RE SINO-AMERICAN TELECOM INC.
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HCCW000329C/1998
HCCW 329/98
IN THE HIGH COURT OF THE
HONG KONG SPECIAL ADMINISTRATIVE REGION
COURT OF FIRST INSTANCE
Companies (Winding -Up) Proceedings No.329 of 1998
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IN THE MATTER OF SINO-AMERICAN TELECOM INC. AND IN THE MATTER of the Companies Ordinance (cap. 32) |
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Coram: Hon Yuen J in Court
Dates of hearing: 19 - 22, 25-26 October 1999
Date of Judgment: 9 June 2000
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JUDGMENT
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1. This is a creditor's petition presented by Dragon Investment Company II LLC ("Dragon"), a Cayman Islands company, for the winding-up of Sino-American Telecom Inc ("the Company"), a BVI company. It is not disputed that the Hong Kong courts have jurisdiction to deal with this petition. The Company is registered under Part XI of the Companies Ordinance, chapter 32 of the Laws of Hong Kong and it has substantial connections with this jurisdiction.
2. The petition is presented on the ground that the Company is indebted to Dragon in the sum of US$2,644,194. It is not disputed that this sum is owing and that it has not been repaid. Further, it is now no longer disputed that the Company is insolvent.
3. The petition has, however, been resisted by a contributory Allan Yuen Shek Sang ("Yuen"). He had previously sought to resist the petition on the ground, amongst others, that the Company was not insolvent, but he has now abandoned that position. He is now resisting the petition on the ground only that it has been presented, he says, for an improper purpose and as such, it is an abuse of the process of the Court.
4. That purpose is said to be Dragon's designs on 1 asset of the Company, viz. its interest, through a subsidiary called Remoco (HK) Ltd ("Remoco"), in a joint venture known as Shenzhen Ligao Telecom Technology Co. Ltd ("Ligao"). Mr Yuen alleges that Dragon's purpose in presenting the petition was not to bring about a rateable distribution of the Company's assets on a winding-up. Rather, it was to acquire Ligao by taking the Company out of the hands of its board of directors and putting it into the hands of (in the words of counsel for Mr Yuen) "friendly" provisional liquidators who would effect the re-structuring of the Company by hiving off Ligao for Dragon so as to secure an advantage for it over other unsecured creditors.
5. In opposing this petition, Mr Yuen is joined by an opposing creditor Andrew Chan who also claims to represent another creditor. The values of their claims are comparatively small. Mr Chan only attended part of the hearing and did not seek to present a case separately from that advanced on behalf of Mr Yuen. There are also other small creditors who have neither supported nor opposed the petition. As far as the value of claims are concerned, Dragon is by far the largest creditor.
6. Before I deal with the facts and issues in this case, I should record my understanding of the position taken by Mr Benjamin Chain, counsel for Mr Yuen, concerning the allegation of abuse of process. Mr Chain's position is not that the petitioner's alleged abuse of process would warrant a dismissal of the petition automatically; he accepts that even if an improper purpose is proved, that is only one of the factors to be considered by the court in the exercise of its discretion whether to order the company to be wound up.
7. I should also record that it has been agreed between counsel that there is no higher burden on Mr Yuen to show that it is plain and obvious that the petition is an abuse of process.
8. The issues in this case must be considered against the background of the following facts.
The Company
9. The Company is held as to about 85% by Mr Yuen and his associates including his wife and his brother. The Company has 2 wholly-owned subsidiaries, Remoco and Goldremart (Holdings) Ltd., both Hong Kong companies.
The Ligao joint venture
10. Remoco has a manufacturing arm which appears to be loss-making, but it is one of the two parties in the Ligao joint venture which is involved in developing a telecommunications business on the Mainland. The Chinese partner in the joint venture is a PRC corporation called Shenzhen Wanlitong Industrial Development Co. Ltd ("Wanlitong"). The joint venture has licences to operate a paging system on the Mainland.
