PERIWIN DEVELOPMENT LTD. v. GRANDFIELD PACIFIC HOTEL LTD.

HCCW000029C/2001

HCCW 29/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 29 OF 2001

____________

IN THE MATTER of the Companies Ordinance (Cap. 32) AND IN THE MATTER of Grand Pacific Hotel Limited (formerly known as Grandfield Pacific Hotel Limited) (In Liquidation)

____________

BETWEEN
	GRAND PACIFIC HOTEL LIMITED (in Liquidation)	Applicant
	AND
	LEUNG KAI MAN	1st Respondent
	CHENG MING CHU	2nd Respondent
	POON, YEUNG & LI (A Firm)	3rd Respondent

____________

Coram: Hon Kwan J in Chambers

Date of Hearing: 30 January 2004

Date of Decision: 30 January 2004

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D E C I S I O N

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1. I have before me a summons issued by Poon, Yeung & Li, the 3rd respondent herein, on 9 January 2004 for security for costs against Grand Pacific Hotel Limited (in liquidation) ("the Company"), under section 357 of the Companies Ordinance, Cap. 32. The Company was ordered to be wound up on a creditor's petition on 3 January 2002.

2. On 15 May 2003, the liquidators issued three summonses in the name of the Company under section 182, one of which was against the 3rd respondent, for an order that payments made by the Company to the 3rd respondent during 9 January 2001 to 3 January 2002 through the directors in respect of legal fees of the Company be declared void. These three summonses are all to be heard on 9 March 2004. The 3rd respondent seeks security for costs in the sum of HK$330,000.00 on the grounds set out in its summons:

(a)	the Company is in the process of liquidation and is insolvent and will not be able to pay the 3rd respondent's costs if the Company's application is dismissed;
(b)	the liquidators have refused to give financial information of the Company to the effect that "on a pari passu distribution in the liquidation process, the 3rd respondent's costs will be secured"; and
(c)	the liquidators have refused to inform, confirm or undertake to the 3rd respondent that its costs "will be secured and/or paid out of liquidation expenses".

3. In the supporting affirmation, a partner of the 3rd respondent deposed that he has no knowledge of "the liquidation expenses so far", "the scale of all the other creditors' claims", and it was "in that respect that [the 3rd respondent] asked for security for costs". It was sought to justify the application that the 3rd respondent was not and is not clear about "the assets and liabilities position of [the Company]".

4. It would seem from the submissions of Mr William Wong, who appeared on behalf of the 3rd respondent, that the 3rd respondent has changed its grounds somewhat in seeking security for costs.

5. The application is resisted by the liquidators. They produced the latest liquidators' statement of account relating to the Company for the period from 3 July 2003 to 2 January 2004, showing that as at 2 January 2004, the Company has maintained a cash balance of HK$717,602.83.

6. At the hearing today, Mr Law Man Chung, who appeared on behalf of the liquidators, has produced to the court a further document entitled Summary of Disbursement as at 28 January 2004, showing further disbursements incurred from 2 to 28 January 2004 in the sum of HK$47,443.73. At the hearing, the liquidators have also provided an undertaking to the court in the following terms:

"The Company shall not until 9 March 2004 or any further order of the court whether by its liquidators, directors, employees, servants, agents and/or otherwise make any payment (payment is defined as any payment out of the estate of the Company subsequent to which the assets of the Company would be less than HK$120,000.00) out of the assets of the estate of the Company".

7. This undertaking is not accepted by the 3rd respondent partly because the figure set at HK$120,000.00 is too low. On the liquidators' part, it was submitted that the limit of HK$120,000.00 is set having taken into account the breakdown of the estimated costs given by the 3rd respondent, in particular that the fees of a Senior Counsel are included in the fees to be incurred for the substantive application. The liquidators take the view that the costs of a Senior Counsel are unlikely to be recoverable on taxation on a party and party basis.

8. As there is no agreement on an acceptable undertaking, I need to resolve if security for costs should be ordered against the Company. Section 357 of Cap. 32 provides as follows:

"Where a limited company is plaintiff in any action or other legal proceeding, any judge having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the company will be unable to pay the costs of the defendant if successful in his defence, require sufficient security to be given for those costs, and may stay all proceedings until the security is given."

9. As stated by the Court of Appeal in Extramoney Ltd & Anr v Chan, Lai, Pang & Co. (a firm) [1990] 2 HKLR 268 at 273E, it is well settled that where a company is in liquidation, it is presumed to be insolvent and will therefore be unable to pay the relevant costs. Hence, the liquidators are required to rebut that presumption to resist an application for security for costs.

10. The liquidators here rely on the established principle that where there is an order for costs in favour of a successful party against a company in liquidation, such costs are payable in full, out of the net assets in the hands of the liquidator, in priority to other claims, including that of the liquidator for his own costs. Hence, the 3rd respondent's prior right to be paid its costs would not have been affected by the liquidation expenses so far or the claims of other creditors, as raised in its supporting affirmation.

11. Mr Law has made a thorough research on the relevant authorities for the above principle. Two of these authorities are judgments of the Court of Appeal and are binding on me. I do not propose to quote from these authorities but merely to list the principal ones:

(1)	Extramoney, supra. at 273I to 274A;
(2)	Norglen Ltd (in liquidation) v Reeds Rains Prudential Ltd [1999] 2 AC 1 at 20G to 21C;
(3)	Typhoon 8 Research Ltd v Seapower Resources International Ltd [2002] 2 HKLRD 660 at 674E to H;
(4)	Buckley on the Companies Acts, 14th edition, Volume 1, pages 568-570 and cases cited at footnotes 13 to 18 on page 568; and
(5)	Halsbury's Laws of Hong Kong, Volume 6, paras [95.1287], [95.1289] and [95.1290].

12. The above principle is not affected in any way by the provision for order of priority of payment of costs payable out of the assets as laid down in rule 179(1) of the Companies (Winding-up) Rules. Rule 179(1) expressly provides that the order for priority of payment is "subject to any order of the court". As stated by Vaughan Williams J in Re London Metallurgical Co. [1895] 1 Ch 758 at 769:

"Then came rule 31 of 1890. It is to be observed that the costs of a successful litigant are not mentioned there at all, nor in my opinion was it necessary to mention them. They are provided for by the words, 'subject to any order of the Court.'"

Rule 31 of the Companies (Winding-up) Rules was the predecessor of rule 195 of the Companies (Winding-up) Rules in England, which is equivalent to our rule 179.

13. Further, rule 179(3) has the effect of preserving the priority of payment of litigation costs awarded against a company in liquidation (Buckley on the Companies Acts, 14th edition, Volume 2, page 1723 at footnote (t); Halsbury's Laws of Hong Kong, Volume 6, para. [96.1290] at footnote 3). Rule 179(3) provides as follows:

"Nothing contained in this rule shall apply to or affect costs which, in the course of legal proceedings by or against a company which is being wound up by the court, are ordered by the court in which such proceedings are pending or a judge thereof to be paid by the company or the liquidator, or the rights of the person to whom such costs are payable."

14. The main argument advanced by Mr Wong is that the funds out of which the successful litigant's costs against a company in liquidation is to be paid are not the gross assets, but the net assets, after deduction of the costs incurred in getting in, maintaining and realizing the assets of the company. The following authorities provide support for allowing the "realization expenses" to be deducted before payment of the litigation costs:

(1) Re London Metallurgical Co., supra. at 769;

(2) Re Movitex Ltd [1990] BCLC 785 at 790e to 791e;

(3) Buckley on the Companies Acts, 14th edition, Volume 1, pages 569 to 570; and

(4) Halsbury's Laws of Hong Kong, Volume 6, para [95.1287] footnote 1.

15. It was submitted by Mr Wong that the realization expenses would include the liquidators' own legal costs in the unsuccessful litigation in which costs were ordered against the company in liquidation. If that it is right, that would clearly be inconsistent with Re Pacific Coast Syndicate Ltd [1913] 2 Ch 26, in which it was held that the liquidator was not entitled to deduct out of monies in his hands his own solicitor's costs in the unsuccessful action, before paying the taxed costs made against the company.

16. I note that Pacific Coast was specifically referred to by Mervyn Davies J in Movitex at 790e to f, just before he turned to the question if the litigation costs should take priority over the expenses of realizing the assets. It seems to me unlikely that the judge would have overlooked the clear inconsistency between Pacific Coast and the other authorities he went on to cite on the question of realization expenses, if such expenses are meant to include the liquidator's own legal costs in the unsuccessful action.

17. Further, in holding that the liquidator should be allowed to deduct the realization expenses before paying the litigation costs, Mervyn Davies J had this to say at 791d:

"Realization is an expense necessarily incurred to produce the money that goes towards paying the litigation costs, that is to say there can be no payment in respect of the litigation costs unless and until the assets of the company are got in and realized."

18. If the matter is understood in that light, the liquidators' own legal costs in the unsuccessful action are clearly not expenses "necessarily incurred to produce the money that goes towards paying the litigation costs".

19. I also derive support from the following statements of Lord Hoffmann in Norglen, supra. at 20G to 21B:

"It is in my view clear that the costs ordered to be paid by a company in liquidation to a successful defendant are payable out of the net assets in the hands of the liquidator, in priority to other claims, including that of the liquidator for his own costs: see In re Pacific Coast Syndicate Ltd [1913] 2 Ch 26 and In re Movitex Ltd [1990] BCLC 785. In re M C Bacon (No. 2) [1990] BCC 430 upon which Mr Jackson relied, deals with a different question, namely whether costs incurred by a liquidator (either directly or in consequence of being ordered to pay the costs of another party) are "expenses ... incurred by the ... liquidator in preserving, realising or getting in any of the assets of the company" within the meaning of rule 4.218(1)(a) of the Insolvency Rules 1986 (SI 1986 No. 1925). Millett J held (rightly or wrongly) that costs incurred in litigation which realised no assets did not qualify for priority under this head. But the right of a successful defendant to an action brought or adopted by a company in liquidation to be paid out of the assets in the hands of the liquidator is not parasitic on the liquidator's right to recover such costs. It is enforceable directly against the company by virtue of the order for costs."

