Lu Jun v. Yu Qi and Others

HCCW 282/2010

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 282 OF 2010

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J U D G M E N T

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1.This is an application by the 1^st and 3^rd Respondents to these proceedings seeking further security for costs from the Petitioner.

2.The proceedings are brought under sections 168A and 177(1)(f) of the Companies Ordinance.  Essentially the Petitioner alleges that the affairs of the company had been conducted in a manner that is unfairly prejudicial to him, or that it is otherwise just and equitable that the company should be wound up.

3.The primary relief that the Petitioner seeks in these proceedings is an order requiring the 1^st and 3^rd Respondents to buy out his shares in the company, of which he is a 15 per cent shareholder.  The alternative relief sought is a winding-up order in respect of the company.

4.The 1^st and 3^rd Respondents have indicated in their affirmations filed in opposition to these proceedings that they are, in principle, prepared to buy out the shareholding of the Petitioner in the company, subject to the determination of the price at which that should be done.

5.The issue that arises as between the parties in respect of the price relates to allegations that the 1^st and 3^rd Respondents have made against the petitioner in respect of certain alleged wrongdoing on the part of the Petitioner in his management of the affairs of the company or its subsidiaries, which, it is said, have given rise to losses to the company which should be taken into account in assessing the price to be paid to the Petitioner for his shareholding in the company.

6.The company is a holding company, holding interests in a number of industrial gas fields on the mainland.  It holds interests in three mainland joint-venture companies that operate gas fields in the PRC and derives its income from two main sources: first, dividends declared by the operators of the gas fields, that is the joint-venture companies in which the company is a shareholder; and secondly, management fees, described as “tax management fees”, that are paid by certain of the joint-venture companies to the company for services provided by the company to those subsidiaries.

7.The amount of the income that is generated from these activities appears to be extremely substantial.  By way of example, by an application made towards the end of last year, a validation order was sought to enable the company to utilise its income for one year of operations (the 2009/2010 financial year) for certain specified purposes: first, to repay to a substantial extent a shareholder’s loan that had been advanced to it by the 1^st and 3^rd Respondents; and second, to pay its operating expenses that had accrued over the past year and to make provision for the ongoing payment of its operating expenses on a current basis.

8.The amount of income involved for approximately one year’s operation was RMB 112 million.  It is, I think, to be anticipated (and certainly the contrary was not suggested by either of the parties) that that level of income is likely to be achieved on an ongoing basis for at least some time into the future, there being no suggestion that the industrial gas fields in question are going to be depleted or exhausted at any time in the immediate future.

9.The debt that it was proposed to repay by means of the validation order, was a debt of US$15 million-odd advanced to the company by the 1^st and 3^rd Respondents and the effect of the proposed repayment (amounting to some RMB 88 million, or about HK$100 million), would be to substantially pay off that debt leaving a balance of about HK$20 million, or about US$2.5 million outstanding.

10.Assuming that the company’s income for the following year (2010/2011) was of a similar scale as in 2009/2010, it would seem likely that the shareholder’s loan could readily be fully repaid now or in the near future. 

11.As far as operating expenses are concerned, those appear to run at a rate of about HK$600,000 per month.  On that basis, with an income of approximately RMB 100 million a year and expenses of some HK$7 to 8 million a year, the company would appear to be highly profitable and therefore highly valuable.

12.The history of the proceedings has been rather chequered.  There have been a large number of interlocutory applications and, in fact, at a relatively early stage in the proceedings the 1^st and 3^rd Respondents did ask for security for costs on the basis that the Petitioner was a person resident outside the jurisdiction.  The Petitioner is, as I understand it, resident in Shanghai.  At that time the Petitioner did not dispute his obligation to provide security and was prepared to do so, which he did in the amount of HK$1 million.

13.At that time the security sought was some HK$1.5 million in respect of costs that had already been incurred in the first month or two of the proceedings and in respect of costs projected up to the trial of these proceedings.  It was against that background that an agreement was reached for HK$1 million in security to be provided.

14.Shortly before the amount of security was agreed, the Petitioner took out an application in about October 2010 seeking the appointment of provisional liquidators in respect of the company. Thereafter, following a consent order made on 2 November 2010 for the provision of security and the payment of $1 million as such security the following day, the proceedings carried on.

