Re The New China Hong Kong Highway Ltd

HCCW 550/2009

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 550 OF 2009

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Before: Hon Harris J in Chambers

Date of Hearing: 22 December 2009

Date of Decision: 23 February 2010

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D E C I S I O N

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The Application

1.The 2^nd Respondent applies to strike out paragraph 82 of the Petition on the grounds that it discloses no reasonable cause of action, or is scandalous, frivolous, vexatious or otherwise an abuse of the process of the Court.

Background

2.The 1^st Respondent is a company incorporated in the British Virgin Islands. The 1^st and 2^nd Petitioners are shareholders in the 1^st Respondent owning 26.19% and 12.30% of its issued shares respectively. The 2^nd Respondent owns 57.38% of the issued shares. The Board of the 1^st Respondent has 7 directors; 5 appointed by the 2^nd Respondent and 2 appointed by the 1^st Petitioner. The 1^st Respondent has not registered under Part XI of the Companies Ordinance, but it appears to be common ground that its principal place of business is located in Hong Kong and that it is subject for the purposes of the Petition to the jurisdiction of this court.

3.The 1^st Respondent is a special purpose vehicle incorporated on 29 December 1993 for the sole purpose of participating in a joint venture with the Sichuan Highway Construction and Development General Corporation (“PRC partner”) to construct and operate an expressway in Sichuan. On 18 March 1994 the 1^st Respondent and the PRC partner entered a joint venture agreement for the formation of a Sino-foreign co-operative joint venture, Sichuan Xin Chuan Expressway Company Limited (“joint venture company”), which was to construct and operate the expressway. The joint venture agreement was subsequently amended on 2 occasions (“joint venture agreement”). The amendments are not material to this application. The 1^st Respondent and the PRC party own 60% and 40% of the joint venture company respectively.

4.The joint venture company is operating the expressway profitably and consequently the 1^st Respondent is profitable.

5.Prior to 27 August 2008 the joint venture company had 9 directors. Five were appointed by the 1^st Respondent and the remaining 4 directors by the PRC party. Two of the 5 directors appointed by the 1^st Respondent had been nominated by the Petitioners. One of the complaints made in the Petition is that subsequently directors nominated by the 2nd Respondent replaced the Petitioners’ 2 nominees without the Petitioners’ agreement.

6.The Petitioners complain that since the change of ownership of the 2^nd Respondent in August 2008 the 2^nd Respondent through its nominee directors of the 1^st Respondent and the joint venture company has engaged in a course of conduct designed to exclude the Petitioners from the management of the 1^st Respondent and the joint venture company and to advance the 2^nd Respondent’s interests and those of its nominee directors at the expense of the Petitioners.

7.The Petitioners assert that the conduct of which they complain unfairly prejudices their interests and that they have lost trust and confidence in the 2^nd to 7^th Respondents. Paragraphs 63 and 64 of the Petition more specifically assert that:

“The Need for Relief

63.  By reason of the matters set out in this Petition, the affairs of NCHK are being conducted in a manner which is unfairly prejudicial to the interests of the Petitioners.  The Petitioners have justifiably lost their trust and confidence in Bantam and its controlling directors or shareholders. The Petitioners have come to the conclusion that continuing the present arrangement is clearly not in the best interests of NCHK as a whole.  The principal reasons may be summarised as follows:

63.1  NCHK Chengdu’s appointed directors have been precluded by Bantam from exercising any control as directors over the management of NCHK and of its assets;

63.2  Significant parts of the income of NCHK is and are to be paid to Yiu and Goh, both Bantam directors, in breach of the dividends policy referred to in paragraphs 47 to 50 above and their fiduciary duties to NCHK; and

63.3  In the absence of assistance from the Court, there is every indication that the unjust and unsatisfactory arrangement will last indefinitely.

64.  With a view to bringing an end to the matters complained of, relief is sought to ensure proper control over the activities of Bantam and the Bantam directors who have participated in the wrongful and oppressive course of conduct, and to recover the excessive directors’ emoluments improperly paid, or alternatively, to seek the winding up of NCHK on the just and equitable ground.”

8.Paragraphs 65 to 81 of the Petition contain an extensive list of orders, which are designed to remedy the conduct of which the Petitioners complain including, to give one example, amendments to the 1^st Respondent’s Articles of Association to require the 1^st Respondent in general meeting to fix by special resolution (as opposed to ordinary resolution, which is what is currently provided for) directors emoluments.

9.I asked Mr. Peter Ng S.C. who appeared for the Petitioners, to confirm what is stated in paragraph 14 of the Petitioners’ skeleton submissions for the application, namely, that they are not seeking a buy-out under section 168A. He confirmed that they are not.

