HCK CHINA INVESTMENTS LTD. AND ANOTHER v. WAH NAM GROUP LTD.

HCCW000166G/2000

HCCW 166/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 166 OF 2000

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	IN THE MATTER of Wah Nam Group Limited
	AND
	IN THE MATTER of an application under s.200(3) of the Companies Ordinance (Cap. 32)

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Coram: Hon Kwan J in Chambers

Dates of Hearing: 25 and 26 June 2002

Date of Handing Down of Decision: 2 July 2002

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D E C I S I O N

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The application

1. I have before me a summons taken out by the joint and several liquidators of Wah Nam Group Ltd. ("the Company") on 18 May 2002 under section 200(3) of the Companies Ordinance, Cap. 32 for directions on the following questions:

"In circumstances where the liquidators have entered into a Restructuring Agreement dated 18 January 2002 ("the Restructuring Agreement") which contemplates a scheme of arrangement between the Company and its members, whereby, in exchange for consideration for their co-operation, the existing shareholders of the Company will exchange their shares in the Company for shares in a new company (formed for the purpose of obtaining a listing on the Hong Kong Stock Exchange pursuant to the Introduction Procedure under the Exchange's Listing Rules)

(a) whether, on the facts of this case, the Court can sanction the scheme between the Company and its members without the need for any meeting of creditors to obtain agreement by a majority in number, representing three-fourths in value of the creditors present and voting, to such scheme ("the first question");

(b) assuming (a) is answered in the affirmative, whether the liquidators are entitled to endeavour to complete the transactions contemplated in the Restructuring Agreement (I) despite the opposition or anticipated opposition of the recently appointed Committee of Inspection; and (II) without the need to convene a general meeting of creditors ("the second question")."

2. The reference to a meeting of creditors in the first question is to a meeting summoned by the court under section 166(1) of Cap. 32. The general meeting referred to in the second question is a meeting held pursuant to section 200 of Cap. 32.

3. There is urgency in this application because the Company has been placed in the third stage of the procedure for de-listing of its shares on the Hong Kong Stock Exchange since 20 July 2001. The listing of the shares would have been cancelled if a resumption proposal had not been submitted to the Stock Exchange by 20 January 2002. Two days before this deadline, the liquidators entered into the Restructuring Agreement with an investor, Leading Highway Ltd. ("the Investor") which set out the economic terms of a restructuring proposal ("the Proposal") and this was submitted to the Stock Exchange. On 1 February 2002, the Stock Exchange notified the financial adviser to the liquidators that it had granted an extension of the period for de-listing of the shares of the Company until 31 August 2002 ("the long stop date") prior to which the implementation of the resumption proposal must be completed. By a further letter to the liquidators dated 24 April 2002, the Stock Exchange informed them that the new listing application should proceed on the basis of the Proposal which was submitted on 18 January 2002 and "not any other proposal", and that the long stop date should remain 31 August 2002 and "would not be extended under any circumstances". These matters were again confirmed in a letter of the Stock Exchange to the liquidators dated 24 May 2002, in which it was stated that if the resumption proposal does not proceed in accordance with the current timetable, the listing of the Company's shares would be cancelled.

4. The present summons seeking directions, the supporting affidavit with a full set of the exhibits (which are substantial) were served by the liquidators on a group of creditors that the liquidators consider might vote against the Proposal. I shall refer to them as the "dissenting creditors". They are HCK China Investments Ltd. and Investment Austasia Ltd. (collectively, "the petitioning creditors"; they are the creditors who presented a petition to wind up the Company and on whose petition the winding-up order was made), and six others being Mr Terence Ho, Mr Samson Chen and four companies controlled by them separately or jointly. The dissenting creditors have filed evidence in this application and they have appeared at the hearing and made submissions. The petitioning creditors were represented by Mr Anthony Chan and the other six creditors were represented by Mr William Giles of Messrs Horvath & Giles.

5. Also present at the hearing was a solicitor of Messrs David Lo & Partners who acted for a creditor or several creditors associated with Mr William Chan Pak To. These creditors did not file evidence and the solicitor made no submissions at the hearing.

6. In addition, all other creditors whose addresses were known to the liquidators were served with the summons and the supporting affidavit without the exhibits. None of them have appeared at the hearing. I understand that the creditors listed as such in the statement of affairs whose addresses were not known to the liquidators represented about 0.05 to 0.06% of the total liabilities of the Company.

The history

7. Trading of the shares of the Company was suspended on 20 July 2000. Six days later, it was ordered to be wound up by the court on the ground that it was unable to pay its debts. On 27 January 2001, the liquidators were appointed under a regulating order pursuant to section 227A of Cap. 32, by which time the Company had entered the second stage of the de-listing procedure. For the facts leading to the making of a regulating order, I refer to the Reasons for Decision I gave on 19 March 2002, paragraphs 5 to 9.

8. During May to July 2001, the liquidators prepared and distributed an information package to investors to invite proposals for restructuring so as to realise the listed status of the Company and other core assets of the group, being the investments of Wah Nam Infrastructure Investments Ltd. ("WNII"), a wholly owned subsidiary of the Company, in three joint ventures which own toll roads and toll bridges in China. Between May and August 2001, a total of seven proposals were received, including that submitted by the Investor. The liquidators came to the view that the proposal of the Investor was the best in terms of the structure and consideration being offered and on 4 September 2001, they entered into an Escrow and Exclusivity Agreement ("the Exclusivity Agreement") with the Investor which provided for a period of time for the Investor to conduct due diligence on the joint ventures in China. The exclusivity period with the Investor, which was extended, expired on 29 November 2001, but the liquidators continued their discussions with the Investor.

9. In November and December 2001, correspondence was exchanged between the dissenting creditors and the liquidators on the price offered by the Investor for the listed status and WNII's investment in the joint ventures. In particular, there was disagreement as to the valuation obtained by the liquidators of WNII's 60% interest in the joint venture known as the Hangzhou Huanan Engineering Development Co. Ltd. ("HHED"). This led to a summons issued by the petitioning creditors on 11 February 2002 for the appointment of a committee of inspection for the Company. On 13 March 2002, I made an order that a committee of inspection be appointed and that it is to be made up of six members, four of them are representatives of the dissenting creditors.

10. Because of the disagreement over the valuation, in December 2001, the liquidators obtained a second valuation from another firm of surveyors on WNII's interest in HHED, as well its interests in the other two joint ventures in Shanxi. In January 2002, a late proposal was received by the liquidators from yet another investor. This was rejected by the liquidators as they were not satisfied that the structure of this late proposal was of a type likely to be acceptable to the Stock Exchange and they entered into the Restructuring Agreement with the Investor on 18 January 2002. There followed the extension given by the Stock Exchange on the terms that I have mentioned earlier.

11. After the committee of inspection was appointed, the liquidators had provided its members with a detailed report which set out, inter alia, the process of selecting the Proposal of the Investor and the key provisions of the Proposal. The committee had held six meetings, some of considerable length, from March to June 2002.

12. At the third meeting, the committee was asked by the liquidators to pass resolutions to approve the liquidators (1) seeking to complete the Restructuring Agreement, (2) not applying to the court to convene a creditors' meeting under section 166, and (3) applying to the court for directions that the scheme of arrangement in the Proposal may be sanctioned without a creditors' meeting. At the fourth meeting, two members voted in favour of all three resolutions. The other four members (representing the dissenting creditors) indicated that they were unable to decide on (1) as they were unable to come to a view that the Proposal was the best for the creditors; they were of the view a creditors' meeting under section 166 should be held, contrary to (2); and they considered (3) to be academic because of their views on (1) and (2).

13. At the fifth meeting on 8 May 2002, the petitioning creditors tabled their written reasons as to why they could not support the Proposal. After lengthy discussions, the members of the committee unanimously resolved to support the decision of the liquidators to apply to the court for directions whether it is necessary to convene a creditors' meeting under section 166 in relation to the Proposal. They further resolved to continue to work with the liquidators with a view to obtaining the support of each member of the committee to accept the Proposal.

14. On 13 May 2002, the other dissenting creditors, Mr Samson Chen and Mr Terence Ho, provided their reasons in writing to the liquidators why they were unable to support the Proposal.

15. On 14 June 2002, the Stock Exchange informed the co-sponsors of the Proposal that the listing committee has approved in principle the listing of the shares of the new company by way of introduction, subject to various conditions set out in that letter.

16. The liquidators are concerned that if a meeting of creditors is to be convened under section 166 to consider the Proposal, the dissenting creditors would in practice be able to prevent approval of the Proposal as they control 22.85% in value of the claims against the Company, notwithstanding that they hold less than 25% in value of the undisputed claims, as it is reasonable to expect that some creditors may not attend the meeting or lodge proxies in respect of the meeting. Further, even if the dissenting creditors should eventually support the Proposal, in view of the statutory majority requirements in section 166(2), there remains a concern that a creditors' scheme could still be voted down by a majority in number even though that majority would represent a small proportion of the creditors by way of value. This is because the inter-company creditors and the dissenting creditors together represent only 12 out of 99 creditors.

The Company

17. The Company was incorporated in Hong Kong with an authorised share capital of 5,000,000,000 ordinary shares of HK$0.10 each, of which 2,138,218,630 were in issue at the date of the winding-up order. It was an investment holding company and the principal operating asset of the Company and its subsidiaries is the three joint ventures held by WNII. As mentioned earlier, these joint ventures are principally engaged in the management and operation of a number of toll roads and bridges in China.

18. According to the statement of affairs, as at the date of the winding-up order, the Company had unencumbered assets of HK$261,253,519.41 and liabilities of HK$219,504,411.97. The liquidators have prepared an analysis of the assets and liabilities based on their investigations. Despite the statement of affairs has recorded surplus assets, the liquidators' investigations show that the liabilities in fact far exceeded the realisable assets. According to the liquidators' estimates, the financial position of the Company on a "high case" basis and a "low case" basis may be presented as follows:

	High Case	Low Case
	HK$	HK$
Total assets	82,447,818.78	50,881,798.77
Available assets (i.e. total assets less administration costs and preferential claims)	48,015,560.68	22,027,841.67
Total liabilities	(122,477,576.46)	(440,444,215.57)
Net assets (liabilities)	(40,029,757.68)	(389,562,416.80)
Estimated return to unsecured creditors	39%	5%

19. On the basis of the above estimates, the shareholders could have no expectation of receiving any return in the liquidation.

20. On the liquidators' analysis, the principal assets of the Company that may be realised in the winding-up consist of the following:

(1) the Company's shareholding in WNII which holds interests in the three joint ventures;

(2) the listed status of the shares of the Company; and

(3) HK$32.55 million which the Company paid into court with accrued interest in High Court Action No. 12439 of 1999, pursuant to an order for interim payment made on 17 December 1999.

21. By the Restructuring Agreement, the liquidators have sought to realise two out of the three principal assets of the Company.

The Restructuring Agreement

22. Before I go to the Restructuring Agreement, it is pertinent to note that in the earlier restructuring proposal submitted by the Investor as annexed to the Exclusivity Agreement, apart from a proposed scheme of arrangement for the shareholders of the Company, provision was made for a scheme of compromise or arrangement with the creditors of the Company along these lines.

23. It was proposed that a scheme was to be entered into between the Company and all its creditors (who are all unsecured) to restructure the outstanding debts of the Company on these terms: the creditors would receive a cash payment of HK$14 million; 32,073,279 shares in the company to be incorporated by the Investor ("Listco") would be issued to the creditors ("the Creditors shares"); the Investor would grant a put option to the creditors for selling the Creditors shares at HK$0.05 per Creditor share to the Investor within two weeks after the completion; and all other subsidiaries of the Company, with the exception of WNII, would be transferred to the liquidators or their nominees at a nominal consideration, the shares of which would be held on trust for the creditors. The cash payment, the Listco shares and the put option, and the transfer of all the other subsidiaries save for WNII would represent the final settlement to all the outstanding debts of the creditors.

24. It was provided that completion of the above restructuring proposal would be subject to a number of conditions precedent, including the sanction by the court of the shareholders scheme and the creditors scheme.

25. I should also mention that in the Exclusivity Agreement, it was expressly stated that the liquidators had not accepted the above restructuring proposal and that nothing in the agreement would constitute an offer capable of becoming a contract by acceptance.

