^st respondent were provided to the petitioner.  The petitioner was content with such an arrangement with the finance and accounts of the Business due to the trust and confidence he reposed in the 1^st respondent: Petition §§22 – 23.

10.As appears from the petitioner’s Points of Claim dated 16 December 2016 (“POC”), the petitioner and the 1^st respondent had different spheres of responsibility within the Business.  A clear division of work existed.  As pleaded in the POC:

(a) The petitioner focused on managing the Business in Russia and Ukraine.  He played a central role in the management of the Russian Operation and was its “leader”.  ‌The petitioner also assisted his father to develop Bergner Ukraine and was consulted by its management and operational staff on a regular basis: POC §§18, 32 – 38.

(b) The 1^st respondent was in charge of the operation of Bergner HK and was responsible for sourcing and supplying products from China to various overseas markets operated by the Business: POC §18.

(c) The 1^st respondent was also in charge of developing new markets in Germany, Spain, India and Israel.  He arranged for corporate entities to be set up in the several markets in which the Business operates and appointed local individuals as directors or managers to those entities, including in Russia and Ukraine: POC §§23 – 24.

BDJ Accounts

Pradeep’s affirmation.

12.Pradeep’s job since 2006 had been to coordinate and prepare consolidated accounts of various business ventures of BDJ for the purpose of profit sharing in the various businesses.  Those consolidated accounts were designated and known as the “BDJ Accounts”.  ‌The Participants wanted to have an accountant dedicated to maintaining the BDJ Accounts that allowed them to have access to updated balance sheets and the financial status of the BDJ Accounts at any time and that was Pradeep’s role.

13.The Participants provided him with the initial numbers relating to assets, liabilities and capital of the Business.  A sample set of the BDJ accounts is in evidence and runs to over 130 pages.

14.Pradeep’s evidence may be summarised as follows:

(i) the BDJ Accounts and the various reports were prepared according to the requirements specified by each of the Participants;

(ii) they were based on financial information in the form of daily financial reports and monthly financial reports sent to Pradeep from the various operating businesses and were prepared continuously throughout the past 10 years;

(iii) the petitioner and the 1^st respondent relied on them in determining the profits and losses of the various business ventures;

(iv) in addition to maintaining the BDJ Accounts, he analysed the financial information provided by each of the business ventures and sent weekly, monthly and yearly reports (including weekly and monthly financial reports and performance report for each of the BDJ offices) to the Participants;

(iv) the petitioner and the 1^st respondent received full sets of the BDJ Accounts on a regular basis while the other Participants would receive the section relevant to their market only;

nevertheless, with the exception of the Russian Operation and Bergner Ukraine, financial information obtained from other operating businesses were all audited (unless not legally required to do so due to a minimal activity or liquidation as was the case with Bergner Israel and Bergner Germany) up to year end 2015;

(vi) Bergner Lux (being a holding company) was not required to have audited accounts but unaudited financial statements were nonetheless prepared annually. Draft consolidated audited accounts for the BSD Group from June 2007 to 31 December 2014 have been prepared (“the Draft Report”): see §§41 – 45 below.

15.Pursuant to the petitioner’s request, the BDJ Accounts were also made available to the petitioner’s personal accountant Abhash Malik (“Malik”) who worked for him from 2012 until 30 April 2015.  ‌There are sample e‑mails during that period from Malik making specific queries concerning the accounts supplied and seeking breakdowns on expenses.  Queries were also made regarding the petitioner’s personal transactions that were treated as withdrawals from the BDJ Accounts by agreement between the Participants. 

16.After mid January 2016, BDJ Accounts could no longer be compiled when, upon the petitioner’s instructions the Ukrainian and Russian operations ceased providing Pradeep with financial information.  Pradeep was notified by e‑mail of 12 January 2016 from his counterpart in Ukraine and Anto received a similar e‑mail on 14 January 2016 from Bergner Russia.

