Re San Imperial Corporation Ltd

HCCW000026/1980

IN THE HIGH COURT OF JUSTICE

COMPANIES (WINDING-UP) NO. 26 OF 1980

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Coram: R. O'Connor, Judge of the High Court

Date of Judgment: May 5, 6, 7, 8, 9, 12.

BEFORE THE HONOURABLE MR. JUSTICE O'CONNOR IN COURT

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JUDGMENT

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1. The background to this case appears from my judgment of the 12th March 1980 in Action 5006 of 1979. I there found the statement of claim defective. Later I gave leave to file an amended statement of claim. That action is a minority shareholders action, brought by Malaysia Borneo Finance Corporation (M) Berhad on behalf of San Imperial Corporation Limited, against various directors of San Imperial Corporation Limited and their associates. The writ in the action was issued on 12th November 1979. On the 19th March 1980 Malaysia Borneo Finance Corporation (M) Berhad presented a petition for the winding up of San Imperial Corporation on just and equitable grounds as provided for by S.177(f) of the Companies Ordinance. The allegations in the petition are, broadly speaking, the same as those in the action and are briefly that James Coe and his associates acquired control of the company, partly with funds provided by the company, in order to fraudulently transfer the assets of the company to himself and his associates, to the detriment of the company and those shareholders not participating in the fraud. It is alleged that there have been breaches of S.48 of the Companies Ordinance and of fiduciary duty. Before me are applications by the company and a number of defendants in the action, who are directors of the company, to strike out, or alternatively dismiss the petition in limine.

2. The power to dismiss or strike out in limine should be exercised with great circumspection. Nevertheless, where it is clear that the court, in the exercise of its discretionary power, would not make a winding up order on the hearing of the petition, it is proper to strike it out in limine, and if the court is of that opinion it ought to have the courage of its opinions and strike out or dismiss the petition. I do not find this to be such a case. Many matters that may carry weight at the hearing of the petition, carry less weight at a hearing in limine. Such suggestions as, for example, that the petitioner bought his way into the company in order to wreck it and is in breach of the spirit, though not of the letter, of S.179(1)(a)(ii) of the Companies Ordinance, or that the control of the company could in certain circumstances be removed from the present directors, are matters that may or may not have a significant influence at the hearing of the petition. However that may be, they do not carry much weight at the present stage, in the light of the allegations in the petition and the evidence.

3. At this stage there is no evidence filed which effectively challenges the allegations in the petition. I consider the matter on the basis that the allegations set out in the petition are true insofar as they are justified by the affidavit in support. The affidavit incorporates the contents of the published Report of an investigation made under S.127(1) of the Securities Ordinance into the affairs of Sin King Cheung Hing Yip Company Limited, which is a James Coe company and effectively controls San Imperial Corporation Limited, In re. Travel and Holiday Club Limited⁽¹⁾ and In re. Armvent Limited⁽²⁾. Of course the allegations in the petition and the evidence supporting them are viewed in the light of any criticisms made by counsel, and would be weakened insofar as they carried within themselves the seeds of their own destruction. Anything I say critical of any person is on the basis of accepting the allegations made in the petition and the evidence supporting it. This evidence, and in particular the Report, shows that James Coe and his associates have been using the assets of San Imperial in order to buy into and increase their control of that company and that they have been, contrary to the interests of the company, depleting its assets in order to enrich themselves. They have done this in devious ways and at times with scant regard for orders of the court. It is a fair inference that they have not yet fully succeeded in their planned spoliations and that they will continue them when opportunity arises and they think they can get away with it.

4. The petition is opposed by the company and I am pressed with the view that the attitude of the company is independent of that of the directors whose conduct is attacked. It is said that I ought to accept that view because the instructions on behalf of the company come from a Mr. Chan who has been appointed a director in order to be a watchdog and to give instructions independently of the other directors. Mr. Chan was appointed a director by those who control the company, that is by those whose conduct gives rise to the complaint in both the action and the petition. He is a friend of James Coe and at the period when the matters complained of occurred he was associated with Sin King Cheung Hing Yip Company Limited which is the James Coe company used as a vehicle for the fraud. I do not accept that Mr. Chan is of such independence as might give confidence in his activities as a watchdog. I am not impressed by the appointment of a watchdog nominated by and friendly with the suspected thief. I accept of course that the company's legal advisers act properly in the matter. Having regard to the past misdeeds of the directors, and the persistence and ingenuity with which they pursued their ends, I find it difficult to accept that they would be unable in future to circumvent any obstacle to their pursuing their ends, especially when the apparent obstacle is their own creation.