11. The terms of the joint venture were that investment capital would be provided by Remoco. It would not be until the equipment were in place and the network in operation that Ligao would be expected to generate revenue.
12. For the purpose of raising funds for the joint venture which was entered into in late 1995, the Company had in 1996 issued certain convertible loan notes. This was in anticipation of an initial public offering (IPO) in the United States in 1997. Dragon is a noteholder, and Rose Marie Fox, a person connected with Dragon and some other noteholders, was placed on the board of the Company, the other directors being Mr Yuen and his wife. (Miss Fox was not however appointed to the board of Remoco - the directors of Remoco were Mr Yuen, his wife and his brother).
The Company's financial situation
13. In April - May 1997, however, the planned IPO failed, apparently because of problems with underwriting. After the failure of the IPO, the Company was unable to repay the loans. The noteholders' position appears to be that the loans were not capable of being converted into equity because the formula that had been used in the loan notes was rendered inapplicable as a result of the failure of the IPO. (This is apparently not disputed as there was no cross-examination on this point).
14. Certain bridging loans, arranged by the noteholders, were then entered into by the Company but its financial situation remained difficult. It was heavily indebted to the noteholders but was required under the joint venture agreement to provide funding for Ligao.
15. Between September and November 1997, there were unsuccessful attempts to interest banks in providing funds. In the meantime, it became apparent that there was discord between Mr Yuen and the representatives of the noteholders. The noteholders had also started investigations into the Company's accounts and were querying the purposes to which some of the funds had been put.
16. In November 1997, a proposal was made by the noteholders to separate the Ligao joint venture from the manufacturing arm of Remoco, with Mr Yuen taking the latter and the noteholders acquiring the former. This proposal was aborted and led to a further deterioration of the relationship between Mr Yuen of the one part and the noteholders of the other.
Events leading to petition
17. In February 1998, the Company's finances had reached such a state that Mr Yuen admitted that it was insolvent. Meanwhile, a creditor had sought a garnishee order to garnishee funds in Remoco's bank account. Mr Yuen then caused payments intended for Remoco to be deposited into Goldremart's bank account.
18. In March 1998, further negotiations between Mr Yuen of the one part and the noteholders of the other part failed.
19. On 15 April 1998, the noteholders sent a letter before action to the Company in respect of its failure to repay the loans threatening to commence proceedings to recover the amounts outstanding.
20. Mr Yuen responded by causing Remoco to resolve at a board meeting on 7 May 1998 that Ligao, which was in effect the Company's only valuable asset, "must be liquidated" together with Remoco. A meeting to discuss the winding-up was called for 16 May 1998. This would have serious consequences as discussed later.
21. On 8 May 1998, in a fax letter Miss Fox called upon Mr Yuen to retract his actions. That was not done. On the contrary, a letter dated 8 May 1998 was faxed by Remoco to Ligao and Wanlitong reiterating the intention to put Ligao into liquidation.
22. The noteholders' response, 2 days before the scheduled meeting, was to present this petition and to make an urgent application to the Court for the appointment of provisional liquidators. That order was granted.
Events after presentation of petition
23. On 16 May 1998, the provisional liquidators of the Company presented a petition to wind up Remoco and Goldremart on the grounds of insolvency and the just and equitable ground. On the same day, the same persons were appointed provisional liquidators of Remoco. The scheduled meeting for the winding up of Ligao was called off.
24. On the application of Remoco, the order appointing provisional liquidators was discharged by the Companies Judge on 21 May 1998. On 25 May 1998, leave was given for the provisional liquidators to withdraw the petitions to wind up Remoco and Goldremart but by the same order, Mr Yuen was required to act in accordance with the directions of the provisional liquidators.
Events leading to validation application for sale of Remoco's interests
25. On 4 June 1998, a letter was received from Chu Qing Hai ("Chu"), a director of Wanlitong, alleging that Remoco has been in breach of the joint venture agreement, that funds were urgently needed and threatening to terminate the agreement.
