Introduction

On 1 March 2017, the Hong Kong Court of First Instance handed down its judgment in David Golan v Janek Davitashvili [2017] HKEC 410. The case serves as a reminder to practitioners that a “no fault divorce” is not a ground for winding up a company, and demonstrates that Hong Kong Courts are prepared to award costs on an indemnity basis against the unsuccessful party if the Court is of the opinion that an application for appointment of provisional liquidator is completely unmeritorious with no reasonable prospect of success.

Background

Mr David Golan (the “petitioner”) and Mr Janek Davitashvili (the “first respondent”) are the only shareholders and directors of BSD (HK) Ltd (the “Company”), each owning 50% of its issued share capital. The Company has three direct subsidiaries, and through a subsidiary, the Company owns three wholly owned sub-subsidiaries. The Company is a part of a larger group of companies engaged in the business of trading in household goods and kitchenware worldwide. The petitioner and the first respondent had different spheres of responsibility and a clear division of work within the Business.

The petitioner’s claim that the Company should be wound up boils down to three main reasons: (i) the first respondent mismanaged the Company and excluded the petitioner from management, (ii) the trust and confidence between the petitioner and the first respondent had been lost, and (iii) the Company is deadlocked as the petitioner and the first respondent cannot co-operate and agree to anything anymore due to a breakdown in relations.

Judgment

Le Pichon DHCJ dismissed the petitioner’s claim to wind up the Company and to appoint provisional liquidators. The parts of the judgment in relation to the petitioner’s attempt to invoke the court’s jurisdiction to wind up the Company on the just and equitable ground on “no-fault divorce” basis and the indemnity costs order imposed on the petitioner warrants our attention:

“No-fault divorce” is not a ground for winding up

On the facts of the case, the petitioner and the first respondent had a common understanding of more than 15 years in the way that the business was managed. There was no evidence of misconduct by the first respondent and it appeared on the facts that it was the petitioner who desired to change the longstanding settled practice of how the business was run. The petitioner, in an attempt to demonstrate that the trust and confidence between the parties had been lost, sought to use the “no-fault divorce” principle to circumvent the need to show that the loss of trust and confidence was due primarily to the misconduct of one side or the other. However, Le Pichon DCHJ stressed that, where the parties were shown to have agreed to a settled course of conduct, and where there has been no breach or departure from what had been agreed by the other party, a party cannot seek a winding up order on the just and equitable ground simply because he has lost trust and confidence in the other or there has been a breakdown in relations. The case of O’Neill v Phillips [1999] 1 WLR 1092 was used to highlight that there does not appear to be any support in the authorities for such a right of unilateral withdrawal.

Indemnity costs order for unmeritorious application
for appointment of provisional liquidator

Le Pichon DHCJ sends a strong message that an application for the appointment of provisional liquidator devoid of merit with no reasonable prospect of success is highly discouraged and that an indemnity costs order is justified in such cases. In the present case, the petitioner failed, among other things, to show sufficient interest in having the Company wound up, to give full and frank disclosure of material facts, and to produce evidence supporting his arguments of a breakdown in mutual trust and confidence which resulted in a deadlock between himself and the first respondent.