5. The petition is, by leave of the court, supported by the receiver by way of equitable execution of 822,560 shares in the company. The receiver was asked by the petitioner to support the petition, and after seeking advice, decided to do so. I consider the receiver has acted properly.

6. The jurisdiction to wind up a company on the just and equitable ground gives a wide discretion to the Court. It is a judicial discretion to be exercised on legal and equitable principles in the light of all the circumstances. The equitable principles to be applied include consideration of whether another remedy is available. Winding up is a remedy of last resort and courts are slow to grant it where another remedy is available. This is the reason why it has been refused in many of the reported cases. Examples of the application of the other remedy principle are where the majority of shareholders could by resolution remedy the matter, where the contributory could reasonably extricate his investment in another way, in some circumstances a minority shareholders action, and where winding up is only sought as interlocutory relief.

7. In this case I do not consider there is another remedy that appropriately takes the place of a winding up order. James Coe and his associates have a sufficient holding in the company to make it unrealistic to suggest that there could be assembled enough honest shareholders to outvote him. That position is likely to remain if not is forever, at least for such length of time as renders it contrary to the interests of honest shareholders and the public that it be allowed to continue. I do not think the petitioner could extricate his investment at a reasonable price by any means other than winding up. Trading in the shares has ceased for the present. It would appear unlikely, in the light of the findings of the Report, that trading will be permitted so long as James Coe is in control. If trading were permitted it would not be surprising if, in the light of the Report, the public were not prepared to invest in a James Coe company, and as a result the petitioner could not realise his shareholding at a fair price. I do not consider the minority shareholders action provides a full remedy, or the same remedy to the petitioner as will be found in a winding up of the company. For the company it is said that the petitioner can obtain his full remedy in the action, that it is unreasonable to seek to wind up the company and it is only sought for interlocutory relief in regard to the action. The answer to that is that the remedies sought are different and in part against different parties. The action seeks remedies as to what happened in the past, the petition looks to the future and seeks to avoid the consequences in the future of what the past foretells. A winding up order would no doubt act as a form of interlocutory relief but I see no reason to doubt that the petitioner, an overseas corporation, wishes to have the company wound up. That interlocutory relief may thereby also be obtained does not necessarily tell against the petitioner. Where the petitioner is a contributory the circumstances on which he may rely are not confined to those which affect him in that capacity, In re. Westbourne Galleries⁽³⁾. Since the enactment of what is in Hong Kong, S.180(1A) of the Companies Ordinance, a winding up order will not be refused on the ground that another remedy is open, unless the petitioner is unreasonable in not pursuing the other remedy. The onus of establishing that another remedy is open and that the petitioner is unreasonable in not pursuing it, lies upon those opposing the petition.

8. The petitioner says that because of past misconduct by those in control of the company, the petitioner has no confidence in the management of the company. That is in the future management. In many cases, catagorised as lack of confidence cases, emphasis is put upon the fact that the company was a quasi partnership. The reason for that is because misconduct, which may not warrant winding up on just and equitable grounds where a company is a large company not in the nature of a quasi partnership, may assume a graver aspect and call for winding up on those grounds because of the particular relationship between the parties in a quasi partnership. Misconduct which is trivial in a large public company, may not be trivial in a quasi partnership. It does not follow that lack of confidence as a ground for winding up is confined to quasi partnership. It may warrant a winding up in other cases also if the lack of confidence is based upon sufficiently grave misconduct, and in particular if it foreshadows grave misconduct in the future. Regard is given to all the circumstances. The reason for lack of confidence may be that there has been in effect a breach of the obligations, between the petitioning contributor and the company or those in control if it, that are laid down in the articles of association. If there have been such breaches, and they are sufficiently grave, and in particular if they are likely to continue, and there is no other reasonable way to prevent them, then a winding up order may well be called for. It is wrong to create catagories of cases, In re. Westbourne Galleries⁽³⁾. Indeed catagorisation would merely serve to illustrate circumstances in which it had been found in the past, just and equitable to make orders. It would not exhaust the possible circumstances which might arise in the future and call for the exercise of the jurisdiction. Looking at the past and present one cannot visualize all the possible circumstances which might arise in the future. Indeed who would have foreseen the circumstances of the present case. While cases are not to be catagorised I am, as was pointed out in In re. Tivoli Freeholds Ltd.⁽⁴⁾, insofar as decisions binding upon me have defined basis elements necessary to constitute a particular concept, bound to follow these decisions.

