Re Boken Ltd.

HCCW000212A/1997

IN THE HIGH COURT OF HONG KONG

COURT OF FIRST INSTANCE COMPANIES (WINDING-UP) NO. 212 OF 1997

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Coram: The Hon. Mr. Justice Rogers in Court

Date of Hearing: 15 September 1997

Date of Handing Down of Decision: 13 October 1997

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D E C I S I O N

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1. In this matter the Petitioner, Mr. Vincent Chow Hon Leung has petitioned to wind up the Company, Boken Limited, on the just and equitable grounds and in the alternative for an order that his shares be bought out by either Boga International Limited or Mr. Kao.

2. Very briefly, Boken Limited was incorporated in 1992 with the intention that it would trade in artificial Christmas trees and Christmas decorations. Boken Limited was, according to the Petition, a two man company in which the Petitioner held a minority shareholding and the majority shareholding was, in effect, held by Mr. Kao although at least to begin with Mr. Kao wished to disguise his shareholding.

3. It is unnecessary to go into all the allegations in the Petition but it suffices to say that it is the Petitioner's case that Mr. Kao has in effect diverted the Company's business to Mr. Kao's other companies. Following upon that and part and parcel of that the Petitioner has been excluded from management of the Company and the Company's affairs have been wound down to the detriment of the Company.

4. To date there has been no evidence filed by the Respondents to the Petition. Boga International Limited, which is the holder of 254,998 shares, and Mr. Kao, who is the holder of two shares as nominee of Boga International Limited, have appeared and indicated that they support the Petition. In effect, therefore, the Respondents say that they consent to a winding-up of the Company and that that should bring an end to the Petition.

5. The Petitioner, on the other hand is not content with a winding-up and wishes to pursue the alternative remedy seeking an order under Section 168A of the Companies Ordinance.

6. The matter first came before me on the 10th June 1997. The Respondents argued that the Company should be wound up and that there should be no further proceedings in respect of Section 168A. At that stage the arguments had not been fully prepared and whilst giving a preliminary indication I said that there could be further argument on the procedural point after research had been done.

7. At the hearing Mr. Winston Poon S.C. argued that it would be an abuse of the process to proceed with the Section 168A application when alternative remedies are available. In this instance, the alternative remedy would be for a liquidator to take such proceedings as he saw fit either with the approval of the committee of inspection or with the sanction of the court and, if necessary, at the direction of the Court at the instance of the present Petitioner.

8. Considerable reliance was placed on the case of Re Full Cup International Trading Limited [1995] BCC 682. That case on its facts is not, perhaps, dissimilar from the present. It was a petition under Section 459 of the Companies Act 1985 which corresponds to Section 168A. The Respondents had been debarred from taking part in the proceedings and the judge proceeded on the basis of the affidavit evidence alone. He held that there had been conduct which had been unfairly prejudicial to the petitioner. It is of note, however, that he was careful to distinguish conduct which could be classified as unfairly prejudicial conduct which could fall within the terms of Section 459 and conduct which was not done in the course of the company's affairs but was done by the Respondents in that case as partners of another firm and directors of another company. The important point of the case however is that despite holding that the Petitioner had established a case of conduct which was unfairly prejudicial the judge refused relief indicating that there should be a winding-up. He did so because the relief sought of a purchase at a price to be estimated was not a practicable proposition. He considered in that case that the enquiries that would be necessary would inter alia throw on the person conducting the enquiry the difficulty of ascertaining exactly what had happened and whether the conduct complained of was objectionable and who was to blame. The judge considered that since the company was dormant by far the most practical course was to allow the company to be wound up and for the liquidator to take appropriate action to redress whatever wrongs needed addressing.

9. In support of this general approach Mr. Poon also relied on the case of Barrett v. Duckett [1995] 1 BCLC 243. That case however seems to me to be different. It was a case whereby a shareholder who claimed to have been unfairly prejudiced was prevented from continuing with a derivative action when there was the alternative remedy of a winding-up followed by pursuit of remedies on behalf of the company by the liquidator. Whereas, of course, the authority is of considerable assistance in assessing the considerations which need to be given, it must also be borne in mind that what was at issue there was whether a derivative action would be allowed to proceed despite the fact that there was an alternative remedy namely action on behalf of the company. In this regard it must be borne in mind that derivative actions are in themselves exceptional and they constitute a very specific and peculiar instance where the court permits a shareholder to take proceedings on behalf of a company. In the Barrett case it can be seen at once that if there is a company the existence of which has come to an end and which could be put into liquidation then it may well be appropriate for the liquidator, who will take over the reins of the company, to take any proceedings on behalf of the company rather than to permit the complex and sometimes convoluted proceedings of a derivative action.