20. I wish also to point out that in the above extract, Lord Hoffmann had cited the cases of Pacific Coast and Movitex in the same breath. I reject the submission that the liquidator's own legal costs in the unsuccessful action would have priority over the taxed costs of the successful litigant.

21. In my judgment, on the available evidence, the liquidators here have successfully rebutted the presumption that the Company is not able to pay costs of the 3rd respondent if an order for costs should be made against the Company. Further, the 3rd respondent would have added protection in view of the undertaking given to the court by the liquidators which I have noted. There is no basis for exercising my discretion to order security for costs. I therefore dismiss the application of the 3rd respondent.

22. I see no reason why costs should not follow the event in this instance. The cash balance maintained by the liquidators after payment of disbursements was known to the 3rd respondent before the summons was issued. The liquidators had no obligation to advise the 3rd respondent of the legal principle on the priority of payment of the litigation costs when the 3rd respondent's solicitors sought assurance from the liquidators' solicitors in correspondence as to the means by which the 3rd respondent's costs position might be protected. I order that the costs of this application be paid by the 3rd respondent to the Company in any event.

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

Representation:

Mr Law Man Chung, instructed by Koo & Partners, for the Joint & Several Liquidators

Mr William Wong, instructed by Ng & Fong, for the 3rd Respondent

HCCW000029B/2001

HCCW 29/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 29 OF 2001

__________

	IN THE MATTER OF GRANDFIELD PACIFIC HOTEL LIMITED
	AND
	IN THE MATTER of the Companies Ordinance, Cap. 32 of the Laws of The Hong Kong Special Administrative Region

BETWEEN
	PERIWIN DEVELOPMENT LIMITED	Petitioner
	AND
	GRANDFIELD PACIFIC HOTEL LIMITED	Respondent

__________

Coram: Hon Kwan J in Court

Date of Hearing: 20 November 2001

Date of Handing Down of Judgment: 3 January 2002

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J U D G M E N T

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1. I have before me a petition presented by Periwin Development Limited ("the petitioner") to wind up Grandfield Pacific Hotel Limited ("the Company") and a motion taken out by the Company on 6 March 2001 that the petition should be dismissed on the ground that there is a bona fide dispute over the debt. Alternatively, the Company seeks an order that all further proceedings in the petition should be stayed. On 23 May 2001, I made an order that the petition for winding-up and the Company's motion for dismissal were to be heard together and that the petition was to be heard after the motion. Both matters were heard by me on 20 November 2001.

2. Mr. Warren Chan, SC who appeared on behalf of the petitioner, put his case solely on the basis that a winding-up order should be made because the Company has failed to show a bona fide dispute of the debt on substantial grounds or that there is a genuine cross claim that is likely to produce a sum as great as such amount of the debt that is admitted or of which there can be no substantial dispute. It is common ground that if I should come to the view that there is no bona fide dispute of the debt on substantial grounds, the Company's motion should be dismissed, I should make an order to wind up the Company and I do not need to investigate any other matter. I should mention that at an earlier hearing, Mr. Chan had expressly abandoned the ground to wind up the Company on just and equitable ground based on the allegation that there is a complete breakdown of trust and confidence between the shareholders of the Company. Further, Mr. Chan and Mr. Robert Tang, SC who appeared for the Company, informed me that no point would be taken regarding the beneficial ownership of the shares of Bellington Associates Ltd. ("Bellington"), a 28% shareholder and a director of the Company, and the authority of the Company's directors to oppose the petition that had been made in the various affirmations on both sides.

3. The Company is controlled by Mr. Joseph Leung Kai Man, who is a director at all times. The only other director of the Company is Bellington. Mr. Leung was the managing director of the petitioner for over six years until he resigned on 9 October 1998. Hence, he was a common director for a significant part of the material time.

4. The petitioner is owned by Full Luxury Limited ("Full Luxury") and the latter is owned by the Foshan Municipal People's Government. The petitioner is the registered owner of a 24-storey building (excluding the 1st floor) at Nos.18, 20 and 22 Percival Street, Causeway Bay, Hong Kong ("the property"). The Company operated and managed the Grandfield Pacific Hotel ("the Hotel") in the property. The property is mortgaged to the Bank of China (Hong Kong) Limited ("the bank") in July 1996. When the petitioner defaulted under the general facilities granted by the bank, the bank brought a mortgage action against the petitioner on 19 November 1998 seeking possession of the property and money judgment. The Company intervened as an applicant and filed an affirmation by Mr. Leung in April 1999 alleging that the bank was estopped from evicting the Company from the property. The bank obtained a money judgment against the petitioner in April 1999 in the sum of HK$396,418,797.69 but the application for a possession order was adjourned sine die with liberty to restore.

5. On 26 August 1999, the bank appointed receivers under the legal charge. On 1 September 1999, the receivers' solicitors served a demand on the Company's solicitors for payment of all outstanding rent of the property under clause 5.1(b) of an agreement dated 22 November 1996 made between the petitioner and the Company ("the Agreement"). This was the first demand for rent ever served on the Company. I should mention that the petitioner and the Company did not enter into a lease of the property at any time, as envisaged in the Agreement. However, the Company has been operating the Hotel in the property without making any payment for the use and occupation up to present. According to the Company's documents, there was a "soft opening" of the Hotel on 28 November 1997 and on 1 September 1998 the Company had obtained a licence from the government authority to operate the Hotel in the property. The hotel licence has since been renewed.

6. Between September 1999 and November 2000, there was correspondence between the solicitors for the receivers and the solicitors for the Company. In summary, the Company alleged that the petitioner had not carried out the modification work to convert the property from an office building into a hotel to the standard as required, pursuant to clause 3 of the Agreement. As a result, insufficient revenue was generated by the Hotel to support the rental payment. Further, it was doubtful if there was in fact any "formal opening" of the Hotel for the contractual rent to be payable because of the alleged failure of the petitioner to carry out the work to the required standard. The Company accepted that it was liable to pay a reasonable amount to the petitioner for its use and occupation of the property but this amount would have to be negotiated. Besides, any payment to the petitioner would have to take into account the Company's claim for substantial damages against the petitioner for the alleged breach and other breaches under the Agreement. Notwithstanding that the receivers had made repeated requests to the Company's solicitors to be provided with particulars and supporting evidence of the Company's claim for damages, no information was given.

7. On 9 January 2001, the receivers as agent for the petitioner presented this petition to wind up the Company on the ground that it is unable to pay its debts. The debt relied on in the petition is the "guaranteed rent" under the Agreement for the period of 22 months from September 1998 to December 2000 in the total sum of HK$53 million. The Company's opposition is based on the lines I have summarised in the solicitors' correspondence. A substantial amount of evidence has been filed on both sides. Whether the dispute of the debt is a substantial dispute is the central issue I need to resolve.

The legal principles

8. The legal principles are not in dispute and I have been taken by both sides to much the same cases, including Re Safe Rich Industries Ltd. CACV No. 81 of 1994, 3 November 1994; the decision at first instance of Re ICS Computer Distribution Ltd. [1996] 3 HKC 440 and in HCCW No. 615 of 1995, 13 May 1996; the decision of Re ICS Computer Distribution Ltd. on appeal in CACV No. 95 of 1996, 8 November 1996; Re Honwell Holdings Ltd. HCCW No. 354 of 2000, 17 July 2001; Re a Company (1983) 1 BCC 98,901 (Vinelott J.); and Re Claybridge Shipping Co. SA [1997] 1 BCLC 572. Mr. Chan has impressed on me that it is incumbent on the Company to put forward "sufficiently precise factual evidence" to substantiate its allegations that the petitioner was in breach of the Agreement and that the breach had caused the loss allegedly suffered by the Company in an amount that would at least be equal to such amount of the debt either undisputed or is beyond reasonable dispute. I have borne this in mind in considering the evidence. I have also borne in mind the submission of Mr. Tang that I am not concerned to decide the dispute but only to determine whether a sufficient dispute exists. I should not try the dispute on affidavit.

9. On the guidance given by the authorities, this is how I have approached the matter.

10. I ask whether the evidence of the Company is believable. I caution myself about unsubstantiated and unparticularised assertions, particularly if there has been a history of information and supporting evidence sought by the other side. The Company's evidence should be looked at against so much of the background that is undisputed or is beyond reasonable dispute, in other words not with a wholly uncritical eye. I should look at the bona fides of the defence, to see whether it is obviously a "put-up job" (see Re Safe Rich Industries Ltd.; Re Claybridge Shipping Co. SA, supra. at 575g-h).

11. In an application for summary judgment, the defendant must show that he has a fair probability of establishing a bona fide defence to obtain leave to defend. To resist a petition, the company must show that it has a bona fide defence, not a fair probability of one. It is possible that a company might on an Order 14 application convince the court that it has a fair probability of a defence but at the petition stage it might not be able to establish it has a bona fide defence. The court must come to a conclusion in the winding-up petition whether there is or is not a bona fide defence. "The court does not dismiss a petition on the basis that a company might be able at some stage in the future to scrape together a case that might be arguable." If the court should refuse leave to defend in an application for summary judgment, that would be the end of the matter. But if a winding-up order is made, the company's claim against the petitioner may still be pursued by the liquidator as he thinks proper, so there is no injustice in adopting a higher threshold for the company requiring it to show that it has a bona fide defence, quite apart from the public policy considerations in a winding-up (see Re ICS Computer Distribution Ltd, supra. at 443G-444A and HCCW No. 615 of 1995, p. 5).

The issues in dispute

12. The issues in dispute raised by the Company may be stated as follows:

(1) On the construction of the Agreement, whether there are any terms to be satisfied for the contractual rent to become payable?

(2) If there are any such terms to be satisfied for the contractual rent to become payable, whether the petitioner is in breach of any term?

(3) Is the petitioner entitled to contractual rent or merely a reasonable sum for the Company's use and occupation of the property?

(4) If the petitioner is in breach of any term, whether the Company has suffered any loss and damage as a result and whether the amount of the Company's claim for damages against the petitioner would be equal to or exceed the undisputed part of the debt?

13. In summary, it is the Company's contention that on a proper construction of the Agreement, for the contractual rent to become payable, the petitioner has to show that it has converted the property into a "3-star hotel in accordance with international hotel standards (AAA-approved and rated)".