17.The Russian Operation maintained a private account ledger for all parties involved in the profit sharing arrangement and would debit the total amount withdrawn to the BDJ Accounts.  Withdrawals made by the petitioner from the Russian Operation would be reported to the Hong Kong office and would then be booked to his BDJ current account.  After mid‑January 2016 Pradeep was only able to obtain limited financial information for the Russian and Ukrainian Operations through the other partners, namely, Zaza in Russia and Izvik in Ukraine in particular concerning withdrawals made by the petitioner and his father Murtaz from those entities.

18.Since 2014 the Russian and Ukrainian Operations have experienced a sharp drop in profits mainly due to the downturn of the Russian and Ukrainian economies and the collapse of local currencies (the Rouble and the Hyrvnia) which dropped over 50% as against the US dollar in mid‑2014.  As goods were supplied and sold in US dollars consumers in those countries could no longer afford them.  In addition there was a lack of cash flow in the Russian Operation due to excessive drawings by the petitioner.

19.The ledger statements of the petitioner’s current account as at 31 December for the years 2007 to 2015 and 30 June 2016 show negative balances for 2007 to 2009 and 2013 to mid‑2016.  It is apparent from the table (CB 628) that the amounts overdrawn by the petitioner increased substantially after 2013.  Between 1 January 2014 and 30 June 2016 (a period of declining profits of the Business), his aggregate drawings exceeded US$16 million and by 30 June 2016 his current account showed a negative balance of over US$20 million.  Even allowing for US$15 million as retained capital it remains overdrawn by approximately US$5 million.

20.Against the background described and having regard to the modus operandi distilled from the Petition and the POC, I turn to the summonses.

I.   The PL summons

21.The legal principles to be applied are not controversial.  The correct approach is accurately reflected in §29(3) of the judgment of Kwan J (as she then was) in Re Boldwin Construction Co Ltd & Ors [2003] 2 HKLRD 237.  The evidence filed in the present case is voluminous and raises wide-ranging issues.  Numerous factual disputes arise and I approach them on the basis that any conflict of evidence should be left to be resolved at trial unless the evidence adduced by the opposing party is “obviously cogent”.

22.It is common ground that two issues arise on the determination of the PL summons: (A) whether the petitioner has shown that he has a good prima facie case for seeking an order for a just and equitable winding-up; and, if so, (B) in the circumstances of this case, whether it would be appropriate to appoint PLs having regard to the commercial realities, degree of urgency and need established by the petitioner, and the balance of convenience.

A.  Whether good prima facie case for winding up

23.The grounds on which the Petition is based appear under the following headings in Section IV of the Petition: (A) Questionable management and exclusion of the petitioner; (B) The petitioner is kept in the dark about the Company's financial position; (C) Other unfairly prejudicial and/or suspicious conduct; and (D) Deadlock and breakdown of mutual trust and confidence.

24.Ms Chan SC, who appeared for the 1^st respondent, drew attention to two preliminary matters arising considered below.

(1) Preliminary matters

(a) Tangible interest

25.It is well‑established that a winding-up order will not be made on a contributory’s petition unless the petitioner has a sufficient interest in having the company wound up.  Normally such an interest will exist if it can be shown that a monetary surplus would be available for distribution to its members.

26.In the present case, it is common ground that the Company is insolvent: see §88 of the POC. The sole creditor is the 1^st respondent who has no intention of calling in the loan.

27.Belatedly (through his reply submissions made available at the commencement of the hearing), the petitioner tried to retract the admission asserting that the reference to insolvency at §88 was a mistake.  Although specific reference to insolvency as ‘common ground’ was made by the 1^st respondent’s solicitors as recently as 18 January 2017 in its letter of even date, it elicited no reaction from the petitioner who has not seen fit to take any steps to correct the alleged error.  In those circumstances, the ‘retraction’ bears the hallmarks of a last‑minute afterthought that must militate against it being a genuine error.

28.It is clear that a sufficient interest does not necessarily have to be monetary in nature so long as it can be shown that a winding up order would serve a ‘useful purpose’: see Ng Yat Chee v Max Share Ltd [2001] 1 HKLRD 561 at 578E–F agreeing with the distinction emphasised by Oliver J in Re Chesterfield Catering Company Ltd [1977] Ch 373 between a tangible interest and a surplus of assets for distribution amongst the shareholders: to regard it as being limited to a surplus of assets would be unduly restrictive of the concept of a tangible interest.

