Ruan Jialin v. Shang Yu Zhong and Another
Read the full judgment text of HCCW 65/2018 on BabelCite. This High Court CFI judgment was delivered on 19 March 2021.
1. By petition presented on 12 March 2018 (“ Petition ”) the petitioner, Mr Ruan Jialin (阮家林) (“ P ”), seeks an order under ss 724-725 of the Companies Ordinance (Cap 622) (“ CO ”) requiring the 1 st respondent, Mr Shang Yu Zhong (尚玉忠) (“ R1 ”), to buy out his shares in the 2 nd respondent, Hong Kong Auson Mining Group Limited (香港澳森礦業集團有限公司) (“ Company ”), alternatively, a winding-up order against the Company under s 177(1)(f) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance
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HCCW 65/2018 [2021] HKCFI 788 IN THE HIGH COURT OF THE HONG KONG SPECIAL ADMINISTRATIVE REGION COURT OF FIRST INSTANCE COMPANIES (WINDING-UP) PROCEEDINGS NO 65 OF 2018 _______________
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_______________ Before: Hon Linda Chan J in Court Dates of Hearing: 10, 19 March 2021 Date of Judgment: 19 March 2021 Date of Reasons for Judgment: 24 March 2021 __________________________________ R E A S O N S F O R J U D G M E N T __________________________________ 1.By petition presented on 12 March 2018 (“Petition”) the petitioner, Mr Ruan Jialin (阮家林) (“P”), seeks an order under ss 724-725 of the Companies Ordinance (Cap 622) (“CO”) requiring the 1st respondent, Mr Shang Yu Zhong (尚玉忠) (“R1”), to buy out his shares in the 2nd respondent, Hong Kong Auson Mining Group Limited (香港澳森礦業集團有限公司) (“Company”), alternatively, a winding-up order against the Company under s 177(1)(f) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“CWUO”). 2.At the end of the trial, I dismissed the Petition and ordered P to pay the costs of and occasioned by the Petition to R1, the Company and the Official Receiver. These are the reasons for my judgment. A. BACKGROUND FACTS 3.The following facts are not in dispute or are indisputable. 4.In 2011, P was an employee of a State-owned company established in the Mainland. R1 was a merchant engaging in wine selling business in Australia. P’s elder brother, Mr Ruan Jiaqi (阮家琪) (“Brother”), was the Chief Executive Officer of 南京泓潤能源發展有限公司 (“Nanjing Co”) which had licences to carry on import and export business in the Mainland[1]. 5.In July 2011, Brother introduced R1 to P[2]. Prior to this, P did not know of, and had no dealing with, R1[3]. 6.At that time, R1 said to P that he knew of an opportunity to cooperate with one Mr Hzndarmin Siantar (佘錦亨) (“Shea”), who owned some nickel and coal mines at P.T. Bumi Buton Delta Megah in Indonesia (“Mines”) but had no money to develop the same. R1 said he had experience in running business but did not have enough money to finance the mining operation or the requisite licences to import any nickel and coal mines into the Mainland. Given that P had the financial means to invest in the business, while Nanjing Co had the requisite import/export licences, R1 proposed to form a business partnership with P for the purpose of carrying on mining development and trading business in Hong Kong and Indonesia. P agreed to the proposal[4]. 7.As recorded in a “shareholder resolution” (股東會決議) (“Shareholders Agreement”), a meeting was held on 28 August 2011 at which P and R1 agreed to cooperate in carrying on mining business in Hong Kong and Indonesia in the following manner:
8.Pursuant to the Shareholders Agreement:
9.Since 2012, the shareholdings held by P and R1 in the Company have been changed to 42% and 58% respectively[5]. No complaint has been made by P about the change in his shareholding in the Petition. 10.In May 2012, P and R1 decided to cooperate with Nanjing Co and Shea in developing and exploring the Mines and they injected funds into Nanjing Co for this purpose[6]. 11.At around the same time, P and R1 also set up 2 other companies namely, Hong Kong Auson Group Limited (香港澳森集團有限公司) incorporated in Hong Kong (“HK Auson”) and PT Auson Mining Indonesia (印尼澳森集團礦業有限公司) incorporated in Indonesia (“Indonesia Auson”) as their vehicles to carry on mining business. 12.However, the quality of the nickel extracted from the Mines and sold through Nanjing Co was not satisfactory and could only be sold at a low price. As a result, the parties suffered a loss of RMB8 million in the business[7]. P and R1 were frustrated by the result and agreed to put an end to all the mining business[8]. 13.By letter dated 4 January 2013, the Companies Registry informed R1 that HK Auson had been deregistered pursuant to s 291AA(9) of the CO. 14.On 22 February 2013, R1 (as party A) and P (as party B) came to an agreement (協議書) to terminate the Company, HK Auson and Indonesia Auson on the following terms (“Deregistration Agreement”):