14. This is not the first time I have looked at the Company's case. I have done so earlier when the Company applied for discharge of the order appointing provisional liquidators. I granted that application and in the course of doing so, I had come to the "provisional view" that the petitioner has made out a good prima facie case for a winding-up order. I am looking at this afresh, in the light of the additional evidence filed and with the benefit of the new arguments addressed to me. I do not propose to repeat the background matters and the evidence that I have set out in pages 3 to 13 of the decision I gave on 12 March 2001.

Are there terms to be satisfied for the payment of contractual rent?

15. Mr. Chan's submission is that rent is payable as from "the First Month of Operation", pursuant to clause 5.1(b) of the Agreement. As a matter of common and commercial sense, the Hotel had started operation, the latest by 1 September 1998, when the hotel licence was issued. Hence, rent as provided in clause 5.1(b), has become payable and the total amount due as at the date of the petition is HK$53 million.

16. Mr. Tang has submitted that rent under clause 5.1(b) is payable from the date of the "formal opening" as defined in the Agreement and for the requirements to be fulfilled for there to be a "formal opening", one needs to look at various other provisions in the Agreement.

17. I set out the relevant provisions below for ease of reference:

"1. DEFINITION & INTERPRETATION

1.1 "Formal Opening" means the date on which the Hotel modified in accordance with Schedule I shall open for business to the public.

"Hotel" means the 3-star hotel and hotel related facilities to be provided by GPH [i.e the Company] at the Leased Property.

"Modification Work" means the work to be undertaken by Periwin [i.e. the petitioner] in accordance with clause 3 and as set out in the Schedule I hereto.

"Month of Operation" means full calendar month for the operation of the Hotel.

"Partial Month of Operation" means part of a calendar month of which the Formal Opening falls on a day other than the 1st day of a calendar month.

"Rent" means the rent payable by GPH to Periwin as provided in clause 5.1 hereof.

"Year of Operation" means a year for the operation of the Hotel the first of which shall commence on the date of Formal Opening.

2. PERIWIN'S OBLIGATION

2.1 Periwin and GPH shall enter into a Lease of the Leased Property upon the principal terms and conditions as set forth in this Agreement.

2.2 Periwin shall use its best endeavours to procure or perform the following:-

(A) to be responsible for and shall request and obtain, at its own cost and expense, within 6 months from the date hereof approval by the Building Authority and all other approvals, consents, orders, authorizations, permits and licenses required to be obtained from or given by competent government departments and authorities having jurisdiction over the Leased Property so as to use the Leased Property as a hotel and to permit the carrying out of the Modification Work provided if so required by Periwin, GPH shall serve as applicant for the Modification Work as the agent of Periwin and at Periwin's cost and expense.

(B) to obtain the consents and/or approvals within two months from the date hereof to be granted by the Bank of China as Legal Chargee and Mortgagee of the Leased Property for Periwin to modify and convert the Leased Property pursuant to Clause 3 and to lease the Leased Property to GPH.

...

3. MODIFICATION WORK

3.1 After the signing of this Agreement, Periwin shall carry out the Modification Work with a view to convert the Leased Property into a 3-star hotel in accordance with international hotel standards (AAA-approved and rated).

3.2 During the course of the Modification Work, GPH shall make frequent inspection at the Leased Property to satisfy themselves that the Modification Work is being carried out to meet the required standard and shall be deemed to have accepted that the Modification Work or any part thereof have been carried out and completed to meet the required standard unless GPH by a notice in writing points out to Periwin any substandard work or defects thereof which shall require remedy variation or modification within 14 days of receipt of Notice in writing by Periwin to GPH of completion of such part of Modification Work.

3.3 In due course Periwin shall procure that a Certificate of substantial completion be issued by the Authorised Person of the Modification Work and forthwith provide a copy of the said certificate to GPH.

4. FITTING AND DECORATION

4.1 Upon receipt of a copy of the Certificate of Substantial Completion GPH shall proceed to decorate the Hotel in accordance with the schedule of fitting and decoration work as contained in Schedule II hereto...

...

5. AGREEMENT TO LEASE

5.1 The principal terms of the Agreement to Lease shall be as follows:-

(a) Term: 10 years subject to sooner termination pursuant to the provisions hereunder including the Break-clause hereunder.

(b) Rent:

For Partial Month of Operation (if any): HK$1,000,000.00 x number of days of operation in that Partial Month of Operation)

For the First Month of Operation: HK$1,000,000.00

...

(c) Payment of Rent: within 30 days after the end of each Month of Operation or Partial Month of Operation during the currency of the Lease."

18. Schedule I to the Agreement related to the modification work for which the petitioner was responsible and it was provided that "interior furnishing to comply with three stars hotel standard". There followed 18 items of work that should be carried out by the petitioner. Schedule II to the Agreement set out 20 items of work for which the Company was responsible, being estimated fitting, decoration and start-up items.

19. It was submitted by Mr. Tang that in the provisions providing for rent and the payment of rent, the Company is obliged to pay rent starting from a "Partial Month of Operation" or "the First Month of Operation". When one looks at the definition of "Partial Month of Operation", it is clearly envisaged that there is to be a "Formal Opening" as defined in the Agreement. I am inclined to agree with this submission. I note that "Year of Operation" as defined would also start with a "Formal Opening". Likewise, it seems to me that the "First Month of Operation" must also start with a "Formal Opening".

20. For there to be a "Formal Opening", the modification work for which the petitioner is responsible must have been carried out in accordance with Schedule I. Further, the Hotel must have been open for business to the public. I do not think it is necessary for the petitioner to show that there is in existence a 3-star hotel for the Company to manage. Whether a hotel is a 3-star hotel would also depend on, inter alia, the "software" such as the facilities and services provided, not just the "hardware" as listed in Schedule I. In my view, it would suffice if the petitioner has carried out the modification work "with a view" to convert the property into a 3-star hotel in that the modification work should "comply with three stars hotel standard". This is one of the reasons why, in the exercise of my discretion, I have refused leave to the Company to put in a late affirmation to adduce a report, not by the American Automobile Association who is to give the rating and approval as stated in clause 3.1 of the Agreement, but by a hotel consultant who has given an opinion that the Hotel does not qualify as a 3-star hotel (strictly speaking it should be a 3-diamond hotel according to the rating system of the AAA). I do not think it would assist me to have the opinion of a hotel consultant based on his evaluation of the rating criteria of the AAA. Besides, the dispute is not about whether the Hotel is a 3-star or a 3-diamond hotel.

21. Even if I do not make a firm ruling on which construction of the Agreement is to be preferred, I am of the view that the Company has raised a substantial dispute that the obligation to pay rent under the Agreement would not just accrue once the Hotel was in operation and was open for business, as contended by the petitioner. I think there is at least a serious argument that there are conditions to be satisfied by the petitioner for this obligation to arise, on the lines as indicated above. On the premise that there are terms to be fulfilled, I go on to consider the Company's case that those terms have not been met so that the petitioner is not entitled to the contractual rent.

Has the petitioner satisfied the terms for rent to become payable?

22. First of all, it must be noted that according to clause 3.2 of the Agreement, the Company was obliged to make frequent inspection at the property to satisfy itself that the modification work was being carried out to meet the required standard and it "shall be deemed to have accepted that the Modification Work or any part thereof have been carried out and completed to meet the required standard" unless the Company has served a notice in writing to the petitioner pointing out any substandard work or defects within 14 days of receipt of a notice in writing by the petitioner to the Company of completion of such part of the modification work. Hence, it is not as if there must be an approval and rating of the AAA that the Hotel is a 3-diamond hotel for the modification work to be regarded as having complied with the standards in clause 3.1. It is also to be noted that clause 3.2 provided that in due course, the petitioner should procure that a certificate of substantial completion of the modification work was to be issued by the authorised person and provide a copy of it to the Company. It would appear from a letter of the Building Authority to the authorised person in the project, Lee Mark & Associates, dated 15 August 1998 that the authorised person had submitted Form BA14 to the Building Authority on 27 June 1998 certifying completion of the alteration and addition works in the property and that further information was submitted in June and August 1998. That letter was copied to the Company. In Mr. Leung's memorandum to Full Luxury dated 7 October 1998 (two days before his resignation as a director of the petitioner) seeking payment of his consultancy fees, he stated that he had executed his professional duties through the petitioner including professional services engaged with the authorised person, the resident site engineer and the quantity surveyor in carrying out the project and that this had been completed. There was no notice or complaint in writing from the Company of any defect in the modification work until 13 October 1998, which was shortly after Mr. Leung had ceased to be a common director of the petitioner and the Company.

23. It is not disputed that the total cost of the modification work carried out by the petitioner came up to approximately HK$33 million odd, that was accepted by the Company in its memorandum to the petitioner dated 13 October 1998. Mr. Leung has however alleged in his first affirmation that the value of the work done by the petitioner in late 1997 was only HK$23 million odd, and that the "enhanced value" of the works of more than HK$10 million as found by AG Wilkinson & Associates, the surveyors engaged by the receivers to prepare a report in these proceedings, was due to the "continuous rectification works and obligations performed by the Company on behalf of the Petitioner so as to make the hotel functionable". I find this unbelievable as this assertion is contrary to the admission of the Company in the memorandum I have mentioned and is difficult to accept in view of the expenses allegedly incurred by the Company for the rectification works as I shall come to. I should also mention that according to AG Wilkinson, they were of the opinion that on the assumption that the invoiced items of modification work had been carried out, the works in the value of HK$33 million would have been sufficient to convert an office building into a 3-star hotel in 1997.

24. Mr. Leung has alleged in his first affirmation there was failure to carry out the modification work in respect of the basement, the 3rd floor and the 4th floor and that the signage, which is item 7 in Schedule I, has not been installed. Further, he alleged that the modification work carried out in respect of the other floors were so defective that the Company had to commission its own construction and decoration workers to rectify the defects and HK$1.5 million was incurred by the Company. He stated that the invoices produced came up to the total sum of HK$1,282,350.00. As a matter of fact, invoices for the sum of HK$789,550.00 only were produced as the balance of HK$492,800.00 was for overtime labour cost allegedly paid to the staff of the Hotel for carrying out the rectification work (see the report of Ian Robinson dated 17 May 2001, paragraph 6.8.7.2). No documents have ever been produced showing that HK$492,800.00 had been paid to the Hotel staff and none of the experts engaged by the Company have verified the accuracy of HK$492,800.00 in respect of the time allegedly spent by the Hotel staff.

