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.

Mr Martin Ho, instructed by Tanner De Witt, for the petitioner

Mr Jose Maurellet SC and Ms Sharon Yuen, instructed by K B Chau & Co, for the 1^st respondent

Mr Lai Chun Ho, instructed by Oldham, Li & Nie, for the 2^nd respondent

Attendance of the Official Receiver was excused