29.Mr Ma representing the petitioner submitted that as a matter of Hong Kong law, there is no strict prerequisite for a tangible interest citing Re Cirtex Co Ltd [1987] 3 HKC 13.  He further submitted that at any rate the position is ‘unsettled’ given two conflicting Court of Appeal decisions in DJH Consultants Ltd (unreported, CACV 164/1984) and Ng Yat Chee.  ‌Those decisions were referred to by Barma J (as he then was) in Mak Shing Yue Tong Commemorative Association Ltd [2005] 4 HKLRD 328 at §66.

30.The first matter to note is that the Court of Appeal in DJH Consultantsdid not decide the matter but merely posed the question as to whether section 180(1) of the Companies Ordinance altered the principle stated in re Rica Gold Washing Co Ltd (1879) LR 11 Ch D 36 and made certain obiter observations.  ‌As Rogers VP pointed out in Ng Yat Chee, the court in DJH Consultants had overlooked the distinction that exists between a tangible interest and a surplus of assets.  ‌Contrary to what the petitioner submitted, it was a distinction Barma J accepted and applied in Mak Shing Yue Tong as appears from §§67 – 70 of that decision.  In those circumstances, Re Cirtex cannot assist the petitioner.

31.As a fallback position, the petitioner submitted that even if a tangible interest were a prerequisite, the exception to the general rule (which applies where it can be shown that the petitioner's inability to prove a tangible interest is due to the Company’s own default in providing him with information to which as a member he is entitled) would be applicable on the facts.

32.But it is for the petitioner to invoke the exception by first identifying his tangible interest and stating what it is.  In the present case, contrary to what the law requires, the Petition failed to allege and plead that the petitioner has a sufficient interest in having the Company wound up: see French, Applications to Wind Up Companies, 3^rd edition at §8.67 as to the requirement.  Here, what the petitioner considered to be his tangible interest is simply not known.  It is not for the court of its own volition to invoke and apply the exception.  It is therefore not apparent how the exception could even arise for consideration.  

(b) Winding up as an alternative relief

33.It is abundantly clear from the Petition that the primary relief sought is an order for a buyout.  Whilst there is a prayer for a winding up order, it is not apparent what particular matters are relied on to make a winding‑up order the appropriate or only practical relief bearing in mind that a winding up order is a last-resort remedy.

34.The courts have time and again stated that it is undesirable to include as a matter of course a prayer for winding up as an alternative to an order for a buyout and it is incumbent on the petitioner to explain the reason for including a prayer for a winding up order: see Re Sun Light Elastic Ltd [2013] 5 HKLRD 1 at §§9 – 11 for the rationale for the approach.  That case is an example of the prayer in the alternative for a winding up order being struck as a result.

35.While I consider that the preliminary matters alone are dispositive of the first issue, as extensive submissions were made by counsel on whether or not there is a good prima facie case, I turn to consider them below.

(2) The petitioner’s substantive complaints

(a) Mismanagement and exclusion from management

36.The petitioner highlighted various matters in support: (i) the 1^st respondent’s refusal to provide him access to the books and accounts of the Company; (ii) the 1^st respondent’s appointment of his brother as sole director of Bergner Austria and himself as sole director of BESL in 2015 without the knowledge and consent of the petitioner, and rejection of the petitioner’s request in July 2016 to be appointed a director of BESL; (iii) the Shada transaction; and (iv) Bergner HK’s excessive handling commission.  

(i) Access to financial information

37.The allegations are that he was denied access to financial information, that he had no means of determining the veracity of the financial information contained in the excel sheets (ie BDJ Accounts) provided to the petitioner in 2014 and 2015 and his being “kept in the dark”.  It was said that despite repeated requests in writing from his legal representatives commencing December 2015, access to the books and records of the BSD Group was denied and in January 2016 excel sheets / ‌BDJ Accounts were no longer provided to the petitioner.