26. On 5 June 1998, the provisional liquidators made an urgent application for an order, amongst other things, that (i) they may cause Remoco to acquire a new wholly-owned subsidiary to be called Remoco (China) Ltd. which would take over Remoco's interest in Ligao and (ii) that they be at liberty to invite offers by way of private treaty from the shareholders and noteholders of the Company and another company called Star Telecom, for the Company's interest in and loans to Remoco and Goldremart and the Company's loans to a company called Rightone Telecom (HK) Ltd. That order was granted by the Duty Judge.
27. Dragon and the noteholders banded together to form a new BVI company called Phoenix Telecommunications Ltd. Its bid made on 23 June 1998 was the only bid received by the provisional liquidators in response to the invitation for offers.
28. On 30 June 1998, the provisional liquidators made an application to the Companies Judge for an order under s.182 (commonly called a validation order) that they be at liberty to dispose of the Company's interest in Remoco, amongst other assets, to Phoenix.
29. The Companies Judge took the view that the application for the validation order was in effect a scheme of arrangement, whereby the Yuen group and those creditors who did not participate in the Phoenix scheme would be deprived of the opportunity to benefit from the Ligao asset on liquidation. This would be in breach of the principle that on a winding-up, the free assets of a company should be rateably distributed amongst all unsecured creditors. The judge dismissed the application for the validation order.
30. The provisional liquidators appealed. On 7 July 1998 the appeal was dismissed on the ground, amongst other things, that the provisional liquidators had failed to obtain a valuation of the Ligao asset, which was the only valuable asset of the Company. There was at least a risk that that asset might be disposed of at an undervalue, given the limited scope of the entities invited to bid.
Events leading to validation order for loan from Phoenix
31. Thereafter on 16 July 1998, there was a meeting between Dragon's representatives and Mr Chu of Wanlitong in which Mr Chu confirmed the need for `emergency funding' and threatened to take steps to terminate the joint venture should US$200,000 not be received by Ligao by 31 July 1998 and US$300,000 the week after.
32. On 3 August 1998, the provisional liquidators applied to the Court for a new validation order, this time to accept a loan of up to US$6m (but with a committed amount of only US$500,000) proposed to be made by Dragon and others (through Phoenix) to the Company (through Remoco) to enable Remoco to fulfil its funding obligations to Ligao and to finance Rightone and Remoco (China).
33. Barnett J granted the order. Thereafter Mr Yuen opposed the petition on the grounds that the Company was not insolvent and that the petition was presented for an improper purpose and was thus an abuse of the process of the Court.
The Law
34.In re a Company [1983] BCLC 492, Harman J held that in considering the issue whether a petition was being presented for an improper purpose, the question was not whether the petitioner genuinely wished to wind up the company; the true question was for what purpose did the petitioner wish to wind up the company. The court had to decide whether the petition was for the benefit of the class of which the petitioner formed a part, or was for some purpose of his own. If the latter, the petition was not properly brought.
35. In that case, the petitioner brought the petition because there was an arrangement with the company's landlord whereby the company's lease would be taken over by the petitioner if a petition had been brought before a certain date. It was clear from the facts in that case that the only purpose of presenting the petition was so that the petitioner could take over the lease.
36. So also in Re Wallace Smith & Co Ltd [1992] BCLC 970, the petition was presented so that the company's directors would no longer be able to mount a defence against the petitioner in other proceedings started in another jurisdiction. Again, it was clear that the petitioner's purpose in presenting the petition was solely to eliminate the opposition in another action.
37. But what about a situation when the petitioner had more than one purpose in mind? In Goldsmith v Sperrings Ltd [1977] 1 WLR 478, Bridge LJ considered Lord Evershed's dictum in re Majory [1955] Ch 600 which dictum was as follows:-
"The so-called `rule' in bankruptcy is, in truth, no more than an application of a more general rule that court proceedings may not be used or threatened for the purpose of obtaining for the person so using or threatening them some collateral advantage to himself, and not for the purpose for which such proceedings are properly designed and exist; and a party so using or threatening proceedings will be liable to be held guilty of abusing the process of the court and therefore disqualified from invoking the powers of the court by proceedings he has abused."
