Hui Wah Chuen v. Siu Kwok Sun and Another

HCCW 318/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 318 OF 2014

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REASONS FOR DECISION

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1.The 1^st respondent (R1) applied for a validation order pursuant to section 182 of the Companies (Winding up and Miscellaneous Provisions) Ordinance, Cap 32. The parties had come to terms, without prejudice to the rights of the petitioner and liquidators (if appointed) to challenge the propriety of the payments made by or for the 2^nd respondent (“the Company”). Only 2 terms in the draft order required adjudication:

A. That R1 should not be allowed to procure the Company to make payment of remuneration for his personal benefit or that of his family members and/or their companies (“term A”);

B. That supporting documents and bank statements of the Company should be provided to the petitioner apart from its monthly statements of account (“term B”).

2.After the hearing, I included term A in the draft order but excluded term B.  Here are my reasons.

Legal principles for granting a validation order

3.For a solvent company, the responsibility of managing its business is entrusted to its director.  In a contributory’s petition,

“If on an application under section 227 relating to a solvent company, (a) evidence is placed before the court showing that the directors consider that a particular disposition, falling within their powers under the company's constitution, is necessary or expedient in the interests of the company, and (b) the reasons given for this opinion are reasons which the court considers that an intelligent and honest man could reasonably hold, it will in the exercise of its discretion normally sanction the disposition, notwithstanding the opposition of a contributory, unless the contributory adduces compelling evidence proving that the disposition is in fact likely to injure the company. A fortiori in my judgment the court will be inclined to exercise its discretion in this manner in a case such as the present, where the primary relief sought by the petition is an order under section 210 that the other shareholders be ordered to purchase the shares at a stated price.” (emphasis added) Re Burton & Deakin Ltd [1977] 1 WLR 390, at 397 G-H, per Slade J

4.The onus is on the opposing contributory to adduce “compelling evidence” to prove that the disposition is likely to injure the Company.

5.These principles have been followed by the company courts in Hong Kong. See eg Re Wah Ying Cheong Company Limited, HCCW 225/1996, 14 March 2003, Kwan J (as she then was); Re Emagist Entertainment Limited [2012] 5 HKLRD 703, Harris J; Chan Mei Chun v K & A International Company Limited HCCW 317/2013, 27 November 2013, Anthony Chan J.

6.In Re Emagist Entertainment Limited, after quoting Re Burton & Deakin Ltd, Harris J explained that in respect of a solvent company, the court will readily grant a validation order.  His Lordship further said,

“5. It seems to me to be implicit in Slade J’s judgment that where the court is faced with a shareholder’s petition in respect of a solvent company which has a valuable ongoing business that the directors should be allowed to continue to operate that business normally and without close supervision by the Companies Court. In practice this means that one would normally expect a company to obtain without any difficulty a validation order in respect of "payment of expenses made in the ordinary course of business". Such an order I would expect normally to be readily made once the court is satisfied of the solvency of the company and the fact that it has an active and ongoing business. (emphasis added)

6. The Companies Court would not be concerned to check with precision the nature and the amount of the expenses. There may be, however, particular items of expense which those in control of a company consider to be sufficiently exceptional that there may be some question as to whether or not they are incurred in the ordinary course of business and in such circumstances I would expect prudent lawyers to advise that a validation order be sought in respect of those specific items of expense.

7. In my view a petitioning contributory should not approach an application for a validation order on the basis that there is an adversarial application before the Court. I would expect normally for a petitioning contributory to be advised that it is not only normal but necessary for a company to obtain a validation order and that it would only be if the shareholder has specific concerns which he can support by credible evidence that he should actively contest any part of the application.”

7.The court would not act as a “de facto financial controller” of the company and would not allow the opponent to make forensic challenges to certain payments:  Re Luen Hing Fat Limited[2008] 4 HKLRD 961, Kwan J (as she then was), §22. 

8.Nor would the court allow the dispute and/or mistrust between shareholders to turn an application of this kind into adversarial, satellite litigation: Emagist Entertainment Limited, §7; Chan Mei Chun v K & A International Company Limited, at §6.