10.Paragraph 82 seeks in the alternative an order:

“That the 1^st Respondent be wound up by the Court under section 327(3)(c) of the Companies Ordinance.”

11.The 2^nd Respondent objects to the inclusion of this alternative claim for a winding-up order, which it says gives the PRC partner the opportunity to determine the valuable joint venture agreement. It has offered to purchase the Petitioners’ shares in the 1^st Respondent at a fair value. Liquidating the 1^st Respondent would realise less for the Petitioners than they will receive if they sell their shares. Thus, argues the 2^nd Respondent, even if the Court finds the Petitioners’ complaints proved, but is not willing to grant the orders sought in paragraphs 65 to 80 of the Petition there is no prospect of the court winding up the 1^st Respondent as it will apply section 180(1A) of the Companies Ordinance. Its concerns are not merely technical argues Mr. Ho. There is a concern that the existence of a winding-up petition may enable the PRC party to treat the joint venture agreement as discharged pursuant to clause 15.2 of the joint venture agreement, which provides “This Contract may be discharged prior to its expiration under any of the following conditions (the Co-operative Enterprise would also be dissolved prior to its expiration under such conditions): …………… (3) When one party to the Co-operative Enterprise voluntarily declares or is forced to declare bankruptcy, receivership and/or liquidation procedure ………”.

12.Similarly, the 2^nd Respondent argues, there is a risk that the joint venture company may be dissolved by virtue of the presentation of a winding-up petition. Article 57 of the joint venture company’s articles provides that “The CJV may be dissolved prior to the expiration of the term under any of the following conditions …….: (3) Either party declares bankruptcy, or either party is forced to commence a proceeding of bankruptcy, reorganisation and/or liquidation ……”

13.The 2^nd Respondent has produced expert evidence that these provisions may be interpreted as operating once a winding-up petition is issued rather than when a winding-up order is made. The Petitioner has also filed expert evidence dealing with this point. Mr. Huang Xiuhua of King & Wood does not expressly agree with the 2^nd Respondent’s experts, but neither does he suggest that their conclusion is wrong. If I have read his opinion correctly he says that he does not know enough about the genesis of the agreements or Hong Kong insolvency law to be able to express with any confidence an opinion as to whether or not a Mainland court would take the view that presentation of a winding-up petition is sufficient to trigger either clause. He does point out that dissolution of the joint venture company prior to the expiration of its term is subject to the approval of the authority that originally approved its establishment and that an application for such approval must be supported by a resolution passed unanimously by the board of the joint venture company (see paragraph 18 of the Opinion). Mr. Ng points out that as the 3^rd to 7^th Respondents control the board the Respondents can prevent such a resolution being passed, although I note that Mr. Huang points out that in the event of disagreement between the directors the dispute can be referred to arbitration and the arbitration award could be relied on if a resolution is not available.

14.For present purposes it seems to me that I should assume that the inclusion of paragraph 82 might trigger a right to dissolve either the joint venture company or joint venture agreement, but that it is unclear how great a problem this might pose in practice to the parties’ interests in the 1^st Respondent.

15.For the reasons I have described above the 2^nd Respondent says that paragraph 82 should be struck out.

The reason for the inclusion of paragraph 82

16.The Petitioners argue that the alternative remedy of winding-up has been included for good reason. First, they argue that they have good reason to be concerned that the 2^nd Respondent may not have the means to pay a fair value for the Petitioners’ interest in the 1^st Respondent. Secondly, they argue that it may be in their legitimate commercial interest to seek a winding-up order. They may, for example, take the view that it is in their interests to bid for the acquisition of the 1^st Respondent from a liquidator. Mr. Ng S.C. relied on the observations of Dillon L.J. at page 300A of Re Copeland & Cradock Ltd. [1997] BCC 294 and also those of Rogers V.P. at page of 7 of the unreported judgment of the Court of Appeal in Re Tai-Ao Aluminium Group Ltd. (CACV 391 of 2005) as demonstrating that this would be a legitimate motive in seeking a winding-up order.

17.Mr. Ambrose Ho S.C., who appeared for the 2^nd Respondent, argued that both of these points are illusory. The 2^nd Respondent is, so Mr. Ho argued, able to finance the acquisition of the shares at the price, which the Petitioners contend they are worth. The reality is that it makes no commercial sense to liquidate the Company. It is unclear whether if the Company were to be wound up it would be possible to sell its interest in the joint venture company.

18.The 2^nd Respondent’s principal objection to the inclusion of paragraph 84 is that it creates the risk that the PRC party will attempt to terminate the joint venture. That risk grows if a winding-up order is made and it is not clear how the Company’s interest in the joint venture company could be realised. I have already referred to this above.