38.As a preliminary matter, it is to be noted that the shareholders agreed that no audited accounts would be prepared for the Company (which is merely a holding company) and the petitioner himself as a director signed resolutions to that effect annually up to 2014.  (As already noted there are audited accounts for all operating subsidiaries of the BSD Group: see §14(vi) above.)

39.The petitioner also criticised the Draft Report (mentioned in §14(vi) above) exhibited to the 1^st respondent’s 1^st affidavit dated 6 October 2016 (“R-1^st”).  He complained that it was in draft form and covered 7 years from 2007 – 2014, suggesting that the finances of the BSD Group needed ‘investigation’.  The 1^st respondent’s explanation for the Report remaining in draft was that the auditors were instructed after December 2014 and the presentation of the Petition in July 2016 had the effect of freezing the Company’s accounts as a result of which the auditors could not be paid.

40.Pradeep’s unchallenged evidence (set out in some detail in §§12 – 19 above and in particular at §14) speaks for itself. Far from having been “kept in the dark” about the Company’s financial position, the petitioner was provided with a constant and regular flow of financial information of the Business. There was no evidence that the explanations/‌breakdowns Pradeep provided to the petitioner were in any way insufficient or unsatisfactory: §15 above.  Moreover, the fact that petitioner himself has exhibited detailed financial information of the Business he had received up until 15 January 2016 undermines his complaint of a lack of access to financial information.  ‌As to the complaint that he ceased to receive BDJ Accounts from January 2016, the petitioner only has himself to blame for that state of affairs: see §16 above.

41.The petitioner’s substantive criticisms of the Draft Report as rendering it unreliable or questionable stem from the fact that (i) it was ‘heavily’ qualified by the auditors, and (ii) two Loan Agreements reflecting respectively a US$10 million loan from Russia Royalton and a US$10 million loan to Bergner HK by the Company are not reflected at all which, it was said, showed an intent on concealing the business records and documents of the Company.

42.But, as the 1^st respondent explained, the reason for the qualification was given in the qualification itself: it was necessary because the auditors were not able to conduct physical stock taking of the subsidiary in Israel.  In any event, the accounts of all operating subsidiaries are audited accounts and the petitioner has not provided any reason for questioning their accuracy and reliability.

43.The complaint concerning the omission of the Loan Agreements from the Draft Report also appears to be without substance.  They were re‑financing loans devised by the petitioner’s accountants in the Russian Operation to reduce interest payable on Russian bank loans from 16% to 8.9% (“the Russian Scheme”) that had been obtained by the Russian Operation to settle Bergner HK’s invoices for goods supplied.  

44.The 1^st respondent has produced various e‑mails pertaining to the Russian Scheme including e‑mails from the “Director Finance” of Royalton Russia on which the petitioner was copied.  Their contents reflect and are consistent with the Loan Agreements in terms of the identity of the lender, the amount of the loans, the purpose of such loans and use of the warehouse (owned by the petitioner’s wife) as collateral security and substantiate the explanation in the preceding paragraph.

45.Bergner HK’s invoices settled by those funds were shown in the Draft Report to be settled by the Russian Operation direct, although in fact the funds were routed to Bergner HK via BSD HK.  The 1^st respondent explained that it was done at the request of the Russian accountants who considered it necessary because of a term imposed by the Russian bank making the loans.  In my view, nothing sinister or untoward could reasonably be inferred from the absence of any mention of the Loan Agreements in the Draft Report.

(ii) Management of operating subsidiaries

46.BESL is the largest operating subsidiary run by three full-time managers who, previously, were also its directors.  The allegation is that they had been forced out and replaced by the 1^st respondent as sole director without the knowledge and/or consent of the petitioner.  The petitioner relied on that event not only as an instance of exclusion but also to show that the operating subsidiaries required an independent party to be appointed to manage them.

47.The Spanish directors have each filed an affidavit to the effect that their resignations were entirely voluntary following legal advice they had obtained and all denied having been forced out against their will.  ‌In the face of that evidence and the agreed modus operandi, the need for an independent party to be appointed to manage BESL is not apparent at all.

