EXCEL NOBLE DEVELOPMENT LTD. AND ANOTHER v. WAH NAM GROUP LTD.

HCCW 130/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 130 OF 2000

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DECISION

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1. On 12 April 2000, I gave an order for validation of a proposed allotment of new shares by the Company. Shortly thereafter, on the basis of new evidence, I was asked not to allow that order to be perfected. This is my decision on that request. Before I deal with that however, I should set out briefly the events that have taken place.

2. On 7 April 2000, the Company applied for a Validation Order under s.182 Companies Ordinance. The transaction sought to be validated was the issue by the Company of 150m. new shares to a company called China Zone at 10 cents each. The shares were to be paid for in cash.

3. The application was part-heard and adjourned to 10 April 2000 when further submissions were made. I directed that certain statements from the Bar table made by counsel for the Company on instructions should be included in affirmations to be filed.

4. On 11 April 2000, the Company filed the 8th affirmation of Alfred Cheung Tze-Fat in support of the application for validation. Exhibited to this affirmation was a Schedule which showed, amongst other things, that (a) there should be deleted from the previous version of the Schedule the sum of HK$9.3m from the sale of a bridge, and (b) that there should be added to the Cash Outflow the sum of HK$6.87m for "renovation of Barney's Fuyong Factory". Barney Technologies is a subsidiary of the Company.

5. The result of these two adjustments was to decrease the funds available to the Company. This was presented in support of the Company's application for validation of the allotment so that the Company could obtain more funds.

6. On 12 April 2000, I delivered a short decision orally, ordering that the transaction should be validated on the only ground that the new shares were to be paid for in cash. That decision has been transcribed and I shall not repeat it here.

7. On 15 April 2000, however, the Petitioners in HCCW 130/2000 filed the 4th affirmation of Terence Ho Pui Tin. In that affirmation, Mr Ho says that after the hearing on 12 April 2000, he had been given information that:-

(i) Barney had closed down and its staff laid off as at 1 March 2000;

(ii) its plant and machinery had been sold to a company controlled by a Mr Ronald Lye and

(iii) no renovation had taken place at the Fuyong Factory.

8. On 17 April 2000, the petitions for the winding-up of the Company were called on. However, in a chambers application made prior to the petitions, the Petitioners asked that the Court's order of 12 April 2000 should not be perfected as a result of the new information in Mr Ho's 4th affirmation, which, the Petitioners submitted, showed that the Company was less than frank with the Court.

9. The Company applied for time to file an affirmation in reply to Mr Ho's 4th affirmation, which had been filed only on the previous Saturday. Given the serious nature of parts of the affirmation, I gave the Company leave to file evidence in reply.

10. On 28 April 2000, an affirmation of Matthew Chan was filed on behalf of the Company. In this affirmation, Mr Chan stated that:-

(i) Barney had not ceased business; rather, the Company had entered into a joint venture with Mr Lye's company Titron Media whereby Barney would be serviced by Titron's staff, resulting in the laying off of Barney's Hong Kong staff;

(ii) there was an agreement for the sale of certain of Barney's plant and machinery to a company called Kinhua, which was related to Titron, but no Formal Sale and Purchase Agreement had taken place and no money had passed hands; and

(iii) there had been a delay in the construction of the planned new factory in Fuyong due to lack of funds, but deposit money for the construction was eventually paid to a local contractor out of the proceeds of the sale of the bridge. There was a change of plans for the factory, and it was subsequently decided that the premises should be let for rental income, instead of being used for Barney itself.

11. On 10 May 2000, the Petitioner in HCCW 130/2000 filed the 5th affirmation of Mr Terence Ho containing refutations of Mr Chan's affirmation which will be referred to later.

12. Neither party sought a further hearing. Neither party sent any submissions relating to the new evidence filed since the previous hearing on 17 April 2000.

