Re Five Lakes Investment Co Ltd

HCCW000079/1983

IN THE SUPREME COURT OF HONG KONG

COMPANIES (WINDING-UP)

NOS. 78 & 79 OF 1983

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Coram: Hon. Clough, J.

Date: 26 OCT 1983

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JUDGMENT

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1. On the 30th July 1983, I made an order for the consolidation of the petitions for the winding up by the court of the above-named companies. On the same date I dismissed an application made by an amended notice of motion to exonerate certain proposed payments On behalf of the companies from the operation of section 182 of the Companies Ordinance (Cap.32) if a winding up order were to be made eventually when the petitions are heard. I also granted the applications made by the petitioner in each case for the appointment of a provisional liquidator for each of the companies pursuant to Section 193 of the Ordinance. I now give my reasons, regrettably belatedly, for those orders.

2. Although there are separate petitions for the winding-up of Five Lakes Investment Company Limited ("Five Lakes") and of Multiford Company Limited ("Multiford"), the two companies and the two petitions have been treated in these proceedings as being one for all practical purposes because the two companies were incorporated as part of a joint-venture to develop and exploit a multi-storey Office block at Nos.8, 10 and 12 Hennessy Road, Wanchai.

3. The petitions are based on the "just and equitable" provision contained in section 177(f) of the Companies Ordinance, corresponding to section 222(f) of the Companies Act 1948. The application under section 182 of the Ordinance relates to out goings proposed to be incurred in respect of the management of the building which was completed in October 1980 and has been earning rental income since that time

4. At present it is expected that the petitions will be strongly opposed and it will be several months before they can be heard. In the mean time the petitioner in both cases, Gala Land Investment Company Ltd. ("Gala Land"), has applied under section 193 of the Ordinance for the appointment of a provisional liquidator and the opposing contributory, Octaland Holdings (H.K.) Ltd. ("Octaland") is making its third application under section 182 of the Ordinance in respect of the out goings proposed to be incurred on behalf of the companies in the course of managing the building. It has been agreed that the two applications should be heard together on the footing that if a provisional liquidator is appointed in the case of both companies, the application under section 182 will have to be dismissed.

5. I am indebted to the three leading counsel for their full and helpful arguments on the facts and the law. Mr. Charles Ching, Q.C. and Mr. Richard Sykes, Q.C. appeared for Gala Land and Mr. Henry Litton, Q.C. appeared for Octaland.

6. Mr. Patel, counsel for the Official Receiver took no active part in the proceedings. On the 20th July 1983 he had sent a letter on behalf of the Official Receiver to the petitioners` solicitors indicating inter alia that if the court were minded to appoint the Official Receiver as provisional liquidator of the companies the Official Receiver would ask the court to appoint a special manager to assist him.

7. The two companies exist to implement a joint-venture between two groups of companies. Each company has two directors only, namely Mr. Chou Wen Hsien ("Mr. Chou") and Mr. Samuel Tak Lee ("Mr. Lee"). Mr. Lee represents the interest in the companies of Octaland and of an associated company Octaland Holdings Ltd. (Liberia) which together own half the shares in each company. Mr. Chou represents the interest of Gala Land which owns the other half of the shares in each company. Gala Land is a wholly owned subsidiary of Ocean Land Development Ltd. ("Ocean Land") of which Mr. Chou is the Chairman and Managing Director. Mr. Chou is a Director of Gala Land. Ocean Land is a public listed company with holdings in many of the companies in which Mr. Lee has either control or an interest. Mr. Lee was appointed a Director of Ocean Land on the 11th August 1972, but was removed as a Director on the 15th May 1982.

8. In 1976 Five Lakes purchased Nos.10 and 12 Hennessy Road and Multiford purchased No.8 Hennessy Road. The multi-storey office block was completed by about October 1980 and the property is mortgaged to the Hong Kong and Shanghai Bank. It is currently earning a monthly rental income of HK$744,676.15. The building loan account at the Hong Kong and Shanghai Bank is currently standing at about HK$47 m. but there is no suggestion from either side that the companies are not solvent.

9. Both companies have accounts with the Hong Kong and Shanghai Bank to which Mr. Lee and Mr. Chou's nominees are signatories. Since June 1976, Five Lakes has had an account with the Chekiang First Bank ("Chekiang") to which Mr. Lee is a signatory. At the time the account was opened there was a proposal that Chekiang should come into the joint - venture and take an interest in Five Lakes but this never in fact materialised.

10. The companies represent one of numerous joint ventures entered into between Gala Land and companies in which Mr. Lee has an interest. Some of the other joint ventures included other interests in addition to those of Gala Land and Mr. Lee. The origin of these joint ventures evidently goes back to 1972 when Mr. Chou was introduced to Mr. Lee. Mr. Lee's qualifications as an architect and engineer with expertise in real estate made him an ideal partner for Ocean Land through its wholly owned subsidiary Gala Land.

