IN RE SIMPSON DEVELOPMENT INVESTMENT (HK) CO. LTD.

HCCW000422A/1998

HCCW 422/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO.CW 422 OF 1998

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IN THE MATTER OF SIMPSON DEVELOPMENT INVESTMENT (HK) COMPANY LIMITED and IN THE MATTER OF the Companies Ordinance Cap.32 of the Laws of the Hong Kong Special Administrative Region

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Coram : The Hon Mrs Justice Le Pichon in Court

Date of Hearing : 23 November 1998

Date of Judgment : 23 November 1998

Date of Handing Down of Reasons : 30 November 1998

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REASONS FOR JUDGMENT

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1. At the hearing of the petition on 23 November 1998, it was ordered that the Company be wound up. The reasons appear below.

2. By Order dated 9 November 1998, the Hong Kong and Shanghai Banking Corporation Limited ("the Petitioner") was substituted as petitioner in place of K. and R. Wong Construction Company Limited (In Liquidation). Leave was also granted to the Petitioner to amended the petition.

3. The amended petition is a creditor's petition. Paragraph 9 of the amended petition set out the text of a letter dated 23 April 1998 ("the Letter") to the Company from the solicitors for the Petitioner demanding repayment of all sums advanced by way of general banking facilities and due under a Mortgage dated 18 July 1996 as well as vacant possession of the properties subject to the Mortgage ("the Properties"). The amount then outstanding was in excess of $47 million. The letter further stated that failing repayment by 28 April 1998, proceedings would be issued against the Company for recovery of all sums outstanding, interest and legal costs as well as possession of the Properties. The amount outstanding and due to the Petitioner as at the date of 6 November 1998 was in excess of $52 million.

4. According to valuations made as at 29 July 1998 the Properties have an aggregate value of $12.6 million. Even if there has been any fluctuation in the value of the Properties between July and the present time, the unsecured portion of the amount owing to the Petitioner is still significant, being of the order of $39 million.

5. Counsel for the Company opposed the petition on the ground that there has been no statutory demand made within section 178(1)(a) of Cap.32. Mr Mui submitted that the Letter was "just a simple demand letter". So far as I was able to understand his submission, for the presumption to arise under section 178(1), there has to be a reference to a period of 21 days for payment. Apart from that, I was unable to discern from Mr Mui's submission the essential features of a statutory demand (i.e. a demand within section 178(1)(a)) said to be absent from the Letter. Regrettably, neither counsel was able to render further assistance to the court on the question whether the Letter constituted a statutory demand for the purposes of section 178(1)(a).

6. Section 178 reads :

"178. Definition of inability to pay debts

(1) A company shall be deemed to be unable to pay its debts-

(a) if a creditor, by assignment or otherwise, to whom the company is indebted in a sum exceeding $5,000 then due, has served on the company, by leaving it at the registered office of the company, a demand under his hand requiring the company to pay the sum so due, and the company has for 3 weeks thereafter neglected to pay the sum, or to secure or compound for it to the reasonable satisfaction of the creditor; or ...."

When one looks at the wording of the statutory provision, there is nothing that requires there to be any reference to 21 days in the demand. The 3 week period is relevant only in the context of the company failing or neglecting to pay a debt that is not disputed on bona fide grounds within that period. The point taken plainly has no substance.

7. For good measure and despite the lack of assistance from counsel, I have considered whether any other point could be taken under section 178(1)(a). I have therefore considered the question whether the Letter which was signed not by the Petitioner but its solicitors was "under [the] hand" of the Petitioner as required by section 178(1)(a). Such an objection would not be valid : the Court of Appeal has held that the personal signature by the petitioner is not necessary. See Cheong Yip Finance (Hong Kong) Ltd. v. Moscow Narodny Bank Ltd. [1979] HKLR 558 at 560.

8. The Company takes no point on quantum and does not dispute the fact that it received a demand in April 1998 for repayment of monies due and owing which was served at its registered office. It has not made any repayment pursuant to that demand. So, here, there is a demand for a debt which is not disputed, service on the Company at its registered office and failure to pay that undisputed debt within 21 days of the demand. Mr Zimmern submitted that in the alternative the Company be wound up on the just and equitable ground. That submission is misconceived.