15.A large number of affirmations were filed on each side and further applications were taken out.  The first application to be taken out after November 2010 was this application seeking further security for costs, which was taken out in April 2011. 

16.In support of the application a skeleton bill was filed indicating that the further costs had been expended in the period between July 2010, which was the period up to which the previous bill had been prepared in respect of incurred costs, and about April 2011 and the indication was that in that period of some 9 or 10 months a further $1 million had been expended on costs.

17.There was also an update given in respect of the anticipated future costs going forward towards trial with a result that the total amount of costs expected to be expended by the 1^st and 3^rd Respondents on these proceedings were said to be some HK$2.5 million-odd.  Thus, giving credit for the $1 million that had already been received, this application was made seeking the provision of a further amount of security of about HK$1.5 million.

18.The application, however, did not come on for hearing very quickly.  There were directions which provided for filing of evidence in respect of the application, and the evidence in relation to the application was in fact completed by about August 2011.

19.In the meantime, other applications were made.  First, there was an application by the petitioner for leave to re-amend its petition in these proceedings.  That application was heard in October 2011 before Mr Recorder Fung, SC.  The proposed amendments, although fairly extensive, extending to about eight pages, thereby doubling the length of the petition, were clearly matters that had all been adverted to and canvassed in affirmations already filed in the proceedings.  In those circumstances it is not too surprising that Recorder Fung granted the application for leave to amend.

20.In relation to that application, although he made the usual order for costs in respect of the amendment themselves (that costs of and occasioned by the amendments should be paid by the Petitioner to the 1^st and 3^rd Respondents) so that costs wasted as a result of the amendment, if any, should be borne by the Petitioner, Mr Recorder Fung ordered that the costs of the application should be the Petitioner’s costs in the cause, reflecting his view that the Petitioner was the substantially successful party in the application, and that 1^st and 3^rd Respondents’ opposition to the application was not well-founded.  Thus, at the end of the day, the costs of the application will have to be borne by the 1^st and 3^rd Respondents, and such costs cannot provide a basis for ordering further security.

21.The next application that was taken out was an application by the Petitioner for the appointment of an interim receiver.  That appears to have largely overlapped with the application for the appointment of a provisional liquidator. 

22.The final application that was taken out was one to which I have already adverted, namely the application by the 1^st and 3^rd Respondents seeking validation orders to enable the income of the company for the year 2009/2010 to be expended to make payments in respect of its ongoing overhead and administrative expenses and such expenses that had been incurred over the past year which have not yet been paid because of the existence of the winding-up relief in these proceedings, and also to enable a substantial repayment to be made to the 1^st and 3^rd Respondents in respect of the shareholders’ loan advanced by them to the company.

23.For some reason, although the application for security for costs was taken out earlier than the other applications (apart from the application for the appointment of provisional liquidators) it was not brought on as a matter of any urgency, and instead the other applications were allowed to proceed with the result that they were fully argued and orders were made on them before this application was fixed for hearing.  The delay in making the application for security is not one for which any explanation has been provided. 

24.That is the background against which this application came to be made.  At the hearing today, Mr Jonathan Wong, who appeared for the petitioner, took four points in opposition to the application.

25.The first was that, as an application that had been made by the 2^nd Respondent for leave to commence derivative proceedings against the Petitioner in respect of the alleged wrongdoing on his part, which had been referred to in the affirmations in opposition to the petition, the position is that the subject matter of the petition is substantially mirrored by the proposed derivative proceedings in which the 2^nd Respondent will be in the position of a plaintiff.

26.That being the case, Mr Jonathan Wong suggested that the situation here was similar to one in which a foreign plaintiff was met with a counterclaim which would require all of the matters that were the subject of his claim to be gone into, so that it could not be said that the foreign plaintiff’s claim would of itself give rise to any costs or expenses which would not in any event have been incurred.  In those circumstances, he suggested that the appropriate course to take would be to refuse to order security for costs.  In support of this argument he relied on Success Wise v Dynamic (BVI) Limited [2006] 1 HKC 149 at paragraphs 12 to 14. 

27.However, he fairly acknowledged that in the context of section 168A and 177(1)(f) petitions, there was authority in the form of my judgment in Re All Our Kids Hong Kong Limited (unreported, CFI, HCCW 141 of 2007, 20 June 2011) to the effect that this principle did not apply in the context of section 168A proceedings where the relief sought by the petitioner was of a different nature and included relief that could not be obtained by way of counterclaim in the proceedings that had been brought against him.