38. Bridge LJ considered the application of this dictum as follows (at 503):-
"For the purpose of Lord Evershed's general rule, what is meant by a `collateral advantage? The phrase manifestly cannot embrace every advantage sought or obtained by a litigant which it is beyond the court's power to grant him. ... In my judgment, one can certainly go so far as to say that when a litigant sues to redress a grievance no object which he may seek to obtain can be condemned as a collateral advantage if it is reasonably related to the provision of some form of redress for that grievance. On the other hand, if it can be shown that a litigant is pursuing an ulterior purpose unrelated to the subject matter of the litigation and that, but for that his ulterior purpose, he would not have commenced proceedings at all, that would be an abuse of process. These two cases are plain; but there is, I think, a difficult area in between. What if a litigant with a genuine cause of action, which he would wish to pursue in any event, can be shown also to have an ulterior purpose in view as a desired byproduct of the litigation? Can he on that ground be debarred from proceeding? I very much doubt it. But on the view I take of the facts in this case, the question does not arise and it is neither necessary nor desirable to try to lay down a precise criterion in the abstract." (emphasis added).
Allegations of collateral purpose
39. Although Bridge LJ's statement above was expressly obiter, it helps to guide the court's deliberations when considering the facts in this case, in which Mr Yuen claims that Dragon had its designs on Ligao, and that it was not interested in a rateable distribution of all the assets of the Company amongst all creditors.
40. Mr Yuen's case is that the "sequence of events" showed that Dragon wanted the noteholders' position vis-a-vis the Ligao joint venture `secured' first before allowing the Company to be wound up, and that the acquisition of the joint venture was the petitioner's only agenda.
41. Notwithstanding that, it would appear clear from Mr Yuen's cross-examination that he has no objection to the Company being wound-up, so long as its assets could be distributed fairly by independent liquidators.
Allegations of evidence of improper purpose
42. The "sequence of events" Mr Yuen relies upon are as follows:-
(1) Dragon's attempts to acquire Ligao;
(2) The acts of the provisional liquidators whom Mr Yuen considers "friendly" with Dragon;
(3) Dragon's solicitors' failure to advertise the petition on the first occasion when it was due to be heard;
(4) The failure of negotiations which Mr Yuen considers Dragon did not conduct bona fide.
(1) Dragon's attempts to acquire Ligao
Previous negotiations
43. First of all, it is clear that there had been previous negotiations in which the noteholders led by Dragon had attempted to acquire Ligao for themselves. They were prepared to pay Mr Yuen off, and for him to retain the manufacturing part of Remoco's business. That arrangement was however aborted.
44. That piece of evidence cannot be conclusive. It does not necessarily follow from that that Dragon presented the petition as part of a design to get for the noteholders through the liquidation process what they had failed to get through commercial negotiation. It is only part of the circumstances to be taken into account in the court's deliberations as to what was the predominant purpose of the petitioner when it brought the petition.
Cause for presenting petition
45. I find that the noteholders (and indeed all creditors) had cause to present the petition when on 7 May 1998 Mr Yuen and his associates caused Remoco to resolve to wind-up Ligao.
46. A winding-up of Ligao would have had drastic consequences. Under clause 44 of the joint venture contract, all assets after dissolution "shall belong to Party A" i.e. Wanlitong. Thus, if Remoco had proceeded with the proposal to wind-up Ligao, as Mr Yuen and his associates resolved to do on 7 May 1998, this would have been tantamount, as it were, to giving the goose away before it had laid any eggs.
