Companies Winding-up Proceedings1995

RE ICS COMPUTER DISTRIBUTION LTD

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53558-EN-1996-05-13

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IN THE SUPREME COURT OF HONG KONG

HIGH COURT

COMPANIES (WINDING-UP) NO. 615 OF 1995

________________

IN THE MATTER OF ICS Computer Distribution Limited
(formerly known as Cheflink Limited)

and

IN THE MATTER OF The Companies Ordinance (Cap. 32)

________________

Coram: The Hon. My. Justice Rogers in Court

Dates of Hearing: 29th, 30th April and 1st May 1996

Date of Delivery of Judgment: 13th May 1996

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JUDGMENT

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1. This is a winding-up petition. This matter came before this Court previously on an application to strike out the petition. I gave my Decision in respect of that on 2nd April 1996. In order to avoid repetition that Decision should be read in conjunction with this judgment. I will not set out the facts herein other than is necessary.

2. As I indicated in my earlier Decision, the test which the Court applies is whether there is a bona fide (in the sense of genuine) dispute on substantial grounds as to the existence of the debt. As I also indicated in my previous Decision, it is for the company against which a petition is presented to adduce sufficiently precise factual evidence to satisfy the Court that it has a genuine dispute on substantial grounds.

3. As regards this case, the petition is resisted on the basis that the Company has substantial claims against the petitioner arising out of the transactions giving rise to the debt relied on. In my previous Decision, I referred specifically to three of the heads of claim. These were the damages for delay in shipment of goods, the claim in respect of unmarketable goods and the claim for damages caused by parallel imports. Those claims in themselves amount to over US$25 million. In consequence, both parties before me on the petition confined their arguments to those claims since the success or otherwise of the Company in establishing a bona fide claim on substantial grounds in respect thereof was likely to be determinative of the Company's defence to the petition.

CLAIM FOR DELAY IN SHIPMENT

4. In my previous Decision, I considered the nature of the Company's claim as presented in the evidence then filed. Having regard to the difficulties faced by the Company by the manner in which their case was presented and the indefinite nature of the evidence, I concluded that unless and until the Company could provide proper evidence as to what it said the contracts were the claim by the Company is not one that I could or should give credence to as constituting a basis of a bona fide substantial claim.

5. Whereas the hearing of a petition for winding up a company usually takes place at the same time as an application to strike out the petition and the Decision on the strike-out application is usually determinative of the winding-up petition, I allowed the Company further time in which to file evidence. I did so primarily because Counsel for the Company having heard the bulk of the submissions on behalf of the Petitioner on the strike-out indicated that the Company wished to file further evidence. I was not disposed to allow that on the strike-out application which had been launched on the basis that the evidence was complete. Primarily because Counsel for the Company had urged me that the Company’s evidence had been badly prepared, I considered it fair in all the circumstances to allow the Company a locus poenitentiae in which to try to rectify the situation.

6. The Company sought to improve its position by filing evidence including the 5th affirmation of Mr. Lam Chi Man. Paragraph 22 of that affirmation provides the sole clue as to what the Company now relies upon as the all important contractual provision or representation upon which it bases its claim for delay. It is said: "Both prior to and subsequent to signing the Distributor Agreement Mr. Bingley Ngai and Mr. Peter Wong had promised/assured me that the Petitioner would deliver the goods in Hong Kong to the Company in less than 30 days from the date of the purchase order. "

7. The first thing that must be noted in respect of this alleged contractual provision which is raised for the first time in the Company's third attempt to provide evidence is that it raises an alleged contractual provision or representation which clearly did not govern by far the bulk of the supply of goods which constitute the basis of the claim upon which the petition is founded.

8. It can be seen from all the documentation in relation to the Letters of Credit which has been exhibited that the goods were not delivered by the petitioner to the Company in Hong Kong but were supplied "ex works", "ex factory" or "ex warehouse" i.e. in Singapore. They were shipped according to the Bills of Lading and as required by the Letters of Credit "freight collect". Furthermore, there is no support for this alleged contractual provision anywhere in all the documents which are before the Court other than the barest allegations in paragraph 22 of Mr. Lam's 5th affirmation made, as I have said, after some of the defects and deficiencies in the case put up on the strike-out application had been pointed out. The mention of the 30 day delivery period is again something not to be found in the documents relating to the supply. Sti1lless is it to be found in any document emanating from the Company and one seeks in vain indication of a claim having been made by the Company on the strength of this promise/assurance. Furthermore, paragraph 22 of Mr. Lam's 5th affirmation does not accord with paragraphs 6 and 7 of Mr. Lam's 1st affirmation. The reader of those paragraphs is lead to believe that at least the initial orders were put in up to 6 months ahead. Paragraph 15 of Mr. Lam's 1st affirmation refers to the 90% of the orders having been worded "as soon as possible". This might show a desire to achieve early delivery but it is no support for the contractual provision which is now said to have existed.

9. In Safe Rich Industries Limited, Court of Appeal 3rd November 1994, Bokhary J.A. pointed out that whether, drawing an analogy with Order 14, a Defendant's assertions are believable must be judged in the context of the indisputable background to the case and not in isolation. Otherwise, as was pointed out, a debt-dodgers' charter would be created. Here, it seems to me that the Company is in the position of not having established a bona fide dispute. As Morton L.J. pointed out in Re Welsh Brick Industries Limited [1946] 2 AER 197 @ 200 it is possible that a Company might on Order 14 convince a Court that it has a fair probability of a defence but at the Petition stage it might not be able to establish that it has a bona fide defence. The distinction as I understand it is that a winding up petition is a summary procedure in which the Court comes to a conclusion. The Court does not dismiss a petition on the basis that a Company might be able at some stage in the future to scrape together a case that might be arguable. If by the winding up stage it does not have a defence then the company is wound up and the putting together of some cross-claim which has yet to be formulated is left to be done during the winding-up.