15.As is clear from clause 2.2(1)-(3) of the Deregistration Agreement, it was agreed between the parties that after P paid RMB1,800,000 to R1 by 22 February 2013, the 2 of them would go to Hong Kong to deal with matters relating to the deregistration of the Company and HK Auson. After completion of the deregistration of the Company and HK Auson, P would pay the remaining balance of RMB320,000 to R1. 16.By a handwritten receipt dated 22 February 2013, R1 confirmed that he had received RMB1,700,000 remitted from Brother on behalf of P. 17.On 25 February 2013, H&C Business (HK) Limited (“H&C”), a corporate service provider, prepared the following draft documents for the purpose of applying for deregistration of the Company:
18.The Form DR1, the Minutes and the Notice were signed by both P and R1, while the IRD Request was signed by R1 alone. The professional fee charged by H&C was paid by R1 and acknowledged by P. 19.Also on 25 February 2013, P and R1 signed a handwritten proof (证明) in these terms (“Proof”):
20.P did not pay the remaining balance to R1 by the deadline stated in the Proof (i.e. 26 February 2013). 21.The deregistration of the Company did not proceed further. 22.In the meantime, on 28 February 2013 one 陳孝明 (“Chen”) applied for and obtained a temporary order from the court in Xuzhou City Yunlong District (徐州市雲龍區人民法院) (“Yunlong Court”) in “(2013) 雲民訴保字第 0102號” to freeze the assets of徐州澳尼森國際貿易有限公司 (“Xuzhou Auson”) and of R1 up to RMB1,050,000 conditional upon Chen commencing his claim within 30 days thereof (“Freezing Order”). 23.By an enforcement notice (協助執行通知書) dated 9 October 2013 issued by the Yunlong Court in “(2013) 雲民訴保字第 0142號” and addressed to Brother (“1st Enforcement Notice”), Brother was informed that R1’s right to receive RMB420,000 had been frozen for one year. 24.There was another enforcement notice dated 15 February 2015 issued by the Yunlong Court and addressed to Brother (“2nd Enforcement Notice”) which stated that the RMB420,000 owed by Brother to R1 had been frozen and could not be paid without the agreement of the Yunlong Court. 25.In March 2014, R1 caused the Company to commence proceedings against P at the Nanjing City Intermediate People’s Court in “(2014) 寧商外初字第22 號” (“Nanjing Proceedings”) to recover USD100,000 said to have been misappropriated by P from the Company. 26.After a full trial, on 22 September 2017, the Nanjing Court gave judgment in favour of the Company and ordered P to repay USD100,000 to the Company (“Nanjing Judgment”). P’s appeal against the Nanjing Judgment was heard on 23 March 2018 and dismissed by the court. B. DISCUSSION B1. Complaints in the Petition 27.It is well established that the petitioner is confined to the heads of complaint set forth in the petition and cannot rely on any new head not fairly covered in the petition. The principles have been stated in In re Fildes Bros Ltd[1970] 1 WLR 592 at 597G-598C in this way:-
28.The petition is a document which defines the issues and the scope of the proceedings just like a pleading. As stated by Chu J (as she then was) in Re Tourmaline Ltd [2000] 4 HKC 348 at 354C-D:-
29.In the Petition, P makes the following complaints:
B2. Evidence 30.The Company and R1 have all along been unrepresented. On 17 June 2020, this Court allowed P’s application to give evidence through video conferencing facility (“VCF”) on the basis that he resided in the Mainland and could not travel to Hong Kong due to the travel restrictions in place. R1 was informed about the direction. 31.The trial date was fixed on 4 September 2020, after having been adjourned twice on 6 July 2020 and 20 August 2020 to accommodate R1. However, no attempt has been made by R1 to participate in the trial through VCF. Instead, by letter dated 3 March 2021 P’s solicitors informed this Court that R1 had again requested the Court to defer the trial on the ground that he was unable to travel to Hong Kong to attend the trial. I refused to defer the trial as I took the view that no good reason had been shown to change the date of the trial. 32.At trial, neither the Company nor R1 appears. By letter dated 2 November 2018 to the Court, R1 purported to set out his grounds in opposition to the Petition. The same contents were subsequently confirmed in an affirmation filed by R1 on 4 March 2019 (“R1’s Aff”). P filed his 5th affirmation (“P’s 5th”) in response to the grounds raised by R1. 33.As there is no order to exclude the affirmations filed by the parties if they fail to attend trial for the purpose of being cross-examined[9], R1’s Aff is admissible as evidence in these proceedings. No submission has been made by Ms Priscilla Chow, counsel for P, in respect of R1’s Aff. 34.Nevertheless, I take into account the fact that R1 has not made himself available for cross-examination, such that the Court does not have the opportunity to test the credibility of his evidence. I will not give much weight to R1’s evidence unless his evidence is not disputed by P in P’s 5th or that it is corroborated by documentary evidence. 