48.In that connection, the petitioner had made an application to the Spanish court in March 2016 for an injunction of receivership (that is to say, for the appointment of emergency managers and hence akin to his present application for the appointment of PLs) in relation to the Spanish resignations.  His application was dismissed with costs on the basis of insufficient evidence and his appeal dismissed on 13 December 2016 with no further right of appeal.  ‌Yet the petitioner failed to mention the dismissal in his 3^rd affidavit made more than two weeks after the dismissal.  In that regard, he had fallen short of his obligation as applicant to make a full and frank disclosure of material facts.

49.But a more disturbing feature emerged in relation to the Spanish proceedings.  The Spanish judgments show that certain “facts” were presented to the Spanish courts in support of the application, “facts” that the petitioner must have known were untrue on his own case as presented in the Petition and the POC.  For example, it was alleged that the petitioner had “recently” discovered that a “new” company Bergner HK set up by the 1^st respondent instead of the Company that had previously done so was supplying BESL and that the 1^st respondent was diverting the Company’s business to Bergner HK.

(iii) Exclusion

50.The principle to be derived from In re Fildes Bros Ltd [1970] 1 WLR 592 (a case similar to the present case) is that where there was a settled and accepted course of conduct between the parties, including a clear division of responsibility with little interference or control by the other, it is not open to a petitioner to complain of the other continuing to do what was in accordance with the settled practice.  As Megarry J remarked (at 597D) equity does not “ignore a settled course of conduct”.

51.Given the agreed modus operandi of the Business from 1999 onwards and the division of responsibility stated in §§9 – 10 above, I do not consider it open to the petitioner to complain (for example, that he was not allowed to participate in the management of the Company and was not consulted over the appointment of the 1^st respondent as sole director of BESL).  In effect, the petitioner is seeking, unilaterally, to change the modus operandi / status quo to a different arrangement in his favour that was never agreed.

(iv) The Shada transaction

52.Shada Holding GmbH was a real estate company operating in the Czech Republic and Slovakia.  The Company acquired it in July 2009 for EUR 1.  The Draft Report showed that on 2 December 2014 it was sold to the 1^st respondent for US$299,280.  The petitioner alleged that it was done without his knowledge or consent and, further, that the basis for calculation of the sale price was wholly unclear implying that it was a matter that required investigation.

53.However the 1^st respondent has produced a written resolution for the sale dated 26 November 2014 signed by the petitioner.  In the circumstances, the transaction is not such as would warrant investigation on any urgent basis or at all.

(v) Excessive commission charged by Bergner HK

54.In supplying goods to the Russian and Ukrainian Operations and the operating subsidiaries, Bergner HK charged a handling commission of 8%.  The petitioner's case is that he was first made aware of that either on 11 January 2016 in Russia (POC §54) or 19 January 2016 in Spain (the petitioner’s 3^rd affidavit, §33) and that the rate is well above the market rate.

55.In fact, there is an e‑mail from Anto dated 23 November 2010 to the petitioner (after the latter had become a director and shareholder) that effective 1 November 2010, the handling commission would be increased from 7% to 8%.  The allegation that the petitioner was not aware of the rate charged until early 2016 is demonstrably untrue.

56.It is also the petitioner’s case that the usual rate is 6% and in support he exhibited an “agreement” dated 17 June 2016 (not signed by the supplier) charging such a rate.  But that transaction was securitised (the buyer having to put up US$1.5 million in an interest-free deposit), which was not the case with Bergner HK quite irrespective of other differences in respect of the services provided.  It is therefore not a comparison of like with like and does not offer prima facie evidence of any prevailing market rate that supports the allegation of overcharging.

