CIBA INTERNATIONAL LTD v. TUNG KA HUNG AND OTHERS

HCCW 1193/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 1193 OF 2002

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Coram: Hon Lam J in Chambers

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D E C I S I O N

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1. On 24 October 2003, the Petitioner applied for leave to further amend the Petition to add the following prayers,

"	(3)	The 1st and 2nd Respondents be restrained, whether through themselves or their agents, servants, officers, Ratonal Electronics Limited or otherwise, from directly or indirectly diverting any business and/or potential business of the Company to the 1st and 2nd Respondents or Ratonal Electronics Limited or any other companies or entities by making use of the business contacts possessed by the Company from time to time or other business opportunities of the Company or howsoever until further order;
	(4)	The 1st and 2nd Respondents be ordered to disclose the details of all business transactions conducted by Ratonal Electronics Limited and the up-to-date financial account of Ratonal Electronics Limited together with copies of all purchase orders, invoices, receipts, sale records, remittance, payments and other relevant supporting documents in the manner as the Court thinks fit;
	(5)	That there be an inquiry of damages suffered by the Company resulting from the misconducts of the 1st and 2nd Respondents as pleaded hereinabove in the manner as the Court thinks fit;
	(6)	That the 1st and 2nd Respondents be ordered to pay the Company such sum as are found owing by the 1st and 2nd Respondents pursuant to the inquiry ordered at paragraph (5) above together with interest."

2. The application was opposed by the Respondents. The only ground of objection advanced was that the proper party claiming for these additional relief should be the company and the proper form of action should be a derivative action. The Respondents relied heavily on the judgment of Kwan J in Tan Man Kou v Chime Corporation Ltd HCMP 4146 of 2001, 6 May 2003.

3. At the conclusion of the hearing on 24 October 2003, this court reserved its decision.

4. After the hearing, this court noted that the decision of Kwan J was subject to an appeal in CACV 124 of 2003 and the appeal was heard on 21 October 2003. After consulting the parties, it was agreed that the decision on leave to amend should be reserved until the Court of Appeal delivered its judgment.

5. The Court of Appeal delivered judgment in CACV 124 of 2003 on 20 February 2004. In that judgment, the Court of Appeal reversed the decision of Kwan J. It was held that as a matter of jurisdiction, in a Section 168A petition, the court can entertain claims that may overlap with claims that could be advanced by the company in a derivative action provided that the criteria under Section 168A can be satisfied. As a matter of discretion, the Court of Appeal held that on the facts of that case, it was arguable that it was appropriate for the petitioner to include the additional claim in the Section 168A petition. Hence, leave to amend for addition of the claim was granted.

6. This court invited parties to file supplemental submissions in the light of the Court of Appeal's decision. The Petitioner filed the same on 19 March 2004. The Respondent chose not to file any submissions and confirmed in a letter dated 13 April 2004 that they would not file submissions in response to those of the Petitioner. Neither party requested for a further hearing on the question of leave to amend.

7. As observed by Ma CJHC in Paragraph 30 of the judgment in Tan Man Kou, the proposed amendments should be considered in the context of the petition as a whole. Even without these amendments, the diversion of business had already been pleaded and relied upon by the Petitioner as part of the unfair and prejudicial conducts perpetuated by the Respondents in the affairs of the company in Paragraph 19 of the Amended Petition. It must therefore be arguable that the additional prayers were within the scope of Section 168A(2) as orders that could be made by the court with a view to bringing to an end the matters complained of.

8. Whether the court would make such orders after the trial is of course a matter for the judge who hears the Petition. One possibility is that a buy-out would be ordered under Prayer (2). Another possibility is a winding up of the Company under Prayer (1). If the court were to make any one of such orders, it might then be relevant to consider whether all or some of these additional orders are necessary. At this stage, I am only considering whether leave should be granted for these prayers to be added. For reasons given, I think leave should be granted and I order accordingly.

9. I also direct parties to restore the summons of 7 April 2003 for argument if they so wish. I shall also reserve the question of costs in respect of the application for leave to amend to the restored hearing.