25. I turn to consider the evidence adduced by the Company in support of the above allegations.

The Company's memorandum dated 13 October 1998

26. This memorandum, which was addressed to the petitioner, was prepared by the management team of the Hotel on the instruction of the Company "to review the Agreement". It set out the obligations performed by the petitioner and the Company and the obligations that had not been performed. It stated that the renovation and building service installations being the petitioner's responsibility were commenced in March 1997 and "completed in principal" [sic] in September 1997 and the Company had purchased most of the items for use of the Hotel decoration between May 1997 to October 1997 and recruited staff between June 1997 to November 1997 so that there was a "soft opening" of the Hotel on 28 November 1997. The investment made by the petitioner to implement its obligations under the Agreement was around HK$30 million and the investment made by the Company to implement its obligations was HK$7 million. It was then stated that the petitioner had left behind obligations to be implemented for the Hotel to be operated as a 3-star hotel and they were listed as follows:

"a. Basement renovation

b. Partial area on Ground Floor and Lobby

c. Renovation on 3rd Floor

d. Renovation on 4th Floor

e. Renovation on Roof

f. Final touch-up on modification work after a series of inspection by Buildings Department, Fire Services Department and Home Affairs Department during the period from May 1997 to August 1998

g. Making good of all defects on building service systems

h. Other modification work such as external signage, etc. to be provided for the Hotel operation."

27. It was submitted by Mr. Chan for the petitioner that the Company has not put forward "sufficiently precise factual evidence" to show what the problems were in relation to the aforesaid parts of the building with reference to the petitioner's obligations under Schedule I. I agree. I consider that the Company should not have difficulty in giving details on the specific items of work that had not been carried out and the specific aspects in which the work done was defective or not up to the required standard, bearing in mind that under clause 3.2 of the Agreement the Company was obliged to make "frequent inspection at the Leased Property to satisfy themselves that the Modification Work is being carried out to meet the required standard", that Mr. Leung was a director of the petitioner until he resigned on 9 October 1998, and that he has the qualifications of an architect with considerable working experience although he is not an authorised person.

The Company's report dated 15 October 1998

28. This report was also prepared by the Hotel management team. It was stated that although the hotel license was issued in September 1998, "there are still many areas waiting to be finished" and a "renovation check list" was given as follows:

"1. Basement renovation

2. Closets for all "01" rooms

3. Wall of all "07" rooms

4. Ceiling of all rooms and floor corridors

5. Ceiling of lift lobby

6. Wall for covering Fire System in the lift lobby

7. Renovation on 3rd floor

8. Main Hotel Sign"

29. The report stated that "since there is a lot of problems on the rooms, the room tariff has been adjusted to below the standard" and some renovation was done by the hotel staff such as the wall of the "07" rooms. Photographs were annexed to the report. I note in this report that there was no mention of any problem with regard to the renovation on the 4th floor, unlike the memorandum dated 13 October 1998. For the reasons I have given earlier in relation to the memorandum, I do not think there is sufficiently precise factual evidence that one would expect, in a project of this size and with the amount invested, to show what exactly the problems were and in what respects the work was uncompleted or was not up to the required standard.

The letters from the Company

30. I have considered the letters written by the Company and its solicitors to the petitioner, the receivers, the bank and the receivers' solicitors dated 8 January 1999, 1 February 1999, 29 September 1999, 6 October 1999 and 14 December 1999. In none of these letters was evidence of a sufficiently precise nature given to lend credence to the allegation that the petitioner had not performed its obligation to carry out the modification work in Schedule I to the required standard.

The report of Albert So Surveyors Ltd dated 17 May 2001

31. This report has annexed to it a report of a building surveyor firm, Samson Wong & Associates Property Consultancy Ltd, giving the findings of an inspection carried out in April and May 2001 by a team led by a qualified building surveyor. It is to be noted that the expert was not provided with specifications and detailed drawings and there was no liaison with the authorised person, Lee Mark & Associates. The items of modification work set out in Schedule I to the Agreement were merely headings of a general nature. All that the expert had to guide him to establish the scope of the modification work were Schedule I and the approved plans, which are attached to his report. I do not think the documents made available to the expert would have given him sufficient information to come to a proper view of the precise scope of the modification work and in what respects the petitioner had failed to carry out the works to the required standard. A notable example of this drawback is that the expert has approached the matter on the basis that there was to be a business centre on the 3rd floor for which the petitioner had failed to carry out the appropriate renovation, when there was no mention in the business proposal of the Hotel in July 1996 that the 3rd floor was to be a business centre. On the contrary, it was expressly stated in the proposal that the hotel facilities would be "very limited", and that "the conversion, layout and decorative expenses to a 3 stars standard [would be] similar to [the] specification of New San Diego Hotel in Kowloon". Another example is the defects found by the expert being incomplete paintwork in various parts of the building. This was not the subject of any complaint in 1998 and no photographs of this defect were taken at that time. It would appear from the captions to some of the photographs in the expert's report in 2001 that the incomplete paintwork was due to work carried out subsequently when the air-conditioning ducts were installed.

32. It is stated in this report that no renovation work was carried out by the petitioner on the 5th floor and this floor was purposely left untouched to retain this as evidence to show its condition in September 1998. There was, however, no complaint in the Company's memorandum and report in October 1998 that renovation work had not been carried out on the 5th floor. No photographs of the 5th floor were annexed to the Company's report in 1998, if the intention was to leave this floor in its existing condition as evidence of the petitioner's breach. The report also stated that "minor works" had been carried out by the Hotel staff on the 5th floor as the Hotel has been using this as an office. This was not borne out by the schedule of rectification works carried out by the Hotel staff that was produced with the invoices for the rectification work done by the Company. It would appear from that schedule that rectification works were carried out to all the floors from the 5th to 23rd floors.

33. As for the photographs provided by the Company attached to the report, they merely show the conditions of the Hotel some three to four years after the modification work was done. There is no obligation of the petitioner to maintain the modification work that had been carried out. The petitioner is not responsible for the wear and tear to the installations it had provided.

34. The expert provided an opinion that if the Hotel was to be upgraded to the standard of a 3-star hotel in September 1998, extra modification costs of HK$20,930,000.00 would have to be spent. The upgrading work to be carried out does not appear to tally with the outstanding work and defective work as found by the expert. The estimated cost was given on the basis of the gross construction floor areas to be upgraded. From the breakdown of the cost estimate given, it would appear that all the areas are to be upgraded, even though no defect was found in some of them, such as the basement to the 2nd floor.

35. For the above reasons, I am unable to accept that this report or the other evidence adduced by the Company provide sufficiently precise factual evidence to support the Company's allegation that there is a substantial dispute the petitioner had not carried out the modification work in Schedule I to the required standard.

Is the petitioner entitled to the contractual rent or a reasonable sum for use and occupation?

36. As the Company has failed to raise a substantial dispute that the petitioner has not satisfied the terms in the Agreement for rent to become payable, it follows that the petitioner must be entitled to the contractual rent in the total sum of HK$53 million calculated up to December 2000 unless there are other valid grounds that the Company is not presently liable to pay rent. I look at the allegation of Mr. Leung that there is a "standstill agreement" which relieves the Company from the present liability to pay rent and the evidence he has adduced in support of this allegation.

37. According to Mr. Leung's first affirmation, on 9 June 1998, there was a meeting between him and Mr. Qiu Qin Ming of Full Luxury (Mr. Qiu was later appointed as a director of the petitioner on 17 September 1998) during which Mr. Qiu suggested that Mr. Leung should "accept off-setting loans to the Hotel". The affirmation went on to say that "as [Mr. Leung] had from time to time made various loans to the said Mr. Qiu and Periwin, Mr. Qiu was in fact suggesting that all loans or outstanding amounts including the 'rent' as stipulated under [the Agreement] between Periwin, Full Luxury and [Mr. Leung] should be dealt with by way of a set-off at a later stage." Mr. Leung would appear to suggest here that Mr. Qiu did not say in so many words that was the full effect of his suggestion that Mr. Leung should "accept off-setting loans to the Hotel", but that was how Mr. Leung had understood that was what Mr. Qiu was "in fact suggesting". Be that as it may, Mr. Leung then said in his affirmation that pursuant to this "standstill agreement", the petitioner had never demanded the Company to pay rent or mesne profit for occupying the property and "[Mr. Leung] and the Company have withheld both [Mr. Leung's] personal claim and the Company's claim for loss or damages against the petitioner." He produced a copy of the minute he had caused to be prepared of the meeting between him and Mr. Qiu on 9 June 1998.

38. Mr. Leung has also alleged that in or about January 1999, there was another "standstill agreement" between the petitioner and the Company that "there should not be cross-claims by [Mr. Leung] in [his] personal capacity, the Company and the petitioner against each other until later when the petitioner and the Company would be in a better financial position to solve this complicated matter" and that was also the background why the petitioner had never chased the Company for payment of rent. No document is produced by Mr. Leung for this second "standstill agreement".

39. When one looks at the minute of the 9 June 1998 meeting that Mr. Leung had caused to prepare, the first thing one notes is that the minute does not bear out what Mr. Leung has said in his affirmation of his understanding of what Mr. Qiu had "in fact" suggested at that meeting. What the minute stated was as follows:

"The estimate of profits distribution dated 3/6/1998 in connection with the two completed projects [one of them being the Hotel project] was tabled for endorsement.

Mr. Qiu again explained the present financing difficulty of Full Luxury and could not be able to pay the consultant fee and repeated his previous suggestion if Mr. Leung would accept off-setting loans to the Hotel."

40. The subject of rent or mesne profit payable by the Hotel was not mentioned at all. At that time, the licence was not issued by the government authority to operate the Hotel in the property. By no stretch of language could the "loans to the Hotel" be regarded as including the rent payable.

41. Further, there was clearly no standstill agreement in June 1998 or January 1999 even as regards Mr. Leung's alleged promise not to demand payment of his consultancy fee as Mr. Leung had issued a series of memoranda, invoices and reminders to Full Luxury dated 10 November 1998, 1 December 1998, 28 December 1998, 9 January 1999 and 7 April 1999 asking Full Luxury to expedite settlement of his consultancy fee in the sum of HK$15.6 million.