10. This claim by the Company seems to be in no better position now, following the Company's latest round of evidence than it was before. Having been taken through the documents that have been exhibited and the various charts prepared, if there is any claim at all, it must be minimal.

CLAIM IN RESPECT OF PARALLEL IMPORTS

11. In their second round of evidence i.e. that which was filed for the strike out application the Company relied upon the Distributor Agreement as creating an obligation on the Petitioner to protect the interests of the distributors by taking steps to curb parallel imports. Mr. Lam's 1st. affirmation was not handicapped by any reference to precisely what provision in the Distributor Agreement was said to give rise to that obligation. As I pointed out in my earlier Decision the point was all but abandoned on the strike out application. It had to be because the terms of the Distributor Agreement made clear that it was in no sense an exclusive distributorship. The Petitioner reserved the right to distribute its own goods in the distribution territory.

12. In his 5th affirmation Mr. Lam raises a completely different argument. In paragraph 16 he says that Bingley Ngai orally agreed with him that the Company would tell Mr. Ngai the price of parallel import goods and then sell its own stock at an agreed reduced price and the Company would then be reimbursed by the Petitioner. Whereas in his 1st affirmation Mr. Lam exhibited a chart which was said to be a schedule of loss prepared by Mr. Ho, this was on the basis of loss recoverable because of some unspecified terms in the Distributor Agreement. Mr. Lam's 5th affirmation does not itemise what he says were the figures agreed by Mr. Ngai. The instance given of an agreement by Mr. Ngai to reduce the price of sales made Synset relate to one type. But neither in respect of that nor in respect of the sales of the Contura Aero does Mr. Lam say what the price compensation was that was agreed. Again, there is not one scrap of paper to support this new assertion. The Company in my view has not adduced sufficiently precise factual evidence to satisfy the Court that it has a genuine dispute on substantial grounds on this ground.

UNMARKETABLE STOCK

13. In my earlier Decision I found it impossible to give credence to the nearly US$6 million claim for unmarketable goods. One of the items to which I referred was the very heavy claim in this respect founded upon the SVGA colour monitors. Again without a great deal more it would be impossible to accept that an item such as that was unmarketable at any price. It is hardly to be supposed that such an item is even to-day out of date.

14. Paragraph 38 of Mr. Lam's 5th affirmation is a series of disjointed statements. The final 2 sentences of the paragraph are clearly irrelevant. In so far as Mr. Lam is attempting to say that monitors are un-sellable on their own, however, when consideration is then given to the list of goods including SVGA colour monitors that the Company was still trying to order late last year, the goods actually ordered last year by the Company including the SVGA colour monitors and the list of goods ordered by other distributors of the Petitioner in the People's Republic including for example SVGA colour monitors the only conclusion that can be come to is that the Company is a long way from establishing a bona fide dispute on substantial grounds on this basis.

CONCLUSION

15. On the basis of the Company's evidence on these 3 heads of alleged cross-claim I would not be prepared to hold even on the new evidence that it had established a bona fide dispute on substantial grounds. The claims apart from the delay in shipment come to US$21,622,636.00 a shortfall of something over US$7. 5 million of the amount owing to the Petitioner. Hence, even if consideration proceeds on the basis that the Company has a bona fide dispute on substantial grounds for the remaining claims and possibly a legitimate claim in respect of a very small proportion of the delay claim there is still a substantial shortfall. But I have held that the Company has failed to establish the existence of a satisfactory claim in respect of at least 3 heads. The deficiency as I pointed out in my previous Decision is therefore even greater.

16. Despite the reference in my previous Decision to the absence of any accounts even in draft, the only attempt to show some kind of solvency has been the production in the new evidence of copies of tax demands. Rightly, Mr. Chan Q.C. did not rely on these as establishing anything. In my view the only conclusion that can be drawn is that the Company is insolvent and unable to pay its debts.

INHERENT IMPROBABILITY OF THE COMPANY'S CASE

17. In my view, in addition to the analysis of the case presented by the Company as I have made above, and as a distinct and separate matter in itself, the Court in my view has to consider the Company's cross-claims with such circumspection as on an Order 14 application would give rise to an order for payment in of in this case at least half the amount of the Petitioner's claim.

18. The history of the matter shows a mounting debt problem as regards the Company's account with the Petitioner. The most graphic demonstration of this is exhibit "LTC 12" to the affirmation of Lau Tin Chi. It is a chart which shows the various Letters of Credit which were opened by on behalf of the Company in favour of the Petitioner. Initially the bills drawn under the Letters were payable at sight. The Letters of credit from January 1994 provided for a 60 day payment period. From August 1994 the period was 90 days. In practice payment seems to have become increasingly delayed as time went by. Eventually, under Letters of Credit LCB39400129 and LCB39400159 no payment was over received.

19. On pages 7 to 9 of my earlier Decision I set out some of the history of the correspondence up to the time of the first hearing of the Petition. It is unnecessary to set it out again here. I am treating it, as I have said at the beginning, as part of this Judgment. This does not show the Company having anything like the claims that have now been put forward. The explanation for the contents of the correspondence, or rather lack of it, prior to the first hearing have been guarded and have been heavily criticised in the course of argument. 1 find that they do not inspire the conviction that the Company had any belief that it had sound claims of the nature now put forward, particularly in respect of the delay claim. The manner in which the evidence has emerged and the shifting nature of it have done nothing to rectify that. The change in stance taken on many of the issues at the different stages of the evidence is something which must be held against the Company.