Representation:

Miss Elaine Liu, instructed by Or, Ng & Chan, for the Plaintiff

Mr Ambrose Ng, instructed by Keith Ho & Co., for the 1st and 2nd Respondents

HCCW 1193/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 1193 OF 2002

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D E C I S I O N

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1. This application for validation order has a chequered history. It came before me on 23 January and 4 March 2003. I need not repeat what I have said in my Ruling of 23 January 2003 and my Reasons for Ruling of 10 March 2003. For reasons set out therein, the application could not be finally disposed of at those hearings. Further evidence had been filed by parties since 4 March 2003 and the matter came back to me on 23 April 2003.

2. The following were relevant developments since 4 March 2003,

(a) the ex parte injunction obtained by the 1st Respondent against Heirlink in HCMP 927 of 2003 to restrain the latter from presenting a petition against Ratonal Industrial Limited ["the Company"] was discharged on 7 March 2003 upon Heirlink's undertaking not to file any petition based on the statutory demand of 7 February 2003.

(b) Heirlink served another statutory demand on 4 April 2003. The debt was stated to be $632,810.20 (instead of $1,188,275.40 in the first statutory demand).

(c) The application for striking out or stay of the petition was dismissed by Kwan J on 12 March 2003. The Petitioner was also ordered to pay security for costs in the sum of $150,000.00.

(d) Kwan J gave directions for the future conduct of these proceedings on 13 March 2003 including that it is to be heard with six sets of related proceedings before the same judge and there is going to be a further direction hearing on 7 May 2003.

3. In addition, without leave of the court, the parties issued two summonses returnable before me on 23 April 2003,

(a) The Petitioner issued a summons on 7 April 2003 asking for injunctive relief and discovery against the 1st and 2nd Respondents concerning their business activities including those of Ratonal Electronics Limited ["REL"].

(b) The 1st and 2nd Respondents issued a summons on 10 April 2003 asking for additional security for costs in respect of the summons of 7 April 2003 which had not been catered for (nor contemplated) under the order of Kwan J made on 12 March 2003.

4. Due to time constraint, I was unable to entertain these two summonses at the hearing of 23 April 2003. Since the hearing of 23 April 2003 was reserved for the disposal of the validation order application and judging from the substantial volume of evidence having been filed and the history of the matter, it was unrealistic to expect those two additional summonses to be heard together with the validation order application within the one day allocated for the matter. I decided that I should hear the application for validation order first. I saw no urgency in respect of the two additional summonses. The alleged diversion of business to REL has been detected by the Petitioner for quite some time and from what I was told on 23 April 2003, the Petitioner was more concerned about getting information as to the business of REL to enable them to assess the situation and to ensure proper accounts would eventually be rendered by REL on profits derived from business diverted from the Company. As it turned out, the hearing of the application for validation order ran beyond 4:30 pm. The two additional summonses have to be adjourned and I have given directions as to the further conduct of the same.

5. As regards the application for validation order, there is no dispute between the parties as to the relevant principles. In the context of the present application, an important consideration is whether the Company is insolvent. If the Company is insolvent, the basic principle is that the assets at the time of the commencement of the liquidation will be distributed pari passu amongst its unsecured creditors. In considering whether to make a validation order, the court must always do its best to ensure that the interests of the unsecured creditors will not be prejudiced. Further, it has been said that the desirability of the company being enabled to carry on its business was often speculative and the court must carry out a balancing exercise (see Denney v John Hudson [1992] BCLC 901 at p.904-5). In other words, for an insolvent company, the court must be satisfied that the transactions it proposes to sanction are likely to be profitable and therefore will increase the company's assets and therefore will be beneficial to the unsecured creditors (Re Fairway Graphics Ltd [1991] BCLC 468). I do not think the Court of Appeal in Re Parnip Investment Limited [1991] 2 HKC 272 laid down anything inconsistent with these principles.