11. The unchallenged assertion in the petitions is that the structure of the joint ventures followed a similar pattern. It was fundamental  that Mr. Chou should be a director representing Gala Land and that Mr. Lee should be a director representing his interests. Paragraph 15(d) and (e) of the petitions contains the following assertions which have not been challenged:-

12. The petitions both assert that, in accordance with the pattern indicated above, Mr. Chou and Mr. Lee were both appointed and continued to be directors of Five Lakes and Multiford. Neither of them was appointed chairman of the Board and Mr. Lee had the day to day running of the affairs of the companies, it being understood between Gala Land and Mr. Lee that there would be consultation as to matters of policy. There were very few formal meetings over the years and Mr. Lee would send minutes of meetings for Mr. Chou's signature. All bank statements, minutes of meetings, contracts and other documents of the companies were kept at its registered office which is where Mr. Lee has his Architect's office, under the name of Messrs. Samuel Tak Lee & Partners. Secretarial and accountancy functions were performed by Mr. Lee's staff.

13. According to the petitions it was understood that Mr. Lee was to be the project architect in respect of the redevelopment of the sites and, since Gala Land trusted him, Gala Land was content to leave him to deal with the various aspects of the redevelopment. Neither Gala Land nor Mr. Chou was ever told the cost of the complete construction or the name of the construction company. Mr. Chou did not sign the construction contract and never, saw it until he was asked to sign the audited accounts of the companies for the year ending 31st March 1981. However, at some time prior to the redevelopment of the property, Mr. Lee informed Mr. Chou of the expected cost of the construction of the superstructure, giving him a figure of HK$8,400,000 which Mr. Chou considered to be reasonable.

14. Both petitions assert that Gala Land relied completely on Mr. Lee's skill and knowledge in matters connected with property and on his honesty and good faith. Gala Land had no reason to believe that he was not organizing the development in the most efficient and financially advantageous way possible, obtaining competitive tenders from independent contractors for all it was necessary to do. It  is further contended that Gala Land would have regarded it as a gross breach of faith for Mr. Lee to place any contract other than a contract for architectural services with any interest  connected with himself, at least without informing Gala Land and obtaining its consent.

15. Having asserted an association based on personal relationship involving mutual confidence and a clearly defined understanding regarding participation in the management of the companies as between Gala Land on the one hand and Mr. Lee and the companies he represented on the other hand, the petitions and the supporting evidence of Mr. Chou go on to assert a total loss of confidence in Mr. Lee on the part of Gala Land and its representative Mr. Chou resulting from discoveries made in relation to the affairs of the companies.

16. In his affidavit in support of the petitions Mr. Chou deposed to the effect that the discoveries referred to above were the result of his increased vigilance regarding the affairs of the companies following an allegation of impropriety which had been made in a well known publication in Hong Kong in connection with the conduct of Mr. Lee in relation to the funds of another joint venture company.

17. The matters alleged to have been discovered by Gala Land and which are set out in the petition and referred to in the evidence of Mr. Chou are briefly as follows:-

18. In addition to the above allegations, the petitions and the evidence of Mr. Chou contain the allegation that, despite frequent requests to Mr. Lee by Mr. Chou since about March 1982 for inspection of the books and documents of the companies, Mr. Lee has consistently frustrated Mr. Chou and manoeuvred and placed obstacles in the way of his getting access to these documents. Mr. Chou contends that it is only in recent months that he has been able to have limited access to certain books of the companies which have been held at the offices of the Commercial Crimes Bureau.

19. I was taken through a bundle of correspondence on this subject which was exhibited to Mr. Chou's affidavit in support of the petitions. It begins on the 10th March 1982 and ends on the 18th January 1983. From September 1982 the solicitors acting for both sides conducted the correspondence and the Commercial Crimes Bureau was involved because, on the 22nd July 1982, Mr. Chou had reported the affairs of Five Lakes to the Commercial Crimes Bureau and soon afterwards the documents of the companies were possessed by the Bureau which was evidently not prepared to allow Mr. Chou access to them without the approval of Mr. Lee.

20. By the 9th October 1982 the solicitors acting for Octaland were insisting that Mr. Chou had during the previous few months been given all reasonable opportunity and assistance to inspect relevant books and records and questioning Mr. Chou's bona fides and requiring him to demonstrate his good faith. On the 28th October 1982, the solicitors acting for Gala Land expressed themselves forcibly to the effect that demonstration of good faith was not a prerequisite to a director's right to inspect the books and records of companies of which he was a director and insisting that Mr. Chou had not been supplied with all the relevant documents relating to the companies. By the 29th October 1982, Octaland's solicitors were asserting, inter alia, that it had become crystal clear that Mr. Chou was seeking access to the documents of the companies "....... not in discharge of his fiduciary duties to the company, but in pursuit of his personal vendetta against our client Mr. Samuel Tak Lee."