20. In Re Claybridge Shipping Company Court of Appeal transcript 9th March 1991, Lord Denning said that

"I entirely agree that a petition should not be used as the means of getting a debt which is bona fide disputed on substantial grounds on which a company would get unconditional leave to defend. But I think that the Companies Court should be able to look into the bona fides of the defence. If it is obviously a "put up job" - or if it is so insubstantial that a Queen's Bench master would only give conditional leave to defend - then I should think the petition should stand."

21. In my view, should I be wrong about the Company not having established a defence, this is just such a case. The facts point to a situation where the defence put up is for the purpose of delaying the Petitioner. Whereas I proceed on the basis that the Company does have some claims against the Petitioner sufficient to give it a set-off, that is only to a limited extent. There is a large proportion of the debt owing to the Petitioner that is uncovered. The history of the matter shows the Company, which had operated on what would apparently seem to have been very slender margins, slowly and belatedly attempting to pay off in the last months of 1995 some of the amount that was owing. This in itself demonstrates the inability of the Company to pay its debts as they become due. Everything, down to the production of the tax forms in lieu of any accounts points to the fact that this is a company without any current assets to pay its debts.

22. In reaching the conclusion that the Company is insolvent and should therefore be wound up I do not in any way underestimate the seriousness of winding up a company. The conclusion to which I find I have no alternative but to arrive, is one taken having given full consideration to the comprehensive submissions of Counsel on both sides. It is also in the light of the fact that the Company has been given a full second chance to present its case. The protestations that there is a mass of documentation which has yet to be analysed and marshaled before the Company's case can be known is an argument to which I cannot accede. The public interest and the commercial interests of the community demand that a company should only be wound up in circumstances where it is justified, but those interests also require that if the company cannot pay its debts it should cease to exist. If a company is to withhold payment of its debts then it must know why it is doing so. If it is not able to demonstrate valid reasons why payment is being withheld, then if it is also unable to show that it can pay those debts and if necessary give security therefor, then winding up is likely to follow.

23. In my view it would be right in those circumstances to order the winding up of the Company and leave it to the liquidator to bring such claims as he thinks proper in the liquidation.

(Anthony G. Rogers)
Judge of the High Court

Mr. Winston Poon Q.C. and Mr. Michael Winckless, instructed by Messrs. Baker & McKenzie, for the Petitioner.

Mr. Warren Chan Q.C. and Mr. Paul Wu, instructed by Messrs. Wong & Partners, for the Company.

Mr. Alfred K.M. Chan for the Official Receiver.

53604-EN-1996-04-02

RE ICS COMPUTER DISTRIBUTION LTD

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IN THE SUPREME COURT OF HONG KONG

HIGH COURT

COMPANIES (WINDING-UP) NO. 615 OF 1995

________________

IN THE MATTER OF ICS Computer Distribution Limited
formerly known as Cheflink Limited

and

IN THE MATTER OF The Companies Ordinance (Cap. 32)

________________

Coram: The Hon. Mr. Justice Rogers in Court

Dates of Hearing : 6th, 19th-21st, 25th - 27th March and 2nd April 1996

Date of Delivery of Decision : 2nd April 1996

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DECISION

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1. This is an application to strike out a winding up petition on the ground that it is an abuse of process.

2. The petition is based on the ground that the company is unable to pay its debts. In relying upon that ground for winding up the Petitioner relies both upon non-compliance with a statutory demand of the 18th November 1995 as proof of the inability and upon general evidence of insolvency amounting to a failure to pay a large debt over a very substantial period.

3. The ground for seeking to strike out the petition is that the Company claims to have a counterclaim arising out of the same transactions as gave rise to the debt thus constituting a set-off. That cross claim is said to exceed the debt due to the Petitioner': Thus, it is said, in reality there is no debt on which to base the petition and it follows from that that the Petitioner is not a creditor and hence has no locus to present a petition.

4. The Petitioner is a well known personal computer manufacturer. Its case is that the Company was appointed a distributor for its products in China in 1993. There is no dispute that over the period 1993 to 1995 the Petitioner supplied the Company computers and related equipment which were invoiced at a total of over US$70 million. It is also not in dispute that payment for much of those computers and related equipment was not made prior to or at the time of delivery and that as a consequence the account between the Petitioner and the Company showed a substantial balance owing to the Petitioner. For example according to the letter of the 24th January 1995 the Petitioner's statement of account as at 31st December 1994 showed a balance owing of US$41,351,227.00. At the date of the statutory demand the amount said to be owing was US$32,256,258.19. As of to-day the amount is US$29,248, 148.19 without taking into account any element of interest.

5. As I shall come to later, the Company has put forward a number of separate heads on which it bases its cross claims. These are hotly disputed by the Petitioner. The first question which must be addressed is "What approach should the Court take where a debt is disputed?" For these purposes I treat the claims put forward by the Company in this case as amounting to a set-off which if valid would extinguish the debt. I therefore treat this case as being one where the debt is disputed. In the course of argument by Counsel on both sides, to which I am considerably indebted, my attention was drawn to well over 30 cases as well as passages in leading text books. I have every reason to believe that every relevant authority was cited. I trust that I will not be considered to be doing injustice to the industry of Counsel if I summarise what I consider is the approach which I should take in a case such as this.

6. The procedure of winding up a company for "insolvency" by petition is a summary one. The test which the Court applies is whether the debt is bona fide disputed on substantial grounds. These are words which appear time after time in the cases. As a matter of practice, and not it may be noted as a matter of law, where the Court is satisfied that this criteria is satisfied the Companies Court should not embark on a trial to determine the issue of the validity of the debt. The petition is therefore dismissed or "taken off the file" unless there are unusual circumstances about the case or the issues involved can be disposed of very simply. In that event the Companies Court may determine the dispute itself or the Petition may be stayed and left on file pending determination.