42. Mr. Leung's allegation of a standstill agreement is unbelievable. I do not think the Company has raised any substantial dispute that it is not under a present liability to pay the contractual rent.

43. I should mention for completeness that according to the report of Albert So Surveyors Ltd obtained by the Company in May 2001, the surveyors are of the opinion that the open market rental value of the property for hotel use, as at 1 September 1998, taking into account the then physical condition, and the findings in the report of Samson Wong & Associates Property Consultancy Ltd, was in the sum of HK$630,000.00 per month. Thus, on the Company's case, even if contractual rent of HK$53 million is not payable, the Company would still be liable to the petitioner for mesne profits of at least HK$13,860,000.00 for 22 months calculated up to December 2000.

If the Company has a genuine cross claim that would be equal to or exceed the petition debt?

44. Before I consider the individual heads of the cross claim that the Company has advanced, I make these general observations.

45. Firstly, the contemporaneous correspondence between the Company and the petitioner, and between the solicitors for the receivers and the solicitors for the Company, that I have summarised in the earlier part of this judgment do not inspire conviction that the Company has a genuine cross claim of the magnitude that it has put forward after the petition was presented. I do not attach significance to the fact that the Company had complained of defective work as early as 13 October 1998 because despite repeated requests, the Company had made no attempt of providing the receivers with any information or particulars of the size and nature of its cross claim or substantiation of the alleged breaches of the petitioner. This kind of conduct is consistent with one who is evading liability, not one who is seeking to set off a genuine and substantial loss against an admitted liability. I have grave doubts of the bona fides of the Company in raising such a massive cross claim.

46. Secondly, the Company has obtained an expert report provided by an accountant, Mr. Ian Robinson, in July 2001 giving a quantification of the Company's cross claim on four different scenarios based on the different dates from which the loss accrued with two variations depending on whether work was carried out by the petitioner to the basement. The loss quantified by Mr. Robinson ranged from HK$39 million to HK$90 million. I do not find the expert report particularly helpful. The expert has relied solely on the information and representations made to him by the Company and its solicitors and he gave his report on the basis that such information was reliable. He does not purport to give any view as to the appropriateness of the calculations he made. It is not for this expert to say if the loss and damage allegedly suffered by the Company was caused by any breach of the Agreement on the part of the petitioner.

47. Thirdly, even if the Company would have a valid cross claim against the petitioner for loss of income due to the petitioner's failure to carry out the modification work, any damages awarded would have to take into account that the Company would have a duty to take reasonable steps to mitigate its loss. It does not appear from the Company's evidence that any such steps have been taken, apart from the rectification work carried out by the Company for which it claims HK$1.2 million.

48. The different heads of claim advanced by the Company are as follows.

Damages for delay

49. It is alleged in the first affirmation of Mr. Leung that the petitioner and the Company had agreed that the Hotel should be ready for operation before July 1997 as hotel occupancy rate was expected to be at its peak during that period. It is not clear from the affirmation when the alleged agreement was entered into and the Chinese letter of the Company faxed to Full Luxury on 20 March 1997 produced by Mr. Leung does not bear out the assertion that there was an agreed deadline by which the Hotel must commence operation. Clause 2.2(A) of the Agreement provided that the petitioner "shall ... obtain ... within 6 months from the date hereof ... all other ... authorizations, permits and licenses required to be obtained from or given by competent government departments and authorities having jurisdiction over the Leased Property so as to use the Leased Property as a hotel and to permit the carrying out of the Modification Work..." It does not appear to me that the time limit of 6 months applies to the completion of the modification work. Besides, the obligations in clause 2.2(A) are qualified by the opening words that the petitioner "shall use its best endeavours". I also note that there was no complaint in the memorandum of the Company to the petitioner dated 13 October 1998 (which was prepared to "review the Agreement") that the Company was in breach of any obligation to complete the modification work so that the Hotel would be ready for operation before July 1997.

50. In my judgment, the Company has failed to show that the claim for damages for delay is made bona fide. Besides, there are difficulties whether the loss allegedly suffered was caused by the petitioner's breach, as I shall deal with in relation to the claim for reduced room rates and reduced occupancy rate.

Rectification work done by the Company

51. This claim is for the expenses incurred by the Company to rectify the defects of the modification work done by the petitioner. If one includes the schedule of the rectification work done by the Hotel staff produced with the other invoices, the amount of the claim as supported by documents would be HK$1,282,350.00. For this petition, I would treat this as a genuine cross claim that can be set off against the petition debt.

Maintenance charges paid for by the Company

52. Invoices in the sum of HK$1,604,181.50 were produced by the Company. It is alleged that these expenses were incurred on behalf of the petitioner. These payments were for water and electricity charges and maintenance, service and replacement carried out to the air-conditioning system, the lifts and the fire service installations. They are expenses of a recurrent nature. It does not appear to me that the Company has put forward a sufficient basis for holding the petitioner liable for these expenses. As I have mentioned earlier, there is no obligation under the Agreement for the petitioner to maintain the modification work in Schedule I.

Loss of income on reduced room rates and reduced occupancy rate

53. These are the biggest items of the Company's claim. Depending on when the loss is to be calculated, whether from 1 June 1997 (on the premise there is to be a claim for damages for delay), 15 November 1997 (around the time of the soft opening of the Hotel) or 1 September 1998 (when the license was issued), the claim for these items would range from HK$44 million to HK$24 million on Mr. Robinson's calculation. The claim for these losses is on the basis that the petitioner had failed to carry out some of the modification work and some of the work done was defective. I have dealt with the evidence put forward by the Company in this regard and have come to the view that the Company has failed to adduce sufficiently precise factual evidence to raise a substantial dispute that the petitioner was in breach of clause 3.1 of the Agreement.

54. There is another difficulty about these two heads of claim and that relates to causation. It has not been shown how the alleged breach would have brought about the reduced room rates or reduced occupancy rate across the board, bearing in mind that the property is a 24-storey building and the alleged defects in the Company's memorandum and report in October 1998 (assuming they were due to the petitioner's breach of the Agreement) would have affected a relatively small part of the building.

Loss of income from the signage, the 3rd floor and the basement

55. The Company claims HK$300,000.00 per month on the basis that the petitioner has failed to erect signage for the Hotel being one of the items of modification in Schedule I. If the loss is to be calculated from 1 September 1998 to December 2000, the total amount claimed is HK$8.4 million. The amount of HK$300,000.00 was taken from the business proposal of the Hotel in July 1996 which gave a projected income from the letting of the signage in that amount. In the Company's memorandum and report in October 1998, it would appear that the signage to be provided was "for the Hotel operation", not for the purpose of letting. Besides, even if damages are recoverable on the basis that it was contemplated that the Company would have let the signage, it was extremely doubtful if the signage could have been let at HK$300,000.00 a month when it is common knowledge that rentals have dropped substantially since the Asian financial crisis in the latter part of 1997. No evidence was put forward by the Company as to what the market rental would be if the signage had been let after September 1998.

56. Loss of income is claimed in respect of the 3rd floor which has not been fitted out as a business centre. I have dealt with this in the earlier part of this judgment. There is nothing in the documents to show that it was agreed that the 3rd floor should be used for this purpose. Even if there is to be a claim under this head, if loss is recoverable on the basis that the 3rd floor would have been let as guest rooms had the modification work been carried out properly, the total amount claimed as from 1 September 1998, on Mr. Robinson's calculation, is HK$2.7 million.

57. As for loss of income from the basement, I do not think the Company has adduced factual evidence that is sufficiently precise to show that it has a genuine claim under this head. I have dealt with this when I went through the Company's memorandum and report in October 1998. Besides, it is totally unrealistic to claim loss of income of HK$600,000.00 a month from the basement as this was based on the projected income in the July 1996 business proposal.

58. To conclude, it does not appear to me on the evidence that the Company has a genuine cross claim for many of the items of loss, and that it is unlikely that the amount recoverable would produce a sum as much as the petition debt of HK$53 million.

Insolvency of the Company

59. I have considered the financial position of the Company in my decision on 12 March 2001 at pages 14 to 16, with the benefit of the reports submitted by the provisional liquidators. The Company has been trading at a loss for some time even if no regard is to be made to its liability to pay rent to the petitioner. The Company is clearly insolvent.

Orders

60. As I am satisfied that the Company has failed to show a bona fide dispute of the debt on substantial grounds or that there is a genuine cross claim that would produce a sum as much as the debt of which there can be no substantial dispute, I dismiss the Company's motion to dismiss the petition and make an order to wind up the Company. I will hear the parties on costs and on any consequential order that I should make.

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

Representation:

Mr. Warren Chan, SC and Mr. M.C. Law, instructed by Messrs. Koo & Partners, for the petitioner.

Mr. Robert Tang, SC and Mr. William Wong, instructed by Messrs. Poon, Yeung & Li, for the Company.

The Official Receiver, attendance excused.

HCCW000029A/2001

HCCW 29/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 29 OF 2001

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Coram: Deputy High Court Judge S. Kwan in Chambers

Date of Hearing: 7 March 2001

Date of Handing Down Decision: 12 March 2001

 

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D E C I S I O N

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1. I have before me a summons taken out by the Respondent, Grandfield Pacific Hotel Limited ("the Company"), on 28 February 2001 seeking to discharge the order made on the ex parte application of the Petitioner, Periwin Development Limited, for the appointment of provisional liquidators of the Company. The ex parte order was made by Cheung J on 18 January 2001 and continued by Hartmann J on 29 January 2001. It was further continued and varied by the order of Deputy Judge To made on 13 February 2001 and an order made by me on 26 February 2001. The variation made in the last two orders was due to an application by the provisional liquidators that they be permitted to cease the business operations of the Company unless they were to receive further funding from the directors and/or shareholders of the Company within a stipulated period in view of the projected cash deficiency of the Company.

2. On 26 February 2001, I granted leave to the provisional liquidators to cease business operations unless they were to receive further funding from the directors and/or shareholders of the Company in the sum of HK$800,000.00. In view of the fact that the Company's application to discharge the order appointing the provisional liquidators was to be heard in just over a week, I ordered that my order giving leave to the provisional liquidators to cease business operations on the aforesaid basis was not to take effect until after the determination of the Company's application to discharge the appointment of the provisional liquidators.