13. On 13 May 2000, having read and considered the new evidence, I directed that the order of 12 April 2000 could be perfected as neither party wished to make submissions. (It would appear that the Petitioner in HCCW 130/2000 did indicate its wish to do so in a letter, which however was not received by this Court until the hearing of the Petition in HCCW 130/2000 which was called on again on 15 May 2000).

14. On 15 May 2000, I gave directions for written submissions to be sent to Court. These have been done.

15. Having considered the new evidence and the submissions, I remain of the view that the provision of cash to the Company justifies the validation of the allotment of new shares in the circumstances of this case. On the face of the Schedule exhibited to Alfred Cheung's 8th affirmation, the Company is short of funds. The subscriber was prepared to pay cash of 10 cents for shares when the net asset value of the Company was only 3 cents per share. If the Company is wound up, it is unlikely that the contributories would be prejudiced by the increase in the share capital in these circumstances.

16. The Petitioners' submission was that Mr Ho's affirmations show that the materials supplied by the Company to the Court in support of the application are untrue, and therefore the Court should not, in the exercise of its discretion, accede to the application.

17. In this respect, I note that there are numerous disputes on the facts from the evidence adduced by the respective parties. An application for validation is an interlocutory procedure, presented on affidavit evidence; the court cannot and should not embark on making findings of fact such as whether a meeting really took place (although signed minutes have been exhibited), or whether documents are truly what they purport to be (especially when they have purportedly come from third parties). If the Petitioners allege that this Company is being run by persons resorting to "fraudulent means", one would expect that an application for the appointment of a provisional liquidator would be made - that has not been done.

18. Consequently I take the view that unless it is clear that the evidence presented in support of the application is false or cannot support the Company's case, the Court should not exercise its discretion to refuse validation when otherwise validation is justified.

19. First, in relation to the business of Barney, it would appear that whilst the staff in Hong Kong had been laid off, there is no evidence that business has ceased also on the Mainland. Questions raised by Mr Ho as to the profitability of Barney cannot be decided by the Court on the existing materials.

20. As for the plant and machinery, it would appear that no Formal Sale and Purchase Agreement has been signed and it has been submitted by the Company that the effect of the letter of agreement has lapsed. That may or may not be so, as the letter is not that clear, but on one reading, it may be so.

21. As for the construction of the factory in Fuyong, there are exhibited a document purporting to be minutes of a meeting of Barney signed or initialed by a number of persons resolving to proceed with the project, detailed supporting documents done by executive staff relating to relocation, architectural plans for the new factory building, a document purporting to be a construction contract with a local contractor, remittances of two payments and a document purporting to be a receipt by the contractor for an instalment payment. These are all prima facie evidence that relocation had been planned and was in the process of being undertaken, and that is in my view sufficient to rebut the Petitioners' case that the renovation was a fabrication by the Company.

22. The fact that the construction of the factory was not in Deloittes' Cash Flow Forecast is not, in my view, sufficiently clear evidence that the payments to the contractor were never made, contrary to the documents evidencing the payments. The omission may be due to other reasons, such as incompetence, inadvertence or concealment. Stronger evidence would be required before the Court could find, in the present application, that the construction contract and payments are a "fabrication".

23. Finally, I note from the Company's Circular that the proceeds from the sale of the bridge would not have been available as early as August 1999, the dates of the remittances to the contractor. However, the remittances showed that they were made by another company related to the then majority shareholder of the Company, and so a bridging or short-term loan of the expected proceeds of sale would not be impossible or improbable. I accept that there is no evidence of such a loan, but the discrepancy in dates is not necessarily inexplicable, and it is not a sufficiently strong pointer for the Court to decide, in the present application, that the construction contract, remittances and receipt, which are documents involving a third party, have been concocted.

24. In the circumstances, I would direct that the order I made on 12 April 2000 be perfected.

HCCW 130/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 130 OF 2000

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D E C I S I O N

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1. This is an application for validation under Section 182 of the Companies Ordinance of the issue of new shares by the Company under a Subscription Agreement made between the Company and a company called China Zone Limited.