21. On the 4th November 1982 Gala Land's solicitors denied this allegation and contended, inter alia, that Mr. Chou was not pursuing a personal vendetta but was "....... just concerned that the companies' activities and books should not be concealed from him so that he cannot be put in any position to query any matter which it may not be in Mr. Lee's interest to have our client query." They added that Mr. Lee's efforts to prevent Mr. Chou from having a complete picture of the companies' affairs were extremely suspicious and gave rise to the inference that Mr. Lee had something to hide.

22. By the 11th November 1982, Octaland's solicitors were accusing Mr. Chou of breach of his duty as a director of Wyatt Estates Limited in attempting to engineer an unfavourable lease of a cargo complex to a company in which his family had an interest. This was accompanied by the assertion that Mr. Chou was seeking access to the documents of the companies, not in discharge of his fiduciary duties, but in pursuit of his personal vendetta against Mr. Lee.

23. Mr. Lee seems to have been advised at this stage that Mr. Chou could only be allowed to inspect specified classes of documents upon proper safeguards and conditions. The rest of the correspondence is substantially concerned with those terms and conditions, with particular regard to whom Mr. Chou might take with him when he made his inspection.

24. The petitions complain that the attitude displayed by Mr. Lee in relation to Mr. Chou's demands to inspect accounts and documents is wholly inconsistent with the basis of trust and confidence on which the joint venture was entered into and leads the conclusion that there must be matters which Mr. Lee wishes to hide from Gala Land. It is further contended that it is essential to enable Mr. Chou to carry out his duties as a director of the company and to enable Gala Land, whom he represents, to appreciate Gala Land's situation as a joint venturer that there should at all times be free access for him to the books and papers of the companies, particularly when the basis of the joint venture was mutual trust and confidence and co-operation and participation in the policy making process of the companies.

25. The petitions and the evidence of Mr. Chou further alleged that there has not been a board meeting of the companies since the 19th February 1982 and that the last general meeting of each of the companies was its Annual General Meeting held on the same day. It is also alleged that the hostility which has arisen between. Mr. Lee and his interests and Gala Land means that it is impracticable for the Board of the companies to function at all. In his evidence in support of the petition, Mr. Chou alleges that since the last meeting of the companies he has attended other director's meetings with Mr. Lee in other companies in which they are both interested, but the usual refrain has been that Mr. Chou has sought access to documents of those companies and has been resisted by Mr. Lee. The state of affairs is described as one of deadlock.

26. The petition concludes with the allegation that Gala Land has completely lost all confidence in Mr. Lee and in his probity and good faith towards them and that the mutual co-operation and participation which formed the underlying basis for the joint venture has been replaced by suspicion and hostility.

27. The timing of the applications before me and the circumstances under which they were made were as follows. The petitions having been presented on the 11th April 1983 supported by Mr. Chou's verifying affirmation filed on the following day, the petition came up for its first hearing and for directions on the 9th May when Octaland was given 30 days to file evidence in opposition and the hearing of the petition was adjourned to the 10th June 1983 for further directions. At some stage, there were evidently two orders made by consent under Section 182 of the Ordinance, one of the orders relating to mortgage payments to the Hong Kong and Shanghai Bank by the companies.

28. On the 2nd June Octaland issued a Summons returnable on the 7th June applying for extension of time to file evidence. On the next day Octaland made its present application under section 182 by notice of motion returnable on the 7th June at 4.30 p.m. The application was initially supported by the affidavit of Irene YU, giving details of the management costs of the companies' building in respect of which the application was being made. The application, the scope of which was slightly enlarged to add two additional items when the notice of motion was amended on the 7th June, was intended to relate to the routine outgoings necessarily to be incurred if the companies' building was to continue to be managed without the appointment of a provisional liquidator until the determination of the winding-up petition.

29. The reaction of Gala Land to the application under section 182 by Octaland was prompt. On the 7th June, the day upon which both Octaland's application was due to be heard, Gala Land issued four summonses, two being for the appointment of a provisional liquidator of each of the companies and two being for abridgement of time in respect of the former two summonses.

30. All these applications came up before me at the end of the day on the 7th June. The application for extension of time to file evidence by Octaland was adjourned to the 10th June and the amended notice of motion of Octaland under section 182 and Gala Land's summonses for the appointment of a provisional liquidator under section 193 of the Ordinance were adjourned to come on together after directions as to the filing of evidence had been given. To hold the position until the hearing of the amended notice of motion I made an order exonerating the relevant payments from the operation of section 182 until further order.