7. There are a number of reasons for this practice. Important amongst those are that it is undesirable that a Company should remain with a petition hanging over its head, so to speak, whilst lengthy and complex litigation is conducted. Winding up proceedings can also potentially put too great a pressure on the company concerned which thus might be forced to make an unjust settlement. One of the reasons that previously has been advanced, namely that the procedure on petition in the Companies Court does not lend itself to trials and potentially complex actions, seems to me to be no longer applicable. The advent of extremely long and often involved I litigation following presentation of petitions on the just and equitable ground has demonstrated that a petition in the Companies Court can be disposed of as well as any other litigation. Indeed, I detect in the more recent decisions a leaning towards a robustness of approach evidencing a greater willingness by the Companies Court to look at the claim put forward by the company with a more critical eye.

8. The statement of the test which the Court applies does not of itself answer all the questions. It is clear that it is not sufficient for a company to say "We dispute the claim" or in the context of this case "We have a set off" see for example Jessel M.R. in re Great Britain Mutual Life Assurance Society (1860) 16 Ch. D. 246 @ 253. In some respects it is appropriate to liken the test to that which is required under Order 14 rule 3 on an application for summary judgment. It is said that the test is not whether the company's case is to be believed but whether it is believable. To this extent Mr. Yu Q.C. cast doubt on the full extent of what for example Lord Denning had said in Claybridge Shipping Company S.A. 9th March 1981. In that case a very strong Court of Appeal consisting of Denning M.R., Shaw and Oliver L.JJ had overruled a decision of Vinelott J. who had held that as the debt was disputed the petition for winding up was not to be allowed. Lord Denning said that if the company's case is obviously a "put-up job" - or if it is so insubstantial that a Queen's Bench Master would only give conditional leave to defend- then the petition to wind up should stand. What Lord Denning said has to be looked at in the context of that case and what he was saying was in the context of looking at the bona fides of the defence .

9. The analogy with Order 14 breaks down in a number of respects. As Oliver L.J. said in the Claybridge case the analogy may fair for many purposes but is not perfect. I would note that in the first place the wording of the Order 14 rule 3 is different from the test of bona fide dispute on substantial grounds. One of the distinctions between the 2 tests was brought out in the case of re Welsh Brick Industries Ltd. (1946) 2 AER 197 a decision of Lord Greene M.R., Morton and Tucker L.JJ. The distinction was there drawn between a fair probability of establishing a bona defence which might suffice for leave to defend on a summary judgment application and the Companies Court finding that there was no bona fide defence. As Shaw L.J. said in the Claybridge case there are public policy considerations to be considered in a winding up and, as Oliver L.J. pointed out, in an Order 14 application the claim would be summarily determined whilst in a winding up the company’s claim can still be pursued by the liquidator. This was a point mentioned by Bokhary J.A. at page 6 of the Safe Rich decision.

10. Importantly for this case there is a distinction between a consideration of whether the Company has established a defence on substantial grounds and a consideration of whether the evidence is believable. Taken to the ultimate, the difference is between whether there is evidence and whether that evidence is believable. It seems to me that the onus must be on e company against which a petition is presented to adduce sufficiently precise factual evidence to satisfy the Court that it has a bona fide dispute on substantial grounds. This seems to me to be the proper approach which emerges both from the cases where the petition has been struck out and those for example as the Great Britain Mutual Life to which I have referred and the Janeash Ltd [1990] BCC 250. In that case Browne-Wilkinson V-C said at 252 "That huge weight of material has remained unanswered". He went on to doubt the truth of such material as had been put in by the company, but that does not, in my view, detract from the basic point that the company's evidence must establish a substantial case. If the evidence fails to establish that case the company cannot satisfy the test by arguing hypotheses of fact on which it is said that such a case exists or could exist.

11. Finally on this point I should mention the question of the level of the debt, or, in this context, the quantum of the counterclaim. Again this is a matter of practice and discretion. However, it seems to me that if there is a bona fide dispute on substantial grounds sufficient to extinguish the claim then that should, absent other considerations, be an end of the matter. However, the fact that only part of the debt were disputed may not be sufficient to determine the petition particularly in circumstances where the company was not in a financial position to make any payment.

12. As a matter of practice there does not appear to be any difference in approach between the determination of the validity of a defence to a petition and an application to strike out a petition. Frequently, the 2 are heard and decided at the same time without distinction being drawn. In this case it seems to me that there is a distinction for this reason that on this matter being called on I intimated to Mr. Yu that as the Company had a motion to strike out the Petition I would hear that first. Whilst in other circumstances the decision on the strike out might finally be determinative of the matter, after hearing a large part of the Petitioner's argument Mr. Yu indicated that he wished to put in more evidence. That application not having been made at the beginning of the hearing I indicated that I intended to complete the strike out application on the basis of the evidence upon which the Company had been content to launch it and to consider any application to admit further evidence, if by then it would still be relevant, after the decision on the strike out.

The Petition and the Claims by the Company

13. The Petitioner's case is that the Company was appointed a distributor under a distributor agreement. That agreement is exhibited to the first affirmation of Mr. Lam on behalf of the Company. Although Mr. Lam explains that he had no opportunity to read the document before he signed it, and indeed signed it for a second time, it is not clear what approach the Company is taking in respect of it. In his reply speech Mr. Yu tentatively drew my attention to the Control of Exemption Clauses Ordinance. I therefore have not heard full argument on this but Mr. Yu was not able to explain to me why the Distributor Agreement was not an international supply contract within the meaning of Section 16. The Company seems to me be to trying to take the benefit of the agreement when it suits it and to by-pass the agreement when it feels the occasion warrants it. I will mention some of the terms of the agreement shortly.