9.A practical way of alleviating the concerns of a petitioning shareholder may be to provide a regular summary to the petitioning shareholder of the expenses that are being paid by the company: Emagist Entertainment Limited, at §7.

Background

10.The petitioner and R1 are the only shareholders of the Company.  The petitioner was one of 2 directors until he was allegedly wrongfully removed by the Company’s resolution in September 2014.

11.The petition was for the Company to be wound up on the just and equitable ground, or for a buy-out order.  Issues included breach of agreement, expulsion from management and breach of fiduciary duties.

12.The Company is solvent.  It has no active business but has been finishing off business with a view to winding-up.

13.There was a cessation agreement made between the petitioner and R1 before the petition was filed. That agreement was contained in meeting minutes dated 17 March 2014 which provided that:

(i) The Company shall not take up new projects from 17 March 2014;

(ii) R1 confirmed that the Company had almost completed all its projects;

(iii) Both the petitioner and R1 were free to take up new projects by using entities other than the Company without any requirement of disclosure to each other;

(iv) The petitioner and R1 shall be paid salary only up to 31 January 2015.

14.R1’s email dated 22 March 2014 made no comment to those meeting minutes.

Term A

15.The potential remuneration of R1 was in the region of HK$90,000 to HK$100,000 per month.  As expected, there was mistrust between the petitioner and R1.  The petitioner insisted on including term A in the draft order because of the cessation agreement. 

16.R1 and the Company objected because (a) there had been alleged unlawful conduct like the petitioner’s removal of business from the Company for his own benefit; and (b) R1 alone was running the Company without the assistance of the petitioner.  R1 suggested that his remuneration after 1 February 2015 should be decided at the next AGM.

17.So far as directors’ salaries are concerned, if the directors are in fact carrying on the business of the company and are providing their services to the company, it would be in order for them to be permitted to make payments of their salaries or other remuneration to themselves: Re Mi Fung Beads Company Limited HCCW224/2004, 19 April 2004, Barma J (as he then was), at §24.

18.However, none of the cases cited to me involved a shareholders’ agreement prior to the petition similar to the cessation agreement.  I failed to see why, pending resolution of its validity and in the absence of evidence invalidating or superseding the concession agreement, the court should pay no heed to it. 

19.Paragraph 16(a) above would, at best, entitle the Company to claim against the petitioner eg for damages, but would not have entitled R1 to remuneration beyond January 2015 under the concession agreement, which was an agreement between shareholders. 

20.In respect of paragraph 16(b), with his removal from the management, the petitioner was barred from working in the Company. If R1 had to do work that the petitioner ought to have done, R1’s remuneration for the period after January 2015 could be adjusted at the hearing of the petition, upon adjudication of the validity of the cessation agreement. 

21.I therefore included term A in the validation order.

Term B

22.For payments made (or to be made) in the normal course of business, a company is not required to provide documents beyond the monthly list: Re Emagist Entertainment Ltd; Chan Mei Chun’s case. 

23.In Chan Mei Chun’s case, §7, Anthony Chan J was careful to order the company to provide only a “brief” monthly statement of accounts, obviously to avoid an onerous obligation on the company.

24.Ms Liu, counsel for the petitioner, was unable to show authorities to the contrary. She invited this court to look at the way in which the respondents went about this summons in failing to provide supporting documents initially.

25.With respect to Ms Liu, despite their initial stance, the respondents had eventually justified this application, latest by 23 February 2015; and the petitioner conceded it, almost in entirety.  There was no reason to impose on the Company an extra obligation beyond the ordinary of providing a monthly list. I therefore excluded term B from the draft order.

Costs

26.The usual order is for costs to be in the cause.  However, there were special features in the parties’ conduct to be taken into account.

27.The application started off as one for a general order for validation. The initial (2^nd) affirmation of R1 only made bare assertions that there were expenses in the ordinary course of business of the Company.  The information provided was not sufficient for the petitioner or the court to distinguish between ordinary business expense and special expense. 