19.Mr. Ng accepted that the prospects of the Petitioners seeking a winding up was small, but I accept his submission that it is not fanciful for the Petitioners to suggest that by the end of the trial it may become apparent that the Petitioners’ best interests are served by a winding-up order. It seems to me that it is not entirely unlikely that after trial the court will conclude that a sale of the Company by a liquidator would result in a higher price per share than a sale of a minority interest in the Company. It is also not entirely unlikely that the 2^nd Respondent will be unwilling or unable to pay the Petitioners a price for their shares that reflects the premium that would attach to the sale of the entire of the Company’s interest in the joint venture company.

20.In my view I should proceed to assess the application on the basis that there is a small possibility, but a possibility all the same, that the Petitioner will seek and obtain a winding-up order. I should also assume that there is a possibility that at some time between now and the trial the PRC partner may, if circumstances make it commercially expedient for it to do so, use the presentation of the Petition as a pretext for terminating the joint venture agreement and the joint venture company.

The correct approach to assessing the application

21.The 2^nd Respondent accepts that in assessing this application I should assume that all the allegations in the Petition and the supporting evidence are true and on this assumption I should consider whether or not there is any real possibility or prospect of a winding-up order being made having regard to section 180(1A) of the Companies Ordinance: Re Wong To Yick Lock Ointment Ltd [2001] 2 HKC 618 per Yuen J (as she then was) at 623H-624B approved by the Court of Appeal at [2003] 1 HKC 484 per Le Pichon J.A. at 487H. Section 180(1A) provides that the court shall not refuse to make a winding-up order on the grounds that some other remedy is available unless it is of the opinion that the petitioner is acting unreasonably in seeking to have the company wound up instead. It follows that I should strike out the petition if I consider that there is no real prospect of the court making a winding-up order. In assessing whether or not this is the case I should, as with an application to strike out a pleading (which the Petition is technically not), bear in mind that it is only in a plain and obvious case that a petition or part of it should be struck out.

22.The difficulty in applications such as the present lies not in identifying the general principle by reference to which the application should be assessed and determined. As I said in Re Mahr China Ltd [2008] 4 HKLRD 141 it lies in applying this principle in cases, such as the present, in which a winding-up order is sought as an alternative remedy. In paragraphs 8 to 13 of my judgment in Re Mahr China Ltd I considered the decisions in Re Ransom Motor Manufacturing Co Ltd [2007] 1 HKLRD 751, Re Wong To Yick Wood Lock Ointment Ltd [2001] 2 HKC 751, Re Prudential Enterprise Ltd [2002] 1 HKLRD 267, Kinong Group Ltd [1999] 4 HKC 100 and Re a Company (00225671982) [1983] 1 WLR 927. In paragraphs 14 to 16 I concluded this review as follows:

“14.  It seems to me that there is a difference between the decisions in Re Ranson Motor Manufacturing Co Ltd and Re Wong To Yick Wood Lock Ointment Ltd on the one hand and Re Prudential Enterprise Ltd, Kinong Group Ltd and Re Company on the other. The former places more emphasis on the generally recognised undesirability of having a winding-up petition hanging over the head of an ongoing business and the court's reluctance to wind up companies if some other remedy is available. The latter recognises the possibility that although at the time an application to strike out is made it may appear that a purchase of shares is the inevitable result of the proceedings, unforeseen events may intervene and lead the court ultimately to be persuaded that a winding-up order is the appropriate remedy. For this reason the correct approach is to stay rather than strike out the claim for a winding-up.

15.  In my view the way to resolve this difference is to return to the accepted test by which a strike-out application is determined. This was explained as follows by Bingham LJ in Re Copeland & Craddock Ltd [1997] BCC 294 at p.300:

It has been often and rightly said that the court’s jurisdiction to strike out a claim advanced by a plaintiff or a claimant or a petitioner is to be exercised very sparinglyand only where the clearest grounds are shownfor doing so. The reason for this practice is clear. Although a court may at a preliminary stage regarda claim as tenuous and having a negligible chance of success, the claimant is nonetheless entitled to the court’s adjudication on it on the merits unless it is a claim which the court is satisfied cannot succeed. In this case the judge clearly regarded the plaintiff’s claim to wind up this company as one which was unlikely to succeed, but he did not feel that the claim was so manifestly unarguableas to justify him in striking it out ... I share the judge’s view that this claim is unlikely to succeed.  I am indeed persuaded that the case is very close to the borderline where striking out would be appropriate.  But I am not quite persuaded that the claim is unarguable whatever comes out relevant to the petition on discovery and in the course of oral evidence. (Emphasis added.)

16.  I, therefore, ask this question: am I satisfied at this stage of the proceedings and on the evidence before me that the claim for a winding-up cannot succeed?  I am not. I cannot rule out the possibility that it will prove impossible to require the first respondent to purchase the petitioner’s shares at a price and on terms that the Court considers reasonable.”

