Char on Man and Another v. Peking Fur Factory (Hong Kong) Ltd and Others

HCMP 768/2018

[2019] HKCFI 2141

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

MISCELLANEOUS PROCEEDINGS NO 768 OF 2018

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Before:  Hon Harris J in Chambers

Date of Hearing:  27 June 2019

Date of Decision:  27 June 2019

Date of Reasons for Decision:  3 September 2019

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REASONS FOR DECISION

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1.The Plaintiffs have issued an originating summons seeking declarations that a written resolution of the board of the directors of the 1^st Defendant, Peking Fur Factory (Hong Kong) Limited (“Company”) dated 11 May 2018 putting the Company into liquidation pursuant to section 228A of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32, (“Ordinance”) is null, void and invalid and the appointment of Wong Kwok Keung and Arab Osman Mohammed as provisional liquidators is also invalid. The Plaintiffs seek a consequential order that the current liquidation is stayed.

2.Although a considerable amount of evidence and submissions were filed for the hearing by the Plaintiffs, the 2^nd and 3^rd Defendants and the Provisional Liquidators it seems to me that the answers to the questions raised by the originating summons are straightforward and I indicated to the parties at the end of the hearing that I intended to grant the substantive orders sought.

3.Section 228A(1) of the Ordinance is in the following terms:

“228A. Special procedure for voluntary winding up of company in case of inability to continue its business

(1) The directors of a company or, in the case of a company having more than 2 directors, the majority of the directors, may, if they have formed the opinion that the company cannot by reason of its liabilities continue its business—

(a)  pass a resolution to the effect that—

(i)  the company cannot by reason of its liabilities continue its business;

(ii)  they consider it necessary that the company be wound up and that the winding up should be commenced under this section because it is not reasonably practicable for it to be commenced under another section of this Ordinance; and

(iii)  meetings of the company and of its creditors will be summoned for a date not later than 28 days after the delivery of a winding-up statement to the Registrar;

(b)  cause a meeting of the company to be summoned for a date not later than 28 days after the delivery of a winding-up statement to the Registrar; and

(c)  appoint a person as the provisional liquidator in the winding up of the company with effect from the commencement of the winding up.”    

4.As is clear from subsection (1)(a)(ii), section 228A can only be used to put a company into liquidation if it is not “reasonably practicable” to put it into liquidation under another section.  As I explain in [13] of my decision in Re Pedagogic Innovations Ltd [1].

“13.  I accept that if the decision to wind up the Company had been left to the shareholders the result would have been the same. However, it seems to me that the following are determinative of the matter. First, s.228A, uses very clear language and it is to be applied strictly. Unless a genuine reason exists for using its procedure rather than convening an extraordinary general meeting, it cannot be used. If it is wrongly used the resulting liquidation has been wrongly commenced. Secondly, it is important that the requirement for a company to hold meetings of members to decide important issues is respected. Members are entitled to be informed of important matters affecting a company's affairs (and there can be nothing more important than the suggestion that a company be wound up) asking directors' questions and exercising their voting rights. Mr Lung's submission amounts to a suggestion that those rights can be ignored if the views of the majority are known and immutable. I disagree.”

5.In the case of private companies, the obvious section to use if its members decide that it should be liquidated is section 228(1)(b) of the Ordinance, namely, by the passing of a special resolution.  Section 564(1) of the Companies Ordinance, Cap 622, (“CO”) defines a special resolution as a resolution passed by a majority of at least 75%.  Consequently, if 75% of members want to pass such a resolution, subject to any quorum requirements that might arise by virtue of the shares being held by one shareholder and the articles requiring a quorum of two or more, section 564 will be available.  Section 548(1) provides that anything that can be done by a resolution passed at a general  meeting of a company may be done without a meeting and without a previous notice being required, by a written resolution of the members.  Section 549 provides that a written resolution may be proposed by directors or by members.

6.It follows that if two or more members (assuming, as is the norm, that the quorum for a general meeting is two) wish to wind up a company they can propose a written resolution and by virtue of their voting power have it passed immediately.  Subject to there being some impediment to production of a written resolution, for example a shareholder who has indicated agreement becoming unavailable to         sign a written resolution, if two or members holding 75% in value of a company’s voting share capital wish to put a company into liquidation there will no justification for using section 228A.

7.It became clear as a result of questions from me at the outset of the hearing that:

(1)  This was not known to the Defendants’ legal team;

(2)  The Company has two members, who control all the voting shares and who wished the Company put into liquidation: Peking Fur and Leather Limited and its subsidiary K and K Fur Creation Limited.  The 2^nd and 3^rd Defendants’ counsel was not able to advance any reason why they could not have passed a written special resolution to wind up the Company.  I note that the board is aligned with these two members; and

(3)  It appears that the misunderstanding that has led to the present situation arose from the board consulting the insolvency practitioners who they intended to appoint as provisional liquidators about the process for putting the Company into liquidation.  They were given precedents for using section 228A.

8.The mistake that was made was relatively benign.  It is unfortunate that it was not appreciated by the parties, until I explained the relevant provisions at the hearing, just how straightforward the position is.

9.I will, therefore, grant the orders sought in the originating summons.  So far as costs are concerned the 2^nd and 3^rd Defendants shall pay the Plaintiffs’ costs, such costs to be taxed if not agree.  I am not going to grant a certificate for two counsel.  The Plaintiffs’ skeleton did not identify the above flaw in the use of section 228A.  The case was in fact very simple and did not need two counsel.

10.The provisional liquidators will bear their own costs personally.  The costs are not to be paid out of the assets of the Company.  I have reached this conclusion for two reasons.  First, albeit the subsidiary reason, the provisional liquidators contributed to the present problem. Secondly, the provisional liquidators filed unnecessarily lengthy evidence and submissions.  The only issue was whether the use of section 228A was justified.  It was not necessary to support the decision to put the Company into liquidation.  The provisional liquidators had no need to file substantial evidence or instruct counsel to represent them.

Mr Clifford Smith SC, Mr Victor T S Lui and Ms Baek Soo Kyung, instructed by K Y Leung & Carina Chen, for the 1^st and 2^nd plaintiffs

Ms Connie Lee, instructed by Kenneth Sit, for the 1^st defendant

Ms Deanna Law, instructed by D S Cheung & Co, for the 2^nd and 3^rd defendants