26. I turn to the Restructuring Agreement. The material provisions, for the purpose of this application, may be summarized as follows:

(1) The Company is to apply to the court for an order convening a meeting of the shareholders and, "if in the opinion of the liquidators it is so required", a meeting of the creditors, to consider a scheme of arrangement under section 166 under which:

(i) all the shares of the Company will be acquired by Listco on terms that the shareholders of the Company will receive one Listco share of HK$0.10, credited as fully paid, for every 50 shares of the Company held by the shareholder; and

(ii) in consideration of the assistance provided by the Company and the liquidators in facilitating a listing of the Listco shares by way of introduction under the Listing Rules and the transfer of WNII's interests in the three joint ventures, the Company will use its reasonable endeavours to complete the Restructuring Agreement on terms that:

(a) the Investor will procure payment of the total cash consideration (made up of HK$14 million and the price for the transfer of the joint ventures in the sum of HK$34 million) to the escrow agent who is to pay the same to the liquidators; and

(b) the liquidators will receive for the benefit of the creditors 32,073,279 Listco shares to be allotted with a put option pursuant to which the liquidators may within ten business days of the closing date sell all or part of these shares to the Investor at HK$0.05 per Listco share.

(2) The Investor shall procure that Listco shall on the effective date (the date on which the scheme in (1) becomes effective) pay to the escrow agent HK$34 million, to be paid by the escrow agent to the liquidators for the account of WNII, in consideration of the Company procuring WNII to transfer all the interests in the three joint ventures held by WNII, to a wholly-owned subsidiary of Listco.

27. Under the Proposal in the Restructuring Agreement, the creditors of the Company are not required to compromise their claims against the Company, unlike the earlier restructuring proposal. It is envisaged that after the Proposal is completed, the creditors will have a rateable claim to the proceeds from the implementation and will be entitled to a rateable claim with respect to the recoveries of any other assets of the Company.

28. The other matter to note is that unlike the earlier restructuring proposal, only the interests of WNII in the joint ventures will be sold, for HK$34 million. The liquidators will retain control of WNII. WNII will use the cash it receives from Listco to discharge its own debts and liabilities and according to the liquidators' investigation and estimate, the debts and liabilities of WNII are approximately HK$21,654,000. On that basis, the sale of WNII's interests in the joint ventures will provide HK$12,346,000 for the creditors of the Company.

29. To recapitulate, under the Proposal in the Restructuring Agreement, the following consideration will be paid to the liquidators for the benefit of the creditors:

(1) cash in the sum of HK$14 million;

(2) HK$34 million for the realisation of WNII's interests in the joint ventures less WNII's liabilities, providing a surplus of approximately HK$12.35 million;

(3) 32,073,279 Listco shares with a par value of HK$0.10; and

(4) a put option to sell the Listco shares within ten business days of closing at HK$0.05 per share (at an aggregate price of HK$1,603,664).

30. The shareholders will only receive 42,764,373 Listco shares with par value of HK$0.10. They will not receive any cash or put option.

Section 166

31. Section 166 of Cap. 32 provides, inter alia, as follows:

"(1) Where a compromise or arrangement is proposed between a company and its creditors or any class of them, or between the company and its members or any class of them, the court may, on the application in a summary way of the company or of any creditor or member of the company, or, in the case of a company being wound up, of the liquidator, order a meeting of the creditors or class of creditors, or of the members of the company or class of members, as the case may be, to be summoned in such manner as the court directs.

(2) If a majority in number representing three-fourths in value of the creditors or class of creditors, or members or class of members, as the case may be, present and voting either in person or by proxy at the meeting, agree to any compromise or arrangement, the compromise or arrangement shall, if sanctioned by the court, be binding on all the creditors or the class of creditors, or on the members or class of members, as the case may be, and also on the company or, in the case of a company in the course of being wound up, on the liquidator and contributories of the company."

32. For the above provision to be invoked in this instance, there must be a compromise or arrangement proposed between the Company and its creditors. What then is a compromise or arrangement for the purpose of section 166? There is no comprehensive definition of this in the Ordinance or in the decided cases. Mr Anthony Chan has referred me to various dicta in a number of cases which I consider to be helpful.

33. On the meaning of "compromise", it was stated that this presupposes some dispute as to the rights of the claimant or difficulty in enforcing them (Mercantile Investment and General Trust Co. v. International Co. of Mexico [1893] 1 Ch. 484n., per Fry LJ). In contrast, the meaning of "arrangement" is not limited to something analogous to compromise (Re Guardian Assurance Co. [1917] 1 Ch. 431 at 448, per Lord Cozens-Hardy MR) and it has been "treated as being one of very wide import" (Re Savoy Hotel Ltd. [1981] 3 All ER 646 at 652, per Nourse J).

34. As for the meaning of "arrangement", this implies some element of accommodation or "give and take" between the parties, so it would be inappropriate to describe a scheme as an arrangement whereby it is proposed that members of a company should abandon their rights without any compensating advantage (Re N.F.U. Development Trust Ltd. [1972] 1 WLR 1548 at 1555, per Brightman J)

35. Hence, so long as the scheme involves an agreement modifying rights, it may be regarded as an arrangement, even though there is no compromise in the sense that the creditors have agreed to accept a lesser sum in full and final settlement of their claims against the Company.

The liquidators' argument

36. Mr Bunting, SC, who appeared for the liquidators, contended that there is no need to convene a court meeting under section 166 to obtain the approval of the creditors for the disposal of two of the principal assets of the Company, as by virtue of their powers as liquidators pursuant to sections 199(2)(a) and (h) of Cap. 32, the liquidators are entitled to realise value from the joint ventures and the listed status of the Company for the benefit of the creditors. It was submitted that the disposal of WNII' s interests in the joint ventures at HK$34 million is a separate transaction from the realisation of the listed status of the Company.

37. It is recognised by the liquidators that it is necessary for a court meeting to be convened for the shareholders to vote on the scheme, in view of Re Albatronics (Far East) Co. Ltd. [2001] 3 HKC 223. What the shareholders are being asked to do is to transfer their shares, which are not assets of the Company, to Listco. Despite the shares are in themselves worthless, the shareholders are entitled to some token consideration or "sweetener" to induce them to dispose of their property in the shares to facilitate the listing of the Listco shares (Re Rhine Holdings Ltd. [2000] 3 HKC 543; Re Yaohan Hong Kong Corp. Ltd. [2000] 3 HKC 554 and the Court of Appeal decision at [2001] HKLRD 363). Thus, the consideration given to the shareholders is merely a cost to the Company of realising the listed status of the Company, since without the agreement of the shareholders to transfer their own shares the disposal of the listed status cannot take place.

38. It was submitted that the scheme does not involve any alteration of the creditors' rights and claims against the Company in the liquidation, so long as the proportion of the value derived from realisation of the listed status to be received by the shareholders can properly be regarded as a cost of realisation of the asset, as opposed to a gift where the proportion to be received by the shareholders far exceeded what can properly be regarded as token consideration. If it were the latter situation, a gift to the shareholders would have modified the rights and claims of the creditors in the liquidation and it would have been necessary to hold a meeting for creditors under section 166 to obtain their approval to the scheme.

39. In comparing the proportion of the consideration to be received by the creditors for the listed status (they are to receive cash of HK$14 million and shares in the Listco with a put option, through which their shares in Listco can all be turned into cash) with the proportion of the consideration to be received by the shareholders (who would only receive shares in Listco), the liquidators have used this method of valuation described below.

40. The value of the Listco shares is highly speculative at this stage, their true value can only be ascertained after a significant history in the trading of these shares has been developed. There are difficulties in comparing the exact percentages of the values to be received by the creditors and shareholders, as it involves comparing the value of cash to be received by the creditors, which is certain, with the value of the Listco shares, which is speculative. Thus, any comparison of values will only be indicative.

41. It is recognised that for the purpose of making an indicative comparison of values apportioned to creditors and shareholders, the usual basis for a valuation of the shares of the new company would be the "net tangible asset value" (see Re Rhine Holdings Ltd., supra. at 545I, 548C; Re Albatronics (Far East) Co. Ltd., HCMP No. 894 of 2002, 5 June 2002, paragraphs 13 and 14). This is consistent with the requirement of the Stock Exchange in that it requires a statement of "net tangible asset backing" for securities for which listing is sought (see the Listing Rules of the Stock Exchange, appendix 1 Part A paragraph 21). However, in this particular situation, the liquidators do not think it appropriate to use the above basis of valuation. Instead, they would use the "net asset value" of Listco as a basis of valuation of its shares. The reason for this is that the interests in the joint ventures to be acquired by Listco are treated for accounting purposes as "intangible assets", pursuant to Statement 2.219 - statement of standard accounting practice intangible assets, issued January 2001, paragraphs 8 and 9. As the interests in the joint ventures are to be treated as intangible rather than tangible assets, Listco will have negative net tangible assets and a negative net tangible asset value per share before conversion of the convertible unsecured loan notes of the Investor ("the CULs") and a negligible net tangible asset value of HK$0.003 per share after conversion in full of all the CULs. The liquidators do not consider it appropriate to treat the Listco shares as having a nil or negligible value.

42. On the basis that the shares of Listco are valued on the "net asset value" of Listco, and that the aggregate fair market value of Listco's interest in the joint ventures is shown as an asset, the net asset value per share would be HK$0.035, before the conversion of the CULs and HK$0.053, after the conversion of the CULs. The liquidators consider it appropriate to use the net asset value before conversion of the CULs, as the Investor has not indicated that it intends to convert the CULs and it is not known when, if ever, conversion might occur.

43. On the above basis, the consideration payable to the shareholders is comparable to the consideration payable to the creditors as follows:

	Consideration	Amount (HK$)	% of consideration
Payable to the creditors	Cash	14,000,000
Value of Listco shares		1,603,664
(assuming exercise of put option)		_________
Total payable to creditors		15,603,664	91.25 %
Payable to shareholders	Value of Listco shares	1,496,241	8.75 %
Total consideration		17,099,905	100%

44. It was submitted that the value of the consideration apportioned to the shareholders being 8.75% is within the range of consideration that would qualify as token consideration.

45. The liquidators's valuation of the Listco shares and their indicative comparison of the values apportioned to the creditors and shareholders are not accepted by the dissenting creditors. Mr Giles contended that the net asset value of Listco should be adjusted by adding the expenses and value paid for the listed status (i.e. the cash payment to the creditors of HK$14 million) as an intangible asset so that the net asset value per Listco share would be HK$0.0632. On that basis, the percentage of the consideration apportioned to the shareholders would be 14.43% and that could not qualify as token consideration. Mr Giles has also put forward two alternative bases for valuing the Listco shares, one is by taking the par value of HK$0.10 per share, the other is by taking the value of HK$0.05 per share which is the value attributed to the creditors' Listco shares in exercising the put option.

46. The liquidators do not regard it appropriate to treat the listed status of Listco with the acquisition cost of HK$14 million as an intangible asset. This is because an intangible asset should only be recognized if it is probable that the future economic benefits that are attributable to the asset will flow to the enterprise and the cost of the asset can be measured reliably (see Statement 2.129 - statement of standard accounting practice intangible assets, paragraph 19). It is also a requirement that the book value of an intangible asset must be amortised over its economic life. As it is not probable that future economic benefits that are attributable to the asset will flow to Listco and there is no basis on which its value could sensibly be amortised over its economic life, the acquisition cost of the listed status should not be regarded as an intangible asset. The liquidators also do not agree that the par value or the put option value should be used as the value of the Listco shares for this exercise.

47. For the reasons given below, I do not think it necessary to resolve the question whose method of valuing the Listco shares should be adopted. Likewise, I do not think it relevant to the question I am to decide, namely, the first question in the summons, whether the dissenting creditors' misgivings as to the valuation of the interests in the joint ventures (that the value for WNII's interest in HHED is too low and WNII's interests in the two joint ventures in Shanxi are assessed at nil value) are justified. I would consider the first question on the assumption that the valuation of the Listco shares by the liquidators is appropriate and that the value of the consideration for realising the listed status apportioned to the shareholders would be 8.75%.

The first question

48. The purpose of section 166 is to provide for a mechanism whereby a scheme of compromise or arrangement, in which the rights of creditors or shareholders are to be modified or altered, can be made binding on all who are so affected without the separate agreement of each of them. To achieve this result, if the statutory majority in section 166(2) in the meeting or meetings convened by the court is achieved, and if the scheme is sanctioned by the court, it becomes binding on all creditors or shareholders or classes, notwithstanding a dissenting minority.