3. The background matters of the present application may be given as follows.

4. The Petitioner is a company incorporated in Hong Kong on 14 July 1992. It was set up by the Foshan City People's Government in the Guangdong Province for the purpose of investing in real estate in Hong Kong. Its managing director was Mr Joseph Leung Kai Man ("Mr Leung") until he resigned in October 1998. Mr Leung was engaged by Full Luxury Limited, another company owned by the Foshan City People's Government as a consultant to advise on the investment in real estate.

5. The Petitioner acquired the property at No. 18 Percival Street, Causeway Bay, Hong Kong ("the Property") and is still its registered owner. Initially, the Property was an office building. On 19 July 1996, the Petitioner executed a legal charge in favour of the Bank of China, Hong Kong branch ("BOC"), to secure general banking facilities granted by BOC to the Petitioner. It would appear from a letter of undertaking from the Foshan City People's Government to BOC dated 9 July 1996 that an advance of HK$342.5 million was made.

6. In or about mid-1996, the Petitioner decided to convert the Property into a hotel and the Company was acquired as a shelf company for this purpose. The Company was incorporated on 6 June 1996 and its name was changed to its present name, Grandfield Pacific Hotel Limited, on 15 October 1996. An agreement was entered into between the Petitioner and the Company on 22 November 1996 ("the Agreement") by which the Petitioner was to carry out certain modification works as listed under Schedule I of the Agreement with the view to convert the Property into a 3-star hotel "in accordance with international hotel standards (AAA-approved and rated)". It was further provided that the Petitioner and the Company "shall enter into a Lease" of the Property on the principal terms and conditions as set out in the Agreement. In essence, the Company was to lease the Property from the Petitioner for ten years at the rent at varying rates as stipulated, it was to carry out fitting and decoration work to the Property as contained in Schedule II to the Agreement, and to manage the Property as a 3-star hotel.

7. Other material terms of the Agreement were as follows:

(1) In clause 1.1, the "Hotel" was defined as "the 3-star hotel and hotel related facilities to be provided by [the Company] at the Leased Property" and "Formal Opening" was defined as "the date on which the Hotel modified in accordance with Schedule I shall open for business to the public."

(2) Clause 2.2 provided that the Petitioner should use its best endeavours to obtain within 6 months from the date of the Agreement approval by the Building Authority and all other approvals and authorisations required to use the Property as a hotel and to permit the carrying out of the modification work; to obtain the consent of BOC within two months from the date of the Agreement for the Petitioner to convert the Property into a hotel and to lease it to the Company; and to procure the amendment of the deed of mutual covenant to enable the operation of a hotel at the Property.

(3) Clause 5 provided in considerable detail the principal terms of the lease to be entered into between the parties. As mentioned earlier, the term was for a period of ten years subject to a break clause in the event that the Petitioner should desire to sell the Property. As for the rent payable, this was to be a guaranteed rent at varying rates or 60% of the operation profits of a particular month, whichever was the greater.

(4) By clause 6.2, it was provided that the Company should during the term of the lease, appoint Mr Leung and one director of the Petitioner as the president and the deputy financial controller of the Company respectively and they should have access to all the books, reports and papers of the Company and be informed of all important management matters concerning the hotel.

(5) Clause 7.3 provided that time should in all respects be of the essence of the Agreement.

(6) Clause 7.8 provided that the parties should not be deemed by reason of the Agreement to have entered into a joint venture or partnership with each other.

8. Pursuant to the Agreement, Mr Leung was appointed a director of the Company on 6 December 1996. Thus, Mr Leung was the common director of the Petitioner and of the Company, until he resigned as a director of the Petitioner in October 1998.

9. On 1 September 1998, a licence was granted by the Government to the Company to operate a hotel at the Property for a period of one year. The parties however did not enter into a lease as envisaged in the Agreement, nor was any rent paid by the Company to the Petitioner under the Agreement. It is not in dispute that the Company has been in occupation of the Property. According to an affirmation of Mr Leung made on behalf of the Company on 13 April 1999 in HCMP No. 6220 of 1998 ("the mortgage action"), "as a matter of fact, the Company started operating the Property as a hotel since 22 November 1996 pending the issuance of the Hotel Licence". There is also evidence in a report prepared by the management team of the Hotel on 15 October 1998 that the Hotel had "soft opened" on 26 November 1997.

10. On 14 September 1998, Mr Leung wrote to BOC on behalf of the Petitioner referring to the Petitioner's application for BOC's consent to the conversion of the Property to a hotel in December 1996 and enclosing a copy of the licence of the hotel dated 1 September 1998. Mr Leung requested BOC to issue its consent to the Petitioner at the earliest opportunity.

11. On 17 September 1998, a new director of the Petitioner was appointed. On 9 October 1998, Mr Leung resigned as a director of the Petitioner with immediate effect. On 13 October 1998, the management team of the hotel sent a memorandum to the Petitioner on the instructions of the Company's board of directors to facilitate a "review" of the Agreement. It was acknowledged in that memorandum that the Petitioner had invested around HK$30 million to implement its obligation under the Agreement and mention was made, apparently for the first time in writing, that the Petitioner had failed to implement certain obligations under the Agreement and "to normalise the Hotel management up to a standard of 3-star Hotel". It was followed by a report of the management team of the Hotel dated 15 October 1998 which I have mentioned and in which certain problems were set out to be rectified. Copies of the memorandum and the report prepared by the management team of the Hotel were supplied by Mr Leung to BOC under cover of a letter dated 16 October 1998, this time in his capacity as a director of the Company.

12. On 19 November 1998, BOC commenced the mortgage action against the Petitioner claiming the monies advanced and possession of the Property. The Company intervened as an applicant to oppose an order for possession in favour of BOC. It was for this reason that Mr Leung made his affirmation on 13 April 1999 as I have stated earlier. In his affirmation, Mr Leung asserted that even if BOC did not give consent for the Company to operate a hotel at the Property, BOC was estopped from evicting the Company because the Company had incurred a total sum of not less than HK$13 million to convert the Property into a hotel in reliance of the Petitioner's agreement to grant a ten-year lease to the Company.

13. On 20 April 1999, an order was made in the mortgage action that BOC was to recover from the Petitioner the sum of about HK$396 million secured by the legal charge with interest and costs and that the application for a possession order was adjourned sine die with liberty to restore. As at present, BOC has not restored its application for a possession order.

14. Instead, BOC exercised its right under the legal charge to appoint receivers of the Property by a deed of appointment dated 26 August 1999 and Mr Stephen Liu Yiu Keung and Mr Matthew O'Driscoll of Ernst & Young were appointed. On 1 September 1999, Messrs Koo & Partners, the solicitors for the receivers, wrote to the Company's solicitors at the time, Messrs Wilkinson and Grist, demanding the Company to pay to the receivers all outstanding rent under clause 5.1 of the Agreement within three days, failing which proceedings would be instituted against the Company. The Company's solicitors replied on 2 September 1999 stating that "the Company had no objection to pay the rent to the Receivers or the Bank provided that the amount is to be properly agreed". It was further stated that although the Agreement provided that there should be a rental payment of HK$2 million a month to the Petitioner, due to the fact that the Petitioner had not carried out its obligations under the Agreement, the Hotel could not generate enough revenue to support the rental of HK$2 million. The Company was willing to negotiate with the receivers or BOC to work out "an acceptable level" of rental payment. A further letter to the same effect dated 14 December 1999 was sent by the Company's solicitors to the receivers' solicitors, alleging that the Petitioner was in breach of the Agreement and that it had failed to carry out the modification work as required and asserting that the Company had a claim in damages against the Petitioner. Despite requests from the receivers' solicitors to the Company's solicitors from January 2000 to November 2000 for the accounts and facts of the alleged claim for damages of the Company against the Petitioner, no information was ever provided by the Company or its solicitors to substantiate its claim for damages against the Petitioner.

15. On 9 January 2001, the receivers as agent for the Petitioner presented a petition for winding-up against the Company on the basis that the Company is insolvent and unable to pay its debt. It was stated in the petition that as from 1 September 1998 when the hotel licence was issued up to December 2000, a period of 22 months, the total amount of rent due to the Petitioner was HK$53 million and no payment has been made by the Company to the Petitioner despite repeated demands.

16. On 18 January 2001, the receivers acting as the agent of the Petitioner applied ex parte for the appointment of provisional liquidators "for the usual reason of protecting and preserving assets of the Company." In the supporting affirmation of Mr Stephen Liu, it was stated that a factor critical to the view that the appointment of provisional liquidators was necessary to ensure preservation of the Company's assets was that the receivers "are in no doubt that the actions of Mr Leung for [the Company] is simply for [the Company] to continue occupation of the Hotel without paying rent whatsoever." The receivers deposed to a strong distrust of Mr Leung as there was no way of knowing his agenda, despite the receivers had made every attempt to obtain substantiation of the Company's claim for damages including corresponding with the Company and making investigations with the Petitioner. Fear was expressed that Mr Leung would not hesitate to frustrate and block the actions of the receivers in order that the Company would continue occupation of the Hotel for as long as possible. Reliance was also placed on the unaudited management accounts of the Company up to December 1998 which showed that the Company had a carried forward loss of over HK$12 million and that it would appear that the Company was trading at a loss even when it had not paid anything to the Petitioner for rent. Cheung J made an order appointing the provisional liquidators on the usual undertaking as to damages given by the Petitioner and by BOC as the mortgagee under the legal charge.

17. On the question if the appointment of the provisional liquidators should be continued, it was accepted by both sides that I have a fresh discretion to exercise on the inter partes application and that I should consider the circumstances known to the court at present, not just the information available to the court at the time of the ex parte application. It was also accepted that the court's jurisdiction to appoint a provisional liquidator under Section 193 of the Companies Ordinance Cap. 32 is unfettered and how that discretion is to be exercised depends on the circumstances of each particular case. In deciding whether to exercise that power, the court should consider two matters. The first is whether the Petitioner has made out a good prima facie case for a winding-up order at the hearing of the petition. If such a case is made out, the second matter to consider is whether it is right that a provisional liquidator should be appointed in all the circumstances (Re Union Accident Insurance Co. Ltd [1972] 1 All ER 1105 at 1109h, 1110a-b). The question whether it is right to appoint a provisional liquidator has to be decided on the basis of commercial realities, the degree of urgency and need established by the Petitioner and the balance of convenience according to the circumstances (Re Five Lakes Investment Co Ltd v. Multiford Co. Ltd [1985] HKLR 273 at 284A-B; Securities and Futures Commission v. Mandarin Resources Corporation Limited & Anr [1997] HKLRD 405 at 408J to 409C).