31. The application by Octaland for extension of time to file evidence in opposition to the petitions came before me on the 10th June. Leading counsel applied for an extension for 12 weeks from the 8th June as prayed in the summons but he was granted 30 days from the 10th June. On the 1st July Octaland took out another summons for further extension of time to file evidence returnable on the 6th July and on that date an extension was granted after counsel for Octaland had undertaken that her client would not rely at the hearing of the application for the. appointment of a provisional liquidator on any evidence filed in opposition to the petitions after the granting of an extension of time.

32. It is apparent from the sequence of events referred to above that Gala Land delayed for nearly two months after the presentation of the petition before applying for the appointment of a provisional liquidator. This delay is not consistent with apprehension on the part of Gala Land of immediate jeopardy to the assets of the companies.

33. However, by the 3rd June, by which time Octaland had issued its summons applying for a substantial extension of time to file evidence and had also moved under section 182 of the Ordinance in relation to all routine outgoings proposed to be paid on behalf of the companies it must have become apparent to Gala Land and its advisers that it would be months until the petition, which was being strongly resisted, could be heard and that in the meantime the attitude of mistrust and antagonism between Mr. Chou and Mr. Lee was such that the affairs of the companies could only be properly conducted either by a provisional liquidator or by Mr. Lee, who was himself in de facto control of the companies, with such fortification as the authority of the court under section 182 might afford. Certainly, Gala Land's reaction to Octaland's application under section 182 was immediate.

34. The application had not taken Gala Land by surprise because, between the 6th May and the 1st June, there had been correspondence between the solicitors acting for the parties in an attempt to obtain the consent of Gala Land to the section 182 application on the footing that it was solely for the benefit of the companies. As in the case of the earlier correspondence between the parties' solicitors concerning disclosure of accounts and documents the correspondence concerning Octaland's proposed application under section 182 became inconclusive and acrimonious.

35. As early as the 9th May 1983 Gala Land's solicitors were requiring that Mr. Chou should have a say in the management of the companies. It was contended that all payments proposed to be authorised under section 182 should be conditional upon the approval of Mr. Chou or such person as he might appoint. Alternatively it was contended on Gala Land's behalf that it might be more expedient for a special manager to be appointed to manage the business of the two companies pending the hearing of the petitions. It was evidently envisaged that such a special manager be appointed by agreement of the opposing parties with the consent of the Official Receiver as the provisional liquidator of the two companies.

36. On the 18th May 1983 Gala Land's solicitors required that any order under section 182 should stipulate that payments by the companies were to be made by cheques drawn on the companies' Hong Kong and Shanghai Bank account and that such cheques should be countersigned by Mr. Chou or a nominee of his. At the same time the validity of the appointment of N. & L. as managers of the building was challenged together with the authority to make any payments to that company which was controlled by Mr. Lee.

37. By the 25th May 1983 Octaland's solicitors were reminding Mr. Chou of his fiduciary duties to the companies and complaining about the time having to be spent on the information that he apparently thought it necessary to require before consenting to the proposed application. Octaland was at this stage prepared to agree that payments on behalf of the companies should be made by cheques drawn on the account with the Hong Kong and Shanghai Bank but, whilst Octaland was prepared to agree to the cheques being countersigned by Mr. Chou it was not prepared to agree to their being signed by any person nominated by him.

38. Finally, the exhibited correspondence ends with a letter dated the 1st June from the solicitors for Gala Land pointing out that in any event the companies' account with the Hong Kong and Shanghai Bank has Mr. Lee and Mr. Y.C. Fok, the personal assistant of Mr. Chou, as its signatories. The letter continues to raise the requirement that any order made under section 182 should stipulate that all income of the companies be paid into the Hong Kong and Shanghai Bank account. It further insists that, since there is no written agreement or board resolution authorising expenditure to be incurred in favour of N. & L. which is a company owned and controlled by Mr. Lee, Gala Land is not prepared to agree to payments being made by virtue of the order to that company. The letter also emphasises that whilst in principle Gala Land is prepared to agree to an application to the court in respect of certain essential expenses, nevertheless, because of the nature of the allegations made against Mr. Lee, the payments to be authorised must be closely monitored and restricted to those which are necessary to continue the business.

39. The point is also made that Mr. Chou suggests that as far as the staffing of the companies are concerned personnel should be employed and paid by the companies direct and not by way of contributions to N. & L. which have never been authorised or disclosed to the board. It is suggested that there be a-meeting between the respective clients of the solicitors in their presence for the purpose of making new arrangements.

40. It was on that discordant note that Cetaland made its application under section 182 on the 3rd June and Gala Land made its application under Section 193 on the 7th June. Octaland who resist the petition on the grounds that it is inspired by the bad faith of Mr. Chou also contend that Gala Land's application for a provisional liquidator made at this late stage is simply a manoeuvre in what amounts to a game of chess and the pursuit of a personal vendetta to frustrate the application by Octaland which is genuinely made with the interest of the companies in mind for the purpose of enabling them to manage the building which is their principal asset.