49. I reject the submission of Mr Bunting that if it should be ruled that it is necessary to convene a section 166 meeting in this instance, then any disposition by the liquidator of the assets of a company would have required such a meeting. As I have mentioned, whether such a meeting would be required would depend on whether there is any modification of the rights of creditors or shareholders so that it would be necessary to seek their approval to the scheme.

50. In the liquidation of the Company, the legal rights of the creditors (who are all unsecured) are to participate in the assets of the Company according to the statutory provisions for distribution of assets on insolvency. On the liquidators' analysis of the assets and liabilities of the Company, the shareholders cannot possibly expect to receive any return in the liquidation, unless the listed status of the Company, which is a corporate asset, can be realised.

51. The Investor has agreed to acquire the listed status of the Company at a total consideration. How that consideration is proposed to be apportioned between the shareholders and the creditors has apparently been premised on the judicial guidance of what would be a fair and reasonable apportionment in the cases referred to earlier. It is clear that what goes to the shareholders would not go to the creditors and what goes to the creditors would not go to the shareholders. Insofar as the shareholders are not expected to receive any return in the liquidation, any consideration made to them for the exchange of their shares in the Company would have been a concession on the part of the creditors, irrespective of whether this is just token consideration or something more. What the liquidators would regard as the "cost" in the realisation of the listed status in respect of the consideration to be apportioned to the shareholders may not be so regarded by the creditors. Besides, even if a cost is to be paid, the amount of the cost to be paid is clearly a matter of give and take affecting the rights of the creditors. I would consider this a modification of the legal rights of the creditors, as there is alteration of the statutory order for the application of assets no matter how one looks at it. On the first question, I rule that it is necessary to convene a meeting of the creditors under section 166.

52. It is unnecessary for me to speculate why the scheme in the Proposal has been devised in this manner, in contrast to the earlier restructuring proposal in the Exclusivity Agreement in which there was a separate scheme for creditors that would require the sanction of the court. I would echo the comments of Le Pichon J (as she then was) in Re Yaohan Hong Kong Corp. Ltd., supra. at 560H, wherein she stated that the scheme, if properly structured, should have included rather than excluded the creditors as a class as, after all, it is a corporate asset that is being realised. Further, if there was more than one way of structuring the scheme, "it remains incumbent on the liquidators to opt for that which advances and protects the creditors' interests and entitlement."

The second question

53. The second question in the summons is premised on the basis that the first question is answered in favour of the liquidators. As I have not answered this in favour of the liquidators, the second question does not arise. Nevertheless, I propose to deal with it briefly as I have heard arguments on this.

54. As I understand it, the nub of the second question is in the second part of the question, namely, whether a general meeting of creditors should be held. The court is not asked to give its approval for the liquidators to implement the transactions in the Restructuring Agreement despite the opposition or the anticipated opposition of the committee of inspection.

55. It was submitted by Mr Bunting that a general meeting of creditors under section 200 should not be convened for these reasons. The dissenting creditors are represented on the committee of inspection and their views on the Proposal have been ascertained in the various meetings of the committee. They have provided their reasons in writing why they are unable to support the Proposal of the Investor and filed evidence in this application. Further, they have made submissions by counsel in this hearing why they do not consider the Proposal the best deal for the creditors in the circumstances, notwithstanding that the listed status with a value of HK$14 million might be lost to the creditors if the Proposal is not implemented by 31 August 2002. As the views of these dissenting creditors are already known, there would be no point in summoning a general meeting to ascertain their views.

56. As for the remaining creditors, 64.46% of the undisputed debts relates to inter-company liabilities. It is unnecessary to ascertain the views of the subsidiaries, as they are controlled by the liquidators. 4.04% of the undisputed debts relates to the debts of two creditors represented on the committee of inspection and they have voted in favour of the Proposal at the fourth meeting of the committee. The creditors whose views are unknown only accounted for less than 8% of the undisputed debts.

57. As for the holding of a general meeting for the creditors to vote on the Proposal, it was submitted by Mr Bunting that the dissenting creditors have not requisitioned for such a meeting under section 200(2). Further, as the liquidators will vote on behalf of the subsidiaries in favour of the Proposal, there would be a clear majority in favour of implementing the Restructuring Agreement, even assuming all the other creditors would vote against it.

58. In taking an opposite stance to the liquidators on the second question, neither Mr Chan nor Mr Giles has disputed that the views of a sufficiently large proportion of creditors have been ascertained or that a clear majority will vote in favour of the Restructuring Agreement. What was submitted is that the liquidators should not exercise their votes on behalf of the subsidiaries and they should abstain from voting, because the liquidators have an interest in promoting the Proposal in that their costs and expenses in implementing the transactions in the Restructuring Agreement would be paid for by the Investor, capped at the limit of HK$8 million.

59. The liquidators are not disqualified in voting for the subsidiaries, even though they may have a special interest in promoting the Restructuring Agreement. Assuming that it is not necessary for a court meeting of the creditors to be held under section 166 to approve the scheme, and the statutory majority is achieved at the court meeting of the shareholders, it would be necessary for the court to consider whether to sanction the scheme. Insofar as it may be appropriate to take into consideration any resolution passed at a general meeting of creditors, the court may "discount or disregard altogether the votes of those who, though entitled to vote at a meeting as a member of the class concerned, have such personal or special interests in supporting the proposals that their views cannot be regarded as fairly representative of the class in question" (Re UDL Holdings Ltd. [2002] 1 HKC 172 at 185B). For this reason, I am of the view that a general meeting of creditors should be held for the Proposal to be put to the vote of the creditors, even though the resolution is likely to be carried by the majority votes of the liquidators on behalf of the subsidiaries.

Costs of the application

60. I make an order nisi that the liquidators' costs of this application as well as the costs of the dissenting creditors are to be costs in the liquidation, to be taxed and paid out of the assets of the Company, as I think it proper for the liquidators to seek directions in this summons.

	(S. Kwan)
	Judge of the Court of First Instance, High Court

Representation:

Mr Michael Bunting, SC and Mr Jeremy Bartlett, instructed by Messrs Allen & Overy, for the liquidators

Mr Anthony Chan, instructed by Messrs King & Co., for HCK China Investments Ltd. and Investment Austasia Ltd.

Mr William Giles, of Messrs Horvath & Giles, for Mr Samson Chen, Mr Terence Ho, Unbeatable Assets Ltd., Excel Nobel Development Ltd., Stamford Star Finance Ltd. and Solar Honest Ltd.

Mr Albert Lai, of Messrs David Lo & Partners, for Mr William Chan

HCCW000166F/2000

HCCW 166/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 166 OF 2000

____________

	IN THE MATTER of Wah Nam Group Limited
	AND
	IN THE MATTER of the Companies Ordinance (Cap. 32)

____________

BETWEEN
	HCK CHINA INVESTMENTS LIMITED	1st Petitioner
	INVESTMENT AUSTASIA LIMITED	2nd Petitioner
	AND
	WAH NAM GROUP LIMITED	Respondent

____________

Coram: Hon Kwan J in Chambers

Date of Hearing: 13 March 2002

Date of Decision: 13 March 2002

Date of Handing Down of Reasons for Decision: 19 March 2002

__________________________________

REASONS FOR DECISION

__________________________________

 

1. I have before me an application for the appointment of a committee of inspection of Wah Nam Group Limited ("the Company"), which has been ordered to be wound up on 26 July 2000, there being disagreement among the creditors as to whether a committee should be appointed and how the committee should be constituted. Initially, the application was made by the petitioning creditors, HCK China Investments Limited ("HCK") and Investment Austasia Limited ("IAL"). At the hearing of the application, the joint and several liquidators also joined in the application.

2. The application is supported by a group of six creditors, being Mr. Terence Ho, Mr. Samson Chen and their companies, Solar Honest Limited, Unbeatable Assets Limited, Excel Noble Development Limited, Empire Harvest Development Limited and Stamford Star Finance Limited. These creditors are represented by Messrs. Horvath & Giles. I shall refer to them as "the H&G clients". Three other creditors also support the formation of a committee but have not appeared at the hearing.

3. The application is opposed by Mr. William Chan, whose solicitor has attended the hearing. Ten other creditors, who are former employees of the Company with the exception of one of them, are opposed to the formation of a committee for fear that this might delay the progress of the liquidation. They have not appeared at the hearing.

4. At the conclusion of the hearing, I made an order for a committee of inspection to be appointed and directed that it should be made up of six members, two from the representatives nominated by HCK and IAL, two from the representatives of the H&G clients and two from the other three creditors who have indicated their willingness to participate in the committee. These are the reasons for my decision.

The background

5. On 27 July 2000, the day after I made an order to wind up the Company, I ordered that special managers were to be appointed to assist the Official Receiver, who had been constituted the provisional liquidator of the Company, as the affairs of the Company were complex. The majority of its assets are held by subsidiaries, of which the most valuable asset is an investment held through a subsidiary, Wah Nam Infrastructure Investment Limited ("WNII"), in three joint venture operations in toll roads and bridges in China. The other asset of significant value is the listed status of the Company in the Hong Kong Stock Exchange. The Company's shares were suspended from trading on 20 July 2000, and as the de-listing process had begun, there was a need to act expeditiously to comply with the procedures of the Stock Exchange if it was intended to have a restructure of the Company with new investors and to apply for resumption of trading of the Company's shares.

6. On the application of the Official Receiver, I made an order on 26 September 2000 that the Official Receiver was at liberty to convene only the first meeting of creditors for the purpose of considering the appointment of liquidators and a committee of inspection. This took place on 24 October 2000. Resolutions were passed by a majority in value of the creditors for the appointment of liquidators and a committee of inspection made up of five members, two from HCK and IAL and three from the H&G clients.

7. On 14 November 2000, a Notice of Motion was taken out by Mr. William Chan and Wah Nam Holdings Company Limited under rule 199 of the Companies (Winding-up) Rules to appeal from certain acts or decisions of the Official Receiver at the first meeting of creditors. Relief was sought to declare invalid the resolutions passed. It was alleged that the Official Receiver's decisions to admit the full claims of HCK and IAL for voting were erroneous in that those claims were highly inflated. The Official Receiver's decisions to admit in full or at all the claims of three of the H&G clients were challenged, as were his decisions to refuse to admit for voting the claims of various subsidiaries of the Company. The Notice of Motion was adjourned for argument on 30 November 2000 after directions were given for the filing of evidence.

8. On 10 January 2001, the Official Receiver sought directions from the court as no progress was made in the appointment of liquidators for the Company in view of the dispute between Mr. William Chan and the other creditors as to voting values and the choice of liquidators. The Official Receiver proposed as a compromise that Mr. John Robert Lees and Mr. Desmond Chung Seng Chiong of Ferrier Hodgson be appointed as liquidators as it would be in the interests of all creditors that an appointment was made as soon as possible. As there appeared to be no provision under section 194 or any other provision in the Ordinance that would empower the court to appoint liquidators that had not been nominated by the first meetings of contributories or creditors, the Official Receiver later sought a regulating order under section 227A so that liquidators may be appointed under section 227B on the application of the Official Receiver.

9. On 27 January 2001, I made a regulating order in this winding-up under section 227A(1) and on the application of the Official Receiver, I ordered that (1) the summoning of the first meeting of creditors and the first meeting of the contributories be dispensed with under section 227B(1)(a); (2) Mr. Lees and Mr. Chiong be appointed joint and several liquidators of the Company under section 227B(1)(b); (3) there be no order as to the appointment of a committee of inspection under section 227B(1)(c) but the liquidators do have liberty to apply; (4) the Notice of Motion of 14 November 2000, which had been set down for hearing, be adjourned sine die; and (5) the special managers be discharged.

10. Since the liquidators took office, they have actively taken steps to realize the assets of the Company and to invite offers of investors to acquire the valuable assets being the interest of WNII in the joint ventures in China and the listed status of the Company. HCK, IAL and the H&G clients were dissatisfied with some of the measures taken by the liquidators as well as measures not taken, which have been ventilated extensively in the correspondence exchanged between their solicitors and the liquidators, the details of which I do not propose to go into. Because of this, HCK, IAL and the H&G clients wished to have a committee of inspection appointed to work with the liquidators so that there would be greater transparency and consultation in the conduct of the liquidation. As there were differences in the constitution of the committee and whether HCK, IAL and the H&G clients should have greater representation on the committee or be limited to two representatives (one for HCK and IAL and one for the H&G clients collectively), HCK and IAL took out the present application on 11 February 2002.