47. In Mr Yuen's oral evidence, he attempted to explain the resolution of 7 May 1998 by saying that he was intending to offer Remoco's interest in the Ligao joint venture for sale, not to wind-up the joint venture. However, the minutes of the Remoco board meeting signed by Mr Yuen, his wife and brother as directors of Remoco, and signed by Mr Yuen as chairman, expressly states that "it is now decided that its subsidiaries ... Ligao ... must be liquidated together with Remoco. ... In order to protect the interest of creditors, the management has resolved to inform both subsidiaries to start the winding-up proceeding". A sale was not mentioned, nor would there have been a sale on dissolution under Clause 44 of the joint venture contract.
48. It may or may not be that Mr Yuen's threat to wind up Ligao was only a ploy to hit back at the noteholders who had been demanding repayment. But from 7 May up until the presentation of this petition on 14 May, this bluff (if it was that) had not been withdrawn by Mr Yuen. Indeed, he had even given notice of the meeting to the Chinese party Wanlitong. At that stage his relationship with the noteholders was poor and it could well have been that he was adopting a "scorched earth" policy; if they were no longer willing to give their financial support, then he would ensure that there would be nothing of value left in the Company.
49. If Mr Yuen had carried out that threat, the joint venture would have been lost to the Company, its creditors and contributories. The Company was in danger of losing its only valuable asset. In these circumstances Dragon had cause to present this petition and to apply for the appointment of provisional liquidators to avert that threat.
Fox's letters dated 30 May 1998 and 30 June 1998
50. Mr Yuen relied on 2 letters, one dated 30 May 1998 and the other undated but probably sent on 30 June 1998, from Miss Fox in support of his contention that it was not Dragon's intention to have a rateable distribution of the Company's assets, but to acquire Ligao for itself.
51. I find that Dragon did want to acquire Ligao for itself (and the noteholders), but as a byproduct of the petition process which it was entitled to bring by reason of Mr Yuen's threat to wind-up Ligao.
52. The May letter was a circular letter sent to "investors" slightly more than 2 weeks after the presentation of the petition and the appointment of provisional liquidators. The purpose of this circular letter was to ask co-investors to sign counter-indemnities for Dragon, which had had to provide an indemnity for the provisional liquidators' costs, liabilities and disbursements.
53. In this letter, Miss Fox said:-
"The deadlock that has affected Sino over the last months has now been broken with the appointment of provisional liquidator, Mr John Lees. Under Hong Kong law, this does not mean that Sino has to proceed to a full liquidation, but the provisional liquidator takes control of the board of the company and will consider any restructuring proposal that is in the interests of the company and the creditors. I see this as a positive step forward for Sino. I am currently working on a restructuring proposal to be put to him and then sanctioned by the Hong Kong courts early next week. I will send a copy of this to you shortly. I believe that Sino is now in a position to move forward rapidly, however the most critical factor affecting Sino is the timing of additional funding for the Sino/Ligao joint venture."
54. It is true that a company against which a petition is presented does not have to proceed invariably to liquidation. Sometimes, restructuring proposals are accepted which would lead to an outcome other than liquidation.
55. This letter shows that Dragon preferred restructuring to liquidation, but by itself, it is not evidence of its predominant intention in bringing the petition.
56. The undated letter was more revealing. In this letter, again sent to "investors", Miss Fox, signing as a director of the Company, wrote:-
"In April [1998], Dragon notified Mr Yuen of their demand for repayment of their investment in convertible notes and bridge loans and the intention to commence formal proceedings if repayment was not made within seven days. After seven days, Dragon commenced legal proceedings through the Hong Kong court system. The purpose of Dragon's action was to initiate a process whereby they and the other investors in Sino would have the potential to realize the value of their investment. In essence, the intention was to have the reorganization proceed through the courts and thereby have greater assurance of an outcome within a reasonable period of time. ...
In addition, the court has approved that Remoco(HK) Ltd's interest in the joint venture Ligao will be transferred to a newly incorporated Hong Kong company Remoco (China) Ltd thus removing it from being associated with the trading business. Initially Remoco (China) Ltd will need to be structured as a wholly-owned subsidiary of Remoco (HK) Ltd. However the intention is ultimately to accomplish a direct ownership of Remoco (China) and Ligao by Phoenix" (emphasis added).