2. The proposed issue is of 150m. new shares of 10 cents each in the Company. At the moment, I am told that the net asset value of the Company is about 3 cents. It is not for me to speculate as to why this company, China Zone, would want to acquire shares in the Company in this way. The subscription moneys are payable in cash. On that basis alone, I would make an order in terms of paragraph 1 of the Summons issued by the Company on 28 March 2000, with the amendments to the schedule as shown in the letter from the Applicant's solicitors dated 6 April 2000, with the addition of the words "into court" after the words "Wah Nam" in the new paragraph (c) of the schedule.

3. I have been brought to a number of pieces of evidence which indicate that some of the evidence filed on behalf of the Company may raise certain suspicions. As I have said, the present order that I am making is made on the basis and on the basis alone of the benefit that would accrue to the Company from being able to get cash of $15m. Therefore, I would reserve any views that I may have on the propriety or otherwise of the acts of the Company in the past few months as indicated in the evidence before me.

HCCW 130/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 130 OF 2000

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DECISION

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1. On 15 March 2000, I heard an application made by the petitioners in HCCW 166/2000 for me to reconsider or vary an order that I had made on Friday 10 March 2000, which order had not been perfected at the request of those petitioners made on Monday 13 March 2000.

2. At the hearing on 15 March 2000, certain statements were made from the Bar table and I gave an order for affidavit evidence to be filed. Affidavit evidence has since been filed, although not in compliance with my directions as to time. These affidavits are:

- the 3rd Affirmation of Alfred Cheung Tze Fat (for the Company) filed on 17 March 2000,

- the Affirmation of Raymond Ng Chi Hin filed on 18 March 2000 (for the petitioners in HCCW 166/2000),

- the 4th Affirmation of Alfred Cheung filed on 21 March 2000, and

- the Affidavit of David Alexander McKellar filed on 22 March 2000 (for the petitioners in HCCW 130/2000).

3. None of the parties has sought to make further submissions. After consideration of the matters submitted to me on 15 March 2000 and the contents of these affirmations/affidavit, I take the view that I should not vary my order for the reasons which follow.

The application for validation

4. In a series of hearings on 8, 9 and 10 March 2000, I heard an application by Wah Nam Group Limited ("the Company") for validation orders under s.182 Companies Ordinance.

5. In substance, there were three transactions which the Company sought to have validated. On 10 March 2000, I delivered a decision dismissing the application in respect of the transactions set out in Item (1) in the schedule attached to the Company's summons. The Company did not proceed with the application in respect of Item (3) after argument.

6. The transactions set out in Item (2) concerned a placing and subscription. Item 2(a) concerned the placing by Mr Chim Hiu Fei of 100m. shares to 36 placees. I did not validate this transaction for the reasons set out in my decision of 10 March 2000.

7. Item 2(b) concerned the issue to Mr Chim of 100m. new shares in the Company at 10 cents each, with the proceeds to be applied towards payment into Court which the Company was required to make under an Order made by Beeson J. on 17 December 1999 in HCA No. A12439/99 ("the HCA Order "), prior to the petitions being issued.

8. The Company is appealing that Order and its counsel says that for that reason, it has not sought a stay of those proceedings under s.181 Companies Ordinance. Although it is open to any creditor or contributory to apply for a stay under that section, no-one has done so.

9. In the meantime, therefore, the order is still effective and the Company has been in breach in failing to make payment.

Decision to validate the subscription and payment into Court

10. My decision delivered on 10 March 2000 has been transcribed and I would not repeat it here. By way of summary, I said I assumed that it would be to the benefit of the Company to make payment into court under the HCA Order. Court orders should be obeyed and there has been no stay of the HCA Order notwithstanding the issue of the petitions.

11. I also took into account the fact that the HCA Order was for payment into Court under Order 29 rule 13, which provides:-

" ... the amount of any interim payment ordered to be made shall be paid to the plaintiff unless the order provides for it to be paid into court, and where the amount is paid into court, the Court may, on the application of the plaintiff, order the whole or any part of it to be paid out to him at such time or times as the Court thinks fit."

