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Validation Orders – what should be the proper approach?

Jan 26, 2021

In the recent decision of Liu Tieh Ching Brandon v. Liu Ju Ching [2020] HKCFI 3176, the Companies Judge Mr. Justice Harris has discussed how parties to Winding-up proceedings should approach applications for validation orders by companies which have ongoing business and are solvent.

The underlying Petition arose from a dispute between shareholders in which the petitioner seeks either a Winding-up Order or relief against the company under section 724 of the Companies Ordinance (Cap.622) (i.e. an unfair prejudice action).

The company issued an application under section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32) for a validation order.  After the application was issued, the parties have reached an agreement as to the terms of the validation order but were unable to agree on the costs order for the application.   The company was of the view that the petitioner had been obstructive in agreeing to a validation order and attempted to use the application as an opportunity to obtain financial information and documents about the company which were not necessary for the purpose of assessing whether or not the validation order should be agreed.

Mr. Justice Harris has made clear that parties to an unfair prejudice petition concerning a company which has ongoing business and is solvent should not approach applications for validation order in an adversarial manner.  Parties are expected to agree to such applications and it is always open to a petitioner to agree to a validation order without prejudice to any claims and complaints it may advance in the proceedings.

In the case of Re Emagist Entertainment Ltd [2012] 5 HKLRD 703, Mr. Justice Harris has expressed his view that directors of a solvent company which has a valuable ongoing business should be allowed to operate the business normally and without close supervision by the Court.  As such, such company should be able to obtain without any difficulty a validation order in respect of payment of expenses made in the ordinary course of business, unless there are compelling evidence disputing that the company is solvent and is carrying on business or proving that the disposition is likely to injure the company.

The costs of the application would normally be payable out of the company’s assets or possibly be made costs in the cause.   However, unreasonable oppositions on the part of the petitioners might result in adverse costs consequences.  In Re Jessop & Baird (Hong Kong) Ltd [2017] HKLRD 78, Mr. Justice Harris has indicated that the Court might be more inclined to make a costs order against petitioners who prove to be uncooperative on an indemnity basis.

To conclude, petitioners should keep in mind that it is normal and necessary for a company to obtain validation order (unless the petitioners have specific concerns which can be supported by credible evidence if they intend to actively contest such application).   On the other hand, companies applying for validation orders may offer to provide a regular summary to the petitioners of the expenses that are being paid to alleviate the concerns of the petitioners.

This article is not and does not purport to be legal advice. For any enquiries related to this article, please contact Ms. Jennifer Li of our firm.


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