14. It is the Petitioner's case that it has supplied goods as I have indicated above and as a result is owed the money claimed in the petition. There is a history of correspondence coming from the Petitioner stating the amount outstanding on the account. Furthermore, at the end of December 1994 Mr. Lam was apparently prevailed upon to sign a guarantee of the Company's indebtedness to the Petitioner to the tune of some US$6 million. In May 1995 the Company signed an audit confirmation addressed to the Petitioner's auditors confirming a balance due by the Company to the Petitioner as at 30th April ofUS$35,354,160.72. The Company says that this was signed with reservations but nevertheless it was signed. Moreover in mid-November 1995 the Company's auditors asked for and obtained confirmation from the Petitioner that as at 31st March 1995 the Company owed the Petitioner an amount in excess ofUS$40 million.

15. It can be noted that legal action in respect of the amount owing was first threatened as long ago as 27th September 1995. A letter from the Plaintiff's solicitors of that date was sent by hand to Mr. Lam threatening action to recover the amount under the guarantee. Despite what would appear to be this rather serious turn of events little direct response seems to have been elicited. During October there were a number of faxes from the Company to the Petitioner complaining of the supply of wrong keyboards and of missing parts and in November a further claim-under what is called the price protection policy was sent in. The statutory demand to which I have already referred was followed by the presentation of the Petition on the 15th December 1995. Even at this stage nothing of very much significance emerged from the Company. The rules with regard to preparation and filing of evidence seem to have been honoured in their breach. Even by the time the petition first reached this Court on the 29th January this year the affidavit on behalf of the Company merely stated that letters had been written to the Petitioner's solicitors, on instructions without affirming the truth of the contents of the letters.

16. The first letter, that after the Statutory Demand, stated that the goods "purportedly sold and supplied" between the 30th April 1994 and the 13th October 1995 were "substantially defective and/or not of merchantable quality". The second letter, after the presentation of the Winding up petition takes issue with the validity of the Statutory Demand as a basis for the petition, reiterates the statement with regard to merchantable quality, refers to the failure on the part of the Petitioner to enforce the price protection policy and adds the statement” … in breach of the said Distributor Agreement ... ( the Petitioner) has purportedly delivered goods to (the Company) in the absence of any continued or verified purchase orders from our client." That last statement may have its antecedent in the word purportedly in the first letter.

17. Whilst dealing with the correspondence the Company has been anxious to rely on a further letter written by Mr. Lam on behalf of the Company to Mr. Pfeiffer, the President and Chief Executive Officer on the Petitioner on the 19th December, that is shortly after the presentation of the petition. There are references in that letter to the Petitioner's staff trying to avoid "our long-term disputes and problems (burden) rather than giving us a practical problem solving solutions to settle all our long term disputes and burden ... " There is also reference to “pending claims to the Compaq products, such as (a) short shipments (b) wrong delivery (c) missing parts (d) manufacturing problems (e) maintenance problems (t) price protecting (g) marketing fund ... etc." In respect of those it was said that there had been no response to many letters that have been written. That letter also contains reference to the Company's new investors and bankers and the fact that a solution had been found and that a proposal for settlement had been due to be provided that week.

18. When the matter was first in this Court on the 29th January the Company sought time to put in further evidence. In view of the fact that the Company had shown no apparent likelihood of having a defence to the winding-up petition I. put the parties under a strict timetable as to ~g of evidence. The matterwas mentioned again on the 12th February and time was allowed for filing evidence in reply to the Petitioner's reply evidence. Eventually the first day of the present hearing when the application to strike out started took place on the 16th March.

19. When the Company's evidence came to be filed on the 6th February in addition to those heads of claim in the 19th December letter there were a number of other heads including in particular damages for delay of shipment in the sum ofUS$18,429,728.00, unmarketable stock of computer products in the sum of US$5,901,176.94, delay claim for spare parts US$1,010,450.00, damages caused by parallel imports in the sum of US$2,144,678.00, unreturned goods sent to the petitioner for repair in the sum of US$1,655,950.00, unpaid sales bonus in the sum of US$857,912.99 and loss of profits as a result of the Petitioner's breach of the Distributor Agreement and misuse of confidential information at that stage unquantified but subsequently quantified at RMB20 million. The total claim comes to something a little in excess of US$40 million as against a total turnover of goods supplied of something over US$70 million. It can be seen that a number of the heads of damages depend for their existence on the Distributor Agreement and far from relying on the allegation in the letter of the 20th December of purported delivery of goods in the absence of any confirmed or verified purchase orders, nearly half the claim is founded upon the proposition that there was delay in shipment of goods.

20. At this stage I should mention a few of the clauses in the distributor agreement. Clause 2.1 makes it quite clear that the Petitioner reserved the right to sell its products both directly and indirectly within the People's Republic of China which was the distributorship territory. No doubt because of that clause Mr. Yu very sensibly all but abandoned the claim for parallel imports in his reply speech.

21. So far as this application is concerned the term of the Agreement is not of crucial importance, nevertheless, it does seem from clause 3 that the Agreement came to an end on 16th August 1995. It is stated that the Agreement cannot be renewed and that it terminates without any notice. It would seem that the Agreement therefore provides a scenario where the distributorship has to be renegotiated and agreed.

22. The provisions for scheduling and ordering the Petitioner's products are set out in Clause 9. Purchase orders which did not have a requested shipping date were to be treated as having a requested date of 60 days. In respect of orders placed less than 60 days prior to the requested shipping date the Petitioner was required to use "reasonable efforts" to ship based on availability. Importantly each purchase order was to be accompanied by an irrevocable letter of credit in a face amount in U.S. dollars equal to the purchase price for the goods ordered as well other charges; the letter of credit had to be in form and content acceptable to the Petitioner in its sole discretion. Clause 9.6 concludes "(The Petitioner) at its sole discretion, may arrange other credit terms without waiving any rights under this section 9.6".

