Re International Capital Network Holdings Limited HCCW 898/2002 shows that the Court is prepared to wind up a listed company on just and equitable ground if the management misconducts itself contrary to the law, the regulatory codes or the representations in the prospectus. 

Introduction

Under Section 177(1)(f) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), the Court can exercise the power to wind up a company on just and equitable ground. This is often sought as an alternative remedy to the buy-out order in disputes between shareholders of private companies.

Would the Court be prepared to grant the winding up order on just and equitable ground if it is a listed company? The judgment in Re International Capital Network Holdings Limited seems to suggest that the Court has not ruled out such possibility.

Facts

In this case, the petitioner filed a petition to wind up the listed company, i.e. International Capital Network Holdings Limited (“the Company”), on the just and equitable ground. The Company was incorporated in the Cayman Islands and is registered under Part XI of the Companies Ordinance. The principal business of the Company is to provide business development and corporate advisory and finance services to small and medium size companies in Hong Kong.

The petitioner was a shareholder of the Company holding 24.33% shares. The board of directors consisted of 2 executive directors associated with the major shareholder of the Company (which held 39.46% shares) and 2 independent non-executive directors.

At the hearing of the petitioner’s application to appoint provisional liquidators, the Court had to consider whether the petition had a reasonable prospect of success. The major complaints of the petitioner against the controlling management of the Company were:

1. Substantive depletion of cash in the Company due to dubious transactions in which the Security and Futures Commission (“SFC”) made a finding that there was an insufficient disclosure on the part of the Company.
2. Misapplication of assets of the Company contrary to the representations made in the prospectus.
3. Attempting to pass resolutions at general meeting to allot shares which might dilute the shareholding of the petitioner.
4. Unreasonably refusing the request of shareholders to hold an extraordinary general meeting on an early date to consider whether to revoke the resolutions of giving a mandate to the board for issuing shares and options to the directors and the employees.
5. Exclusion of the votes of the petitioner at the extraordinary general meeting and annual general meeting without sufficient grounds.
6. Failure to respond to the offer of Koffmann Securities Limited contrary to the Takeovers Code and the ruling of SFC.
7. Resignation of key personnel of the Company.

The Court’s ruling

The Court held that the complaints made by the petitioner showed a strong prima facie case that the controlling management had misconducted themselves in the management and affairs of the Company. The Court would be prepared to grant a winding up order if the directors or principal shareholders of a listed company choose to flout the code imposed by the regulatory bodies. The petitioner had justifiably lost confidence in the controlling management. Since the petitioner could not dispose of its shares due to the lock-up period (each of the management shareholders undertook not to transfer their shares within 12 months from the listing date of the Company), it was prima facie unjust and inequitable to require it to continue as a member.  

Significance to future cases

The meaning of “just and equitable” is in itself a wide and general term that cannot be understood without looking at the facts of the particular case. For example, one of the special features in this case includes the fact that the petitioner cannot dispose of his shares despite the complaints. While it is a factor the Court will take into account, the Court will not preclude winding-up petitions even if the petitioner is free to dispose of its shares. In Re St Piran Ltd [1981] 3 All ER 270, the Court did not rule out the possibility of winding up a listed company on the ground of the management flouting the regulatory codes alone. Therefore, if an aggrieved shareholder wishes to wind up a company in court, different scenarios in different cases can create uncertainties to the result of the application.

However, what is clear is that the Court will not exercise its power to wind up a listed company lightly. In the case of listed companies where shareholders are generally free to sell their shares in the Stock Exchange if they are unhappy with the company’s management and business directions, the overriding concern of the Court will always be the management and conduct of the company. The wind-up process of the Court cannot be used, for example, “as the means of evoking a judicial decision as to the probable success or non-success of a company as a commercial speculation” (Loch v Blackwood [1924] AC 783). Therefore, if the complaints have nothing to do with the company’s management misconducting itself contrary to the law, regulatory codes or its representation in the prospectus, a shareholder’s use of winding-up proceedings against the company on just and equitable ground may amount to an abuse of process.