12. It appeared to me, no authorities having been submitted to me to the contrary, that the requirement under that Rule that an application had to be made to Court for payment out (as distinct from a situation where a payment into Court could be immediately accepted by the plaintiffs) would be a sufficient safeguard that the money paid in would not become the property of the plaintiffs in the Action (who are also the petitioners in HCCW 130/2000).

Further submissions on application to reconsider or vary

13. On 15 March 2000, Mr Mok Yeuk-chi counsel for the petitioners in HCCW 166/2000, submitted that payment into court under O.29 r.13 was analogous to payment into court under O.14. If that were the case, the plaintiffs in the Action would become secured creditors (In re Ford Ex parte The Trustee [1900] 2 QB 211, W. A. Sherratt Ltd v John Bromley Ltd [1985] QB 1038) and therefore, would be preferred to other unsecured creditors. The court should not order validation if it would be unfair to the general body of unsecured creditors.

14. He also submitted that there was a hidden agenda to the Company's intention to make payment in, because Mr William Chan, who had previously been the single largest shareholder of the Company, was a rival claimant to the funds which the plaintiffs in the Action were claiming, and which were the subject of the order for payment into Court.

Decision

15. I take the view that I ought not, in the exercise of my discretion, to reconsider or vary the order I made on 10 March.

Secured creditors argument

16. First, I am not persuaded that payment into Court under O.29 r.13 would make the plaintiffs secured creditors. It would appear to me on the interpretation of O.29 r.13 and O.29 r.17 that the Court retains a wide discretion over funds paid into Court as interim payment.

17. Order 29 rule 17 provides that : -

"Where a defendant has been ordered to make an interim payment or has in fact made an interim payment, whether voluntarily or pursuant to an order, the Court may, in giving or making a final judgment or order, or granting the plaintiff leave to discontinue his action or to withdraw the claim in respect of which the interim payment has been made, or at any other stage of the proceedings on the application of any party, make such order with respect to the interim payment as may be just, and in particular -

(a) an order for the repayment by the plaintiff of all or part of the interim payment; or

(b) an order for the payment to be varied or discharged;

(c) ..."

[emphasis added]

18. The reference to the `discharge' of the payment must be to discharge of a payment into Court, because if the payment had been made to the plaintiffs, the order could only be for repayment.

19. The wording of r.17 is very wide. No similar rule for the discharge of payment can be found in the rules regarding payment into Court under O.22 r.1 and r.8, or O.14.

20. In making such order "as may be just", the Court would, in my view, take all relevant circumstances into account, including the fact that the defendant is a company against whom petitions to wind-up have been presented (including one by the plaintiffs in the Action) and the fact that the Action (including the order for interim payment) might have been stayed had an appeal not been lodged.

21. Accordingly, I do not think that Mr Mok's concern, that the payment of the subscription proceeds into Court pursuant to the HCA Order would make the plaintiffs secured creditors, is well-founded.

22. At this juncture, I should note that it was Mr McKellar's submission for the plaintiffs in the Action/the petitioners in HCCW 130/2000 that under the terms of the HCA Order, interim payment was to be made to the plaintiffs, with the plaintiffs then making payment into Court.

23. Paragraph 2 of the Order provides that "the 1st Defendant [the Company] do make an interim payment to the 1st and 2nd Plaintiffs in the amount of HK$24 million plus outstanding interest, such amount to be paid into Court within 21 days from the date hereof".

24. Whilst I can see that the first part of the Order refers to "an interim payment to the 1st and 2nd Plaintiffs", it is clear, for the reasons following, that this does not mean that the Company was first to make payment to the plaintiffs, and the plaintiffs were then to make payment into Court.

25. If such a 2-stage payment was envisaged, one would expect different deadlines for the 1st stage, and then for the 2nd stage. That would have to be the case because the money from the Company would have to be credited to the plaintiffs' account first before the plaintiffs made payment into Court.