23. It is to be noted that Clause 9 is in terms of the shipping date. This ties in with clause 13 which provides that title passes upon delivery of the goods to the appointed freight forwarder or common carrier at the designated shipping location.

24. For the purposes of this decision it is only necessary to consider 3 of the heads of cross-claim put forward by the Company. I have already mentioned the claim in respect of parallel imports. I cannot at the moment see a valid basis on which this could be sustained and, as I have already mentioned, in his reply speech Counsel for the Company merely indicated that he did not wish to address me on the topic.

25. The major claim is that in respect of delay of shipment of goods. The fact that it takes more than imagination to conceive this as being raised in the solicitors' correspondence, or indeed the letter to Mr Pfeiffer which I have mentioned, is something which in my view, given the massive size at which it now stands, goes as to the bona fides of the claim. Those facts have to be weighed against the allegations that the delay in shipments was the subject of discussions between representatives of the Company and the Petitioner over the years. It is the Company's position that the correspondence in respect of this item of claim is sparse because the matter was discussed with staff of the Petitioner many of whom have left the Petitioner's employment. Furthermore, Mr. Lam's evidence was that the Company had been requested not to put their complaints in writing since they would be circulated to senior management and they would cause and caused difficulties for the persons with whom the Company dealt within the Petitioner's organisation. This point was much emphasised by Counsel for the Company in the course of argument. Nevertheless the fact remains that correspondence relating to claims for late delivery seems to me conspicuous by its paucity. Whatever reticence there might have been about committing such matters to paper would presumably have evaporated after the letter of the 27th September 1995 when the Petitioner made clear through its solicitors that it would be pursuing Mr. Lam under the guarantee.

26. The basis of the claim for shipment delay is said to be encapsulated in a schedule exhibited "LCM-5" to Mr. Lam's affirmation. This was the subject of no small argument in the course of these proceedings but it seems to me that for these purposes it is unnecessary to examine all the points made in respect of it.

27. Crucial to the exhibit and a consideration of the claim which it is said to itemise is the starting point. For this purpose one of the key points of the table is to show the delay in shipment. There are 2 crucial columns one is headed "Order Date" and the other is headed "Receipt Date". It is clear from a consideration of the documents which have been exhibited that the date given in "LCM-5" for the Order Date is the date on which the Company put in an order. For example the order in relation 1st shipment under Letter of Credit LCB39400129 is said with reference to exhibit "LCM-22" to have been May 1994. Again for example items numbers 64 and 68 on "LCM-5" relate to this order. However a copy of the Letter of Credit is exhibited "LCM-23" and that was only issued on the 2nd September 1994. Difficulties do not stop there. Mr. Yu on behalf of the Company attempted to argue that the Letter of Credit was not specific as to the goods. I find myself unable to accept that argument even at this preliminary stage of the proceedings. The document states on its face "Evidencing shipment of Commpaq ( sic) computer 4/33 Quantity: 2000 sets ... ". That is clearly specific as to the items. The Company did undertake by fax dated the 19th September to accept discrepancies as to the amount of the goods to be shipped and as to the description of goods. This however, seems to have been a fax to the Petitioner and not to the bank and the ultimate outcome was clearly non-payment.

28. Nor can I see any validity Mr. Yu's argument that the Petitioner could have shipped goods under any of a number of Letters of Credit which according to the argument were apparently available at the time. This again seems to me to be an attempt to raise an argument without the fundamental evidence to support it.

29. Turning to the delivery date a copy of the Bill of Lading said to be in respect of this shipment is exhibited as part of exhibit CWK -14 to Mr. Chan's 3rd Affidavit on behalf of the Petitioner. That Bill of Lading identifies the Letter of Credit by number. It is dated and shows shipment on the 1st October 1994. Much discussion took place as to whether Concord Express, a trading name of or otherwise connected with CE Logistics (Asia) Pte. Ltd., was the appointed freight forwarder of the Company. From a number of documents it would seem it was, for example in the face of the fax dated the 2nd August 1995 more than a bare assertion would be necessary to establish it was not. Concord Express may have been an organisation that the Petitioner had recommended to the Company and it may also have been a place at which goods were also stored by the Petitioner. Be that as it may the basis on which the relevant date is put as "Receipt date" and not "Shipping date" has not been made clear to me. Neither can I see justification at the moment for the date to be put as 14th October 1994.

30. The chart "LCM-5" shows, as I have said the Order date as May 30th and the receipt date as 14th October. On the basis of that it is said that there was 4.56 months delay. It seems to me that if the Company is to put forward a claim based upon breach of contract then it must show by some prima facie credible evidence what that contract was. The claim put forward in "LCM-5" cannot be based on the Distributor Agreement since the Order could not have taken effect thereunder without the Letter of Credit and the relevant date is the Shipping date and not the receipt date, presumably of the goods either in Hong Kong or in China. It is necessary therefore for the Company to put forward evidence of some other contract if it wishes to make good its point that it has a claim based on delay. It is not sufficient for Counsel to hypothesise, however attractively, that this might have been waived or that might have been varied. The fact that the Petitioner has kept its internal records showing the date of the order as "Transaction Date" does not indicate that the Petitioner agreed to waive the term relating to the provision of a Letter of Credit and therefore agreed to treat the Company's order as an operative order before some semblance of a Letter of Credit was available. It requires evidence to show that was so. The Court must know what it is that the Company says is the contract and when and how it is that it says that contract was made. If as Mr. Yu tried to argue that contracts were made and constituted outside the terms of the Distributor Agreement then it has to be made clear how and when this was done.