41. To support this contention Mr. Litton rightly relies on the fact that when the summonses for the appointment of a provisional liquidator were issued Mr. Simon Ip a solicitor acting for Gala Land, deposed in his supporting affidavit that before the making of the application by Octaland under section 1982 of the Ordinance Gala Land had no knowledge of the rental income generated from the companies' property whereas, in fact, as Mr. Lee pointed out in his affidavit filed on the 12th July, this could not be true because on the 10th July 1982 Mr. Lee had given Mr. Chou a table of information containing details of all the tenants and the rent they were paying.

42. In a further affidavit filed on the 21st July Mr. Ip acknowledged that he made a mistake on this point. He explained that the affidavits were drafted in a hurry on the 7th June 1983 in great urgency as a result of Octaland's application under section 182. At the time Mr. Chou was abroad and Mr. Ip had to obtain instructions relating to the contents of his affidavit from other officers and staff of Gala Land over the telephone. He says that what Gala Land meant was that it had no knowledge of the monthly accounts showing the expenditures of the two companies and not that it had no knowledge of the monthly rental.

43. Bearing in mind the contents of the correspondence  between the solicitors which led up to the two applications, I accept the explanation given by Mr. Ip on this point. In that correspondence Gala Land had made its requirements in connection with the proposed order under section 182 clear through its solicitors and those requirements had not been met. I am unable to accept that Gala Land's opposition to the section 182 application or its application for the appointment of a provisional liquidator is actuated by spite or personal vendetta on the part of Mr. Chou.

44. Furthermore, in my view it is clear from the evidence contained in Mr. Simon Ip's affidavit filed on the 7th June 1983 in support of the applications for the appointment of a provisional liquidator that the application is made on a broad front and in reliance, inter alia, on the allegations contained in the petitions and in the verifying affirmation of Mr. Chou filed on the 12th April 1983. Indeed, in paragraph 6 of Mr. Ip's affidavit he refers not only to those documents but in particular to paragraphs 26 and 28 of the petition and paragraphs 10 to 27 of the verifying affirmation in which the allegations upon which the petition is founded are mentioned. In addition, in paragraph 7 of his affidavit the problems arising from the Chekiang account which is under the control of Mr. Lee or his nominees are referred to and later in paragraph 9 there is reference to the correspondence, which I have referred to above, between the solicitors of the parties leading up to the application.

45. In the final paragraph of his affidavit Mr. Ip refers to all the matters relied upon by Gala Land for the appointment of a provisional liquidator in terms, in my judgment, making it absolutely clear that the application is made on a very much wider basis than was contended on behalf of Octaland. In addition to the allegations made against Mr. Lee and N. & L. it is stressed that because of the substantial income received by the two companies and the fact that the hearing of the petition may be delayed due to the application of Octaland for extension of time to file evidence in opposition the petitioner fears that the assets of the two companies may be substantially depleted before the hearing.

46. Mr. Litton, on behalf of Octaland sought to resolve the issue between the parties by making an unconditional offer to pay all income received in respect of the building into the account of the companies with the Hong Kong and Shanghai Bank which is under the joint control of the parties, thereby, as he put it, eliminating all anxiety over funds leaving the company. He contended that, on the evidence, if this course were adopted, there remained outstanding only matters of interim management and certain payments being made by N. & L. In my judgment Mr. Sykes for Gala Land was fully justified in rejecting this proposed solution on the grounds that, whilst it went some way to allay anxiety regarding jeopardy of the companies' assets, there were much wider issues involved in relation to management, other assets and the Chekiang account and that section 182 was not intended to provide a solution to the difficulties which had arisen.

47. If a provisional liquidator were appointed he could be given all necessary powers to ensure the proper management of the companies' affairs pending the nearing of the petition and the application under section 182 would fall away. Accordingly the crucial question is whether or not a provisional liquidator should be appointed for the companies.

48. Section 193(1) of the Companies Ordinance, which corresponds with Section 238(1) of the Companies Act 1948, provides that subject to the provisions of that section the court may appoint a liquidator provisionally at any time after the presentation of a winding-up petition. The language of the sub-section is general and although in practice where applications for the appointment of provisional liquidators have been opposed it has been more common for appointments to be made in situations where it can be shown that there is jeopardy to the assets of the company or obvious insolvency or the company has admitted that there is no defence to the petition, I respectfully adopt the decision of Plowman J. in Re Union Accident Insurance Co. Ltd. (1972)  1 All E.R. 1105 at p.1109 to the effect that the relevant provision confers a general power on the court to appoint a provisional liquidator depending on the particular circumstances of each case. I also accept the statement of the law set out in the 43rd edition of Gore-Browne on Companies at paragraph 31-30 to the effect that a provisional liquidator may be appointed for a company after the presentation of a petition if the property of the company is in danger, or it is alleged that those in control are misappropriating or wasting its assets or any other good cause exists.