The application

11. The summons was issued under section 200(5) of the Ordinance, which provides that if any person is aggrieved by any act or decision of the liquidator, that person may apply to the court and the court may confirm, reverse or modify the act or decision complained of and make such order as it thinks just. In addition, the inherent jurisdiction of the court was invoked. In correspondence, the liquidators have taken the point that it might not be appropriate for the petitioning creditors to apply for the appointment of a committee of inspection, as a regulating order has been made in this instance, citing Re Guangnan (KK) Supermarket Ltd. [2002] 1 HKC 188. In that case, the provisional liquidators applied for a regulating order under section 227A and the appointment of liquidators and a committee of inspection under section 227B. Yuen J. queried the locus standi of the provisional liquidators to apply for orders under section 227B(1) as it is provided in that section that the court may make certain orders "on the application of the Official Receiver" and no other possible applicant is mentioned, unlike section 227A(1). As a result, a joint application was made by the Official Receiver and the provisional liquidators and the court made the orders sought under section 227B(1) on that basis.

12. In the present case, various orders under section 227B(1) had been made in January 2001 on the application of the Official Receiver. As regards the appointment of a committee of inspection, the order I made on 27 January 2001 was that there would be no order in that respect but the liquidators were given liberty to apply for the appointment of a committee. Under section 227A(4), it is provided that where any order made under, inter alia, section 227B prescribes any procedure it shall be deemed to be in substitution for the procedure which would be required by the Ordinance but for the making of such order. Mr. Cameron Scott, who appeared for the liquidators, informed me at the hearing that the liquidators have decided to join in the application of HCK and IAL for the appointment of a committee, although the liquidators would seek a different order regarding the composition of the committee. I am satisfied that the application, made jointly by HCK, IAL and the liquidators, is made on a proper procedural basis.

Whether a committee of inspection should be appointed

13. In opposing the application, Mr. David Lo, who appeared for Mr. William Chan, submitted that on 27 January 2001 the court made no order on the appointment of a committee although the liquidators were given liberty to apply. He argued that there is no material change in circumstances to warrant the appointment of a committee at this stage. Proposals for the restructure of the Company are being implemented with the objective of seeking resumption in trading of the shares of the Company. Unless the restructuring of the Company has fallen through and the Company then proceeds to liquidation, there is no need to form a committee. It was further submitted that if the court should decide on the formation of a committee, the appointment of the committee should be voted on by the creditors of the Company.

14. The appointment of a committee of inspection is a matter for the discretion of this court. Under section 227B(2), it is provided that where under subsection (1) the court makes any appointment of a committee, it shall not be necessary to ascertain the wishes of the creditors or contributories, and the provisions of section 206(1) and (2) shall cease to apply. There had been a first meeting of the creditors called by the Official Receiver on 24 October 2000, with the result that the resolution passed was challenged in an application taken out by Mr. William Chan and another.

15. I have had regard to the correspondence exchanged between the liquidators and the solicitors for the various creditors seeking appointment of a committee. It seems to me that although the liquidators have held informal meetings with these creditors to address their concerns about the restructuring proposals and the valuation of the Company's assets relating to those proposals, communication could be improved. These creditors do have the resources to make a meaningful contribution to the work in the liquidation and they are willing to give their time and input. If they were to be provided with information in a timely manner and on a regular basis, they should be able to make useful and constructive contribution instead of negative criticism after the event. Hopefully, this may dispel some of their dissatisfaction in the way the liquidators have handled certain matters. There is no evidence and no suggestion that these creditors who are vocal about their concerns do not have in mind the best interest of the general body of creditors, which is to ensure that the liquidation is carried out expeditiously and effectively with the maximum assets realized for the benefit of all the creditors.

16. I should mention that a committee is more than just a consultative body for the liquidators, as the liquidators would appear to suggest in their affidavit. Under section 200(1), it is provided that the liquidator of a company which is being wound up by the court shall, in the administration of the assets of the company and in the distribution thereof among its creditors, "have regard to any directions that may be given by resolution of the creditors or contributories at any general meeting, or by the committee of inspection, and any directions given by the creditors or contributories at any general meeting shall in case of conflict be deemed to override any directions given by the committee of inspection." The function of the committee is to assist the court in its supervisory role over the liquidators, and avoid the need for time-consuming and costly applications to the court (Re Goodway Ltd. [1999] 1 HKC 141 at 148E).

17. I am of the view that the appointment of a committee of inspection would facilitate the progress of this liquidation. I reject the submissions that a committee would delay or hinder the liquidators' work. I therefore order that a committee of inspection is to be appointed for the Company.

The constitution of the committee

18. Mr. Anthony Chan, who appeared for HCK and IAL, submitted that his clients should have two representatives in a committee of five members. Mr. Ling Chun Wai, who appeared for the H&G clients, likewise submitted that his clients should be represented by two members in a committee of five. Mr. Lo submitted on behalf of Mr. William Chan that HCK, IAL and the H&G clients should not be represented in the committee at all because their claims are disputed by Mr. Chan. Mr. Scott, for the liquidators, accepted that HCK, IAL and the H&G clients should be represented but their representation should be limited to one member for each of the two camps. He submitted that in a committee of five, the other three members should be the other three creditors who have expressed interest in serving on the committee so as to give a more balanced representation of all the creditors.

19. Firstly, it seems to me there is no question of excluding HCK, IAL and the H&G clients from the committee. This is hardly a realistic proposition. The combined claims of HCK, IAL and the H&G clients represent a total of 65.62% of the value of the known claims, whether disputed or not (19.88% for the H&G clients and 45.74% for HCK and IAL). If one takes into account the amount of the disputed claims for these creditors according to a preliminary review of the liquidators, the total undisputed claims for these creditors would range from 31.52% (17.09% for the H&G clients and 14.43% for HCK and IAL) to 22.5% (6.18% for the H&G clients and 16.32% for HCK and IAL). On any view, these creditors are substantial creditors and they should be represented on the committee.

20. Secondly, there is consensus of all counsel that the size of the committee should not be too big, as that may prove unwieldy. In Re Guangnan (KK) Supermarket Ltd., supra., it was held that a committee of eleven was too large and the court reduced the members to seven, having regard to the unreported decision of Re BCCI Finance International Ltd and Re Bank of Credit and Commerce Hong Kong Ltd. (1992) CWU No. 217 and 218 of 1991 and the English Insolvency Rules which provide that the committee of inspection should be between three and five persons.

21. Thirdly, it is not disputed that there should be balanced representation of the creditors on the committee so that it would be fairly representative of the general body of creditors. What is in dispute is how that balance should be achieved. Mr. Scott submitted that the other three creditors who have expressed interest in serving on the committee (Online Credit Ltd., Corporate Link Ltd., and Karison Travel Ltd.) should all be appointed with two members representing HCK, IAL and the H&G clients so that the committee would not be controlled or influenced by a specific group of creditors. He referred me to the unreported decision of Yuen J. in CA Pacific Finance Ltd., HCCW No. 36 of 1998, 16 December 1999, in which the court made an order under section 227B for three vacancies in the committee of inspection to be filled and a minor creditor who had expressed a keen interest in the liquidation was appointed as "it would also be fair that parties or creditors with small amounts of claims should also be represented so that the liquidation would take into account a wide spectrum of parties involved."

22. Mr. Chan and Mr. Ling submitted that their respective clients should be represented by two members for each camp instead of one each to achieve a fair representation. They are without doubt significant creditors. The combined claims of the other three creditors who have expressed interest in serving are just 4%, if one takes the most generous view and maximum percentages calculated by the liquidators, and only 1.7% on the least favourable scenario. As the decisions of the committee are made by a majority vote of its members and not by the size of their claims (see section 207 (3)), unlike a meeting of creditors (see section 287(2)), the three minor creditors would have a controlling voice in the proceedings of the committee. This would create an imbalance in the sense that the representation is not truly reflective of the creditor's interest in the liquidation. Further, a minor creditor who has fewer resources at his disposal and less interest at stake in the liquidation is unlikely to devote as much time and energy to the affairs in the liquidation and the CA Pacific Finance case is an example of members losing interest so that the court had to make an order to fill vacancies after half of the members resigned. I agree with these submissions.

23. In my view, it would be appropriate in these circumstances to allow the respective clients of Mr. Chan and Mr. Ling to have two representatives each on the committee. To achieve a proper balance so that the interests of the minor creditors would be properly reflected and looked after, I have decided that they too should have two representatives on the committee, making it a total of six members.

Orders

24. I order that a committee of inspection be appointed for the Company and it is to be made up of six members, comprising two from the representatives nominated by HCK and IAL (Mr. Bernard Tam and Mr. Raymond Ng), two from the representatives of the H&G clients (Mr. Terence Ho and Mr. Samson Chen), one from Online Credit Ltd. (Mr. Fai H. Chan) and a duly authorised representative from Corporate Link Ltd.

25. I further order that the costs in this application of the clients represented by Mr. Chan and Mr. Ling and the costs of the liquidators be taxed and paid out of the Company's assets and that the costs of the liquidators be treated as costs in the liquidation.

	(S. Kwan)
	Judge of the Court of First Instance
	High Court

Representation:

Mr. Anthony Chan, instructed by Messrs. King & Co., for the petitioning Creditors

Mr. Ling Chun Wai, instructed by Messrs. Horvath & Giles, for the supporting creditors

Mr. David Lo, of Messrs. David Lo & Partners, for Mr. William Chan

Mr. Cameron Scott, of Messrs. Allen & Overy, for the joint and several liquidators

HCCW000166E/2000

HCCW 166/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 166 OF 2000

____________

IN THE MATTER of Wah Nam Group Limited and IN THE MATTER of the Companies Ordinance (Cap. 32)

____________

BETWEEN
	HCK CHINA INVESTMENTS LIMITED	1st Petitioner
	INVESTMENT AUSTASIA LIMITED	2nd Petitioner
	AND
	WAH NAM GROUP LIMITED	Respondent

____________

Coram: Deputy High Court Judge S. Kwan in Court

Date of Hearing: 26 July 2000

Date of Ruling: 26 July 2000

 

_______________

R U L I N G

_______________

 

1. This is an unusual application taken out by Wah Nam Group Limited ("the Company"). The summons issued on 25 July 2000 seeks an order that the hearing of the petition be adjourned for 6 weeks. This summons was taken out after the hearing of the petition had been concluded on 21 July 2000 and after I have ordered that the matter be adjourned to the afternoon of 26 July for delivery of judgment. The reason for the lateness of the application is as follows.

2. On 24 July 2000 the Company received a Letter of Intent from China Investment Group Limited ("China Investment") to purchase the 60% interest in a PRC joint venture called Hangzhou Huanan Engineering and Development Co. Ltd ("HHED") which is owned by Wah Nam Infrastructure Investment Limited ("WNII"). WNII is a BVI company and is a wholly owned subsidiary of the Company. The purchase price mentioned in that letter is "approximately than [sic] HK$100 million subject to contract". It is further stated in that letter that China Investment would instruct its solicitors to prepare the draft sale and purchase agreement and in the meantime the Company was asked to instruct the directors of WNII to assist China Investment in performing due diligence on the proposed acquisition.

3. The letter is headed "subject to contract", and it is expressly stated that it is a letter of intent and is not legally binding. The valuable asset owned by HHED is a toll road being Highway G320 in Hangzhou. China Investment is owned 44.06% by Henderson Investment Limited.

4. The Company's affirmation in support of this application was made by a director Miss Chow Kit Lin. She stated in paragraph 5 of her affirmation that she was advised by Mr Chan Pak To William who is another director of the Company and has been in charge of the negotiation with China Investment and she veily believed that the formal contract for the sale and purchase of HHED is expected to be signed within 14 days of her affirmation. This is a substantial transaction if it is carried through. Save for the one page letter of intent, I have not seen any document regarding the "negotiation" mentioned by Miss Chow. No details have been provided of this negotiation. Mr William Chan, the director who is in charge of the negotiation, made no affirmation in support of this application. The court is not told what is the basis of his expectation that there is to be a formal contract for sale and purchase within 14 days. I should also mention that Mr William Chan has featured prominently in these proceedings. He has played an important role in the affairs of the Company at all material times. Although he left the board of directors at one stage he has rejoined in early July 2000. He has not made any affirmation in the winding-up proceedings to date.