26. Alternatively, if it were to be suggested that there would just be 1 payment, directly from the Company to the Court, then no purpose is served by ordering the Company to hand the draft to the plaintiffs first, and then for the plaintiffs to hand the same draft to the Court. Further, the plaintiffs' own case is that the amounts were ordered to be paid into Court because of a rival claim from Mr Chan. Mr Chan's interests would not be protected if the plaintiffs could get their hands on the money this way.

27. In my view, the reference to the "1st and 2nd Plaintiffs" was in contradistinction to paragraph 1 (where the Company was ordered to make interim payment of $6m. to the 1st Plaintiff only), to show that the interim payment of $24m. into Court was in relation to the two amounts alleged to be owed to the 1st and 2nd Plaintiffs, viz. $9m. and $15m. respectively.

Hidden agenda argument

28. In respect of Mr Mok's 2nd submission, there was no evidence to suggest that Mr Chan still has any control over the board of the Company, or that the Company is not being run with the best interests of the Company at heart. The Court cannot be asked to speculate in the absence of evidence. If the petitioners in HCCW 166/2000 have a case that the Company is not being run properly, they have remedies available to them under the Companies Ordinance, such as the appointment of a provisional liquidator. No such application, properly grounded in evidence, has been made.

29. Further, it is open to the petitioners to apply for a stay of the Action under s.181 Companies Ordinance if they consider that there are sufficient grounds for a stay. If a Court order has not been stayed, it should be obeyed.

Mr Chim's position

30. Further, I take the view that in the exercise of my discretion, it would be wrong to vary my order made on 10 March 2000 given the possible effect of any variation on Mr Chim's position.

31. The subscription was an exercise in raising funds from Mr Chim for payment into Court. There is no evidence that Mr Chim is not an independent third party dealing with the Company at arms' length. He entered into the Placing and Subscription Agreement on terms that time was of the essence.

32. One of the conditions was the Listing Committee of the Stock Exchange agreeing to grant a listing of and permission to deal in the subscription shares within 14 days from the date of the Agreement made on 28 February 2000 (i.e. by 13 March 2000) .

33. The Listing Committee was asked to grant listing and permit dealing in the subscription shares on the basis that the proceeds were to be paid into Court. After I delivered my decision on Friday 10 March, the Stock Exchange was informed of the development by the Company and a revised application, omitting reference to the intended subscription under Item (a), was received by the Stock Exchange on Saturday 11 March.

34. On Monday 13 March 2000, the application was granted by the Stock Exchange. Pursuant to the grant of the application, the certificates were prepared on 15 March and the new shares were issued and were paid for by Mr Chim on 16 March 2000.

35. Although on the morning of Monday 13 March, the petitioners in HCCW 166/2000 had written to the Court with submissions on the form of the order to be perfected, it was not until 15 March that the present application for reconsideration or variation of the order was made, although earlier dates had been offered by the Court. No application was made for a stay of the order, and transactions were effected on the strength of the order.

36. Thus the situation is that on 13 March 2000, Mr Chim had been told that the Stock Exchange had granted approval to listing and dealing, and the Exchange's approval had been made on the basis that the proceeds were to be paid into Court. If the Exchange were now to be told that the proceeds were not to be paid into Court but to a receiver (as Mr Mok suggests), it would be necessary for the Listing Committee to reconsider the matter. In those circumstances, Mr Chim might well have an opportunity to withdraw from the transaction, given the time limits agreed upon in the Subscription Agreement, which were waived only to enable the certificates to be prepared.

37. Further, funds have been made available by Mr Chim and shares have been issued. In my view, it would be wrong for the Court to unravel these transactions at this late stage, particularly when it had been open to the petitioners in HCCW 166/2000 since 4 March 2000 (when the summons was served on them) to apply to stay the proceedings in the Action if they considered payment into Court under that action to be prejudicial to them.

38. In all the circumstances, I would decline to reconsider or to vary my order made on 10 March 2000. I would make an order nisi that the costs of this application follow the costs of the application to validate, i.e. that they be costs in the cause in the Petition.