10. Where, however, the proceedings which are contemplated are Section 168A proceedings the relief which is sought may take many forms. Sometimes, the relief might take the form of a control over the affairs of the company. On many occasions, however, what is sought by the petitioner is either that the petitioner's shares should be bought by those whom it is alleged have arrogated the company to themselves or else that the petitioner be permitted to purchase the shares of the other shareholders.

11. In this instance the Petitioner avers that the primary relief which he seeks is that his shares should be purchased by the Respondents. Mr. Tang S.C. on behalf of the Petitioner says that the relief which is sought is far less cumbersome than any possible action by the liquidator against the majority shareholder and the directors. What is sought in these proceedings is primarily a valuation of the shares of the Company based on an analysis of what the Company should have been worth had the wrongful acts complained of not been committed and, for example, Mr. Graham Pielow of the Christmas Consulting Group remained a customer of the Company.

12. In my view, there may be substance in Mr. Tang's submissions. It could be that winding-up proceedings on the just and equitable ground were in any event not appropriate, but I can see that if the Petitioner were able to satisfy the Court that it would be appropriate to order a purchase of the Petitioner's shares in the Company at a valuation which could be simply arrived at, that would be far more preferable than leaving it to a liquidator proded either by the Petitioner or by the court at the Petitioner's request to take proceedings against the majority shareholder who is accused of stripping the company of its assets. In my view, the Petitioner should not be deprived of the chance of a potentially simple remedy simply because the Company could be put into liquidation. It would, perhaps, have been better had the Petition been framed on the basis that the primary relief sought would be relief under Section 168A, but the matter having proceeded this far it is now a matter of less immediate importance.

13. The decision in the Full Cap case appears to me to be one of an exercise of discretion as to what if any remedy should be available which can only be taken once the full facts have been reviewed and the Court can see whether it would be right to order a purchase of shares on a basis to which the Petitioner would be entitled. At this stage I am not prepared to rule out the possibility of such a purchase of shares nor that the question of valuation of the shares could not be done simply.

14. There are of course a number of other factors to be taken into account. In the first place it may be possible that the proper value of the company would be higher than the company would be worth on the basis of a disposal of its assets even taking into account sums recovered under an action against the directors and shareholders. On the other hand, the liquidator may have wider powers of investigation including summoning former directors than would be available to a Court on a section 168A petition.

15. Nevertheless taking all these matters into account, it seems to me, right that the Petitioner should be allowed to proceed with his Petition at this juncture. There is a prima facie case made out in the Petition that the business of the Company has been wrongly extracted from the Company by the Respondents who by reason of their shareholding and otherwise have had control of the Company and the Petitioner seems to me to be entitled to a full hearing as to what if any relief should be granted.

16. In those circumstances I propose to make an order nisi for the further conduct of these proceedings. In view of the submissions which have been made I consider it appropriate that before any further evidence is filed the contentions of the parties should be clarified. In that regard I consider that the Petitioner should file a Statement of Contentions setting out the basis of his claim to relief and specifying precisely the relief which he seeks including therein an analysis of the manner in which he contends the valuation of the shares should be made. That should be completed within 3 weeks of the handing down of this Decision and the Respondents should file a Statement of Contentions in answer within 3 weeks of the filing of the Petitioner's Statement of Contentions. Thereafter the matter should be restored for further directions in particular as to the filing of evidence.

17. As discussed during the course of the hearing, if the Petitioner does not succeed in respect of the Section 168A petition and the Company is wound up and no other relief is granted then the costs as from at least the 10th June 1997 would be likely to be awarded in favour of the Respondents. Of course, should the Petitioner succeed in obtaining relief on the Section 168A petition then, no doubt, the costs would be in the Petitioner's favour. In those circumstance I propose to make an order nisi that the costs of the hearing be reserved to the judge hearing the Petition.

Representation:

Mr. Robert Tang, S.C. and Mr. Horace Wong instructed by Messrs. Allen Chan & Co. for Petitioner

Mr. Winston Poon S.C. instructed by M/s. Baker & Mckenzie for Respondents

Mr. M.K. Tam for Official Receiver