(b) No-fault divorce

57.The petitioner sought to invoke the court’s jurisdiction to wind up the Company on the just inequitable ground on "no-fault divorce" basis ie on the sole ground that trust and confidence between the parties had been lost without the need to show that the loss of trust and confidence was due primarily to the misconduct of one side or the other.  ‌In O’Neill v Phillips [1999] 1 WLR 1092 Lord Hoffmann did not consider that there to be any support in the authorities for “such a stark right of unilateral withdrawal”.  He rejected the notion that a member can demand that his shares be purchased simply because he feels that he has lost trust and confidence in the others and cautioned against pressing the quasi-partnership analogy too far: at 1104F–H.  

58.Where the parties are shown to have agreed to a settled course of conduct (for example, as in Re Fildes Bros Ltd) then, where there has been no breach of or departure from what had been agreed by the other party, a party cannot seek a winding up order on the just and equitable ground simply because he has lost trust and confidence in the other or there has been a breakdown in relations.  The same considerations pertain here.

59.As explained in §51 above, it is the petitioner who is seeking to change the longstanding settled practice of how the Business is run. No-fault divorce does not apply in such circumstances.

(c)  Deadlock

60.Counsel for the petitioner submitted that the Company is deadlocked in that the petitioner and the 1^st respondent who are the only directors of the Company cannot co‑operate and agree to anything anymore.  ‌The petitioner further contended that there is also deadlock at the level of BSD Lux.

61.But as is clear from the division of responsibility as pleaded by the petitioner, it is the 1^st respondent who has the responsibility of appointing directors of the subsidiaries of the BDS Group, that being part of the settled course of conduct. In this regard, it is also not open to the petitioner to complain.  

(3) Conclusion

62.In my view, the preliminary matters alone would preclude the conclusion that the petitioner has a good prima facie case for a winding up order.  Further, the substantive reasons advanced for just and equitable winding up also do not bear scrutiny. The PL summons was accordingly dismissed.

63.While strictly unnecessary, I will briefly address the petitioner’s grounds for the appointment of PLs to the extent that they have not yet been considered.

B.  Whether appropriate to appoint PLs

64.The factors relied on are (1) deadlock at the parent company level coupled with the need to manage active operating subsidiaries; (2) the need to ascertain the proper financial position of the Company; (3) the need for PLs to be appointed to conduct investigations into any alleged impropriety; and (4) the need for PLs to take action to prevent wrongful use of the intellectual property rights of the Company and/or the BSD Group.

65.The matters in (1) and (2) have already been considered.  The Shada transaction and the alleged 'excessive' commission charged by Bergner HK fall within (3) and have also been considered.  That leaves outstanding the intellectual property rights (“IP rights”) issue to which I now turn.

66.The evidence shows that the IP rights were first registered in 2001, six years prior to the incorporation of the Company. They were registered in the name of Royalton Overseas Ltd (“Royalton Overseas”), a company beneficially owned by the 1^st respondent and his wife and held through nominees.  ‌The nominees transferred those shares to the 1^st respondent and his wife in 2005.

67.The IP rights are not vested in either the Company or its subsidiaries.  There is no evidence to show that they were assets of the Company and/or the BSD Group and no evidence to show that they were held on trust for the Company and/or the BSD Group.

68.The petitioner sought to rely on a draft memo entitled “Bergner group restructuring through Luxembourg” dated 17 October 2013 (“the draft memo”) allegedly discovered by the petitioner in the Russian office in early 2016 as showing that the Larger Group owned the IP rights.

69.The draft memo concerned a proposed restructuring of the Larger Group.  It envisaged a “contribution in kind” of the IP rights of Royalton Overseas and Art of Diamond held through a new company to be formed “Lux IpCo” to be followed by a sale by them of their shares in Lux IpCo to the Company.  One might ask, rhetorically, why a contribution in kind and a sale would be necessary if, on the petitioner’s revised case, the Group already owned the IP rights.

70.It is the 1^st respondent’s case that the draft memo was prepared at the instigation of the Participants including the petitioner.  The purpose was to explore the possibility of each Participant injecting some of his assets into a new corporate structure to attract new investment or even lead to a possible listing but that never materialised.  Whether or not that was so, in my view, the draft memo cannot reasonably be read and construed as constituting an admission by the 1^st respondent that the IP rights belonged to the Group: there is no rational basis for such a view.  If anything, the draft memo contradicts the petitioner’s case.