49. As regards the exercise of the power to appoint a provisional liquidator I also follow the approach of Plowman J. in treating two matters as relevant for consideration. The first is whether Gala Land, as the petitioner, has made out a good prima facie case for a winding-up order at the hearing of the petition. This matter is to be considered on the basis that any views expressed by the court on the merits of the petition are provisional only because at this stage the court is not trying the petition. Secondly, if the court concludes that a good prima facie case for a winding-up order has been made out the question arises whether it is right that a provisional liquidator be appointed in all the circumstances. As Bright J. pointed out in Re Club Mediterranean Pty. Ltd. (1975) 11 S.A.S.R. 481 this question has to be decided on the basis of commercial realities, the degree of urgency and need established by the petitioner and the balance of convenience according to the circumstances. The circumstances will of course vary in every case but they include the eventuality of the paralysis of the company by a dispute between shareholders or directors.

50. In the early stages of the hearing Mr. Litton conceded on behalf of Octaland that Gala Land had shown a prima facie case for the making of a winding-up order if their allegations could be proved at the hearing. However, later he made it clear that he was contending that in relation to the application for a provisional liquidator it was incumbent upon a petitioner to show only an arguable case or a serious question for decision in accordance with the principles applied in American Cyanamid Co. v Ethicon Ltd. (1975) A.C. 396 (H.L.).

51. In my judgment that is not the correct test in relation to an application under Section 193 of the Companies Ordinance. I accept and apply the test which Plowman J. applied in Re Union Accident Insurance Co. Ltd. (Supra) I emphasise that a conflict of evidence can only be resolved on the hearing of the petition. In my judgment, if Gala Land can at this stage show, by believable evidence, facts which if eventually proved at the hearing of the petition will entitle it to a winding up order and if the contrary is not proved at the present time, then Gala Land will have established a prima facie case.

52. Applying that test I have no hesitation in concluding that Gala Land has established a prima facie case for a winding-up order here. As Mr. Sykes pointed out, the petition and the evidence in support alleges facts which justify loss of confidence in Mr. Lee. In particular there are the allegations of payments by the companies to Ming Kai, a business evidently controlled by Mr. Lee, payments to Ming Fai which have not been explained, and payments to businesses controlled by Mr. Lee and to other companies in which Gala Land does not have equal control. In addition the evidence contained in the correspondence exhibited to Mr. Chou's affidavit in support of the petition shows failure on the part of Mr. Lee to allow Mr. Chou access to the books and documents of the companies.

53. There is a conflict of evidence regarding the transfers of the companies' funds of which Mr. Chou complained in his evidence. In his affidavit filed on the 12th July 1983 Mr. Lee alleges that Mr. Chou's assertion that these payments were not known to him and that they were discovered by him subsequently is a pretence and patently ridiculous because all the transactions were shown in the books and accounts of the companies to which Mr. Chou's staff had frequent access. Likewise Mr. Lee alleges that the continued existence and activity of the Chekiang account is shown in the books of Five Lakes and in all relevant payment vouchers which were examined on many occasions by the accounting staff of Mr. Chou. These allegations of Mr. Lee have been denied by Mr. Chou and three of his staff and the relevant issues of fact will have to be determined on the hearing of the petition.

54. As regards the legal basis for the petition and the prima facie case for the appointment of a provisional liquidator I accept Mr. Sykes' submission that this is really a classic case for a winding-up order under the just and equitable provision if the allegations are proved at the hearing of the petition.

55. It is common ground between the parties that, by mutual understanding, the affairs of the companies were conducted in a very informal way. There is no denial, in the evidence filed on behalf of Octaland, of the allegation in the petition and in the evidence of Mr. Chou that the association between Gala Land on the one hand and Octaland and its associated company on the other hand in forming the companies was one based on the personal relationship and mutual confidence existing between their two representatives Mr. Chou and Mr. Lee. Again, there is no denial in the evidence filed on behalf of Octaland that there was an understanding between Octaland and its associated company on the one hand and Gala Land on the other regarding the management of the affairs of the companies under which Mr. Lee was to be left with the day to day management of the companies' affairs whilst Mr. Chou was to be consulted in relation to matters of policy.

56. Accordingly, in my judgment, this is clearly a case, on the evidence so far adduced, where the petitioner Gala Land has shown prima facie evidence of the existence of two of the typical factors referred to by Lord Wilberforce in Westbourne Galleries Ltd. (1973) A.C. 360 at p.379 which bring into play the just and equitable provision in the Ordinance through which obligations common to partnership relations may come in and the analogy of partnership law is permitted to be applied as it was applied in Re Yenidje Tobacco Co., Ltd. (1916) 2 Ch. 426 (C.A.) which was approved in Re Westbourne Galleries Ltd. (Supra).