31. Both the Letter of Credit LCB39400129 and LCB39400159 contained what on the face are certain peculiarities in that although their intent was to cover a number of shipments each shipment was limited to US$2 million worth of goods, the Letters of Credit had in effect to be renewed after each shipment and each expired in relation to its opening such that it would have been impossible to effect a second shipment thereunder and still keep the required gap of 1 month between any 2 shipments and effect more than 2 shipments under each Letter. It would appear that these Letters of Credit never were extended or renewed and hence it is difficult to see, on the basis of the present evidence, how the 3rd shipments could have ever taken place.

32. The approach of the Company with regard to the dates of Order and shipment dates is sufficient to show that unless and until the Company can provide proper evidence as to what it says the contracts were the claim by the Company is not one that I could or should give credence to as constituting a basis of a bona fide substantial claim which can form the proper basis to strike out the Petition.

33. A further example of the need to provide prima facie evidence is to my mind exemplified by reference to the 3rd shipment under Letter of Credit LCB39400159. There was a great deal of argument as to whether the Petitioner was at fault in relation to this shipment. It was said that it was for this reason that the Petitioner agreed to reimburse the substantial storage charges to the tune of HK$400,000 or whether as Mr. Chan on behalf of the Petitioner said the release of the shipment was delayed due to the non-payment. Again it seems to me incumbent on the Company if it wishes to strike out the Petition to show that there was an agreement which would entail the Petitioner supplying goods to the Company on yet more credit notwithstanding that according to the letter of the 24th January 1995 there was more than US$41 million outstanding at the time.

34. It is not necessary to go through many of the arguments that were put to me so thoroughly. For example in relation to the transactions that were summarised in LCM-24(d) as I have already indicated something more than a bare assertion would be necessary to establish that Concord Express was not the Company's agent, but leaving that aside a comparison of the Bill of Lading dated the 21st May 1995 and the fax 14th July 1994 showing that confirmation of acceptance of the discrepancy in the Bill of Lading was given on the l0th May leads to the prima facie conclusion that shipment was shortly after the Letter of Credit was available. In relation to the transactions summarised in LCM-24(e) the dates of order and "Receipt" for 6 out of the 10 items are within 60 days. Given the approach to the dating which has been adopted by the Company in the preparation of the Schedules these dates have to be approached in the light that I have already indicated. In respect of all these if the Company wishes to show that the Petitioner has been in breach of contract it is necessary to adduce evidence as to what that contract is.

35. It was argued on behalf of the Company that the massive records which they retained and had to brought from the People's Republic of China was prohibitive of a case being presented which set out the basis of the cross-claim to any greater degree than had already been done. It was said that the Company was a small and lean organisation with only a handful employees spread over many different locations. The preparation of the Company' s case was something which would take very much longer to prepare than has been allowed and indeed was something so complex in itself that in effect it required a trial. I do not see that is a valid ground for crediting the Company with a bona fide substantial claim. No doubt those who deal in substantial amounts will have that much more to cope with than organisations that deal in small amounts. That, however, does not relieve them from preparing their case on an adequate basis. As I have indicated it is more than 6 months since a claim under the guarantee looked a realistic probability. Mr. Yu candidly submitted during the course of argument that the Company's case had been badly prepared. That however cannot be a reason for the Court excusing the Company from presenting the standard of case required to support its contentions in Court. Whilst some credence can be given to that argument on the basis of the state of the evidence when the matter first came for hearing on the 29th January, the Court is in no position to decide what is incompetence or otherwise of the legal advisers and what is in fact a case where the Company cannot put forward sufficiently precise factual evidence to satisfy the Court that it has a bona fide dispute on substantial grounds which I have held is required.

Unmarketable Goods

36. Mr. Lam has put forward a claim for unmarketable stock of computer products in the sum of US$5,901,176.94. It is put upon the basis that the products are outdated and therefore unmarketable. The list of items is set out in exhibit "LCM-6" I find it difficult to accept that the items listed here were so outmoded that they were or, indeed, are unmarketable. Some of the computers may not be the latest but I see no reason why they should be unmarketable at any price. Mr. Yu was at pains to say that this was a matter for cross-examination.

37. If the argument were to be used as a defence, I doubt that the proverbial Queen's Bench Master would entertain a claim of this nature unsupported as it is with any evidence other than the barest assertion of the existence of a claim. If he were to consider it as a defence it could in my view only be upon the payment into Court of the full amount. As far as today's application is concerned a claim which includes within it a claim for nearly half a million U.S. dollars on the basis that SVGA colour monitors are unmarketable cannot in my view command the respect necessary to warrant dismissal of a winding-up petition if it is supported as this one is only by the barest of assertions.

38. In summary therefore of the claims put forward by the Company I am not satisfied that the Company has made out a case of a bona fide dispute on substantial grounds in relation to the claims in respect of parallel imports, delay in shipment or unmarketable goods. These were put at US$2,144,678.00 in respect of parallel imports, US$18,429,728.00, in respect of the delay claim and the claim in respect of unmarketable stock of computer products was in the sum of US$5,901,176.94. On my calculation this makes a total of US$26,475,582.94. On my calculation this leaves the remainder of the Company's claim at something in the region of less than US$14 million. I make no comment on those claims at the moment other than to say that in respect of some of them the Company appears to have a substantial claim. For the purposes of to-day it is unnecessary to decide whether there was bona fide defence on substantial grounds to that extent. This may not be so in respect of all the claims but it is unnecessary to go into those aspects.