6. Although the Petition is a contributory's petition, as I said in my Reasons for Ruling of 10 March 2003, the intervention of Heirlink as Supporting Creditor is significant in the context of this application. Unless I can be satisfied that the alleged debt due to Heirlink should not be taken into account in considering the solvency of the Company, the non-payment of such a debt is prima facie evidence of inability to pay debt when it was due.

7. Whilst Mr Lo (counsel for the Respondents) was correct in pointing out that the Petitioner could not rely on Section 178 (1)(a) of the Companies Ordinance because less than 3 weeks have elapsed since the service of the second statutory demand, this is by no means the end of the matter. Mr Lo accepted that the court could still come to a conclusion that the Company is unable to pay its debts if the overall picture justifies the same. He however submitted that on the material before the court, the Company should be regarded as solvent. In the alternative, even if the Company is insolvent, he urged this court to take the view that the continuation of the business of the Company is likely to be profitable and beneficial to the unsecured creditors.

Solvency of the Company

8. Though Mr Lo tried to persuade me that there is a serious dispute to the debt due to Heirlink, I am not convinced. Although there had been an assignment of the debts by Heirlink to Polyclad, the evidence clearly showed that Polyclad had re-assigned those debts back to Heirlink in February 2001. This is confirmed by a letter dated 6 March 2003 written on behalf of Polyclad to Heirlink. It was further confirmed in that letter that only partial payment in the sum of $555,465.20 had been received. Despite time being given to enable the Respondents to produce evidence as to payment of the balance, all that Mr Lo could rely upon is a facility letter dated 5 October 2000 from Fortis Bank to Grand Bond (Asia) Limited which made reference to letters of credit facility with Polyclad as one possible beneficiary. Even Mr Lo had to accept that this is not evidence of payment of the balance. He however invited this court to consider that there is a possibility that payment had been made. On the evidence before me, particularly in the light of the clear evidence from Heirlink and Polyclad as to the non-payment of the balance, I am unable to draw any inference from the facility letter of 5 October 2000 that payment had actually been made for the balance.

9. Mr Lo then submitted that even if the debts due to Heirlink were not fully paid, there is sufficient cash in the bank accounts of the Company to pay for the same. Perhaps in recognition of the weakness of their argument as to the dispute of the Heirlink debts, the Respondents reached an agreement with Heirlink in the afternoon of 23 April 2003. The terms of the agreement, as relayed to me by counsel, are as follows,

(a) in the event that a validation order is made, the Respondents undertake to pay $632,810.20 to Heirlink within 7 days of the order;

(b) in that event, Heirlink would not present a winding-up petition based on the second statutory demand and would withdraw the latter within 7 days after the payment of $632,810.20;

(c) After receiving the payment of $632,810.20, Heirlink would pay the 1st Respondent $100,000.00 by way of costs in HCMP 927 of 2003;

(d) Save as to (c), HCMP 927 of 2003 would be withdrawn by the 1st Respondent with no order as to costs;

(e) Heirlink would not oppose this application for validation order;

(f) Even if no validation order is granted, the Respondents would waive the benefit of the costs order made by me on 4 March 2003 against Heirlink. Heirlink and the Respondents would not ask for costs against each other for the hearing of 23 April 2003.

10. As a result of this agreement, Mr Raymond Lau (counsel for Heirlink) did not oppose the application for validation order.

11. It follows that if this court were to make a validation order, the Respondents would use the money in the bank accounts of the Company to pay $632,810.20 to Heirlink. Heirlink would then in turn pay a sum of $100,000.00 to the 1st Respondent by way of costs in HCMP 927 of 2003.

12. In my judgment, this agreement between Heirlink and the Respondents is in clear conflict with the fundamental precepts of winding-up of the affairs of a company in financial difficulties. As Ms Liu (counsel for the Petitioner) pointed out, it is a clear case of preference putting Heirlink in priority over the other unsecured creditors. Unless I can be satisfied that the Company is financially sound and solvent with sufficient resources to pay off all its creditors, I will not sanction such an agreement.