5. In exercising my discretion whether to grant or refuse an adjournment, I have taken into account the following matters apart from the ones I have already mentioned regarding the supporting affirmation.

6. Very little information has been placed before the court on the financial position of WNII. I note from the audited report in Chinese of HHED as at 31 December 1999 that there is a substantial liability of WNII owing to HHED in the sum of RMB56 million. In the last audited account of the Company made up to 31 December 1998, it is stated that the Company and its subsidiary had pledged its 60% shareholdings in HHED (being the subject of the proposed sale) with its net asset value amounting to approximately RMB109 million to HHED's PRC joint venture partner, Hangzhou Lu Da Highway Engineering Company, to secure for Lu Da or its related company to grant guaranties in favour of certain banks in obtaining bank loans of RMB35 million for HHED. I have no information whether there has been further borrowings by WNII or the extent of the prior charge on WNII's 60% shareholding in HHED. The court is left in doubt as to what would be the net proceeds received by WNII and the Company even if the deal were to go through.

7. As I have mentioned earlier, the letter from China Investment is merely a letter of intent, there is no certainty whether the deal would go through or not. There had been previous attempt by the Company and WNII to dispose of the 60% interest in HHED. This is mentioned in the last audited account of the Company referred to earlier. It is stated that there was an intended disposal of the 60% interest for a projected cash consideration of HK$85 million in September 1999 and a non-binding letter of intent had been signed with the potential purchaser. Nothing had come of that letter of intent.

8. The next matter I wish to mention is a Mareva injunction granted by Beeson J in HCA No. 12439 of 1999 on 15 December 1999. This is an action brought by the supporting creditors against the Company and others in respect of 4 loan notes. An injunction was granted to restrain the disposal of assets up to HK$61 million. One of the assets specifically covered by that injunction is WNII's 60% interest in HHED. The Company says that if an adjournment is granted today, an application would be made in HCA12439 of 1999 to discharge or vary that injunction. I have been told by counsel appearing for the supporting creditors that there was a previous attempt to vary or discharge the injunction in January this year and the application was unsuccessful.

9. I note further that notwithstanding the Company has filed an affirmation in March 2000 deposing that the Company and its subsidiaries hold unencumbered assets of HK$93 million, which is more than the limit provided for in the injunction, the Company has not taken out any application to discharge that injunction. I think there is great uncertainty if the Company would succeed in getting a discharge or variation.

10. Given the uncertainties whether there would be a deal to sell the 60% interest in HHED, the uncertainties regarding the amount of net proceeds to be received, the paucity of information on the financial position of WNII, and the uncertain prospects of a variation or discharge of the injunction, I do not think it would be proper to exercise my discretion to grant an adjournment. I would mention that if a winding-up order is to be made, the deal, if there is one, would not be affected. I am sure the liquidator would take the matter in hand and exercise his best endeavours to negotiate with the intended purchaser to reach a deal beneficial to all.

 

 

 

Representation:

Mr Winston Poon, SC leading Miss Adriana Ching, instructed by Messrs King & Co, for the Petitioners

Mr Chan Pat Lun, instructed by Messrs Horvath & Giles, for the supporting creditors

Mrs Dora Chan, instructed by Messrs Siao, Wen & Leung, for the Company

Mr Alfred Chan, for the Official Receiver's Office

HCCW000166D/2000

HCCW 166/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 166 OF 2000

____________

IN THE MATTER of Wah Nam Group Limited and IN THE MATTER of the Companies Ordinance (Cap. 32)

____________

BETWEEN
	HCK CHINA INVESTMENTS LIMITED	1st Petitioner
	INVESTMENT AUSTASIA LIMITED	2nd Petitioner
	AND
	WAH NAM GROUP LIMITED	Respondent

____________

Coram: Deputy High Court Judge S. Kwan in Court

Dates of Hearing: 14, 20 and 21 July 2000

Date of Handing Down of Judgment: 26 July 2000

 

_______________

J U D G M E N T

_______________

 

1. This is a petition for the winding-up of a publicly listed company, Wah Nam Group Limited ("the Company"). The trading of the Company's shares has been suspended in the Hong Kong Stock Exchange. The petition was brought by HCK China Investments Limited ("HCK"), a company incorporated in the British Virgin Islands and Investment Austasia Limited ("IAL"), a company incorporated in the New South Wales and whose shares are listed on the Australian Stock Exchange. They will be referred to collectively as "the Petitioners".

2. 3 creditors of the Company have appeared on the hearing of the petition to support it. They are Excel Noble Development Limited ("Excel"), Unbeatable Assets Limited ("Unbeatable") and Stamford Star Finance Limited ("Stamford"). Excel and Unbeatable are the petitioners of a winding-up petition against the Company in HCCW No. 130 of 2000, which was ordered to be stood over until the petition in the present proceedings has been dealt with.

3. At the outset of the hearing, I gave leave to the Petitioners to amend the Petition by inserting the words "as is evidenced in a document described as" before the words "promissory note" in each of paragraphs 5(a) to (d) and 6(a) to (d). The purpose of the amendments is to make clear that the Petitioners do not rely on the 8 documents on which the debts are founded as promissory notes. Mr Winston Poon, SC, who appeared with Miss Adriana Ching in this hearing, has accepted in his skeleton argument that notwithstanding each of the documents was stated to be a promissory note on the face of the document, none of them could take effect as promissory notes under the Bills of Exchange Ordinance, Cap. 19. It is, however, contended by the Petitioners that the "promissory notes" are valid as formal contracts or contracts by deed without the necessity for consideration because they are written documents, sealed with the common seal of the Company and there was delivery. Alternatively, if the "promissory notes" are not enforceable as deeds, they are evidence of indebtedness of binding agreements for which consideration had been given. The aggregate sum of the 8 "promissory notes" given by the Company to the Petitioners is A$7.35 million, with interest thereon at 8% per annum from 15 March 1999 to 14 December 1999.

4. The petition is brought under Section 177(1)(d) of the Companies Ordinance, Cap. 32, namely that the Company is unable to pay its debts. The Petitioners rely on Section 178(1)(a) (i.e. service of statutory demand) and/or Section 178(1)(c) (that it is proved to the satisfaction of the court that the Company is unable to pay its debts).

The background facts

5. The background facts may be given as follows.

6. The 8 "promissory notes" were given by the Company to the Petitioners pursuant to Clause 3.1(c)(ii) of an agreement dated 16 April 1998 made between IAL of the first part, the Company of the second part and the then directors of IAL of the third part. I shall refer to this agreement as the "Acquisition Agreement" following the terminology used in a circular of the Company to its shareholders dated 26 June 1998. By the Acquisition Agreement, IAL agreed to sell to the Company the entire issued share capital of two subsidiaries wholly owned by IAL. They are IAL HK Limited ("IAL HK") and Wah Nam Infrastructure Investment Limited ("WNII"). The total purchase price was A$49 million of which A$41.65 million was settled by the Company on completion on 15 September 1998, save for a cheque for A$1,080,453.00 which was subsequently countermanded by the drawer and is not relevant to the present proceedings as accepted by the Company. The balance of the purchase price in the sum of A$7.35 million was to be paid within 15 months of completion, i.e. by 15 December 1999.

7. Completion of the Acquisition Agreement took place on 15 September 1998 and the Company acquired the entire issued share capital of IALHK and WNII. 8 "promissory notes" were issued by the Company, 4 in favour of HCK and the other 4 in favour of IAL, as provided under Clause 3.1(c)(ii) of the Acquisition Agreement, in the total sum of A$7.35 million.

8. The first instalment of interest under the 8 "promissory notes" was payable on 15 March 1999 and was duly paid by the Company. The second instalment of interest, which was payable on 15 September 1999, was not paid by the Company to HCK and IAL. As a result, HCK and IAL brought proceedings in the High Court in HCA No. 15615 of 1999 and HCA No. 15616 of 1999 to recover the second instalment of interest. The capital sum and the final instalment of interest under the "promissory notes" were due on 15 December 1999. As no payment was made by the Company, 8 statutory demands dated 22 January 2000 were served on the Company, one in respect of each "promissory note". Eventually, this petition was presented on 23 February 2000, within a fortnight of the other petition presented by Excel and Unbeatable in HCCW No. 130 of 2000.

Are the "promissory notes" enforceable as deeds?

9. In each of the "promissory notes", it is stated that the Company "hereby promises to pay" to HCK or IAL the amount stated therein together with interest as stipulated on or before 15 December 1999 and that the amount was payable at Sydney. The common seal of the Company was affixed to each of the documents and it is stated on each document that the common seal was affixed by authority of a resolution of directors in the presence of two of the directors of the Company at that time. It is not alleged by the Company that the directors had no authority to affix the common seal, nor is it alleged that the documents were not duly executed.

10. What is contended by Mrs Dora Chan, who appeared for the Company, is as follows. It is argued that if the "promissory notes" are subject to Australian Law, they cannot take effect as deeds in view of Section 127(3) of the Corporations Law of Australia. If the applicable law is common law, it is submitted that the "promissory notes" would not take effect as deeds because they were not intended to be made as deeds.

11. Under Section 127(3) of the Corporations Law of Australia, it is provided inter alia that "a company may execute a document as a deed if the document is expressed to be executed as a deed." It is argued by the Company that none of the 8 documents in question was "expressed to be executed as a deed". In fact, each of them was stated to be a promissory note. This argument based on Australian law can be disposed of quickly. In the Corporations Law, "company" is defined under Section 9 to mean a company registered or taken to be registered under the Corporations Law of Australia. The Australian legislation clearly has no application to a company incorporated under the laws of Hong Kong. It has no bearing whatsoever to the execution of a deed by the Company, which was incorporated under the Companies Ordinance.

12. I turn to consider the argument based on the common law as the applicable law. Before I do so I should point out that the position in the United Kingdom is different because the requirement of sealing was abolished for all deeds executed by an individual and by a company incorporated under the Companies Acts by legislation enacted in 1989. Under Section 1(2) of the Law of Property (Miscellaneous Provisions) Act 1989, which governs the execution of deeds by an individual, it is provided that for such an instrument to be a deed, it must make "clear on its face that it is intended to be a deed by the person making it or, as the case may be, by the parties to it (whether by describing itself as a deed or by expressing itself to be executed or signed as a deed or otherwise)." In respect of deeds executed by companies, it is provided under Section 36A(5) of the Companies Act 1985, as amended in 1989, that "a document executed by a company which makes clear on its face that it is intended by the person or persons making it to be a deed has effect, upon delivery, as a deed." There is no Hong Kong legislation equivalent to the statutory provisions in the United Kingdom enacted in 1989.

13. Notwithstanding this, Mrs Dora Chan has argued that at common law, it is still a requirement that for a document to take effect as a deed, it must be intended as a deed by the maker of the document. In support of that proposition, she has referred me to an article entitled "Breaking the seal: the new law on deeds" by Graham Virgo and Charles Harpum, published in [1991] LMCLQ 209 in which the authors dealt with the position at common law and in respect of the requirement of sealing, they have made the following statements:

"As regards bodies corporate, the sealing of a document made by a corporation with the corporate seal authenticated it as the corporation's. However, it did not of itself make the instrument a deed. In most affairs a corporation could act only under its seal. It followed, therefore, that a document bearing a corporate seal was not a deed unless the intention to make it so was apparent." (at p. 210; emphasis supplied)

14. No authority has been cited by the authors in support of the statement in italics.

15. Mrs Dora Chan has also referred me to Chitty on Contracts, 28th ed, Vol 1 para. 1-045; "The Law of Contract" by Treitel, 10th ed, p. 145; and "The Law of Contract" by Cheshire, Fifoot and Furmston, 13th ed, p. 29.