Has the Petitioner made out a good prima facie case

18. At this stage, I need only form a provisional view whether the Petitioner has made out a good prima facie case for a winding-up order at the hearing of the petition. In order to make out a prima facie case, the Petitioner must show, by believable evidence, facts which are not disproved and which, if eventually proved at the hearing of the petition, will entitle it to a winding-up order (Re Fives Lakes Investment Co. Ltd v. Multifold Co. Ltd, supra, at 284D-E).

19. It was submitted by Mr Robert Tang, SC on behalf of the Company that there is a genuine and substantial dispute over the debt of HK$53 million claimed by the Petitioner as guaranteed rental under the Agreement. It was the Company's case that although the Property was converted into a hotel, the Petitioner was in breach of clause 3.1 of the Agreement in that the Petitioner was obliged to carry out the modification work "with a view to convert the Leased Property into a 3-star hotel in accordance with international hotel standards (AAA-approved and rated)." I understand "AAA" stands for the American Automobile Association and it is this body that gives star rating to hotels. It was alleged that notwithstanding substantial sums of over HK$30 million had been incurred by the Petitioner in the modification work, the work carried out was incomplete or not of such quality to make it attain the standards of a 3-star hotel or alternatively it has not been rated as a 3-star hotel. The Company does not deny that it is liable to pay an amount to the Petitioner for its use and occupation of the Property but it was contended that the Company should not be liable to pay the guaranteed rate as provided and what that amount should be would have to be assessed by the court after a trial. Furthermore, it was alleged that the Company has a substantial counterclaim against the Petitioner and this counterclaim has been quantified at HK$132 million alternatively HK$92 million. The loss and damage was said to comprise the profits that the Company would have made if the Hotel had been able to generate revenue as a 3-star hotel, that the Hotel should have been in operation in June 1997 instead of September 1998, and the assumptions and projections as to profits and occupancy rate in a business proposal prepared in 1996 were to be adopted. The counterclaim estimated at HK$132 million alternatively HK$92 million was in respect of loss and damage calculated only up to January 2001. In addition, it was submitted that as the Company would be entitled to a ten-year lease under the Agreement and assuming that the period of the lease had begun to run from September 1998, the lease would have another seven years to run and the Company would also claim loss and damage for the next seven years or so.

20. I should also mention that a number of subsidiary points were taken by Mr Leung in the affirmations he filed disputing the Petitioner's claim. I do not propose to mention them here except to say that I have considered them.

21. On the part of the Petitioner, it was submitted by Mr James Thomson that one should look at the reality of the situation, which was that a substantial sum of HK$33 million had been spent by the Petitioner towards the modification work. Further, the receivers had obtained a report from a firm of surveyors, A. G. Wilkinson and Associates in October 2000 in which the surveyors expressed the view that based on the assumptions that the invoiced items were true and had been carried out, the amount of HK$33 million would have been sufficient to convert an office building into a 3-star grade hotel in 1997. I have been taken to the letters of complaint written by the Company to the Petitioner regarding the alleged failure to carry out the modification work to the required standard of a 3-star hotel. Mr Thomson pointed out that if the Company had been suffering a substantial loss of more than HK$2 million a month, one would have expected the Company to do more than merely writing letters to the Petitioner. The earliest letter written to the Petitioner by the Company would appear to be in January 1999, after Mr Leung had ceased to be a director of the Petitioner. Further, Mr Leung claimed that the Company had incurred a sum of not less than HK$13 million alternatively HK$10 million towards the decoration work of the hotel, of which only HK$1.28 million was apparently substantiated by invoices. As for the counterclaim, there was no provision in the Agreement that the modification work must be completed by June 1997 or any particular date. The claim of loss and damage over the next seven years has not taken into account the break clause in the Agreement or the duty to mitigate. I note that Mr Tang has acknowledged that the computation of the Company's loss and damage is "not scientific". I need say no more about the colossal sums in the counterclaim which were apparently quantified for the first time in the affirmation of Mr Leung filed in February 2001.

22. As I have stated, I am only required to form a provisional view at this stage whether a good prima facie case has been made out. In my view, the Petitioner has shown by believable evidence, facts which are not disproved and which if eventually proved at the hearing of the petition, will entitle it to a winding-up order.

Whether it is right to appoint provisional liquidators in the circumstances

23. In the order made by Cheung J on 18 January 2001 on the ex parte application of the Petitioner, it was provided that the powers of the provisional liquidators should be limited to, inter alia, the following acts:

(a) to do everything necessary to identify, locate and preserve all assets of the Company and, if necessary, to carry on the business of the Company; and

(b) to do all things reasonably necessary to preserve the value of the Company's business pending the determination of the petition.

24. These powers are in line with the objective of the ex parte application, which was to protect and preserve the assets of the Company, as I have mentioned earlier.

25. Following their appointment, the provisional liquidators have taken various steps and carried out investigation into the affairs of the Company. They have submitted three reports to the court dated 8 February 2001, 23 February 2001 and 6 March 2001. Much more is known about the operations of the Hotel and the financial position of the Company as compared to the time when the ex parte application was made.

26. The principal activity of the Company is the operation of the Hotel at the Property. It has been trading at a loss for some time even if no regard is to be made to its liability to pay rent to the Petitioner, which is in dispute. Its continued operation was and is dependent on funding from its shareholders and directors. According to Mr Leung, he had provided some HK$13 million to the Company as shareholders' loan and directors' loan but he would not demand payment of the loans for the time being. The financial position of the Company as appeared from the audited and unaudited accounts may be summarized as follows:

27. It should be noted in the two audited accounts that they were heavily qualified with a disclaimer from the auditors that they were unable to form an opinion as to whether the accounts gave a true and fair view of the state of the Company's affairs. In the report of the auditors dated 28 August 2000 for the accounts of the year ended 30 April 1999, the auditors considered that there was a "significant level of concern as to the appropriateness of the going concern basis" in view of the fundamental uncertainty arising from the difficulties encountered in the estimation of the possibility of future legal action relating to the Company's liability to pay rent to the Petitioner.

28. The operating expenses of the Hotel were in the region of HK$700,000.00 to HK$800,000.00 a month based on the figures of last year, according to the financial controller of the Hotel. Also according to the figures provided by the financial controller, the Company had an operating surplus for the year 2000 in the sum of about HK$4.6 million, without making provision for any liability to pay rent. The provisional liquidators have confirmed that the hotel operations are conducted mainly on a cash basis.

29. Notwithstanding the financial controller's information that the Company had an operating surplus of HK$4.6 million from its operations in 2000, the provisional liquidators only found HK$117,363.00 cash in the bank account at the date of their appointment. Mr Leung's explanation was that the profits made had been used to reduce the loans and repay the debts of the Company. Given the limited cash in the bank account, the drop in occupancy rate of the Hotel since the provisional liquidators' appointment (which is dealt with below), and that the operating expenses would be at least HK$700,000.00 a month, the provisional liquidators made a cash-flow forecast if the Company was to continue operating the Hotel until the end of April 2001 when the petition would have been heard. They projected a cash-flow deficit of about HK$426,000.00, to which figure should be added the arrears of wages for January 2001 and the maintenance cost of the air-conditioning system and this would bring the total projected cash-flow deficit to HK$808,452.00. It was in these circumstances that I made the order on the application of the provisional liquidators on 26 February 2001 granting them leave to cease business operations unless further funding was received from the directors and/or shareholders.

30. Given that the objective of the appointment of the provisional liquidators was to protect and preserve the assets of the Company, and given what is known about the operations and financial position of the Company, I ask myself whether that objective would be achieved if the appointment of the provisional liquidators is to continue. It seems to me that there are little or no assets of the Company that would be put in jeopardy, given the present state of affairs. The most valuable asset of the Company is its right to operate the Hotel under the Agreement. If insufficient revenue is generated to cover operating expenses without a further funding from Mr Leung or the other shareholders and directors, as the provisional liquidators thought should be done, the business would not be viable and it could not be carried on, with or without the appointment of the provisional liquidators, as the operations of the hotel have been conducted mainly on a cash basis.

31. It was submitted by Mr Thomson for the Petitioner that the appointment of the provisional liquidators should be continued because they have uncovered certain irregularities in the Company's accounts and they should be allowed to continue with their investigations, which have not been completed, due to the un-cooperative attitude of Mr Leung and the staff at the Hotel. Mr Thomson pointed to the fact that only HK$117,363.00 was found in the bank account on the provisional liquidator's appointment despite an operating surplus of HK$4.6 million for last year according to the financial controller's information. There was also some kind of special arrangement between the Company and SAJ International Consultants Limited ("SAJ"; a company substantially owned and controlled by Mr Leung) by which the Company had requested SAJ to collect moneys due from travel agents on its behalf and pursuant to which SAJ had paid about HK$7.9 million to the Company from September 1999 to 18 January 2001. Up to the last report of the provisional liquidators on 6 March 2001, the provisional liquidators' investigations into the accounts and ledger records of the dealings between the Company and SAJ have not been completed as no commentary, reconciliation or explanation was given by Mr Leung on the bank statements of SAJ and the cash ledger accounts of the Company. Mr Thomson submitted that it was necessary that appointment of the provisional liquidators should continue as there is a risk that the revenue of the Hotel might be depleted or diverted to SAJ or elsewhere, in view of the huge discrepancy between the profits generated in 2000 and the actual cash position.