57. As regards the question of inspection of the companies' books, I accept Mr. Sykes' submission that not only did Mr. Chou have a right as a director of the companies to access to the books and accounts but, by analogy with partnership law, Gala Land as an equal shareholder in the joint venture must at all times have an absolute and unqualified right to be fully informed through its representative about and to inspect all books and documents of the companies. I also accept Mr. Sykes' submission that if there is a legal right under the authority of Conway v Petronius Clothing Co. Ltd. (1978) 1 W.L.R. 72 to prevent Mr. Chou and Gala Land having access to books and accounts of the companies equity would override it under the circumstances of this case unless Octaland were to establish that Mr. Chou required access to the relevant documents for an ulterior purpose.

58. As to the question whether it is right to appoint a provisional liquidator in this case, the court has to consider the matter having regard to the balance of convenience and to commercial realities in light of the circumstances of the particular case. Authorities can only assist on questions of principle. Considering the question without reference to any decisions in other cases I have come to the following conclusions.

59. It is common ground that the companies have always been run in a very informal manner because they were originally formed on the basis of an association of the shareholders depending upon the personal relationship between the two directors who are the sole directors of the companies and upon the mutual trust existing between them and between the shareholders whom they represent. On the evidence before me that mutual trust has gone. This has been manifestly demonstrated by the acrimonious correspondence which took place between the two directors and the solicitors for the relevant parties when Mr. Chou was endeavouring to obtain access to the books and accounts of the companies. Mr. Chou, who was highly suspicious of the conduct of Mr. Lee in connection with the affairs of the companies and other joint ventures, went so far as to report him to the Commercial Crimes Bureau in July 1982 and by the end of the correspondence Mr. Lee was accusing Mr. Chou through his solicitors of bad faith and also of serious misconduct in relation to the affairs of another company of which both Mr. Chou and Mr. Lee were evidently directors.

60. The same mistrust and lack of co-operation between the two directors and those whom they represent is again clearly manifested by the correspondence which passed between the solicitors for the parties in May and early June this year prior to the application by Octaland under section 182. Mr. Chou is constantly demanding a say in the management of the companies' affairs and Mr. Lee is accusing him of being unreasonable and denying most of his demands.

61. It is clear that if a provisional liquidator is not appointed the affairs of the companies can only be effectively run, under the circumstances, by either one director or the other. If allegations of non disclosure made in the petition are proved at the hearing of the petition it seems that Mr. Lee must in any event be deemed to have vacated his office as a director pursuant to regulation 72 of Table A and similar allegations have been made in the case of Mr. Chou. Be that as it may, any suggestion that they should co-operate and continue to manage the affairs of the companies together is, in my judgment, wholly unrealistic when each is accusing the other roundly of bad faith and the aura of mistrust which hangs over them prevents them from reaching any significant agreement concerning the affairs of the companies.

62. On behalf of Octaland Mr. Litton has attacked the bona fides of Mr. Chou, accused him of playing a game of chess and not acting bona fide and at the same time Mr. Litton contends that Octaland and Mr. Lee will assume the bona fides of Mr. Chou and welcome him to any board meeting which he might propose. On the other hand when Gala Land offered to provide for the companies the same management services as are currently provided by Mr. Lee's company N. & L. no answer was received to the offer.

63. Under such circumstances where Gala Land has established a prima facie case for the winding-up of the companies under the just and equitable provision on the basis of justifiable lack of confidence and also of deadlock and where Mr. Chou is under a duty not only as a director but also as representative of Gala Land to ensure the proper conduct of the companies' affairs it cannot, in my judgment, be right to allow Mr. Lee to remain in de facto control of the companies or to expect Mr. Chou as the representative of Gala Land to co-operate with Mr. Lee in the management of the companies until the hearing of the petition on the basis that Mr. Chou is to forget all the allegations of breach of confidence and impropriety which he has levelled at Mr. Lee.

64. In my judgment the situation that exists at present is such that the companies cannot be properly and lawfully managed in accordance with their Articles. The dispute between the directors and the atmosphere of mutual distrust is such and there is such deadlock and paralysis in the management of the companies that a provisional liquidator clearly should be appointed to hold the position until the petition is heard. The court should be very slow to interfere in the internal workings of any company but where the division between the two directors is such that they cannot work together in any degree of harmony the right course, in my judgment, is to appoint a provisional liquidator just as, in similar situations arising between partners the proper course is to appoint a receiver to hold the position until the dispute between them is resolved.