57. It is noticeable that there was no mention of what unsecured creditors would expect to get at liquidation through a pari passu distribution. The expressed intention was to have reorganization proceed through the petition process with Phoenix's sights on acquiring Ligao in the reorganization.
58. In my view this was the situation described by Bridge LJ in Goldsmith - a situation where Dragon had genuine cause for a petition to be presented against the Company, but also had an ulterior purpose in view as a desired byproduct of the petition process.
59. Where there was a genuine cause (to prevent Mr Yuen carrying out his threat of winding up Ligao), it cannot, in my judgment, be said that the ulterior purpose was the sole or even the predominant purpose of the petition. Any independent creditor, without reorganization in mind, would still have had to take the step of presenting a petition to thwart Mr Yuen's threats. Otherwise the joint venture would have been lost to Wanlitong at the expense of the Company, its creditors and its contributories.
Validation application for sale of Remoco's interests
60. As part of his `sequence of events' argument, Mr Yuen also relied upon the provisional liquidators' application for validation of a proposed sale of Remoco's interests to Phoenix.
61. The order obtained from the Duty Judge on 5 June 1998 has been described as unusual by the Court of Appeal. By reason of the matters following, however, I accept that the provisional liquidators' application to the Duty Judge was caused, not by any machination on the part of Dragon, but by the urgency of the situation.
62. On 4 June 1998, Wanlitong had sent a letter to, amongst others, the provisional liquidators listing Remoco's alleged breaches and threatening that if Remoco failed to provide funds, the next tranche of which was to be available on 30 June 1998, Wanlitong would terminate the agreement.
63. There is no evidence that Wanlitong was part of any conspiracy with Dragon or the other noteholders or the provisional liquidators to issue that threat. As such, it must follow that this was a genuine threat and it was accepted by Mr Chain counsel for Mr Yuen that a further injection of funds was necessary.
64. It may be that the provisional liquidators' application to the Duty Judge, made the next day, was not well thought out, but absent any conspiracy with Wanlitong, this cannot in my view amount to evidence of a scheme on the part of Dragon with the assistance of the provisional liquidators to deliberately engineer a situation so that it could acquire Ligao on terms favourable to itself and unfair to other creditors and the contributories.
65. Mr Chain pointed to Phoenix's correspondence with Maurice Vallat in May-June 1998 as an indication of Phoenix's confidence in acquiring Ligao. It would appear from a letter dated 5 May 1998 that Mr Vallat had already been contacted by the noteholders for a position in the joint venture. However it is not clear from that letter when this contact first began.
66. It is common ground that in late 1997, the noteholders had been negotiating to acquire Ligao from Remoco, with Mr Yuen to receive a payment and the manufacturing arm. Since Mr Yuen would no longer be involved with the joint venture, the noteholders would have needed someone to replace him. Therefore it is entirely possible that Mr Vallat had been approached then.
67. When an order was obtained from the Court on 5 June 1998 for bids to be made within less than a month, someone with expertise in the field would have had to step immediately into action should Phoenix succeed in its bid. Hence, the noteholders' desire not "to lose" Mr Vallat, as indicated by Miss Fox in her letter to the representatives of the noteholders in June 1998. I find that the retainer of Mr Vallat did not prove that Dragon knew that its acquisition of Ligao was a certainty.
68. I then come to Phoenix's bid of 23 June 1998 and the provisional liquidators' application to validate the sale to Phoenix.
69. Phoenix's bid was not a generous one. As was shown in Miss Fox's letter to the provisional liquidators dated 9 June 1998, Phoenix was anxious to secure the Ligao joint venture for itself at the least possible cost. It was acting in the capacity as a potential purchaser, and it is not unnatural that it was driving a hard bargain.
70. It was up to the provisional liquidators to stand firm in the interests of the Company and other unsecured creditors and to enable themselves to make an informed decision whether, in all the circumstances, Phoenix's bid should be accepted or rejected.