39. I bear in mind that a claim of US$14 million is itself very significant. But there is no evidence of solvency of the Company. No accounts whether audited or even in draft have been exhibited. The Company has filed no evidence to suggest that even taking into account its cross-claims that it can pay its debts as they fall due. Still less is there any evidence that the Company is able to pay any sum that is found due without taking into account all or any of its cross-claims. Whilst I bear in mind the danger of putting undue pressure on the Company by allowing winding-up proceedings to continue, there is a substantial public interest in not allowing the continuation of trading by entities that are unable to pay their debts. At the moment there is on my holding no bona fide defence on substantial grounds to a claim of at least approximately US$15 million.

40. In the conclusion I am not able to see that it is correct to dismiss this petition.

(Anthony G. Rogers)
Judge of the High Court

Mr. Winston Poon and Mr. Michael Winckless instructed by Messrs. Baker & McKenzie for Petitioner.

Mr. Benjamin Yu, Q.C. and Mr. Paul Wu instructed by Messrs. Sung & Co. for the Company.

Miss Denise Hardwick for the Official Receiver.

17761-EN-1996-03-06

In re ICS COMPUTER DISTRIBUTION LTD. formerly known as CHEFLINK LTD.

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HCCW000615/1995

CWU No. 615 of 1995

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

____________

BETWEEN
	IN THE MATTER OF ICS COMPUTER DISTRIBUTION LIMITED formerly known as CHEFLINK LIMITED

	AND

	IN THE MATTER OF THE COMPANIES ORDINANCE (CAP. 32)

____________

Coram: The Honourable Mr. Justice Rogers in Court

Date of Hearing: 6 March 1996

Date of Delivery of Decision: 6 March 1996

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D E C I S I O N

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1. This is a short application to amend an order which was drawn up following the hearing on 29th January 1996.

2. This is a winding-up petition and the amount involved is no small sum. It involves a sum of over US$30m. When the matter first came before me, the company was able to secure, I might say not on the basis of any credible evidence but more on the basis of submissions, an adjournment of the matter. At that stage, counsel for the petitioning creditor asked me to impose terms, which involved a substantial payment into Court. In answer to that request, counsel on behalf of the company said, inter alia, "Secondly, my lord, this whole distributor agreement is in a way secured by a personal guarantee given by the Managing Director and I understand that an action by writ has already begun against the Managing Director on the guarantee. My lord, I would have thought that in those circumstances it would be rather harsh on the respondent company if the company is to make any payment into Court."

3. The matter then proceeded and counsel for the petitioning creditor did point out that he was interested to hear the submission in relation to the personal guarantee because the matter had been heavily disputed by the Managing Director who was saying that he did not do it at all and it was only for the sum of US$6m.

4. At the end of the proceedings counsel for the petitioning creditor quite properly, in my view, requested that the company's affidavit should include a reference to the submission from the Bar that there is a personal guarantee of US$6m outstanding because in his words "We would very much like to have that in other proceedings."

5. To that I said: "Yes, I think that you will have to do that." addressing counsel for the company who responded: "Yes, my lord", and I then clarified that it would have to be from the person involved and he said: "Certainly, my lord."

6. I am informed that when the draft order was submitted the undertaking that was drawn up in the final order was contained in the body of the order but the correction was made to make it an undertaking. That was in the following form "Mr. Lam Chi Man, Jimmy, the Managing Director of the respondent shall make and file an affidavit/affirmation confirming that the personal guarantee dated 22nd December 1994 in the sum of US$6m. given by him in favour of the petitioner in respect of all moneys and liabilities payable or incurred by the respondent to the petitioner on any account whatsoever, whether actually or contingently, together with all interest, costs and other expenses is valid, binding and of full force and effect."

7. I have to say this, that in view of the fact that the petitioning creditor did inform me that they had had difficulties in enforcing the guarantee it was probably too much to ask for that the respondent would submit, in effect, to judgment on the guarantee. Nevertheless, I take a very serious view of what has taken place. I was told about this guarantee specifically so that I would consider not making an order for payment into Court by way of security. The whole purpose of telling the Court about the guarantee was to indicate to the Court that there was some measure of security. I should have been told by counsel for the debtor that that guarantee was disputed.

8. I consider also that the interchange at the end of the hearing to which I have referred whereby it was made clear that this guarantee should be referred to in the evidence was, in any event, honoured in its breach. Mr. Lam's affidavit made no reference to it. It was only after it was pointed out that there had been a breach of the undertaking that, belatedly, he made reference to the fact that he had instructed his solicitors to dispute liability.

9. The question now is what to do about costs. Mr. Garland on behalf of the creditor says that the costs should follow the event because the undertaking was wrongly drawn up. Mr. Poon on behalf of the petitioning creditor says that there should neither be that order nor should there be no order as to costs. He says that if the company eventually were wound-up it would mean that the costs of this would be borne by the creditors. I intend to make this order that there shall be no order as to costs. I think that, unfortunately, the undertaking as drawn up was slightly over enthusiastic and for that reason it has to be varied.

10. On the other hand, clearly an undertaking was given to me, and what is more it was breached and in those circumstances I cannot see it right that the company is allowed costs. Furthermore, in view of the interchange and in view of the fact there were both counsel and solicitors in Court, I consider it may not be right that the respondent company should pay its lawyers for their errors and for correcting them. I intend to make an order that the solicitors for the respondent company appear before the Court within 10 days to show cause why the costs of the company in making this application should not be borne by them personally.

Representation:

Mr. Winston Poon and Mr. Michael Winckless instructed by Messrs. Baker & McKenzie for the Petitioner.

Mr. Benjamin Yu, Q.C., Mr. Peter Garland, Q.C. and Mr. Sammel K.Y. Chan instructed by Messrs. Sung & Co. for the Respondent Company.

Mr. Alfred Chan for the Official Receiver.

	(Anthony G. Rogers)
	Judge of the High Court Court