28.The second point that Mr Jonathan Wong took was that in this case, given the terms in which the validation order was made, which involved, as a means of protection of the Petitioner’s interest in the company, an undertaking proffered by the 1^st and 3^rd Respondents that 15 per cent of the amounts sought to be validated would be paid by them into court as a means of providing a measure of protection for the Petitioner’s interests, that there was a substantial fund in the court of some just under HK$15 million which would be available to meet any adverse order for costs that might be made against the Petitioner in these proceedings.

29.As the argument on this matter progressed, Mr Wong extended the submission somewhat and modified it by suggesting that whatever might be the status of the moneys in court, in that it should perhaps more properly be regarded as an asset of the company rather than the Petitioner, it nonetheless demonstrated that the company was a valuable one and that the Petitioner’s shareholding in the company was therefore an asset of the petitioner to which recourse could be had if it should become necessary in order to satisfy any costs award that might be made in favour of the 1^st and 3^rd Respondents in these proceedings.

30.The third point that Mr Jonathan Wong took was in relation to delay.  He pointed out that although this application had been made in April 2011, and although it is said that the reason for the application is the additional costs that have been incurred as a result of the interlocutory proceedings that have taken place during the course of 2011, all of the interlocutory proceedings in question took place after the application for further security for costs was made.  Yet for reasons best known to the 1^st and 3^rd Respondents they made no effort to ensure that their application for security for costs was heard first so that they would be able to secure themselves in relation to their costs, rather than allow the applications to go ahead, thereby resulting in costs being incurred and then seeking thereafter to be provided with ex post facto security in relation to those costs.

31.He suggested that in these circumstances, where no good explanation for adopting that course had been put forward, it would not be appropriate to protect the 1^st and 3^rd Respondents in respect of their position in costs when they could easily have done so themselves by ensuring that their application for security was dealt with in advance of the other applications that were heard.

32.Finally, Mr Jonathan Wong suggested that if one looked at the skeleton bill of costs that had been provided by way of evidence as to the likely level of costs that were concerned, the costs that were claimed were in many respects excessive and that looked at realistically, in respect of the additional applications that were said to have justified the further application for security, a realistic amount of further costs which should be provided for in respect of the two applications was, he said, in the order of around HK$200,000, rather than the HK$1.5 million that is now asked for.

33.Mr Brian Wong, appearing for the 1^st and 3^rd Respondents, disputed these submissions and sought to persuade me that in all of the circumstances of the case it would be right for the court to grant further security in favour of the 1^st and 3^rd Respondents, notwithstanding that the application is made a little late in the day.

34.Having considered the submissions on both sides, I have come to the view that in all of the circumstances of the case, it would not be appropriate for me to order further security to be paid at this stage.

35.The reasons that I have come to this view are as follows: In relation to the first ground put forward by Mr Jonathan Wong, as I indicated in the course of argument, I am not persuaded by this ground. It seems to me that in these proceedings the petitioner is seeking relief which he would not be able to seek in the context of any other proceedings, namely a buy out of his shares or alternatively the winding-up of the company.

36.Although it is fair to say that the allegations raised by the 1^st to 3^rd Respondents, which they put forward in support of their argument that the price at which the petitioner should be bought out should be reduced, are matters that are also sought to be raised in the proposed derivative action.  It does not seem to me that that provides a sufficient answer, for the reasons that I gave in paragraphs 27 to 30 of my judgment in the All Our Kids case.  It does seem to me that the nature of the claim that has been made by the petitioner in this case goes well beyond that of simply defending the allegations that are to be made against him in the derivative action (if leave is obtained for that proceeding to be brought).

37.Quite apart from that, it seems to me that bearing in mind that this matter is set down for trial with trial dates fixed for the end of July this year and the proposed derivative action is as yet only at the stage of an application for leave, which is not to be heard until the beginning of May this year, there is no realistic prospect that the derivative action will be able to be heard at the same time as the trial of this petition.

38.That being the case, this petition will have to go ahead in any event and it seems to me that in those circumstances it is also appropriate to treat this as the main proceedings for the purpose of considering whether security ought to be granted.