71. Mr Lees said in evidence that alternative sources for the funds that Wanlitong was demanding were not available. He had approached 3 banks, none of whom was interested in providing funds. Mr Yuen was unable to raise any funds and Star Telecom was apparently not interested enough to put in a bid. Phoenix's bid was the only bid received and on that basis the provisional liquidators made the validation application on 30 June 1998.
72. The Companies Judge refused to validate the sale and the Court of Appeal dismissed the appeal from that refusal because the provisional liquidators had failed to obtain a valuation of what Ligao was or would be worth so as to enable themselves to make a proper assessment of the bid. In his evidence Mr Lees said that there were no funds for a valuation. (Although Mr Lees also said that there was not enough time for a valuation, it has to be noted that there were some 6 weeks between the appointment of provisional liquidators and 30 June 1998 when the application for validation was made).
73. The provisional liquidators should have insisted on being put in funds for a valuation. They failed to do so. Dragon was obviously attempting to pursue the best deal for Phoenix by taking advantage of the provisional liquidators' lack of funds and resolve. However, in my view, that episode stops short of being evidence that the petition was presented by Dragon for an improper purpose when the petition was necessary to thwart Mr Yuen's threat to wind up Ligao, to the detriment of everyone involved with the Company.
Validation application for loan
74. On 16 July 1998, there was another demand for funds from Wanlitong. This led ultimately to a loan being sought by the provisional liquidators from Phoenix, which loan was sanctioned by Barnett J on 3 August 1998.
75. Mr Yuen was served with the application and appeared (at least for part of the hearing) before Barnett J. Although Mr Yuen has alleged that the order was wrongly made, there has been no appeal and I must take it that the order was made by the judge in the proper exercise of his discretion, when the exigencies of the situation were that further funds were required to keep the joint venture alive for Remoco, and the provisional liquidators could not marshal funds from any other quarter except Phoenix. This application therefore does not support Mr Yuen's contention of an abuse of process in bringing the petition.
76. Finally I should note that Mr Chain had at one stage made a submission based on s.265(5B) of the Companies Ordinance. He submitted that Dragon was attempting to "sidestep" this provision and this was a further abuse of the process of the Court. However it would appear that this subsection is not applicable prior to liquidation, so there is no question of Dragon attempting to "sidestep" it.
(2) Provisional liquidators' actions
77. Mr Yuen's case was that the provisional liquidators were not impartial. He did not allege any special relationship between Dragon and the provisional liquidators before their appointment, but he had taken the view that because the provisional liquidators were funded by Dragon, that was evidence of an abuse as he had not realized that petitioners would generally be required to indemnify provisional liquidators.
78. Mr Yuen has however referred to other instances where the provisional liquidators were not seen to be treating the parties (i.e. himself of the one part and the noteholders of the other) equally.
79. On 8 July 1998, after the Court of Appeal had dismissed the appeal from the Companies Judge's refusal to validate the sale, the provisional liquidators wrote to James Collins-Taylor, the noteholders' representative, asking him "to clarify what strategy you wish to take in terms of potentially acquiring the assets of Sino and also entering into the proposed loan documentation. I am now in the process of assessing the options available to me and, as such, I need a clear indication as to what your proposed strategy is and how you propose to implement that strategy".
80. Mr Yuen has construed that as a request by the provisional liquidators for, as it were, further instructions from the noteholders. I do not agree that the letter is capable of only that construction. The provisional liquidators knew that Ligao was the only asset of any value for the Company. They also knew that the noteholders were interested in Ligao as Phoenix had been the only bidder. It was therefore natural and sensible for the provisional liquidators to keep abreast of the plans of the only people who were in the market for the Company's only asset. Having said that, it would have been better had the provisional liquidators copied such correspondence to Mr Yuen to avoid any suspicions of manoeuvres behind his back.