9. Proof by a creditor that the debt has not been paid within a reasonable time is prima facie evidence that the company is insolvent where the company has no bona fide basis on which to dispute the debt in question. See Re Globe New Pattern Iron and Steel Company (1875) LR 20 Eq.337. Therefore irrespective of whether the Letter constitutes a statutory demand, it is open to the court to infer that the Company is unable to pay its debts within section 177(1)(d) where it was under an undisputed obligation to pay a specific sum and failed to do so. See Re United Strength Limited [1992] 1 HKC 386 and 6 Halsbury's Laws of Hong Kong at 95.0978. Were it necessary to do so, I would draw such an inference.

10. Accordingly, I am satisfied that the Company is unable to pay its debts.

	(Doreen Le Pichon)
	Judge of the Court of First Instance High Court

Representation:

Mr Zimmern, inst'd by JSM, for the Petitioner

Mr Louie K.K. Mui, inst'd by C.M. Li, Chow, Pang and Chan, for the Respondent

Ms Phyllis McKenna, for the Official Receiver

HCCW000422/1998

HCCW422/98

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINGING-UP)

ACTION NO. CW 422 OF 1998

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IN THE MATTER OF SIMPSON DEVELOPMENT INVESTMENT (H.K.) COMPANY LIMITED (森信發展投資有限公司) and IN THE MATTER OF the Companies Ordinance, Chapter 32 of the Laws of Hong Kong Special Administrative Region

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BETWEEN
	K & R WONG CONSTRUCTION COMPANY LIMITED	Petitioner
	AND
	SIMPSON DEVELOPMENT INVESTMENT (HK) COMPANY LIMITED	Respondent

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Coram : Hon Mr Justice Cheung in Court

Date of hearing : 5 November 1998

Date of delivery of judgment : 6 November 1998

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J U D G M E N T

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The petition

1. This is a petition by K & R Wong Construction Company Limited ("K & R Wong") for winding-up of Simpson Development Investment (HK) Company Limited ("Simpson Development"). K & R Wong was ordered to be wound up on 5th March 1998 upon a petition by the Hong Kong & Shanghai Banking Corporation Ltd. ("Hong Kong & Shanghai Bank") and it is now acting by the liquidators.

2. Under the audited accounts of K & R Wong for the year ending 31st March 1997, the sum of $33,245,549 was stated to be due from a related company. The auditors of the accounts, on enquiry by the liquidators, stated that the related company was Simpson Development. Statutory demand for repayment of the $33 million odd dollars was made on 27th March 1998. No payment was made by Simpson Development and the petition was accordingly presented.

Affirmations of Simpson Development

3. Two affirmations were filed by Mr Wong Kam-shing, a director of Simpson Development in opposition to the petition. The first affirmation stated that these two companies were associated companies. Mr Wong Yau-tai was the Chairman of the Board of Directors of both companies. On 17th March 1997, by four mortgage agreements, Mr Wong Yau-tai as the mortgagor, and Simpson Development as the borrower secured $47,249,656.79 from Hong Kong & Shanghai Bank. It was a tripartite agreement between Mr Wong Yau-tai, K & R Wong and Simpson Development that the $47 million would be transferred to Simpson Development for investment purposes. For this reason, the $33 million referred to in the petition did not carry any interest.

4. Simpson Development further denied receiving the statutory demand although this is not a point now relied upon by Simpson Development.

5. The four mortgage agreements clearly showed that the borrower was K & R Wong and not Simpson Development. Mr Wong Kam-shing then filed a further affirmation stating that the four properties were held by Mr Wong Yau-tai upon trust for Simpson Development because Simpson Development provided the purchase price. He then further stated that Simpson Development had mortgaged three properties to Hong Kong & Shanghai Bank and money was lent by the bank on the security of the seven properties (namely the four earlier mortgaged properties and these three properties) to K & R Wong. Under the tripartite agreement, K & R Wong was to repay the money to the bank, it had failed to do so and the bank had taken actions against the seven properties and Simpson Development had lost the seven properties. It is said that Simpson Development has a good counterclaim against K & R Wong.

The principle

6. The principle in this area is dealt with by the Court of Appeal in Re S. Zhong Shan International Investments Co. Ltd. [1990] 1 HKC 90. The starting point is that the petitioner bears the overall persuasive or legal burden to satisfy the Court that the company is its debtor before it can have any locus standi in the winding-up proceedings. Clough J.A. at page 97 further stated that:

" The petitioner is required to verify his petition on affidavit under r 26 of the Companies (Winding-up) Rules and that rule provides that the petitioner's affidavit 'shall be sufficient prima facie evidence of the statements in the petition'. It follows that the evidential burden then shifts to the company to show that there is a substantial ground for disputing the debt or that it is bona fide disputed : see Phipson, Evidence (13th Ed) at para 4-20. If the company adduces no evidence, the evidential and legal burden imposed upon the petitioner will have been discharged. If the company adduces evidence, it may or may not, depending on the opinion of the court on the cogency of the company's evidence, shift the evidential onus back to the petitioner; but certainly at the stage where a petitioner verifies his petition under r 26, it must be right that the evidential onus shifts to the company.