16. It seems to me that Mrs Chan has conflated the proposition of the authors of the article in the above statement I have italicised with the changes introduced to English law by the 1989 legislation. It is quite clear that the extracts in Chitty and Treitel she has referred me to are concerned with the position as governed by the Acts in 1989. Even if I were to accept that the position at common law is as set out by the authors in the italicised statement (and I repeat that the authors have not cited any authority in support of that statement), it is quite clear from the reading of the article that the authors have not regarded the position at common law as they understood it to be the same as the provisions introduced into English legislation in 1989. At p. 224 of the article, in which the authors discussed section 1(2) of the Law of Property (Miscellaneous Provisions) Act 1989, they have stated as follows:

"Section 1(2) provides that an instrument shall not be a deed unless two pre-conditions are satisfied. One of these is not new: the deed must be validly executed as a deed by the person making it or the parties to it. The other is a novelty. An instrument must now make it clear on its face that it is intended to be a deed by the person making it or the parties to it. This may be done by describing an instrument as a deed, or by stating that it is executed or signed as a deed, 'or otherwise' ... The requirement that a document should be a deed only if that is apparent from its face is a necessary concomitant of changes to the manner in which a deed made by an individual or by a company must now by executed." (emphasis supplied)

17. Thus, even assuming that the authors have correctly described the position at common law when they stated that the intention to make a document bearing a corporate seal a deed must be apparent, they have not stated that such an intention must be apparent "on the face" of the document. It seems to me that Mrs Chan has misunderstood the position at common law.

18. I was referred by Mr Poon to para. 1-042 in Chitty on Contracts, which in my view sets out correctly the position at common law:

"At common law, all deeds were documents under seal, but not all documents under seal were and are deeds. A deed must either:

(a) effect the transference of an interest, right or property, or

(b) create an obligation binding on some person or persons, or

(c) confirm some act whereby an interest, right or property has already passed."

19. It is submitted by Mr Poon that the "promissory notes" are deeds because they "create an obligation binding on some person or persons", as apparent from the opening words of the document which provided that the Company "hereby promises to pay". I accept Mr Poon's submissions. I reject Mrs Chan's submissions that if the documents were stated to be "promissory notes", it could not have been intended by the maker of the documents that the documents were also made as deeds. I hold that each of the "promissory notes" is valid and enforceable as a deed with the consequence that it would not be necessary for the Petitioners to show that they had provided consideration.

Was consideration for the debts provided by the Petitioners?

20. If I am wrong in holding that the "promissory notes" are valid as deeds, I go on to consider whether there was consideration provided by the Petitioners for the debts due from the Company as evidenced by the "promissory notes". I wish to make clear that this part of my ruling is strictly obiter as I have held that the "promissory notes" are valid and enforceable as deeds and that it would not be necessary for the Petitioners to establish consideration.

21. As set out in the background facts, the "promissory notes" were given by the Company in part payment of the purchase price of the shares sold by IAL to the Company under the Acquisition Agreement. As provided in Clause 3.1(c)(ii) of the Acquisition Agreement, the Company was to give 4 promissory notes in favour of IAL and the other 4 in favour of HCK and that the aggregate sum of the 8 notes would be A$7.35 million.

22. There is no doubt that IAL had provided consideration for the debt of A$3.35 million as evidenced by the 4 "promissory notes" given by the Company to IAL. Completion of the sale and purchase of the shares in question by IAL to the Company had taken place on 15 September 1998. But was there consideration provided by HCK in respect of the debt of A$4 million as evidenced by the 4 "promissory notes" given by the Company to HCK? HCK was not a party to the Acquisition Agreement. It had no obligation to perform under that agreement. Consideration must move from the promisee, in this case, HCK. This had not happened here. There were other share sale transactions taking place contemporaneously between the Company, HCK, IAL and other entities, which I shall deal with in the subsequent part of this judgment. However, in respect of the obligation of the Company to pay the purchase price of the shares under the Acquisition Agreement, HCK had not provided any consideration for it.

23. Mrs Chan has taken a lot of points to oppose this petition for winding-up. However, she has made no submission on this point and seems to have tacitly accepted that consideration had been provided by IAL and HCK. Mr Poon has not alluded to the possibility of HCK providing no consideration and merely submitted that there was no denial by the Company that consideration had not been passed to the Company under the Acquisition Agreement because IAL had performed its side of the bargain.

24. The position where there is more than one promisee and one of them has provided no part of the consideration is discussed in Chitty on Contracts at paras. 3-039 to 3-042. Where a promise is made to A and B jointly, it can be enforced by both of them even though the whole consideration was provided by A. Where a promise is made to A and B severally, each promisee must provide consideration for what is a separate promise to him. Where a promise is made to two persons jointly and severally, the author's view would appear to be that the promisee who has provided no consideration would be unable to sue on any several promise for this is ex hypothesi an independent promise and no consideration for it has moved from that promisee. The author has further commented that the probable view would be that the promisor makes no promise at all to the promisee who has provided no consideration but only has authority to pay him.

25. In the present case, the debt in the aggregate sum of A$4 million to HCK was evidenced by 4 "promissory notes" given by the Company to HCK. In my view, the Company's promise to pay HCK the debt in question was made to HCK severally. As HCK had not provided consideration for the debt, HCK would not be able to enforce the Company's promise to pay A$4 million. This would in no way affect the debt of A$3.35 million due to IAL, as IAL had provided consideration to the Company in respect of that debt. IAL would also be able to enforce the promise of the Company made to it under the Acquisition Agreement to pay the balance of the purchase price of A$7.35 million, which would include the A$4 million covered by the "promissory notes" to HCK, as IAL had provided consideration for this promise. I wish to repeat and emphasize that this part of my judgment is obiter.

Were the statutory demands valid - s. 178(1)(a)?

26. Two points are taken by Mrs Chan for the Company. Firstly, it is contended that the statutory demands are not valid because they were based on the notes as promissory notes and not as a debt under the Acquisition Agreement. Secondly, it is argued that the debts as amounts due under the Acquisition Agreement were never demanded by the Petitioners as the debts were only demanded as amounts due under various promissory notes.

27. The relevant part in each of the statutory demands is as follows:

"We, Messrs King & Company, solicitors for [HCK/IAL] ... HEREBY on behalf of [HCK/IAL] DEMAND payment of the amount of [A$1,000,000.00/A$837,500.00] now due by you to [HCK/IAL] together with interest thereon at the rate of 8% per annum from the 15 March 1999 to 14 December 1999 amounting to [A$60,000.00/A$50,250.00] under the promissory note No. 1 [or Nos. 2 to 8 as the case may be] made by your company to [HCK/IAL] on 15 September 1998."

28. There is no prescribed form in the Companies Ordinance for a statutory demand for the purpose of Section 178(1)(a). That provision states that "if a creditor.... to whom the company is indebted in a sum exceeding $5,000.00 then due, has served on the company.... a demand under his hand requiring the company to pay the sum so due", the company shall be deemed to be unable to pay its debt if it has for 3 weeks thereafter neglected to pay or to secure or compound for the debt. So long as the debt is adequately described and the company is able to ascertain from the demand what is due by it, the requirement under section 178(1)(a) would have been satisfied. It is not required under the statute to describe the basis upon which the debt is due.

29. The statutory demands in question have identified the amount and referred to the document which was made by the Company to HCK or IAL on 15 September 1998 so as to enable the Company to ascertain what was the debt due by the Company to HCK or IAL. I hold that each of the statutory demands is valid and Section 178(1)(a) can be relied upon by the Petitioners in that the Company should be deemed to be unable to pay its debts as the Company had for three weeks thereafter neglected to pay the debts or to secure or compound for the debts.

Inability to pay the debt - s. 178(1)(c)

30. The Petitioners have adopted a fall-back position in that they seek to rely on Section 178(1)(c) if I should rule that the statutory demands are not valid. It is submitted by Mr Poon that where a company is under an undisputed obligation to pay a debt and has failed to do so, it could be inferred that it is unable to do so (Cornhill Insurance plc v. Improvement Services Ltd [1986] 1 WLR 114). The reason for non-payment of a debt has to be substantial and it is not enough if a thoroughly bad reason for disputing a debt is put forward honestly (Re Taylor's Industrial Flooring Ltd [1990] BCC 44).

31. The question here is whether the debts of HCK and IAL are bona fide disputed by the Company on substantial grounds. In the absence of a substantial ground of defence to the debts, I could infer evidence of insolvency. The onus is on the Company to "adduce sufficiently precise factual evidence to satisfy the court that it has a bona fide dispute on substantial grounds" (Re ICS Computer Distribution Ltd [1996] 1 HKLR 181 at 183I).

Is there a bona fide dispute of the debts on substantial grounds?

32. As I understand Mrs Chan's submissions, the Company does not dispute that there is a debt of A$7.35 million owed by the Company under the Acquisition Agreement but asserts that the Company has a set-off or counterclaim in respect of the following amounts:

(1) A$2,101,408.00

This figure is arrived at by taking the amount of A$2,432,760.00 which is the amount payable to Charmlink International Limited ("Charmlink") and Wise Spencer Limited ("Wise Spencer") under a share sale agreement dated 15 April 1998 ("the Eutopia Agreement") less A$331,352.00 which is the amount paid by IAL under an arrangement to buy back 20% of its shares. It is unnecessary for the purpose of this judgment to go into the buy back arrangement, suffice it to say that the amount which is the subject of the alleged set-off or counterclaim is the purchase price of the shares sold under the Eutopia Agreement, the net figure of which is about A$2.1 million.

(2) A$4,322,468.00

This is an amount allegedly due to Aachen (Asia Pacific) Consultants Limited ("Aachen") under a mandate agreement dated 5 December 1997 ("the Mandate Agreement"). By a deed made on 6 April 2000 between Aachen as the assignor and the Company as the assignee, the debt allegedly due to Aachen under the Mandate Agreement was assigned to the Company.

33. It should be noted that even after taking into account the amounts in (1) and (2) above, the Company still owes A$926,124.00 to the Petitioners. I turn to consider each of the alleged grounds for set-off.

The amount allegedly due under the Eutopia Agreement

34. It is contended by the Company that the Acquisition Agreement (under which the 8 "promissory notes" were given to the Petitioners) was part of a series of inter-dependent transactions which the Eutopia Agreement also formed part. The Eutopia Agreement has not been completed. Due to the default of the purchaser in the Eutopia Agreement, the Company is deprived of the proceeds under the Eutopia Agreement (in the net sum of approximately A$2.1 million) which would have been applied towards settlement of the purchase price under the Acquisition Agreement.

35. It is necessary to give a description of the parties and the agreements in the transactions said to be inter-dependent. There are a total of 5 agreements. I shall use the terminology in the circular of the Company to shareholders dated 26 June 1998 to avoid confusion, as different terminology was used in the affirmations and various share sale agreements. The 5 agreements are as follows:

(1) the Acquisition Agreement

This is an agreement dated 16 April 1998 made between IAL as the vendor and the Company as the purchaser by which IAL agreed to sell to the Company the entire share capital of WNII and IALHK, two subsidiaries wholly owned by IAL. The purchase price was A$49 million.

(2) the Disposal Agreement

This is an agreement dated 16 April 1998 made between the Company as the vendor and HCK as the purchaser by which the Company agreed to sell to HCK about 25.1 million shares in IAL (which represented 50% of the total issued shares of IAL). The purchase price was approximately A$24.3 million.

(3) the IAL Agreement

This is an agreement dated 16 April 1998 made between HCK as the vendor and IAL as the purchaser by which HCK agreed to sell to IAL the entire issued share capital of Golden Glory International Limited ("Golden Glory"). The purchase price was A$35 million.

(4) the HCK Agreement

This is an agreement dated 16 April 1998 made between Wah Nam Holdings Co. Limited ("Wah Nam Holdings") and its related companies as the vendor and HCK as the purchaser by which the vendor agreed to sell to HCK about 16.7 million shares in IAL (which represented about 33% of the total issued shares of IAL). Wah Nam Holdings is a private company incorporated in Hong Kong and is beneficially owned as to 60% thereof by Mr William Chan Pak To, a director of the Company. The purchase price under this agreement was approximately A$16.2 million.

(5) the Eutopia Agreement

This is an agreement dated 15 April 1998 made between Charmlink and Wise Spencer as the vendor and Eutopia (BVI) Limited ("Eutopia") as the purchaser by which the vendor agreed to sell to Eutopia about 2.5 million shares in IAL. The purchase price was about A$2.4 million and the net amount payable was about A$2.1 million. On the case of the Company, Charmlink and Wise Spencer are the nominees of Wah Nam Holdings, I shall assume this is so for the purpose of these proceedings. Eutopia would appear to be the nominee of HCK, again I shall assume this is so for present purpose.