81. Mr Yuen had also pointed to another document which, if true, would have substantiated his fears of bias of the provisional liquidators. This was a purported minute of a meeting at the provisional liquidators' office on 20 November 1998 attended by Mr Lees, a member of his staff, Mr Vallat and William Brown who had used to work for Remoco and who was then assisting Phoenix. If the contents of this minute were accurate, then the provisional liquidators would have been behaving in a biased and most improper way towards Mr Yuen.
82. Mr Lees has denied the contents of the purported minute. It is not known who was the author and Mr Chain did not pursue this matter further in cross-examination of Mr Lees.
83. In conclusion, therefore, I am not satisfied that Mr Yuen has made out a case of bias on the part of the provisional liquidators, although the evidence shows that they may not have been as firm with Phoenix and not as sensitive to Mr Yuen's perceptions as they should have been.
(3) Failure to advertise
84. Mr Yuen also referred to an episode in which the petition was not advertised in time, leading to a postponement of the hearing scheduled for 20 July 1998. He says that that showed that Dragon was not anxious to proceed to a liquidation.
85. However Mr Collins-Taylor has given evidence that he had never given instructions to Dragon's solicitors to delay advertising, and he was not challenged on this part of his evidence.
86. Further, there is evidence from the solicitors that the Gazette was full. This was supported by a letter from the Government Printer's Office showing that attempts had been made by the solicitors to place the advertisement.
87. Mr Chain submits that Dragon's solicitors should have tried to place the advertisement earlier. However, there is no evidence as to when the Gazette became full and certainly there is no evidence that the solicitors were or should have been aware of this. I find therefore that there is nothing in this point.
(4) Lack of bona fides in negotiations
88. Finally Mr Yuen's case was that further evidence of abuse can be found in Dragon's lack of bona fides in negotiations after the presentation of the petition.
89. The parties had entered into negotiations which failed. That was not surprising given the lack of trust between them. The noteholders had begun to lose trust in Mr Yuen ever since investigations had been made into his use of funds, which revealed some irregularities which were later rectified. It is common ground that he had also attempted to stultify a garnishee order by paying Remoco's funds into Goldremart's account. There was also his threat to wind up Ligao even though the Company would have thereby lost its only valuable asset.
90. Given this history, it is not surprising that the goodwill and trust that is essential in conducting negotiations would be lacking. I do not therefore find that the failure of the parties to arrive at a negotiated settlement can be regarded as any party's fault, much less as evidence of an abuse of process by Dragon.
Conclusion
91. In conclusion therefore, I find that Dragon had genuine cause for a petition to be presented against the Company by reason of Mr Yuen's actions in threatening to windup Ligao. Any independent creditor would have done the same to stop Mr Yuen from in effect depleting the Company of its only asset.
92. Although Dragon wished to acquire Ligao for itself as a byproduct of the petition process, I find this latter purpose was not the predominant purpose of the petition, the predominant purpose being to stop the depletion of Ligao. Accordingly I would not dismiss the petition on that ground.
93. Further, even if I am wrong in finding that the petitioner's predominant purpose was not an improper one, in the exercise of the court's discretion in the circumstances of this case, I would still have ordered the petition to proceed to liquidation. It is apparent from the evidence that Mr Yuen had been running the Company in such a way, and his relationship with the Company's main financial backers was so poor, that the Company could not carry on normal operations.
94. The interests of the Company as a whole, including other unsecured creditors and contributories, would be best served by an independent liquidator being put in place to dispose of the Company's assets fairly and properly, free from the recriminations and distrust between the main creditors of the one part and the board and main contributories of the other that had so beset and paralysed the proper conduct of this Company's business.
95. Accordingly I would make the usual winding-up order. I will hear the parties as to costs, the identity of the liquidator to be appointed and any ancillary orders.
| (MARIA YUEN) | |
| Judge of the Court of First Instance High Court |
Representation:
Mr Robert Whitehead instructed by Herbert Smith for the Petitioner
Mr Benjamin Chain instructed by Ivan Tang & Co for Opposing Contributory Mr Allan Yuen
Chan Chi Yun Andrew, Opposing Creditor, in person