Re C.G. & L. Investment Ltd.

CACV000154/1991

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Coram: Hon. Fuad, V.P., Penlington & Nazareth, JJ.A.

Date of hearing: 3rd - 4th March 1992

Date of handing down judgment: 26th March 1992

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J U D G M E N T

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Penlington, J.A.:

1. This is a consolidated appeal against orders made by Barnett, J., dated the 6th August 1991 in respect of applications made by C.G. & L. Investment Limited ("CG&L") and Wyatt Estates Limited ("Wyatt") for consent to the payment from company funds of expenses which it was anticipated would be incurred between the lodging of petitions to wind up each of these companies and the hearing of those petitions. For the purposes of this appeal the orders are in identical terms.

2. The relevant background material relevant to this appeal is as follows. Both CG&L and Wyatt are property companies. Both are solvent and there would be a substantial surplus available to contributories if they are liquidated.

3. In the case of CG&L the petitioner is Gala Land Investment Limited, a wholly owned subsidiary of Ocean Land Development Limited, a publicly listed company. Mr. W.H. Chou is chairman of the board of Ocean Land and a substantial shareholder. The other shareholders are three companies, Octaland Holdings Limited, Samuel and Investors Limited and N. & L. Investment Limited. Each of these companies is opposing the petition and it is the petitioner's case that each is controlled by Mr.Samuel Tak Lee. This is not admitted by the respondents. The petition asks that the company be wound up.

4. The petitioners in the case of Wyatt are Gala Land and Shatin Properties Limited, a wholly owned subsidiary of Gala Land. The other shareholders in Wyatt are Samuel Tak Lee, Samuel and Investors Limited, Millport Investment Limited and Gilded Investment Limited. Again it is the petitioners' case that they are all controlled by Mr. Samuel Tak Lee which is not conceded. The petition asks for an order that Wyatt be wound up or that Mr. Lee be ordered to purchase the petitioners' shares at a valuation.

5. Both petitions are brought pursuant to s. 177(1)(f) of the Companies Ordinance i.e. that it is just and equitable that the companies should be wound up. The Wyatt petition also seeks relief under s. 168A of the Ordinance.

6. There has been a considerable volume of correspondence between the former solicitors for the petitioners (hereafter called "the appellants") and the respondents as to the question of payment from the funds of each company for various expenses which it was anticipated would be incurred between the date of the filing of the petitions and the delivery of judgment upon them. There has been agreement as to some of these items but not as to others. Consequently applications under s. 182 of the Companies Ordinance were made by the respondents for the authorisation of payments and an application was also taken out by the appellants for an injunction to prevent such payments being made which were not agreed. It was however the appellants' case that if orders were not made on the respondents' application to which it objected they would not proceed with their application for injunctions.

7. Clause 3(b)(i) of the orders granted by Barnett, J., authorises payment of the company's liability to tax. There is no objection by the appellants to this. Clause 3(b) (ii) provides for payment to the directors of the company of their annual fees. Again there is no appeal in respect of that paragraph. Clause 3(b) (iii) provides that the company's auditors should be paid for services rendered. There is no objection so far as these services relate to auditing or advice in connection with the company's tax liabilities. Objection is however raised in relation to auditing services provided "relating to matters done by the Company in the ordinary course of its business such costs being limited to those which are necessary". It is submitted that this is too wide and amounts to a blanket authorisation for payment to the company's auditors. In particular it is the petitioners' case that there is no need to obtain the auditors' assistance in answering questions put to the company by the appellants at its Annual General Meeting.

8. However the main thrust of the appellants' case is directed towards Clause 3(b) (iv) which is in these terms:

"[payments to] the Company's legal advisers in respect of fees and disbursements due to the legal advisers for legal services rendered to the Company in connection with the proceedings herein or any other proceedings, provided that the legal services are rendered to the Company in the ordinary course of its business such costs being limited to those which are necessary,".

This it is submitted is far too wide and is contrary to the general principle that a company should not itself take part in proceedings for its winding-up where the dispute is essentially between shareholders.

9. Clause 3(b) (v) which provides for the payment of miscellaneous expenses incurred by the company in the ordinary course of its business is also disputed as being a blanket authorisation.

10. At the hearing of this appeal it was made clear by Mr. Robert Tang, Q.C., leading counsel for the respondents, that there was no question of CG&L playing any part in the question of its own liquidation. It would however be faced with some expenses such as discovery of documents which would require legal costs to be incurred. However there was, it seems, no dispute about that. So far as Wyatt was concerned, CG&L was a substantial shareholder in that company and would be opposing the petition for its winding-up and should be authorised to expend funds in the course of doing so. However again Wyatt itself would not take any part in opposing its own liquidation.

11. The relevant section of the Companies Ordinance relating to the payment of monies out of the company's assets between the date of the filing of a petition for its liquidation and the date of judgment on that petition is s. 182 which corresponds to s. 127 of the Insolvency Act 1986 in the United Kingdom. It reads as follows:

"182. In a winding-up by the court any disposition of the property of the company, including things in action and any transfer of shares or alteration in the status of the members of the company made after the commencement of the winding-up, shall, unless the court otherwise orders, be void".