13. The payment of $632,810.20 to Heirlink will seriously undermine the cash flow position of the Company. According to the management account produced by the Respondents, as at 31 October 2002, the Company had cash in the sum of $1,410,924.00. By way of interim relief, a sum of $400,000.00 had been withdrawn. According to Exhibit "TKH-70" in the 7th Affirmation of Tung Ka Hung, as at 28 February 2003, the Company's bank balance was $1,130,601.68. If a payment of $632,810.20 were to be made, only a balance of $497,791.48 would be left in the bank accounts. Mr Navis Wong deposed in Paragraph 11 of his first affirmation as to the monthly expenses of the Company. It was about $300,000.00 per month. Although I was told that two staff had resigned since then, it did not significantly reduce the monthly expenses of the Company.

14. The management account shows that the Company owed its trade creditors $10,546,648.00 and in addition, there are current liabilities in terms of sundry accounts payable and accruals in the sum of $2,333,564.00. On top of that, there is an item called short term bank loan in the sum of $461,727.00. Mr Lo told me that was a hire purchase loan by Wing Hang Finance. According to the evidence of Mr Navis Wong, the instalment is $45,539.00 per month. There is also a mortgage loan of $1,237,654.00 with monthly instalment in the sum of $28,826.17.00. These two instalment payments were included in the $300,000.00 odd monthly expenses of the Company. The Respondents have not provided me with the up-dated information as to whether there has been any defaults in terms of these instalment payments. Exhibit "NW-20" suggests that there had been defaults regarding the Wing Hang loan.

15. It is not necessary for me to be embroiled in the dispute about whether the short term loan and a certain portion of the mortgage loan should be classified as current liabilities from accounting point of view. Section 178(1)(c) of the Companies Ordinance provides that in determining whether a company is unable to pay its debts, the court shall take into account the contingent and prospective liabilities of the company. In this connection, the observations of Nicholls LJ (as he then was) in Byblos Bank SAL v Al-Khudhairy [1987] BCLC 232 are pertinent,

"... If a debt presently payable is not paid because of lack of means, that will normally suffice to prove that the company is unable to pay its debts. That will be so even if, on an assessment of all the assets and liabilities of the company, there is a surplus of assets over liabilities. That is trite law.

It is equally trite to observe that the fact that a company can meet all its presently payable debts is not necessarily the end of the matter, because para (d) requires account to be taken of contingent and prospective liabilities. Take the simple, if extreme, case of a company whose liabilities consist of an obligation to repay a loan of ￡100,000 one year hence, and whose only assets are worth ￡10,000.00. It is obvious that, taking into account its future liabilities, such a company does not have the present capacity to pay its debts and as such it 'is' unable to pay its debts. Even if all its assets were realised it would still be unable to pay its debts, viz, in this example, to meet its liabilities when they became due. It might be that, if the company continued to trade, during the year it would acquire the means to discharge its liabilities before they became presently payable at the end of the year. But in my view para (d) is focusing attention on the present position of a company. I can see no justification for importing into the paragraph, from the requirement to take into account prospective and future liabilities, any obligation or entitlement to treat the assets of the company as being, at the material date, other than they truly are.

Of course a company's prospects of acquiring further assets before it will be called upon to meet future liabilities will be very relevant when the court is exercising its discretion: for example, regarding the making of a winding-up order or the granting of short adjournments of a winding-up petition."

16. Mr Lo urged me to have regard to the fact that apart from Heirlink, no other creditors appeared to be interested enough in these proceedings to take part therein. That may be so. But I do not think this court can disregard their interests in the exercise of the discretion in granting or refusing to grant a validation order. In Paragraph 9 of the 3rd Affirmation of Navis Wong, he referred to suppliers of the Company "pushing for payments and threatening to take legal proceedings against the Company".