36. The purpose of the above transactions, in so far as the Company is concerned, is to enable the Company to dispose of its IAL shares which would be held by HCK after completion and to acquire the remaining interests in both WNII and IALHK. So far as IAL is concerned, upon completion, IAL would only be interested in the entire issued share capital of Golden Glory, the principal business of which is a cable car operation in Beijing.

37. Completion of these agreements was all scheduled to take place on 15 September 1998. I was referred to provisions in the Acquisition Agreement, the HCK Agreement and the Eutopia Agreement by which it is stated that completion is conditional upon the contemporaneous completion of the related transaction or transactions as described in each of these agreements. I do not know what were the "related" transactions in so far as the Disposal Agreement and the IAL Agreement are concerned because these agreements have not been adduced in evidence.

38. Evidence was adduced from Mr Andrew Chen Aun Li, a director of Aachen, as to how the payment of the purchase price was effected for some of the transactions. On completion of the Disposal Agreement, the purchase price of approximately A$24.3 million was satisfied by HCK issuing a bill of exchange in favour of the Company. On completion of the HCK Agreement, the purchase price of approximately A$16.2 million was satisfied by HCK issuing bills of exchange in favour of Wah Nam Holdings and its related companies. On completion of the Acquisition Agreement, the purchase price of A$41.65 million was satisfied in part by the Company, Wah Nam Holdings and its related companies endorsing the various bills of exchange referred to above in favour of IAL for the total sum of about A$40.5 million. The difference of A$41.65 million and A$40.5 million was paid by a cheque of A$1,080,453.00 which was provided by HCK at the direction of Aachen and which was countermanded for reasons not relevant to the present proceedings. The balance of the purchase price in the sum of A$7.35 million was provided by the Company issuing the 8 "promissory notes" to the Petitioners.

39. Having given a description of the transactions which are said to be inter-dependent, I am at a loss to understand how it could be alleged by the Company that the Company would be entitled to a set-off in respect of the amount due under the Eutopia Agreement which has not been completed. The Company is not the vendor of the shares in the Eutopia Agreement. Moreover, the vendor companies, Charmlink and Wise Spencer, are the nominees of Wah Nam Holdings, not of the Company, on the Company's own case. Neither HCK nor IAL, the Petitioners herein, is a purchaser under the Eutopia Agreement. Eutopia is alleged to be a nominee of HCK. They are two separate companies and I cannot disregard this fact. There does not appear to be any justification for lifting the corporate veil.

40. Furthermore, under the Eutopia Agreement, the transaction stated in that agreement that must be completed contemporaneously with the transaction under the Eutopia Agreement is only the HCK Agreement. The Acquisition Agreement is not a transaction required to be completed contemporaneously with the Eutopia Agreement.

41. There is yet another argument advanced on behalf of the Company that it is entitled to a set-off of the proceeds that should be paid under the Eutopia Agreement. It is alleged that the shares under the Eutopia Agreement were carved out and formed the subject of a separate agreement under the Eutopia Agreement instead of being included in the HCK Agreement so as to circumvent requirements under the Corporations Law in Australia and the Australian Stock Exchange on which the shares of IAL are listed. It was thought that the shares carved out under the Eutopia Agreement would not be subject to any voting disqualification, and as they were acquired in the name of a nominee, not in the name of HCK, they could be voted at the direction of HCK if the need should arise. It is alleged by the Company that its former directors, Mr Samson Chen and Mr Terence Ho Pui Tin, had acted in breach of their fiduciary duty to the Company in carrying out the Eutopia Agreement in contravention of the Corporations Law of Australia. I am quite unable to see how Mr Chen and Mr Ho could have acted in breach of their fiduciary duty to the Company in those circumstances, as the vendor companies under the Eutopia Agreement are not the nominees of the Company but of Wah Nam Holdings, which is a wholly separate entity. It is then argued that HCK knew of this breach of fiduciary duty of the Company's former directors, and HCK had assisted in the commission of such breach of fiduciary duty with the consequence that HCK should hold the proceeds that should be payable under the Eutopia Agreement in trust for the Company. This seems to me to be an extraordinary proposition. I am unable to see any sound legal basis for this and none has been put forward. The argument was merely advanced in the barest form in the way I have described.

42. For the above reasons, I hold that the Company has not made out any case of a set-off or counterclaim on substantial grounds in respect of the proceeds under the Eutopia Agreement.

The amount allegedly payable under the Mandate Agreement

43. The assignment of the alleged debt took place on 6 April 2000, after this petition for winding-up was presented, and shortly before the Company filed its evidence on 12 April 2000 to oppose the petition. Leaving aside the lateness of the assignment of the debt, I turn to consider if there is any sound basis for a set-off or counterclaim in respect of the amount allegedly due under the Mandate Agreement.

44. The Mandate Agreement was made on 5 December 1997 between Mr Khoo Ee Liam and Khoo Ee Ting of the one part and Aachen of the other part. It recited that the Khoos had engaged the services of Aachen in sourcing an Australian listed company for acquisition and in consideration of the services, the Khoos agreed to pay Aachen a consulting fee in the amount and manner as stated therein. HCK was not a party to this agreement. So how is it said that HCK is liable to pay the debt to Aachen under the Mandate Agreement so that the debt (which has been assigned by Aachen to the Company) could be used to set-off the Company's indebtedness to HCK as evidenced by the 4 "promissory notes"?

45. The Company's argument runs as follows. HCK is at all times beneficially owned by Mr Khoo Ee Liam and his wife. HCK and Mr Khoo Ee Liam should be regarded as the same. There is a bare allegation in the affirmation of Mr Alfred Cheung Tze Fat, the Legal Officer of the Company, that he was advised by Mr Andrew Chen, a director of Aachen, and verily believe that the Khoos requested Aachen to "provide the Services to HCK, upon and subject to the clear understanding and agreement between Khoos, HCK and Aachen (arrived at during a series of meetings between [sic] discussion between Khoos and Andrew Chen and others during October to December 1997) that Khoos and HCK shall be jointly and severally liable to pay Aachen the Consulting Fee." (emphasis supplied) Mr Andrew Chen has made an affirmation in these proceedings on 7 July 2000, but has not deposed to any details of the "understanding and agreement" by which the Khoos and HCK should be jointly and severally liable to pay the consulting fee to Aachen.

46. This alleged set-off would of course not affect the Company's debt to IAL in the sum of A$3.35 million. The Company's argument on this must fail. HCK was not a party to the Mandate Agreement. There is no valid reason for lifting the corporate veil. Moreover, on the evidence, the Company has simply not adduced "sufficiently precise factual evidence" to satisfy the court that it has a serious contention that the Khoos and HCK should be regarded as jointly and severally liable to pay Aachen the consulting fee. The alleged meetings and discussion between the Khoos, Andrew Chen and other unspecified persons took place during October to December 1997 according to the Company's evidence. The Mandate Agreement was made on 5 December 1997 and was close in time to the alleged meetings and discussion. The Mandate Agreement provided that the Khoos were to pay Aachen the consulting fee. There is no mention in that agreement of any joint and several liability with HCK. It does not seem to me that the allegation of joint and several liability is credible.

47. I hold that the Company does not have a set-off or counterclaim on substantial grounds in respect of the alleged debt under the Mandate Agreement.

48. As I have mentioned, Mrs Chan has taken a lot of points for the Company to oppose the winding-up. I have dealt with the main points and I do not think it is necessary to deal with all the arguments advanced by her. I would only say that I reject her argument that the parties should have litigated their disputes in Australia and that the Petitioners should not have brought proceedings to wind up the Company in Hong Kong. I also reject her argument based on a debenture given by Wah Nam Holdings to IALHK dated 22 April 1997 by which Wah Nam Holdings has charged its undertaking and all its property and assets as security for its debt to IALHK in the sum of about HK$86.79 million. I am wholly unable to see any or any relevant liability on the part of the Petitioners in respect of that debenture.

Is the Company insolvent?

49. I have held that the statutory demands are valid and that the Petitioners can rely on the deeming provision in Section 178(1)(a) that the Company is unable to pay its debts.

50. The Petitioners rely on Section 178(1)(c) as an alternative, under which they have to prove to the satisfaction of the court that the Company is unable to pay its debts. I must be satisfied that the Company is insolvent before I make a winding-up order.

51. In my view, there is clear evidence of insolvency in that there is failure by the Company to pay the debts due to the Petitioners as they fell due notwithstanding that the Company has no substantial ground for disputing them. I have already referred to the cases of Cornhill Insurance v. Improvement Services and Re Taylor's Industrial Flooring Ltd. Furthermore, even on the Company's case of set-off and counterclaim, the amounts that could allegedly be applied as a set-off are insufficient to extinguish the Petitioners' debts. There is a short-fall of A$926,124.00 which has been undisputed all along and which the Company has not paid.

52. I was referred by Mrs Chan to the two principal tests for insolvency, namely, the cash flow test and the balance sheet test. It is urged on me that I should apply the balance sheet test in this instance.

53. I should mention that if the cash flow test is to be applied and no regard is given to the assets or prospective assets of the Company, the Company is clearly insolvent as it is unable to pay its debts as they fall due. I have already referred to the debt due to the Petitioners. There is also a debt of HK$10 million due to Heng Fung Holdings Co. Ltd ("Heng Fung") on a convertible note which has matured on 21 July 2000. At the hearing of the petition on that day, I was informed by Mrs Chan that the Company has agreed with the holder of the convertible note for the amount due to be rolled over. However, she had no instructions on the details of the arrangement and was unable to say whether there is a disposition of the assets of the Company to necessitate an application for a validation order.

54. I should also mention that there were two applications for a validation order to date and they were made by Yuen J on 10 March 2000 and 12 April 2000, as a result of which new shares of the Company were issued to Mr Chim Hiu Fei and China Zone Ltd and the proceeds paid for the subscription of the new shares in the total sum of HK$24 million were applied by the Company to make a payment into court as ordered by Beeson J in HCA No. 12439 of 1999 on 17 December 1999. That action was brought by Excel, Stamford and Unbeatable, who have appeared as supporting creditors in this petition, against the Company and other defendants in respect of 4 convertible loan notes given to the supporting creditors. By the order of Beeson J, it was ordered that the Company was to make a payment into court of HK$30 million (the amount due in respect of two of the loan notes) by 7 January 2000 and a Mareva injunction was granted against the Company to restrain the disposal of assets up to HK$61 million (being the amount due in respect of the other two loan notes). The order of payment into court was not fully complied with until 14 April 2000, after Yuen J made the second validation order on 12 April 2000.

55. I am firmly of the view that the Company is insolvent applying the cash flow test.

56. If the balance sheet test is to be applied, a company would be regarded as insolvent if its liabilities should exceed its realisable assets. It is contended by the Company that I would reach a different result regarding the solvency or otherwise of the Company applying this test. It is argued that on the pro forma balance sheet of the Company as at 31 May 2000, this showed net current assets of HK$221 million and current liabilities of only HK$30.5 million. There are a number of seriously questionable aspects about this latest financial statement of the Company and they are as follows:

(1) The pro forma balance sheet is a one-page document provided by the Company. The last audited account of the Company was published on 2 August 1999. The Company has not, to date, produced the audited accounts for the year ended 31 December 1999. Under the Listing Rules of the Stock Exchange of Hong Kong Limited, the audited accounts of a listed company should be published within 5 months of the financial year end. On 22 June 2000, the Company obtained an order from the court giving it an extension of 4 months to 30 October 2000 to comply with its obligation under Section 122 of the Companies Ordinance by which the directors are required to lay before the Company at its annual general meeting the accounts made up to a date falling not more than 6 months before the date of the meeting. This failure to provide audited accounts within time should be looked at in the context of the last audited account made up to 31 December 1998 which was heavily qualified. It was stated by the certified public accountants they had not been able to obtain sufficient evidence concerning related party disclosures, the recoverability of advances to and amounts due from related companies, an amount due to a related company, obligations in connection with a joint venture in the PRC, and the appropriateness of the accounting treatment for the notes which were the subject of 3 subscription agreements in September 1998. Further, the Company had not disclosed the net result of subsidiaries not consolidated, which is not in accordance with the requirements of the accounting practice of the Hong Kong Society of Accountants.