9. In Lock v. John Blackwood Limited⁽⁵⁾ the following passage occurs in regard to lack of confidence:-

10. In that case an important factor was that the company was a quasi partnership, but the principle was expressed in general terms without limitation. Where the misconduct is sufficiently grave, there seems no good reason to confine it to quasi partnerships and it does not seem to be so confined, see the passage in In re. Wondoflex Textiles Pty Ltd.⁽⁶⁾, which case was generally approved in In re. Westbourne Galleries⁽³⁾. I consider the passage quoted to be consistent with the judgments in In re. Westbourne Galleries⁽³⁾.

11. A factor to be considered where there is a lack of confidence is whether the matter could be remedied by obtaining a change of directors. If it could, a winding up order is unlikely to be obtained, as a more appropriate remedy would be available. It appears that the present directors have a grip on the company that will not be easily loosened and could not be loosened in time to avoid the likelihood of further damage to the company except by a winding up order. In some cases the expression 'loss of confidence' is used. That might be taken to indicate that a necessary requirement is an original confidence. I do not consider that to be so. Lack of confidence is a more suitable expression. If a person, lacking confidence, received a gift of shares, he is not disentitled to succeed on a petition because he obtained his shares at a time when he had no confidence in the directors. Of course a person who, lacking confidence in a company, bought into it in order to wind it up, may find that the circumstances in which he obtained his shareholding tells against him if he seeks an order on just and equitable grounds. The court may disapprove of his conduct. That would merely be the application of an equitable principle. In this case the allegations in the petition, supported by the evidence in the Report afford ample grounds for the petitioner to have lack of confidence in those in control of the company. As Sir George Jessel M.R. said in Dawkins v. Antrobus⁽⁷⁾ the conduct of the directors 'was so totally devoid of reasonable and probable cause as that I could brand them with the epithet of being either idiots or corrupt'.

12. It would not be surprising if proved subordination of the interests of the company to the interests of the directors and another company of which they are directors and shareholders, and treating the assets of the company as if they were their own, together with an apparently justifiable inference from past acts that such conduct was likely to continue, were considered to be just and equitable grounds for winding up the company. A winding up order would in those circumstances appear to also be in the public interest.

13. It is said that having regard to the similarity of the allegations in the petition with those in the action, it is oppressive to allow the petition to continue. It is suggested that the petition could have been brought instead of the action. I have already dealt with a connected submission that is that the petitioner will get a full remedy in the action. At the time the action was brought the petitioner was not qualified under S.179(1)(a)(ii) to bring a petition as he had not held shares for the required statutory period. It is suggested that he could have brought a petition as his nominee the HongKong & Shanghai Bank had held the shares for the statutory period. The petitioner apparently asked the Bank to bring proceedings but it would not do so, as it did not consider that part of banking business. In theory no doubt the petitioner could have had a petition presented at the time the action was instituted. However, in practice it is unreasonable to criticise it for not taking the action that would have been required for it to do so. It is suggested that the action having been brought, a winding up order would have the effect of delaying the action. In my opinion the findings in the Report justify both a winding up order and the action. In any event it seems that the allegations in the action are well supported by the Report, and it would perhaps be surprising if the liquidator did not seek, and the court approve, of the action continuing. It seems that the action and petition are both required to remedy the situation that has arisen and what can be foreseen as to the future.