It is well settled that a creditor's petition will fail if the company's debt is bona fide disputed or (which is the same thing) disputed on some substantial ground : Re Welsh Brick Industrial Ltd. [1946] 2 All ER 197 (CA). The judge in the present case regarded himself as :

... concerned to ascertain whether there is any reasonable possibility that the company has a bona fide defence to the claim being made by the petitioner."

Evidence of indebtedness

7. It is necessary to examine in this proceeding the evidence pointing to the indebtedness of Simpson Development. All that K & R Wong can show is an entry in its own account that the money is due from Simpson Development. The notes of the auditors in the audited report stated that the amount was unsecured, interest free and had no fixed repayment terms. K & R Wong said that the money was an inter-company loan.

8. I have great difficulties in accepting that what was disclosed in this account is sufficient to show that a debt is due from Simpson Development. In the first place, these statements in the account did not even show that the money was in the nature of a loan. One would expect to see documents such as minutes of meetings dealing with the use of the money. None was produced.

9. It is said that the auditors had adopted the standard accounting practice and examined the books of K & R Wong. This, in my view, does not carry the matter further. One just does not know what documents had been examined by the auditors. There is no evidence that they have examined the books of Simpson Development.

10. It is said that the two companies are related companies. There is certainly no evidence disclosed of any acknowledgment of the debt from Simpson Development. The fact that the two companies are related does not mean that Simpson Development had acknowledged the debt.

11. It is said that the two companies shared common directors. This might be so at some stage, but certainly was not the position when the audited account was signed on 13th February 1998. The audited account was for the year ending 31st March 1997. The two directors who signed the accounts, namely, Ho Hung-hoi and Ng Sui-wing were appointed on 1st December 1997 and 2nd February 1998 respectively. Mr Ho only became a director of Simpson Development on 18th March 1998. Nothing more can be said on this. In my view, the verifying affidavit does not carry the matter further.

Criticism of evidence of Simpson Development

12. Simpson Development admitted that it had the money but contended that it was transferred to it for investment purposes. Criticism was made of the flimsy nature of Simpson Development's evidence. Certainly, Mr Wong Kam-shing had been making some assertions without supporting documents. He asserted that Simpson Development was the borrower of the four earlier agreements when the documents in fact showed K & R Wong was the borrower. He then asserted Simpson Development was the mortgagor of the three other properties when the mortgage documents produced by him showed that it was the mortgagor of only one of the three properties. No evidence was produced to show the purchase price of the four earlier mortgaged properties came from Simpson Development.

Substantial dispute of the debt

13. However, the crux of the dispute is whether the money was a loan to Simpson Development and whether Simpson Development was indebted to K & R Wong. While Simpson Development did not produce documents in support of its assertion, the same criticism can be made of K & R Wong. The two companies were obviously closely related and at one time sharing common directors. On the evidence, I just cannot say that the money received by Simpson Development must necessarily be a loan which it was liable to repay on demand. Nor can I say that Simpson Development's contention that the money was intended for it to be used in investment is a matter so obviously frivolous or unsustainable that I ought to dismiss it out of hand.

14. On the evidence, there is a substantial dispute to the debt. I am not prepared to make a winding-up order based on the evidence presented. I would adopt the approach of Jones J. in Re Par Excellent Co. Ltd. (CWU No.128/1989) and Re Kailey Development Co. Ltd. (CWU No.27/1984) and hold that the Company Court is not the appropriate forum to try the dispute. Neither is an adjournment or stay of the petition to let the dispute being determined an appropriate step because a long delay will make the process of liquidation more complex : Re Esquire (Electronics) Co. [1996] 3 HKC 309.

15. The appropriate order in this case is to dismiss the petition.

Other matter

16. There is one matter I ought to mention, it is said that the arrangement between Simpson Development and its creditor showed that it is unable to pay its debt. I am unable to draw such a conclusion from the evidence before me.

	(P. Cheung)
	Judge of the Court of First Instance, High Court

Representation:

Mr Richard Zimmern, inst'd by M/s Johnson Stokes & Master, for the Petitioner

Mr Kenneth Wong, inst'd by M/s C.M. Li, Chow, Ping & Chan, for the Respondent