(2) In the pro forma balance sheet, current liabilities are stated at HK$30.5 million. The amount due to the Petitioners under the 8 "promissory notes" in the total sum of HK$33,957,000.00 (equivalent to A$7.35 million) is stated as a separate item and is not included in the current liabilities. Likewise, the amount of HK$10 million due to Heng Fung on a convertible note which has matured on 21 July 2000 is not included under current liabilities. This accounting treatment is improper to say the least. There is no justification for taking the amounts due on the "promissory notes" and the convertible note out of current liabilities and treating them as long term liabilities in the pro forma balance sheet. This is also different from the treatment of the promissory notes in the audited accounts of 1998 in which the amount due thereunder is treated as part of the current liabilities.

(3) In the pro forma balance sheet, an amount of HK$243 million being investment in subsidiaries is regarded as part of the assets of the Company. The amount for investment in subsidiaries is the most significant item that makes up the net current assets of the Company in the pro forma balance sheet. This would appear to be confusing the Company's account with the consolidated account of the Company and its subsidiaries. The liabilities of subsidiaries do not appear in the pro forma balance of the Company. There is, for instance, a substantial liability of RMB56 million of WNII, a wholly owned subsidiary of the Company, to a PRC joint venture known as Hangzhou Huanan Engineering and Development Co. Ltd ("HHED", of which WNII owns 60%), as appears from the audited report of HHED as at 31 December 1999. The pro forma balance sheet cannot give a true and fair view of the financial position of the Company. I should also point out that in the last audited account of the Company as at 31 December 1998, the net current liabilities of the Company stood at HK$163 million whereas the net current liabilities of the Company and its subsidiaries stood at HK$63 million.

(4) Under the item of issued and fully paid capital in the pro forma balance sheet (in the amount of HK$303 million), there is included an amount of HK$90 million being new shares to be issued by the Company to the vendors under a share sale and purchase agreement dated 28 February 2000 between the Company and the vendors by which the Company was to acquire the entire issued share capital of Beauty Asia Enterprises Ltd at an aggregate consideration of HK$90 million. That agreement is the subject of the Company's application for a validation order that was heard on 10 March 2000 but was adjourned sine die by Yuen J. The Company has not restored this application to date. As the transaction has yet to be validated by the court, the amount of HK$90 million involved in the transaction should not be included as part of the issued and fully paid capital in the pro forma balance sheet.

(5) In the application for a validation order heard by Yuen J on 17 April 2000 and 15 May 2000, evidence was adduced by the Company which showed that the net asset value of the Company was 3 cents per share. In the pro forma balance sheet as at 31 May 2000, only two weeks after the last hearing for a validation order, the net asset value of the Company is presented as 7 cents per share (arrived at by taking the net current assets of HK$221 million and dividing it by the issued and fully paid capital of HK$303 million), more than double of the net asset value per share on the information presented to the court only two weeks ago. No explanation has been provided by the Company for this considerable fluctuation in the net asset value per share over such a short period of time. This makes me doubt the accuracy and reliability of the pro forma balance sheet.

57. On the available information, it does not appear to me that the realisable assets of the Company would exceed its liabilities. I arrive at the same conclusion that the Company is unable to pay its debt applying the balance sheet test.

Discretion of the court

58. An order for the winding-up of a publicly listed company would have grave implications affecting a great number of people. It is submitted by the Company that the court should exercise its discretion not to wind up the Company having regard to the following matters:

(1) the Petitioner's debts are very much disputed;

(2) the Acquisition Agreement under which the "promissory notes" were given was part of a complex asset swapping arrangement involving inter-dependent transactions;

(3) there are complex questions of fact and law involving breach of fiduciary duty of the Company's former directors, constructive trust, illegal transaction and the lifting of the corporate veil; and

(4) the Petitioner's debts are secured.

59. As I have found against the Company on the first three matters, it would only be necessary for me to deal with the fourth matter.

60. Under the Acquisition Agreement, it is provided that the sum of A$7.35 million to be paid by the Company shall be secured by the Company depositing with the escrow agent, Messrs Baker and McKenzie, the share certificate of all the WNII shares (being one of the parcel of shares sold to the Company under the Acquisition Agreement) until full payment of A$7.35 million. The Company has produced a Share Deposit Deed ("the Share Deposit Deed") made on 15 September 1998 between IAL, HCK, the Company and B & Mc K Nominees Ltd ("the Deposit Agent") by which it is provided that the Company must transfer, or procure the transfer of, the WNII shares to the Deposit Agent upon execution of the deed as the Company was obliged to do under the Acquisition Agreement. It is alleged by the Company that security has been provided in that the WNII shares were transferred to the Deposit Agent and that the Petitioners could and should have enforced the security under the Share Deposit Deed instead of seeking to wind up the Company.

61. There are some peculiar features about the alleged transfer of the WNII shares to the Deposit Agent:

(1) The Company has produced to the Court at this hearing the original of a share certificate of the WNII shares issued to the Deposit Agent on 3 August 1999. If the WNII shares had been transferred to the Deposit Agent as security pursuant to the Share Deposit Deed, there is no explanation as to why the original share certificate is held by the Company instead of by the Deposit Agent. It makes one wonder if the Deposit Agent has indeed received the security.

(2) There is a letter dated 20 July 2000 from the Deposit Agent to IAL confirming that it has not received from the Company or any other party "any share transfer documents" relating to WNII.

(3) According to the audited account of the Company as at 31 December 1998, which was published on 2 August 1999, it is stated that the Company "has pledged" all its shares in WNII as security under the Share Deposit Deed. According to the share certificate issued to the Deposit Agent, the WNII shares were issued to the Deposit Agent only on 3 August 1999, the day after the publication of the audited account.

(4) To add to the confusion, there is a letter from the Deposit Agent dated 15 March 1999, which was before the WNII shares were issued to the Deposit Agent according to the share certificate dated 3 August 1999. It would appear from the letter that the WNII shares were in the possession of the Deposit Agent as on the date of that letter because the Deposit Agent had given notice to the parties to the Share Deposit Deed that it would retain the WNII shares pursuant to the deed as it had received conflicting demands with respect to the WNII shares.

(5) There is a letter dated 13 April 2000 from HCK to the Company alleging that the actual transfer of the WNII shares to the Deposit Agent had not been effected by the Company as at the date of that letter. A further complaint was made by HCK that in October 1999, after the Company's default to pay the interest due on 15 September 1999 on the "promissory notes", the Company had arranged to dispose of a valuable asset of WNII being the toll bridge at Hangzhou without reference to the shareholders of WNII and in breach of the Share Deposit Deed which provided that the voting rights pertaining to the shares of WNII must be carried out at the direction of HCK after a notice of default has been given by HCK.

62. Leaving aside the uncertainties as to whether security has in fact been provided to the Petitioners, there is also the question if the security would be an adequate security in that the Petitioners would be able to pay themselves in full by realising it. I have grave reservations whether the security allegedly provided is adequate. The WNII shares are the shares of a private company with restriction on the transfer of the shares. It is very different from the situation in Re I J Langleb Ltd CWU No. 377 of 1996, Le Pichon J, 9 December 1996 (unreported) in which office premises were the subject of a charging order absolute obtained by the petitioning creditor against the company. Furthermore, according to the audited account of 1998, the Company and its subsidiary have pledged the 60% shareholdings of WNII in HHED to obtain bank loans of RMB35 million.

63. As I have grave reservations to the security allegedly provided to the Petitioners and the adequacy of it, I do not think this is an appropriate case to exercise my discretion not to make a winding-up order.

64. In conclusion, the Petitioners have established to the satisfaction of the court that the Company is unable to pay its debts and is insolvent. I order that a winding-up order be made against the Company. I will hear the parties on costs.

 

 

 

Representation:

Mr Winston Poon, SC and Ms Adriana Ching, instructed by Messrs King & Co, for the Petitioners

Mrs Dora Chan, instructed by Messrs Siao Wen Leung, for the Company

Mr Ling Chun Wai, instructed by Messrs Horvath & Giles, for the supporting creditors

The Official Receiver, attendance excused

HCCW000166C/2000

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

--------------------------------------------------------------

	IN THE MATTER of the Companies Ordinance Cap. 32 and IN THE MATTER of Wah Nam Group Limited

BETWEEN:
	EXCEL NOBLE DEVELOPMENT LIMITED	1st Petitioner
	UNBEATABLE ASSETS LIMITED	2nd Petitioner
	AND
	WAH NAM GROUP LIMITED	Respondent
	[Applicant in the summons]

 

HCCW 166/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 166 OF 2000

--------------------------------------------------------------

	IN THE MATTER of the Companies Ordinance Cap. 32 and IN THE MATTER of Wah Nam Group Limited

BETWEEN:
	HCK CHINA INVESTMENTS LIMITED	1st Petitioner
	INVESTMENT AUSTASIA LIMITED	2nd Petitioner
	AND
	WAH NAM GROUP LIMITED	Respondent
	[Applicant in the summons]

 

Coram: Hon Yuen J

Dates of hearing: 17 April 2000 (in Chambers) and 15 May 2000 (in Court)

Date of Decision: 13 July 2000

 

--------------

DECISION

--------------

 

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.

 

 

 

Representation:

Mr Kenneth Chan (on 17 April 2000) and Mr Benjamin Chain (on 15 May 2000) instructed by Siao Wen & Leung for the Company

Mr David McKellar (on 17 April 2000) of Horvath & Giles and Mr Thomson Mo (on 15 May 2000) instructed by Horvath & Giles for Petitioners in CW130/2000

Mr Bernard Tam (on 17 April 2000) of King & Co and Miss Adriana Ching (on 15 May 2000) instructed by King & Co for Petitioners in CW166/2000

Miss A Li from the Official Receiver's Office

HCCW000166B/2000

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

____________

IN THE MATTER of the Companies Ordinance Cap. 32 and IN THE MATTER of Wah Nam Group Limited

____________

BETWEEN
	EXCEL NOBEL DEVELOPMENT LIMITED	1st Petitioner
	UNBEATABLE ASSETS LIMITED	2nd Petitioner
	AND
	WAH NAM GROUP LIMITED	Respondent
	[Applicant in the summons]

____________

HCCW 166/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 166 OF 2000

____________

	IN THE MATTER of the Companies Ordinance Cap. 32 and IN THE MATTER of Wah Nam Group Limited

BETWEEN
	HCK CHINA INVESTMENTS LIMITED	1st Petitioner
	INVESTMENT AUSTASIA LIMITED	2nd Petitioner
	AND
	WAH NAM GROUP LIMITED	Respondent
	[Applicant in the summons]

(Heard together)

____________

Coram: Hon Yuen J in Chambers

Date of Hearing: 12 April 2000

Date of Decision: 12 April 2000

 

_______________

D E C I S I O N

_______________

 

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.

 

 

 

Representation:

Mr Kenneth Chan, instructed by Messrs Siao, Wen & Leung, for the Respondent Company

Mr David McKellar, of Messrs Horvath & Giles, for the Petitioner in CW 130/2000

Mr Bernard Tam Tak Hing, of Messrs King & Co., for the Petitioner in CW 166/2000

Miss A Li from the Official Receiver's Office

HCCW000166A/2000

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

------------------------------

IN THE MATTER of the Companies Ordinance Cap. 32 AND IN THE MATTER of Wah Nam Group Limited

-----------------------------

BETWEEN:
	EXCEL NOBLE DEVELOPMENT LIMITED	1st Petitioner
	UNBEATABLE ASSETS LIMITED	2nd Petitioner
	AND
	WAH NAM GROUP LIMITED	Respondent [Applicant in the summons]

------------------------------

HCCW 166/2000

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 166 OF 2000

------------------------------

	IN THE MATTER of the Companies Ordinance Cap. 32 and IN THE MATTER of Wah Nam Group Limited

BETWEEN:
	HCK CHINA INVESTMENTS LIMITED	1st Petitioner
	INVESTMENT AUSTASIA LIMITED	2nd Petitioner
	AND
	WAH NAM GROUP LIMITED	Respondent [Applicant in the summons]

(Heard together)

Coram: Hon Yuen J in Chambers

Date of hearing: 15 March 2000

Date of Decision: 24 March 2000

 

---------------

DECISION

---------------

 

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.

 

 

 

Representation:

Mr Kenneth Chan instructed by Siao Wen & Leung for the Company

Mr David McKellar of Horvath & Giles for petitioners in HCCW 130/2000

Mr Mok Yeuk Chi instructed by King & Co for petitioners in HCCW 166/2000