32. It seems to me that the risk of dissipation of assets is over-stated. Whatever might have happened in the past, given the present financial position of the Company, that it is barely able to cover operating expenses from the revenue generated, I do not think the risk as envisaged by Mr Thomson has been demonstrated. The provisional liquidators have undoubtedly done invaluable work in investigating the affairs of the Company and the information they have gathered and the work they have done would be of considerable assistance to the liquidator, in the event that a winding-up order is made. The work and investigations that have not been completed by the provisional liquidators could be carried on by the liquidator, if one is appointed eventually, but at the moment, it has not been demonstrated to me that there is a pressing or urgent need for the appointment of the provisional liquidators to continue so that they could carry on with their investigations.

33. I also look at the downside to the Company if the order appointing the provisional liquidators is not discharged. The officers and staff of the Company have not co-operated with the provisional liquidators and this has caused much difficulty in the work of the latter. The staff had organised a sit-in and demonstration at the offices of the provisional liquidators when their wages were not paid in February 2001. There was picketing at the Hotel and banners were put up. There were other acts of hostility towards the staff of the provisional liquidators assigned to work at the Hotel. It is not surprising that the occupancy rate of the Hotel had dropped in this kind of atmosphere and bookings were cancelled by travel agents. I set out below the drop in occupancy rates from the latest report of the provisional liquidators:

	2001 Average %	2000 Average %
19 to 31 January	34.7	79.4
1 to 28 February	35.2	58.6
1 to 5 March	40.6	68.5

34. I should mention that in making a cash-flow forecast of the revenue to be generated after their appointment, the provisional liquidators have made their projection on the basis of a 30% drop in occupancy rate. The average occupancy rate of the Hotel in 2000 was 70%. Although the occupancy rates might have gone up slightly according to the bookings placed with the Hotel for March and April (they were 51% and 48% respectively according to Mr Leung's figures), there would still be a drop compared to the figures of last year.

35. I also take into account that the fees and expenses of the provisional liquidators and their legal advisers, up to 6 February 2001, were estimated to be in the region of HK$1.25 million. Their work was extremely time consuming due to the non-cooperative attitude of the Company's officers and staff.

36. In exercising my discretion whether to continue the appointment of the provisional liquidators, I need to balance the serious consequences to the Company and the need to preserve and protect the assets of the Company, which was the stated objective of the Petitioner in making the application. On the material before me, it does not seem to me that the balance of justice and convenience comes down in favour of continuing the appointment. I am not satisfied that the Petitioner has established the need for the appointment of provisional liquidators to be continued as the evidence did not show that any assets of the Company would be in jeopardy before the hearing of the petition or that there are assets which require protection by the appointment of provisional liquidators. In the special circumstances of this case, I do not think the appointment of provisional liquidators should be continued merely because the Company has been operating at a loss and that it may not be viable if there is no funding within a short time. In my view, it would be a disproportionate remedy to continue with the appointment of provisional liquidators in the circumstances. For these reasons, I make an order in terms of paragraph 1 of the Company's summons dated 28 February 2001 that the orders appointing the provisional liquidators be discharged.

37. I should also mention that the Company has also relied on material non-disclosure as a ground for discharge of the orders appointing provisional liquidators. It does not appear to me that this ground has been made out.

38. The Company has also sought an order in its summons that the Petitioner do pay the Company such damages to be assessed that have been sustained by the Company by reason of the orders appointing provisional liquidators which the Petitioner ought to pay. I decline to make such an order at present. I have yet to hear submissions from the Petitioner regarding this. What I would do is to give the Company liberty to apply to the court to enforce the undertakings in damages given by the Petitioner and by BOC to the court when the Petitioner obtained the order appointing provisional liquidators on 18 January 2001. If and when such an application is made by the Company, subject to what the Petitioner and BOC may have to say, my present inclination is to direct that the application be stood over until after the hearing of the petition.

39. I will hear the parties on the costs of the Company's application to discharge the orders appointing provisional liquidators, the costs of the Petitioner's application for the appointment of provisional liquidators, and the costs of the appointment of the provisional liquidators.

 

 

 

Representation:

Mr James Thomson, instructed by Messrs Koo & Partners, for the Petitioner

Mr Robert Tang, S.C. and Mr William Wong, instructed by Messrs Poon, Yeung and Li, for the Company

Mr Joseph Kwan, of Messrs Deacons, for the Provisional Liqudiators

The Official Receiver, attendance excused

HCCW000029/2001

HCCW 29/2001

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. HCCW 29 OF 2001

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Coram: Deputy High Court Judge S. Kwan in Chambers

Dates of Hearing: 23 and 26 February 2001

Date of Decision: 26 February 2001

 

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D E C I S I O N

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1. This is an application by the Provisional Liquidators for directions from the court that they be allowed to cease operation of the hotel business carried on by Grandfield Pacific Hotel Limited ("the Company") pursuant to the provisions of liberty to apply made by Hartmann J on 29 January this year.

2. For the jurisdiction of the court to give such a direction if expedient, I was referred by Mr Bartlett to various authorities and they are as follows: firstly, Palmers Company Precedents Part 2, 17th Edition, page 103 in which no authority was cited for the proposition that a provisional liquidator may apply for a direction from the court to cease the business operation of a company if expedient; secondly, there is the case of Re Union Accident Insurance Co Ltd [1972] 1 Lloyd's Report 297 at 302 in which the court expressed the view that it was within the power of the provisional liquidator to close down the branch office of the company in question; and lastly, there is the Australian case of Re M L Industries Pty Ltd (1981) 5 ACLR 769 in which the court refused the application taken out by the provisional liquidator on the basis that the petition for winding up would be heard a mere five days away and also because of the paucity of information provided by the provisional liquidator in support of his application. I am satisfied that this court does have jurisdiction to give such a direction if appropriate and indeed it has not been seriously challenged by Mr William Wong who appeared for the Company that I do have this jurisdiction.

3. On 18 January this year, Cheung J made an order on the ex parte application of the Petitioner appointing provisional liquidators with powers to do everything necessary to preserve the assets and to carry on the business of the Company until the further order of the court.

4. On the return date of the inter partes summons for continuation of Cheung J's order before Hartmann J on 29 January, it was ordered that the appointment of the provisional liquidators be continued until varied or discharged by the court. The court was informed at that hearing that the petition for winding up would be contested and the Company would seek a discharge of the order appointing the provisional liquidators, hence directions were given for the parties to file evidence. As at present, all the evidence has been filed for the application to discharge which is to be heard on 7 March 2001. The petition for winding up would be heard on 10 April.

5. The Company's principal activity is to operate a hotel in Causeway Bay. The provisional liquidators have encountered difficulties in carrying out their duties due to the lack of co-operation of the directors and senior staff and the failure to provide material information and records to the provisional liquidators despite repeated requests. The hostility shown towards the provisional liquidators is such that the provisional liquidators have seen fit to engage security guards for the protection of their staff working at the hotel premises. I shall not go into the details of non co-operation which are set out in full in the two reports provided to this court by the provisional liquidators. The Company has made allegations that the provisional liquidators had not been behaving impartially. Suffice it to say at this stage that I do not accept such allegations.

6. This is by way of background, and is not the primary reason for the provisional liquidators' application today. The Provisional Liquidators are concerned with the tight cash flow situation of the Company and the Company's ability to continue trading without additional funding from directors or shareholders. That is why directions are sought from the court that they be permitted to cease trading unless further funding is received.

7. I appreciate that it is a draconian order to direct that the provisional liquidators be allowed to cease trading before the Company's application for discharge of the appointment of the provisional liquidators is heard. I bear in mind that this would be heard fairly soon and the petition for winding up would be heard on 10 April.

8. In my judgment, the provisional liquidators' concerns are justified. The professional view of the provisional liquidators on the liquidity of the Company and the cash flow forecast is entitled to respect. I shall, however, make some adjustments to the provisional liquidators' estimates and forecast for the reasons given below. At this stage, I am not looking at the broad picture but at a very limited scope to see if the Company is able to discharge its liabilities in the operation of the hotel business in the short term until the end of April, which I think is a reasonable period.

9. The first adjustment that I am going to make relates to the provision of legal costs in the sum of $570,000.00. In the order of Cheung J, the order as to costs was that the question of which party is to bear the costs of the appointment of the provisional liquidators is to be reserved. There is no reason why the fees of the legal advisers of the provisional liquidators should be treated differently from the provisional liquidators' costs. There seems to me to be no or no sufficient reason why the Company should make provision for the fees of the provisional liquidators' legal advisers at this stage when it is not clear who would bear the costs ultimately. In my view, the provision of the legal costs should be removed from the Provisional Liquidators' cash flow forecast.

10. The second adjustment that I am going to make arises out of the additional information disclosed by the Company in the third affirmation of Leung Kai Man filed on 23 February 2001 on the latest booking records supplied by the front desk reservation of the hotel for March and April this year. These figures have been set out in table form in the submissions of Mr Wong. According to the latest information supplied, the occupancy rate for March and April based on the bookings made as at 22 February 2001 would be 51% and 48% respectively, not 39% and 51% as forecast by the Provisional Liquidators. That would bring in room revenues of $703,373.00 for March and $660,820.00 for April 2001. However, it should be borne in mind that the room revenues would not be received by the Company all at one go. Mr Bartlett has given me a revised table on the basis that the Company's new figures on bookings are taken into account. The net result is that there would be a cash flow deficit of about $426,000.00 if the Company is to continue operation to the end of April. This is the adjustment I should make to the cash flow forecast.

11. In addition to the above cash flow deficit as forecast, there are two additional items that should be added to provide for payment of arrears of wages for the hotel employees in January 2001 and the liability to pay maintenance costs for the air-conditioning system. These figures added to the figure of cash flow deficit as forecast would bring the total deficit to $808,452.00.

12. In my judgment, there should be additional funding provided to the Company if it is to carry on the hotel operation. I will round down the figure for additional funding to $800,000.00. As I have indicated to the parties earlier, in view of the fact that the application for discharge is going to be heard on 7 March, much earlier than we all expected, I will order that the order I make today is not to take effect until after the determination of the application for discharge on 7 March. I will hear the parties on the exact terms of the order that I am to make on the basis of the decision given.

 

 

 

Representation:

Mr Mohan Datwani, of Messrs Koo & Partners, for the Petitioner

Mr Jeremy Bartlett, instructed by Messrs Deacons, for the Provisional Liquidators

Mr William Wong, instructed by Messrs Poon, Yeung & Li, for the Company