35.P gives viva voce evidence through VCF. Except for the matters discussed in §§46 and 49(5) below, the evidence given by P including his answers to the questions posed by this Court are candid and I accept his evidence. B3. Impermissible attempts to change P’s case 36.In her written opening, Ms Chow submits that the Company is “a quasi-partnership”, being “an association formed on the basis of a personal relationship, involving mutual confidence” and the parties had “reached the common understanding that both shall be jointly responsible for the conduct of the business of mining development and trading and shall have equal say when it comes to decision making”. This is despite the fact that none of the matters she points to have been pleaded in the Petition. When this is put to Ms Chow, she maintains that the so-called “quasi-partnership” and “common understanding” have been pleaded in §§11-13 of the Petition. 37.I do not think it is open to P to expand or change his case through the various labels introduced by Ms Chow (for the first time) in her written opening for the following reasons:
38.In any event, even if (which is not established) there is any basis to suggest that there was the alleged “common understanding” or that the cooperation between P and R1 through the Company was a “quasi-partnership”, these matters per se are not sufficient grounds for the Court to grant any relief under ss 724-725 of the CO or s 177(1)(f) of CWUO. Properly understood, it is only where the basis upon which the shareholders cooperated in running the company was founded on their personal relationship, or the mutual trust and confidence reposed in each other or the manner in which they had cooperated in the past that it would be necessary for the Court to look behind the corporate structure and consider whether there was the common understanding, established practice or mutual trust and confidence between the shareholders as suggested by the petitioner which, although not enforceable as a matter of law, would create an equitable constraint over the exercise of legal rights by all the shareholders. The principle is best encapsulated in Re Saul D Harrison [1995] 1 BCLC 14, at 19a-20e, where Hoffmann LJ (as he then was) said this:
39.Similarly, in Re Astec (BSR) plc [1998] 2 BCLC 556, Jonathan Parker J analysed the juridical basis for the Court to impose equitable constraint on the exercise of legal rights (at 586d-588d, applying Lord Wilberforce’s and Hoffmann LJ’s passages in Ebrahimi v Westbourne and Re Saul D Harrison respectively) and said (at 588d-f):-
40.The above passage was cited with approval in O’Neill v Philips [1999] 1 WLR 1092, at 1101, where Lord Hoffmann cautioned against extending the concept of “legitimate expectation” in circumstances to which the traditional equitable principles have no application (at 1102). 41.In the present case, the matters complained of by P in the Petition concern either the alleged breach of Agreements (i.e. the Shareholders Agreement and the Deregistration Agreement) or breach of statutory duties. It is not P’s case (as confirmed by him under cross-examination) that R1 acted in compliance with the Agreements (such that his conduct was lawful) but that his conduct was unfair or inequitable as it contravened the equitable constraints imposed on his legal rights. The suggestion that there was the alleged “common understanding” or that the cooperation between P and R1 through the Company was a “quasi-partnership” is a red herring. 42.I turn to the complaints raised in the Petition. B4. Failure to deregister the Company 43.The complaint has no merit. As stated in §§14 - 16 above, under the Deregistration Agreement, P was under an obligation to pay RMB2,120,000 but he only paid RMB1,700,000 to R1, and the balance of RMB420,000 was never paid to R1. 44.In §17 of R1’s Aff, he said that after P had paid RMB1,700,000 to R1, Brother immediately told the former Mayor Miao (whose daughter was involved in setting up Auson HK with R1) to use his influence to freeze the RMB1 million deposited at bank. Even after P had signed the Proof to confirm his agreement to pay the remaining balance of RMB420,000 to P by 26 February 2013, the amount was never paid. P does not contradict this part of R1’s evidence in P’s 5th. 45.It is difficult to see how P can complain about R1’s failure to complete the deregistration of the Company when the parties had agreed that the Company should only be deregistered after P paid the entire RMB2,120,000 to R1 by 26 February 2013, which P never did. 46.In trying to explain away his failure to pay RMB420,000 to R1, P relies on the Freezing Order, the 1st Enforcement Notice and the 2nd Enforcement Notice and asserts that he (and his Brother) had been prevented by the Yunlong Court from making the payment. I do not accept P’s assertion:
47.As stated in Section B3 above, there was no “common understanding” between P and R1 and their cooperation through the Company was a purely commercial one. R1 was entitled to act in accordance with the Deregistration Agreement and refused to take further step to deregister the Company after P had acted in breach of clause 2.2(1)-(3) of the same Agreement. It is neither unfair nor inequitable for R1 to insist on his legal rights under the Deregistration Agreement. B5. Failure to hold general meetings and breach of CO 48.Before considering the complaint, it is necessary to consider whether the Company has carried on any business in its own right. This is because if the Company has never carried on any business, it is difficult to see how the failure to hold general meetings or to lay audited financial statements at such meetings, albeit in contravention of the CO, can be said to be unfairly prejudicial to the interests of P or the Company or that it would be “just and equitable” for the Court to wind up the Company. 49.The following facts and matters show that the Company has never carried on any business in its own right:
50.It is also clear from the evidence that after the parties had signed the Deregistration Agreement, P had lost interest in the Company and ceased to be concerned about its affairs:
51.Having regard to the fact that the Company has never carried on any business in its own right and P has lost interest in the Company since February 2013, I do not think it is open to P to complain about the failure of the Company to hold any general meetings or to present any financial statements at such meetings. At its highest, the breach is a technical one, and no unfairness or prejudice has been suffered by P as a result. B6. Breakdown in relationship & exclusion from management 52.In light of my holding that the cooperation between P and R1 was a purely commercial one, and did not involve any mutual trust and confidence, it is strictly speaking unnecessary to consider whether the breakdown in relationship or the loss of trust and confidence on the part of P in R1 can constitute a ground for the Court to grant any relief under ss 724-725 of the CO or s 177(1)(f) of the CWUO. 53.Nevertheless, since P has relied on the commencement of the Nanjing Proceedings as a ground leading to the breakdown in relationship with R1 at §29 of the Petition, where it is pleaded that “since the commencement of the [Nanjing Proceedings], the relationship between [R1] and [P] has broken down”, I will state my view on the issue. 54.In the Nanjing Judgment, which was delivered after a full trial at which P had advanced many grounds in opposition to the claim, the Court held that P had misappropriated USD100,000 from the Company and failed to account or return the same to the Company. These findings confirm that it was P’s misconduct which led R1 causing the Company to commence the Nanjing Proceedings against P, and that such act of R1 was amply justified. 55.As it is not in dispute that the commencement of the Nanjing Proceedings caused a breakdown in relationship between P and R1, were it were necessary to consider whether there had been a breakdown in relationship or mutual trust and confidence between the parties, I would have held that such breakdown was caused by the misconduct of P. It is well established that where, as here, it was the misconduct of P which was causative of the breakdown in relationship, the Court would not grant any relief sought by the petitioner (Yeung Bun v Brio Technology International Ltd & ors [2000] 2 HKLRD 218, at 223F-225D). 56.For completeness, I would add that Ms Chow contends that the Court cannot take into account the Nanjing Judgment as the findings are opinions of the Nanjing Court and hence are not admissible as evidence (Chen Mei Lan v Registrar of Companies [2017] 1 HKLRD 924, §3). The contention is misconceived. In Chen Mei Lan, Queeny Au-Yeung J referred to the principle that a previous criminal conviction is inadmissible as evidence in subsequent civil proceedings. The principle has no application here, given that the commencement of the Nanjing Proceedings is a matter relied on by P in the Petition, while the Nanjing Judgment is a document adduced by P in one of his affirmations filed in support of the Petition. Having chosen to raise the issue and relied on the Nanjing Judgment as evidence in these proceedings, it is not open to P to contend that the contents of the Nanjing Judgment are inadmissible. 