39.It cannot be said that these matters will have to be canvassed in the derivative action because even if leave is given for those proceedings to be commenced and they eventually make their way to trial, it is quite possible that such findings as the court may make in the course of the trial of these proceedings will simply be relied upon to deal with the question of the appropriate disposition of the derivative action. 

40.Moreover, having regard to the nature of the opposition put forward by the 1^st and 3^rd Respondents in these proceedings, which is essentially a suggestion that the amount of damage caused to the company by the matters in respect of which the derivative action is sought to be brought should be taken into account and netted off against the price to be paid for the petitioner’s shares, it seems to me that if that argument succeeds and an order for a buy out is made on that basis, the Respondents will have little left to complain of in the proposed derivative action in that such loss as the company might recoup would effectively have been taken into account in the price at which bought out the Petitioner.

41.In those circumstances it may well be that the Petitioner would wish to consider some means of ensuring that if a buy-out order is made on terms along the lines of those proposed by the 1^st and 3^rd Respondents, that provision should be made to ensure that the Petitioner is not at risk of being penalised twice for the same wrongdoing (assuming he is guilty of any, which has not, of course, as yet been determined).  For all of these reasons I do not think that the first ground put forward by Mr Jonathan Wong in opposition to this application is a good one. 

42.However, it does seem to me that the second ground that is one that has real force.  It is not entirely clear to me why this point was not taken from the outset when an application for security for costs was made.  But, be that as it may, it seems to me that I should consider this application on its merits unaffected by the fact that the petitioner has previously provided security for costs. 

43.The point seems to me to come down to this: while it is undoubtedly the practice of the court to grant an order for security for costs in favour of a person in the position of the defendant in proceedings brought by a foreign plaintiff, the reason for that practice lies in the difficulties that may be faced by a successful defendant in seeking to enforce a costs order against an unsuccessful foreign plaintiff.  However, it is well established that if the foreign plaintiff has assets within the jurisdiction which are sufficient to cover the likely amount of costs of the proceedings, an order for security will generally be refused.

44.In the present case it is quite obvious that the Petitioner does have an asset within the jurisdiction, namely his shareholding in the company.  The company is a Hong Kong company; the shares are therefore assets located in Hong Kong.  Notwithstanding that the Petitioner is a resident of Shanghai, his asset, i.e. his shareholding in the company, is a local asset.

45.On the basis of the material that has been alluded to in the course of this application, it is quite clear that this is an extremely valuable asset.  The income of the company for one year alone was of the order of RMB 100 million.  On that basis, even taking a relatively conservative approach to the likely useful life of the underlying gas fields which form the main source of income of the company, the value of the company is likely to be extremely substantial, and a 15 per cent interest in it, which represents the Petitioner’s shareholding, is likely to be a correspondingly valuable asset. 

46.In those circumstances it seems to me that there is clearly an asset within the jurisdiction that could provide a means for recoupment by the 1^st and 3^rd Respondents of any costs that they may ultimately be awarded in these proceedings. 

47.Apart from the fact that the shares themselves would appear to be of significant value and that they are assets located in Hong Kong against which enforcement would be possible, it seems to me that it is, in fact, open to the 1^st and 3^rd Respondents and those running the company to enable themselves to recoup any costs order that they may be awarded at the end of the trial in other ways as well, arising out of the company and the parties’ respective interests in it.

48.As Mr Jonathan Wong pointed out, the fact is that the company is deriving large amounts of income every year, which when compared with its administrative and running expenses suggests that it is extremely profitable.  In those circumstances it would obviously be open to the management of the company, if they were minded to do so, to declare a dividend of which the Petitioner would be entitled to 15 per cent, and from that 15 per cent it would be possible for the 1^st and 3^rd Respondents to recoup any order for costs that might be made in their favour.

49.That apart, it seems to me that even if that were not done the position would still be that the asset would be located in Hong Kong.  If no dividends were declared, the company would be so much the more valuable having retained its profits, and there would be the ability to obtain a charging order against the Petitioner’s shares in the company to secure any liability for costs that might fall on the Petitioner at the end of the day.

50.But it seems to me that there is a further point which can be taken into account, which is this: in these proceedings the Petitioner seeks to have his shares purchased by the 1^st and 3^rd Respondents.  The 1^st and 3^rd Respondents have indicated that they are willing to do so.  The only question is as to whether certain matters should be taken into account by way of reduction of the purchase price of the shares.