28.In my view, the respondents clearly overlooked the need for  evidence to be placed before the court under the principles of Re Burton & Deakin Ltd.  The first round of affirmations was wasted. On this ground alone, the respondents simply had no ground to seek indemnity costs.

29.The respondents later provided 4 affirmations with supporting documents.  A part of his 5^th affirmation was unnecessarily contentious whereas the 6^th affirmation contained legal arguments.  Even on the day of the hearing, the respondents sought leave to put in R1’s 7^th affirmation, and his 4^th Affirmation in answer to the petition.   The former was corrective in nature and ought to be admitted and I give leave to have it filed.  The latter was irrelevant.

30.The petitioner’s position was no better.  He filed 3 affirmations plus an affirmation of his sister.  Although he purportedly did not object to a validation order, he had asked for supporting documents and gone as far to verify eg a small payment of $1,100 made to the government.  The petitioner’s scrutiny of the respondents’ case went into the realm of forensic challenge, even commenting on the purported exercise of the company’s management decisions, contrary to Re Luen Hing Fat Limited.  The adversarial approach continued in the petitioner’s 5^th affirmation even after R1 filed his 5^th affirmation on 23 February 2015 which would have enabled the petitioner to assess the merits of this application.  The petitioner had not even started to allege that the payments by the respondents were likely to injure the Company.  There were items which the respondents readily conceded though, eg the double counted items.  The adversarial approach of the petitioner put the respondents at risk of default in paying creditors and employees, but for R1 who bore part of the payments.

31.The petitioner ended up largely agreeing upon a “general” validation order involving about $3,180,000 for ordinary business expenses and another $3,500,000 being reimbursement for R1.  The sum total was well over the $607,000 that R1 initially claimed to have expended on behalf of the Company in his 2^nd affirmation. 

32.As confirmed by Ms Liu, the petitioner’s challenge was about $455,000 out of the $7,000,000 claimed (ie 6.5%).  Upon giving up that challenge on a without prejudice basis, she agreed that the difference in amount in the draft order and what was claimed by the respondents was “negligible”.

33.Both sides, in my view, had contributed to the unnecessary costs incurred. Nevertheless, the hearing was still necessary because of the late indication of concession on the part of the petitioner and the need to adjudicate on 2 terms. Each side won in respect of one term.

34.The costs statements told something about the approach of both parties. The respondents sought a startling figure of HK$616,275, and the petitioner HK$195,513.  With the greatest respect, the level of costs sought by the respondents might have been justified for a complex and urgent injunction, but the nature of the present application was nowhere near that.  Such costs incurred for an interlocutory matter like this demonstrated a complete lack of sense of proportion: Order 1A, rule 1(c) of the Rules of the High Court.

35.Taking all circumstances into account, I order the petitioner to bear the costs of the hearing, summarily assessed at $70,000, to include also meetings/communication between lawyers and the respondents concerning the draft order.  Other costs of the summons shall be in the cause, provided that costs of the respondents shall not include the costs of R1’s 2^nd and 6^th affirmations. Costs of the petitioner shall not include those relating to affirmation of his sister.

36.Ms Liu objected to the Company’s incurring costs for this summons.  With respect, a company is a proper party to an application for a validation order: Re Wah Ying Cheong Limited, HCCW 225/1996, 14 March 2003, §16, per Kwan J (as she then was).  After all, it was the Company’s expenses that were in issue.  The Company (and R1) were thus entitled to costs. 

Conclusion

37.I give leave to file the 7^th affirmation of R1, service is dispensed with.  I make an order in terms of the draft order prepared by the petitioner, save that for paragraph 3, the words “together with the supporting documents and the bank statements of the Company’s bank accounts” shall be removed.  I make an order nisi on costs in terms of paragraph 35.

38.I thank counsel for their assistance.

Ms Elaine Liu, instructed by ONC Lawyers, for the petitioner

Mr Kenneth Lee, instructed by Lau, Wong & Chan, for the 1^st and 2^nd respondents

Attendance of the Official Receiver was excused