65. As to the contention on behalf of Octaland that Gala Land had made its application for the appointment of a provisional liquidator as a ploy in a game of forensic chess and that this was really an example of Mr. Chou trying to tweak the nose of Mr. Lee, I reject this argument because I consider that Gala Land was fully justified in making its application for a provisional liquidator when it realised that the hearing of the petition was likely to be postponed for months by reason of Octaland's application for a very substantial extension of time to file evidence in opposition. Furthermore it is clear that the purpose of empowering the court to exonerate any disposition from the provisions of section 182 is not to provide a substitute for the appointment of a provisional liquidator but only the much more limited purpose of preventing a proposed disposition of a company's property after the presenting of a winding-up petition from being invalidated by reason only of a subsequent winding-up order being made in respect of the company.

66. I was pressed with the argument that the companies were self running and that the evidence of Mr. Lee showed that the building, which was the principal asset of substantial value of the companies, was being efficiently and cheaply run with the assistance of the management services provided by his company N. & L. and other agents. According to Mr. Lee's evidence there was nothing left to be done at a board meeting other than the signature of audited accounts and there was nothing requiring a shareholder's resolution.

67. In my judgment this is much too narrow a view of the situation. I accept the arguments advanced by Mr. Ching and Mr. Sykes emphasising that, apart from the objections to the activities of N. & L. in the management of the companies' building, there are other aspects of the companies' affairs which have to be considered and which must be provided for before the hearing of the petition. For example there is the matter of the Chekiang account out of which very substantial payments have been made in the past on the authority of Mr. Lee. This account remains at present under his control. Furthermore the companies have made substantial loans to other ventures and questions may well arise for decision by the board in connection with these loans before the hearing of the petition. The problems arising out of the income tax assessment made on the companies are, in my view, just one example of the matters which may well arise for consideration by the board before the hearing of the petition.

68. It was contended by Mr. Litton that the purpose of appointing a provisional liquidator is to preserve the status quo, as indicated in the authorities. He went on to contend that accordingly it would be wrong to appoint a provisional liquidator to displace Mr. Lee in the day to day management of the companies which was in any event self running on an economic footing. He also contended that the state of affairs was one created by Mr. Chou himself who was now seeking to upset the status quo and oust Mr. Lee on the strength of Mr. Chou's complaints.

69. I do not accept that argument. In my judgment, the reference in the authorities cited below to the maintenance of the status quo in relation to the appointment of a provisional liquidator where the just and equitable provision is invoked is clearly intended to mean that the provisional liquidator, as in the case of a receiver of a partnership business, is appointed in order to hold the position until the dispute between the warring parties has been resolved. The whole point of appointing a third party to intervene in the affairs of the company is to ensure that those affairs will be managed by an independent party whose duty will be to safe-guard the interest of the company or to partrership, as the case may be, until the dispute is resolved.

70. It was further contended that the appointment of a provisional liquidator in the present case would involve substantial expense because a special manager would have to be appointed to manage the building whereas N. & L. were providing very much cheaper management services than would be available from any other source. I agree, but I accept the argument on behalf of Gala Land that there is always a price to be paid for the appointment of a provisional liquidator or a receiver in situations of this kind and that, in any event, if the provisional liquidator appointed saw fit to employ N. & L. to continue to manage the building Gala Land would be prepared to accept his decision as an independent third party.

71. It was also contended on behalf of Octaland that the appointment of a provisional liquidator would have an injurious effect on the companies because delicate negotiations for the renewal of leases shortly to expire were in hand and the appointment of a provisional liquidator would almost certainly scare away existing and prospective tenants, reduce the income of the companies and create a risk that the bank would call in the existing mortgage loan. However there is no suggestion that the companies are insolvent at present and I accept the argument advanced on behalf of Gala Land to the effect that if any tenants or prospective tenants were to be scared away from the premises this would have happened at the time when the petition was presented.

72. Accordingly, in my judgment, it is right in the circumstances of this case to appoint a provisional liquidator. I am fortified in the view I have taker on this question by the approach adopted by the Court of Session in Levy v Napier (1962) S.Cas. 468 and applied in McCabe v Andrew Middleton (Enterprises) Ltd. (1969) S.L.T. 29 which were both cases concerned with the just and equitable provision. I am indebted to Mr. Sykes for his helpful citation of other cases which supported his arguments but I do not find it necessary to refer to them in this judgment.

73. Those are my reasons for the order appointing two provisional liquidators for the companies and dismissing the application under section 182. When I gave my decision at the end of the hearing, I was asked to leave the question of costs over until the parties had seen my reasons. I will accordingly hear counsel's submissions on the question of costs when these reasons are handed down.

Representation:

Mr. Henry Litton, Q.C. and Mr. John Bleach and Miss Linda Siddal instructed by M/s Peter Mark & Co. for the Opposing Contributory Octaland Holdings (H.K.) Ltd.

Mr. Charles Ching, Q.C. and Mr. Richard Sykes, Q.C. and Mr. Robert G. Kotewall and Mr. Winston Poon instructed by M/s Johnson, Stokes & Master for the petitioner Gala Land Investment Co. Ltd.

Mr. Woollard for Official Receiver