51.If the 1^st and 3^rd Respondents are successful in these proceedings it would seem likely that they will have succeeded on that contention.  But at this stage there is nothing to suggest that even after such appropriate reduction as is made to the value of the shareholding to take account of alleged wrongdoing on the part of the shareholder, the shares would not still be of some real (and probably considerable) value.  There is certainly nothing to suggest that the Petitioner’s shareholding would be thereby rendered valueless, such that the 1^st and 3^rd Respondents would be able to acquire it for no, or a very small, consideration.

52.In those circumstances it seems to me that the simplest course for the 1^st and 3^rd Respondents to take would be to offset any costs that are awarded against the purchase price that it may pay at the end of the day to the Petitioner for his shares in the company.

53.In those circumstances it does seem to me that given that there is an asset which is quite likely, at the end of the day, to be realised by a sale of it from the Petitioner to the 1^st and 3^rd Respondents, the only question being as to the price at which that sale takes place, there is realistically relatively little risk that the 1^st and 3^rd Respondents will be left in a position of having costs awarded in his favour which it will not be able to satisfy.

54.That in itself, I think, is a sufficient reason to dismiss this application. 

55.However, I would just add very briefly that in relation to the question of delay, it does seem to me that there is some force in the point.  Although Mr Brian Wong suggested that the interlocutory applications that were made were largely at the instigation of the Petitioner and it would therefore be unfair for the 1^st and 3^rd Respondents to be at risk as to their costs in respect of them if they are successful at the end of the day, since the costs order made in respect of all of those applications (other than the re-amendment application) was costs in the cause, it does seem to me that the remedy for that, or the protection for that, was within the hands of the 1^st and 3^rd Respondents in that they could have ensured, had they been minded to do so, that their application for security for costs was dealt with first.

56.No very clear explanation was provided as to why this was not done and it seems to me in those circumstances that it would have been appropriate to have, at the very least, substantially reduced the amount of costs to be awarded by way of amount of security to be given to take account of that factor. 

57.Finally, in relation to the question of the quantum of the costs, I would observe that although the amount now sought is some $1.5 million by way of additional security, it should, I think, be borne in mind that when security was originally provided in the amount of $1 million by agreement, that was at a time when the estimated costs of the proceedings as a whole were estimated at $1.5 million. 

58.On that basis, even if one accepts at face value the skeleton bill with an estimated cost of the entire proceedings, including all of the interlocutory applications, at $2.5 million, it seems to me that had the court been minded to make an award for security in respect of the whole of the costs, that amount would have been discounted to some extent.

59.Certainly, the additional costs that have been put forward would not be $1.5 million, since $1.5 million was a figure that was in place from the very beginning.  The additional costs in respect of which security is now sought would appear to be a sum of $1 million being the difference between $2.5 million put forward in the present skeleton bills and the $1.5 million put forward in the original skeleton bills when the consent order was made.

60.Looking at the figures themselves I have to confess that some of the figures in terms of time spent and in terms of the level of fees sought to be charged in respect of various applications seem to me to be somewhat on the high side.  I would therefore accept that there would be some element of discount in respect of that. Taking into account also the fact that some element of discount (at least) should be applied in respect of the delay in the bringing of this application, it seems to me that even if I had been of the view that in principle some further security might be appropriate, , whether or not such security would, in fact, have been ordered after these relevant discounts had been applied is a matter of some uncertainty.  I think it likely that at the end of the day no further security would have been ordered taking the factors of delay and the size of the bills and the appropriate discount to be applied to them into account.

61.However, for the reasons which I have given, the principal reason for which I dismiss this application is on the basis of Mr Jonathan Wong’s second ground as developed in the course of submissions today, namely that although the Petitioner is a person who is resident outside the jurisdiction, he does have within the jurisdiction an asset which would appear on the face of it to be an extremely valuable one from which the 1^st and 3^rd Respondents should be able to secure that any order for costs in their favour is met at the end of the day.

62.For those reasons I have come to the view that the appropriate course to take would be to dismiss this application.

(Discussion re costs)

63.I make an order that the costs of this application be paid by the 1^st and 3^rd Respondents to the Petitioner in any event.