In the recent case of Re Promising Securities Company Limited [2023] HKCFI 3367, the court has clarified the bases upon which an “unfair prejudice” petition may be brought. More importantly, the court stated that a buy-out order can be made not only against existing shareholders, but in appropriate cases, also against non-shareholders.
Background
In that case, P1 and P2 are minority shareholders of the company holding 28% of the shares. R1-R5 are shareholders holding the other 72% shares. R6 has never been a shareholder but was at the material time a director of the company. P1 and P2 complained that R1-R6 conducted the affairs of the company in an unfairly prejudicial manner by, among others, excluding P1 and P2 from management and attempting to dilute their shareholding.
P1 and P2 settled with R1, R3, R4 and R5, and proceeded with the trial against R2 and R6. In the end, Linda Chan J found that the affairs of the company had been conducted by R2 and R6 in an unfair manner and the interests of P1 and P2 had been prejudiced. A buy-out order was made against R2 and R6.
Grounds for Unfair Prejudice Petitions
The proper ambits of “unfair prejudice” petitions and the concept of quasi partnerships have been authoritatively explained by Lord Hoffmann in O’Neill v Phillips [1999] 1 WLR 1092 and by the Hong Kong Court of Final Appeal in Kam Leung Sui Kwan v Kam Kwan Lai (2015) 18 HKCFAR 501.
Nevertheless, despite the long line of cases, there has not always been a correct understanding of the relevant principles. As observed by Linda Chan J at §55 of the judgment:-
“… very often, the parties and their legal representatives do not really appreciate the true principles and seem to think that by calling a company a quasi partnership, the petitioner can complain about the conduct of the respondents even though the conduct did not involve any breach of legal rights or accepted practice and there was no equitable constraint on the exercise of legal rights on the respondent …”
In §§49-54 of her judgment, Linda Chan J has distilled the principles and offered practical guidance on this area of law. In sum, in the context of an “unfair prejudice” petition, the petitioner needs to show that the respondents have acted in breach of:-
- what the parties agreed in contract (including the articles of association) such that there was a breach of his legal rights (legal rights); or
- what the parties have accepted to be the practice or the manner in which the affairs of the company should be conducted, even though such practice or manner is inconsistent with the terms of the contract or articles (accepted practice).
Practically speaking, in considering whether to present “unfair prejudice” petitions, it is useful for practitioners to first identify the parties’ legal rights and their accepted practice. Only if the impugned conduct involves a breach of legal rights and/or accepted practice should an “unfair prejudice” petition be brought.
Buy-Out Order against Non-Shareholder
The most usual remedies in “unfair prejudice” petitions are for the shareholders in fault to buy out the other shareholders. On the other hand, a buy-out order against non-shareholders has seldom, if at all, been made in Hong Kong.
Section 725 of the Companies Ordinance (Cap. 622) lists out the remedies that the court may grant if it is satisfied that a company’s affairs are conducted in an unfairly prejudicial manner. Among others, under section 725(2)(a)(iv)(B), the court may make an order for the purchase of the shares of any member of the company by another member of the company. Under that provision, a buy-out order is only targeted at shareholders.
However, one must note that section 725(2) is expressly stated not to limit the generality of section 725(1), which gives the court the power to “make any order that it thinks fit for giving relief in respect” of unfairly prejudicial conduct.
In Apex Global Management v FI Call Ltd [2014] BCC 286, Vos J (as he then was) having reviewed numerous authorities held that sections 994-996 of the Companies Act provide a wide and flexible remedy. Non-members of a company can be joined as respondents, and, in an appropriate case, such non-members can be made primarily or secondarily liable to buy the petitioners’ shares. Artificial limitations should not be introduced to reduce the effective nature of the remedy.
The aforesaid sections 994-996 of the Companies Act are equivalent to sections 724-726 of the Companies Ordinance. Having considered Apex Global Management and the facts of the case, Linda Chan J ordered both R2 and R6 to buy out the shares of P1 and P2. In other words, this case has firmly established that the court has jurisdiction to make a buy-out order against non-shareholders.
Patrick Siu represented the Petitioners.