23.Mr. Ho agreed that the question posed in paragraph 16 of the abovequote isthe correct question to ask, but he argued that it had to be considered in the factual context of each case and mindful of the provisions of section 180(2). He referred me to a number of authorities to illustrate how he contended the material before the court should be assessed. In Re a Company No. 001363 of 1988 (1989) 5 BCC18 concerned an application to strike out a contributory’s petition for the winding-up of a company on the just and equitable ground. Warner J. said this at page 24 G “I heard a good deal of argument as to whether sec. 459 could apply at all, in S-J’s case. I will assume that it does and that S-J could apply, if he chose, for relief under that section either instead of or as an alternative to a winding-up order. The question remains whether it is reasonable for him to do so.” As I understood Mr. Ho’s argument, he submits that even if the court concludes that, although unlikely, there may be grounds at the end of trial for a petitioner to seek a winding-up order in preference to an alternative remedy if the court also concludes that it would order the alternative remedy on the grounds that it would be unreasonable for the petitioner to insist on having the company wound up the court should strike out the claim for a winding-up order. This approach places emphasis on the reasonableness or otherwise of the inclusion of the claim for a winding-up order. Mr. Ho cited as what he suggests is a further examples of this approach Re Wong To Yick Wood Lock Ointment Ltd in which Yuen J referred at page 645D to there being no “substantive benefit they would gain for a winding-up order which they would not from a buy out order. There is no evidence that a winding-up order is the preferred remedy for any of the petitioners, and reason given for any preference”. In the Court of Appeal Le Pichon J agreed that this was a legitimate consideration: see page 489F-G.

24.I accept that if I were able to conclude at this stage that it would be unreasonable of the Petitioner to insist on having the Company wound up if it is successful at trial it would be appropriate to strike out paragraph 82. This means that I need to be satisfied at this stage that there is plainly no realistic prospect of the Company being wound up. I do not read the cases that Mr. Ho relies on as saying any more than this and providing illustrations of circumstances in which a court will conclude that it is appropriate to strike-out a claim for a winding-up order. In my view the correct approach to balancing the uncertainties present when assessing early in proceedings what relief might reasonably be sought at trial is demonstrated by the following passage from the judgment of Rogers V.P. in Tai-Ao Aluminium Group Ltd CACV 391/2005 (unreported 22 June 2006) (paragraph 16):

“16.  Whilst it might be said that the petitioner was not apparently opposed to a buyout, it is not possible, at the moment, to say that he would be acting unreasonably to insist instead on a winding-up of the Company.  Indeed, winding-up the Company might well be to his advantage. The Company itself is a holding company.  Taishan is quite obviously a going concern and any liquidator of the Company would be in a position to dispose of Taishan.  Indeed the petitioner may well wish to buy Taishan from the liquidator. That would be a different proposition than buying out the shareholders of the Company.  Again the judge took the view that there would be a significant risk that a sale by a liquidator would produce a less satisfactory price.  That may well be a legitimate consideration when it comes to the final order to be made on the hearing of a petition but, again, at least so far as this case is concerned it is far too early a stage on a strike out to take such a view.  It cannot be said that the petitioner’s claim for a winding-up order is clearly unsustainable or that he is unreasonable in making such a claim.”

25.In the present case the Petitioner accepts that it is unlikely that it will seek a winding-up order, but it has put forward an explanation for including paragraph 82, which in my view has sufficient substance that it cannot be said that there is plainly no prospect of the court every making an order that the Company be wound up. I accept that the case is close to the line that divides the plainly unrealistic from the unlikely, but in my view it sits on the latter side of the border.

26.I do not accept that having reached this conclusion there is any justification for striking-out paragraph 82 because of the risk that exists that the PRC partner might try and argue that it is a basis for terminating the joint venture company or the joint venture agreement. In my view the fact that it gives rise to a possible risk should be treated as an example of the reason why the court will strike-out a claim for a winding-up order if there is no realistic prospect of such an order being made having regard to the provisions of section 180(1A), but having decided that the court may be persuaded that a winding-up order is the appropriate remedy the risk does not provide a justification in itself for striking-out.

Conclusion

27.I dismiss the 2^nd Respondent’s Amended Summons dated 30 September 2009 and order that the costs of and occasioned by the application are paid by the 2^nd Respondent to the Petitioner.

Mr. Peter Ng, SC & Mr. Samuel Chan, instructed by Messrs Baker & McKenzie, for the Petitioners

Mr. Samuel Yip, instructed by Messrs Keith Lam, Lau & Chan, for the 1^st Respondent

Mr. Ambrose Ho, SC & Mr. Liu Man Kin, instructed by Messrs Paul, Hastings, Janofsky & Walker, for the 2^nd to 7^th Respondents

Attendance excused – Official Receiver