12. The fundamental principle therefore is that any payment from the company's funds for whatever purpose shall be void unless authorised by a court order. If however the company is still carrying on business it will usually be advantageous to both its creditors and its contributories if it is allowed to continue to do so and this will involve the payment of debts incurred in the ordinary course of business. Clearly a court order could not be obtained for every individual item and an order is often made which allows the company to pay debts incurred in the ordinary course of business. What is however sought here is authority for the payment of legal expenses of litigation. It is argued for the appellants that such expenses are not such as would come within the meaning of the phrase "payments in the ordinary course of business". For the respondents Mr. Tang argued that while neither CG&L or Wyatt would take part and incur costs in connection with the petition for its own winding-up, CG&L was a contributory to Wyatt and was legitimately entitled to be a party in opposing the petition for the winding of Wyatt. Furthermore as Wyatt was the owner of a valuable property i.e. a container warehouse, there was always the possibility that it would be engaged in legal proceedings such as those necessary if a tenant failed to pay rent. He relies on decision of Hoffmann, J., in Re a company (No 005685 of 1988), ex parte Schwarcz and another [1989] BCLC 424. There the dispute was over the merits of a management buy-out. There was no question of the company being insolvent, which is the same position as in the matter now before this court. Hoffmann, J., said in considering the question of the contents of an order under s. 187 of the Companies Act (UK) that:

"What is said by the petitioning creditors is that this is in substance a dispute between the shareholders and that in principle is wrong for the company's money to be spent on litigation between the shareholders.

I accept that general principle, though the company is and has to be a formal party to the proceedings. An order is sought against the company that it should buy certain shares, and it is of course concerned with the validity of the deregistration resolution."

He went on:

" The argument is thus about whether it would be a breach of fiduciary duty on the part of the directors of the company to spend the company's money in this way. The jurisdiction under s 127 is designed for the protection of creditors, and I suppose also to some extent contributories, in the event of there being an insolvent liquidation so that the 'relation-back' doctrine would apply to disposition of the company's assets. It does not seem to me right that that jurisdiction should be used in a case where there is no question about the company being able in the end to pay all its lawful debts and therefore no such protection is required."

He went on again:

"I do not think I am at present in a position to express a clear view that no expenditure of any kind by the company on the costs of these proceedings would be justified, and I do not see that anyone is likely to suffer any harm if that question is deferred until the substantive matters have been gone into on the motions."

13. Mr. Charles Ching, Q.C., for the appellants relies on a long line of cases and in particular Re Crossmore Electrical and Civil Engineering Ltd. (1989) 5 BCC 37, that a company's money should not be expended on disputes between the shareholders. He argues that the terms of the order as made by Barnett, J., are in the light of that principle too wide. The expenses of litigation are not incurred in the ordinary course of a company's business and there should be a specific sanction of the court before any such costs are paid. Reliance is placed on Crossmore, also a decision of Hoffmann, J., where he said at p. 38:

"The company is a nominal party to the s 459 petition, but in substance the dispute is between the two shareholders. It is a general principle of company law that the company's money should not be expended on disputes between the shareholders: see Pickering v Stevenson (1872) LR 14 Eq 322. Consequently it seems to me clear that such expenditure on defending the s 459 petition would not be in the ordinary course of business and the order should be subject to a proviso which states that expressly."

Hoffmann, J., then went on to consider the question of the costs of the company in defending the creditor's petition. However that was in connection with the dispute as to whether or not a debt was owing by the company and appears not to be relevant to the matter now before us.

14. This question came before the court again in Re a Company No. 004502 of 1988, ex parte Johnson [1991] BCC 234. There Harman, J., reviewed all the leading decisions including those of Hoffmann, J., in Re Crossmore and Deputy Judge Nugee, Q.C., in Re Milgate Developments Ltd. [1991] BCC 24. With reference to that latter decision he said:

"He concluded that the whole course of authority was that it was clearly the law that no company ought to be concerned or ought to incur costs by taking part in a sec. 459 petition. That train of authority is the legal basis for para. 1 of this application.

In my judgment, that decision was correct. The train of authority being well established, it seems to me quite clear that, if it is shown that directors of a company have been causing the company's money to be spent on financing the resistance either to a 'pure' sec. 459 petition or, according to Plowman J in Re A & BC Chewing Gum and myself in Re Hydrosan, in financing the company's resistance to a member's winding-up petition based on the just and equitable ground, the court should prevent such expenditure."

Harman, J., went on to say:

"     Secondly, the application seeks an order that the company be permitted to pay its legal costs out of its own assets."

He continued:

"The proper costs of the company, properly incurred, on the sec. 127 application which it made (which was, as I understand, made by consent and where I would expect the costs would be comparatively slight), the costs of giving proper discovery (the extent of which has not so far been considered), and such further costs as really may be expedient and necessary in the interests of the company as a whole and are properly incurred by the company pursuant to a resolution of the board, may of course be properly payable out of the company's assets. In advance, one cannot say whether any of the fees here referred to are such costs or not, and, id my judgment, this order is one which I would not consider could be made in a matter such as this, a sec. 459 petition."

15. We would agree with that statement and in particular the last sentence.

16. While it is not in dispute that some of the legal costs to be incurred by both CG&L and Wyatt are legitimate charges on the companies' assets and an order can be made for payment of those expenses the form of the orders made by Barnett, J., are in our view too wide particularly in the light of the established principle that a company's money should not be expended on disputes between shareholders. We consider that specific approval should be obtained from the court for any expenses incurred by either company in connection with the proceedings for its own winding-up and for the expenses of CG&L in taking part in the proceedings for the winding-up of Wyatt. We will hear counsel as to the form of the order that should be made and on costs.

Representation:

Mr. Robert Tang, Q.C., & Miss M. Chew (Herbert Smith) for both companies in both appeals

Mr. Charles Ching, Q.C., & Mr. Winston Poon (Knight & Ho) for petitioner/appellants in both appeals