Conclusion

71.In summary, the petitioner has failed to show that he has a good prima facie case for winding up the Company.  In any event, I am also not satisfied that the evidence shows that the Company’s assets are in imminent danger and/or require protection and/or that there is a real risk of dissipation to warrant the appointment of PLs.  Nor am I persuaded that any urgent need for investigations to be conducted into any alleged impropriety has been made out.  

72.As circumstances that would warrant the grant of what is recognised to be a highly intrusive interim remedy have not been shown to exist, the PL summons was dismissed.

II.  The document summons

73.The summons made reference to Order 24, rules 3 and 7 as well as to sections 373 – 375 of the Companies Ordinance.  Ms Chan submitted (and I agree) that as an application for discovery under Order 24 it is premature as pleadings have not been closed.  In fact it had all but been abandoned by the time of the hearing.

74.The petitioner commenced the present proceedings qua shareholder under sections 724 – 725 of the Companies Ordinance or section 177(1)(f) of Cap 32.  In so far as the petitioner is seeking inspection of documents qua director, the procedure adopted is wrong.  An originating summons qua director should have been issued under sections 373 – 375 for final relief against the Company: see RHC Order 102, rules 2 (1) and (2).

75.The petitioner fastened on the word “may” in rule 2(1), submitting that it was not mandatory.  That reading is wrong: see the “Editorial Introduction” in Hong Kong Civil Procedure 2017 at 5/0/2.  It explains the change brought about by the CJR.  The right of inspection is enforced by originating summons: see Butterworth’s Hong Kong Company Law Handbook (18^th Edition) at 630.  Accordingly, the document summons was also dismissed.

Indemnity costs

76.Upon the dismissal of the PLs summons and the document summons, at the conclusion of the hearing the petitioner was ordered to pay the costs of the Official Receiver of $28,000 assessed on a gross sum basis.

77.The court also awarded costs, payable forthwith on an indemnity basis, in favour of the 1^st respondent with certificate for two counsel, to be assessed on paper on a gross sum basis.

78.Indemnity costs were awarded for the following reasons.  It will have become apparent from the reasons set out above that the applications were hopeless from the outset.  They are entirely devoid of merit and had no prospect of success.  They should never have been made.  The entire exercise has been nothing but a total waste of the court’s time.

79.Because of the intrusive nature of the remedy sought especially in ongoing business operations, it is trite that is a remedy that the court does not lightly grant in the absence of a strong case being made out for requiring urgent and immediate intervention.  ‌Typically, it would involve assets being in jeopardy or at risk of imminent dissipation if no appointment were made.  Here, none of that could be shown: the Company operates as a holding Company with no substantial assets other than shares in its subsidiaries that are not readily disposable.  Given the composition of the board there is also no risk of dissipation or dilution.

80.In their letter of 18 January 2017, the 1^st respondent’s solicitors set out detailed reasons why there was no basis for the PL application.  ‌They requested that it be withdrawn setting a time limit of a week and giving fair warning of the likely order that would be sought if the proposal were to be rejected.  The proposed costs order in the event of a withdrawal can only be described as generous from the petitioner’s perspective.

81.Even assuming that the petitioner had been able to mount some sort of a prima facie case (which is not the present case), balance of convenience considerations would rule out any appointment in circumstances where the petitioner is a foreign national with no apparent assets within the jurisdiction and who has not offered any undertaking as to damages (much less fortification).

82.Hopeless applications are not to be encouraged. They fly in the face of a litigant’s obligations under the CJR.  In the circumstances of this case, indemnity costs are warranted.

Mr Henry Ma, of Haldanes, for the petitioner

Ms Linda Chan SC and Ms Elizabeth Cheung, instructed by Winston & Strawn, for the 1^st respondent

2^nd respondent: BSD (HK) Limited (absent)

Ms Ophelia Lok, Acting Assistant Official Receiver, of Official Receiver’s Office, for the Official Receiver

APPENDIX