14. Reliance is placed by the Company on In re. Anglo Greek Steam Company⁽⁸⁾ and In re. Haven Gold Mining Company⁽⁹⁾, In re. Great Cobar Copper Mining Company⁽¹⁰⁾ for the proposition that where the complaint relates to past acts the proper course is an action and not a winding up order. I put aside for the moment the fact that the petitioner does not only complain of past acts, but relies on past acts as indicating what the future is likely to be if the company is not wound up. It seems to me that the cases referred to are simply illustrations of the application of the equitable principle that before granting relief on equitable principles the court will consider what other remedy is available. They were decided before the enactment of what in Hong Kong, is S.180(1A) of the Companies Ordinance. It must be kept in mind that winding up is a remedy of last resort. Another point is that at the time the first two of those cases were decided the court's thinking was guided by the since refuted doctrine that 'just and equitable' was to be construed euisdem generis. In the Anglo Greek Steam Company case⁽⁸⁾ it further appeared that the company could be placed under proper management and prosper in the future, which is very different to the prognosis for our company. It was remarked in that case that if the company continued to be run in the manner it had in the past, it was probable that the court in future would make a winding up order. In the case of In re. Haven Gold Mining Company⁽⁹⁾ it was expressly found that there was no basis for the allegations of fraud and that being so the petitioners had no case. The decision in that case was based upon a failure of the substratum of the company, in that the subject matter of the business of the company had ceased to exist. The remarks that if fraud had occurred it could have been waived by a majority of the shareholders, is simply another illustration that equity looks to alternative remedies and will not act if the matter can be rectified in another more appropriate manner. That case is not of assistance in circumstances where there is the prospect of future continuing fraud with the object of those in control obtaining the assets of the company, in fraud of the company and the other shareholders. Minority shareholders do not make the directors or majority, a gift of the assets represented by their shares.

15. The Great Cobar Mining Company case⁽¹⁰⁾ was decided in 1902 when the euisdem generis rule had lost some of its sway, see the passage top of page 103. The decision appears to be based on the fact that what was desired was merely a temporary winding up in order to facilitate an action to set aside the sale of the company's assets, and that the petitioners, if they succeeded in having the sale set aside, had no wish to proceed with the winding up. The decision rests on the proper remedy being an action to set aside the sale, and there were no grounds, on the facts, to apply the remedy of last resort and make a winding up order. In our case the petitioner desires a winding up in any event.

16. I see nothing in the point that allegations in the petition are inconsistent with the allegations in the action. I consider it quite in order for the petitioner to point out the case being put forward by James Coe's company, Siu King Cheung Hing Yip Company Limited, in other proceedings in regard to that company's right to 15 million shares in San Imperial. The ownership of those 15 million shares is a matter that could affect the future control of the company. However it appears that the final decision as to the ownership of those shares is a considerable time away and whatever that decision may be it appears that the effective control of the company for a considerable time will be in the hands of James Coe.

17. Another case to which I have been referred is Charles Forte Investments Limited v. Amanda⁽¹¹⁾. In that case the articles of the company gave the directors a discretion to refuse to register any transfer of shares without assigning reasons therefor. They refused to register a transfer by the petitioner, who sought therefor to present a petition on just and equitable grounds. It was struck out, not surprisingly, as there were no equitable grounds upon which it could have been granted. The petitioner was himself acting in disregard of the agreement contained in the articles of association, and he could call no equitable principle to his aid. In any event there was no reason for allowing the remedy of last resort as a full remedy could have been obtained by an action.

18. I see no reason to dismiss or strike out the petition.

Representation:

Richard Yorke, Q.C., Charles Ching, Q.C., Patrick Fung & Winston Poon instructed by Johnson, Stokes & Master for the Petitioner.

Robert Wright, Q.C. & Andrew Li instructed by T.S. Tong & Co. for the company.

Ronny Tong instructed by Liu, Chan & Lam for Siu King Cheung Hing Yip Company Limited, Kar Yiu Company Ltd., James Coe, Hui Chan Tze and Jack Choa.

Miss Appleby, Q.C. & Arjan H. Sakhrani instructed by Slaughter & May for the Receiver.

John T. Allen for Official Receiver.

(1) [1967] 1 W.L.R. 711

(2) [1975] 1 W.L.R. 1679

(3) [1973] A.C. 360 at 375, 385

(3) [1973] A.C. 360 at 374

(4) [1972] V.R. 445 at 468

(5) [1924] A.C. 783 at 788

(6) [1951] V.L.R. 458 at 465

(7) [1881] 17 Ch. D. 615 at 625

(8) [1866] L.R. 2 Eq. 1

(9) [1881] 20 Ch. D. 151

(10) [1902] S.R. N.S.W. 94

(11) 1964 Ch. 240