17. The 1st Respondent had settled some of the indebtedness of the Company by his own resources. The total amount of such payments, according to exhibit "NW-11" in the 3rd Affirmation of Mr Wong, is $1,628,811.36. Even so, the Company still owes large amount of money to its trade creditors. Mr Wong also produced a deed of indemnity executed by the 1st Respondent in favour of a creditor Lee Tai Precious Metal Company Limited in respect of a debt of $167,880.00. That seems to be a compromise for payments to be made by instalments. Although I have no information as to the developments concerning this debt subsequent to this deed, this at least showed that the creditor had pressed for payment from the Company and the Company was prima facie unable to make payment in full after the debt had become due.

18. In paragraph 14 of my Reasons for Ruling dated 10 March 2003, I have alluded to my concern about the position of the large amount due to unsecured creditors. The Respondents did not produce detail information about these creditors and I simply have no means to be satisfied that their interests would be properly safeguarded if a validation order were granted. On the material before me, there is a high probability that the payment of $632,810.20 to Heirlink would prejudice the other creditors.

19. Further, in Paragraph 21 of the 4th Affirmation of Navis Wong, he deposed to the fact that liabilities of more than $700,000.00 is overdue and outstanding from the Company. An examination of the list exhibited as "NW-20" suggested that those were mostly expenses incurred after October 2002. Hence, this $700,000.00, or at least a large portion thereof, were not included in the trade debts of $10,546,648.00 set out in the management account.

20. Hence, the existing bank balance of $1,130,601.68 is not sufficient to pay off both the $632,810.20 due to Heirlink and the $700,000.00 odd liabilities incurred after October 2002, not to mention the pre-Petition indebtedness. There is a real likelihood that the Company would be wound up by one of its creditors, if not by the Petitioner.

21. On the whole, I have serious doubt about the solvency of the Company and on the existing material, even taking into account of the other current assets of the Company set out in the management account and disregarding the shareholders' loans which the Respondents agreed to defer, I am not satisfied that the Company is able to pay all its debts when they become due.

Profitability of the business

22. Mr Lo argued that even if the court is not satisfied with the solvency of the Company, it may still make a validation order if the continuation of the business of the Company is likely to be profitable and will thus increase the company's assets so as to be beneficial to its creditors. I have no quarrel with this proposition. But the question is whether there is sufficient evidence before me to warrant a conclusion that the continuation of the business of the Company is likely to be profitable. As reminded by Fox LJ in Denney v John Hudson [1992] BCLC 901, the speculative nature of the future profitability of a business is something I must bear in mind. In the absence of very cogent evidence pointing to the profitability of the business in the future if a validation order were granted, this court should be slow to conclude that the interest of the unsecured creditors would not be prejudiced.

23. In the present case, the Respondents have not produced any credible evidence to substantiate the profitability of the business. Mr Lo placed heavy reliance on the management account showing that the Company made a profit in the sum of $248,738.00 in the seven months prior to November 2002. He also referred to the 4th Affirmation of Mr Wong who deposed to the negotiations the 1st Respondent conducted with six regular customers of the Company. All it boils down to is that these customers indicated that they would be willing to place further orders with the Company and settle their outstanding debts to the Company if the latter could resume normal operation, including the operation of its bank account. Mr Wong made an estimate that the gross profit margin would be 15-20%. Turnover figures relating to these six customers between January and October 2002 were also given.

24. I do not regard these as sufficient to establish that the business would be profitable. In the past, the company had been running at a loss. According to the audited accounts of the Company, the business sustained a loss in the sum of $218,561.00 in the year ended 31 March 2000. For the next year, it sustained a loss of $3,249,137.00. By comparing the retained profits carried forward in the audited accounts for 31 March 2001 and the retained loss brought forward in the management account, between 31March 2001 and 31 March 2002, the business sustained a loss of $5,344,911.00. Mr Lo accepted these figures but he submitted that those poor results were the consequence of the wrongdoing and mismanagement on the part of Mr Wan who is in the same camp as the Petitioner. There are of course disputes of fact in this regard. However, Mr Lo told the court that the 1st Respondent assumed control of the Company in October 2001. Between October 2001 and March 2002, it would appear that the Company still suffered great loss in its business.