57.As stated in §50 above, since February 2013 P had lost interest in the Company and ceased to be concerned about its affairs. As soon as P knew that the Company had not been deregistered by March 2014 (as he accepts), it would be incumbent upon him to perform his role in accordance with the Shareholders Agreement or, at the very least, offered to assist R1 in performing such role. P has done neither. It lies ill in P’s mouth to complain that he has been excluded from management of the Company. B7. Company no longer required 58.Ms Chow submits that a winding up order should be made “as there has been a failure of substratum of the Company” given that there has been “a final and conclusive abandonment of the business”, citing Re Media Vision Ltd [1993] 2 HKC 629, at 633C-F. I do not think the case assists P. In that case, the petitioner’s pleaded case was that “the company [had] not traded since in or about the third quarter of 1991, accordingly, the purposes for which the company was formed [had] now been concluded”. Rogers J (as he then was) held that this part of the petition was demurrable as the assets of the company were still there and if the present management chose, the company could be run broadly as envisaged in the shareholders’ agreement (at 634A-F). In other words, much depends on the fact of the case. 59.In the present case, by the time the Petition was presented, the Company still had ongoing affair, which was the claim against P for return of USD100,000. There is no evidence that P has repaid the amount to the Company. There is no factual basis for Ms Chow to suggest that there was “a final and conclusive abandonment of the business” of the Company. B8. No tangible interest and improper motive 60.It is well established that a petitioner must show that he has a sufficient interest which to entitle him to ask for the winding up of the company. This may be in the form of a surplus available for distribution to the shareholders or a “tangible interest” in the form of some advantage or avoid some disadvantage which would accrue to him by virtue of his membership of the company (Re Rica Gold Washing Co Ltd (1879) 11 Ch D 36, at 42-43, per Lord Jessel MR; Re Chesterfield Catering Co Ltd [1977] Ch 373, per Oliver J). 61.The Petition, to the extent that it seeks a winding up order against the Company, is demurrable as there is no plea that the Company is solvent or that there will be surplus available for distribution to the shareholders upon the winding up of the Company. This is not surprising, as the evidence shows that the only asset of the Company was (and still is) the USD100,000 payable by P to the Company. At the time the Petition was presented, P did not accept that he was liable to pay the USD100,000 to the Company. There was therefore no basis for P to plead or assert that the Company was solvent or that there would be surplus available for distribution to the shareholders. 62.When this point is raised with Ms Chow in opening, she asserts that P has subsequently come to an agreement to settle the Nanjiing Proceedings with the Company and P will make the payment in due course. Ms Chow says that she intends to ask P to produce a settlement agreement said to have been made between P and the Company in 2019 during examination-in-chief. I refuse to allow P to adduce the new document which had admittedly been available to P since 2019 but no attempt whatsoever has been made by P to disclose or adduce it as evidence in these proceedings. 63.In any event, even assuming P is going to pay the USD100,000 to the Company as Ms Chow suggests, it has not been demonstrated by P that if the Company is wound up by the Court, there will be any surplus available for distribution to the shareholders. This again is not surprising given that the Company’s assets will have to be applied to pay liquidation expenses including remuneration and costs of the liquidators (which will be substantial) and other prescribed fees payable on the assets realised by the Company. 64.In her written closing, Ms Chow suggests, for the first time, that P does not have to show that he has sufficient interest in seeking a winding up order against the Company as the present case comes within the exception to the rule. She suggests that “only very limited information in relation to the company is available to the petitioner and the affairs of the company requires independent process of investigation upon winding-up”, such that P is unable to prove that he has a tangible interest in seeking a winding up order, citing Re China International Business Development (Hong Kong) Limited, CACV 94/2015, 18 November 2015, §§17-23). 65.Neither matter relied on by Ms Chow has been pleaded in the Petition or established by evidence. In any event, the so-called limited information in relation to the Company was the result of P’s own decision not to be concerned about the Company or to perform his role in accordance with the Shareholders Agreement. It is also clear on the fact that there was nothing which require investigation. Ms Chow says that the breach of the CO is a matter which requires investigation. I disagree. The breach has already been raised by P in these proceedings and determined by this Court. No further investigation is required.
Ms Priscilla Chow, instructed by L & W Lawyers, for the petitioner The 1st and 2nd respondents are not represented and absent Attendance of the Official Receiver is excused | ||||||||||||||||||||||||||||||