25. More importantly, the Respondents did not provide this court with any information as to the profitability of the business from November 2002 to now. As I mentioned in the course of arguments, given the Respondents' case that REL had been conducting the business for the Company to ameliorate the adverse impact of the Petition and they were quite willing to account such profit to the Company, the Respondents should provide information as to how much profit has been generated from such business albeit carried in the guise of REL. Notwithstanding my observation as to the lack of information on the profitability of the business since the Petition in Paragraph 15 of my Reasons of Ruling dated 10 March 2003, the Respondents chose to withhold such information.

26. Mr Lo submitted that it was difficult for the Respondents to produce concrete evidence as to profitability as the Company is still shouldering the adverse impact of the Petition. To some extent, I agree that the Petition must have some adverse impact on the profitability of the business. However, I do not think the Respondents can rely on this to absolve them from producing credible evidence to show that the continuation of business would be beneficial to the unsecured creditors. Without such evidence, it would not be right for this court to grant a validation order when it has serious doubt as to the solvency of the Company.

27. On balance, I do not feel able to conclude that the resumption of business by the Company would be profitable. This is particularly so in view of the very tight cash flow position and the serious doubts I have in respect of the financial viability of the Company. It follows that I cannot be satisfied that the grant of a validation order would not prejudice the interests of the unsecured creditors.

Result

28. For these reasons, the application for validation order must be dismissed. I will also make an order nisi that the Respondents shall pay the costs of the Petitioner regarding this application in any event. As between the Respondents and the Supporting Creditor, by reason of their agreement, there will be no order as to costs.

Representation:

Ms Elaine Liu, instructed by Messrs Or, Ng & Chan, for the Petitioner

Mr Tommy Lo, instructed by Messrs Keith Ho & Co., for the 1st to 3rd Respondents

Mr Raymond Lau, instructed by Messrs Simon Ho & Co., for supporting creditor, Heirlink Industrial Limited

The Official Receiver, attendance excused

HCCW 1193/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1193 OF 2002

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REASONS FOR DECISION

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The application

1. This is an application to strike out or dismiss a petition for winding up and for relief under section 168A of the Companies Ordinance, Cap. 32, alternatively, for stay of all proceedings pending the determination of other related proceedings being HCA No. 3705 of 2002, HCCW No. 727 of 2002, and/or HCCW No. 1097 of 2002. The company concerned is Ratonal Industrial Limited ("Ratonal"). The petitioner is a company known as Ciba International Limited ("Ciba"), which is wholly owned and controlled by Mr Chow Chung Man Eros ("Eros Chow"). The 1st and 2nd respondents are Mr Tung Ka Hung ("Tung") and Mr Wong Chi Sang Navis ("Navis Wong"). Ratonal is the 3rd respondent.

2. The application for striking out or dismissal was made by Tung and Navis Wong under Order 18 rule 19 of the Rules of the High Court. A number of grounds were set out in the summons. I do not intend to refer to most of them as Mr Tommy Lo, who appeared for the applicants, has sensibly confined his grounds for striking out to two matters. Firstly, it is said that Ciba has no locus to bring a petition for relief under section 168A as it was not a member of Ratonal when the petition was presented on 29 October 2002. Mr Lo has confirmed to me that he does not challenge the locus to Ciba to petition for winding up, as this is governed by a different provision, namely section 179(1)(a). Secondly, it is alleged that there was lack of good faith of Ciba in presenting the petition and that it had acted with an ulterior motive.

3. I should mention that the application for a stay of proceedings in this petition pending the determination of other proceedings was hardly pursued by Mr Lo at the hearing.

4. At the conclusion of the hearing, I dismissed the application and these are the reasons for my decision.

The background

5. The background matters relevant to this application, which for present purpose are taken from the evidence filed by Eros Chow and do not constitute findings as such, may be briefly stated as follows.

6. Ratonal was incorporated in 1990. In 1999, there was an agreement reached between Eros Chow, Tung, Navis Wong and others, who were all engaged in the manufacturing and trading of printed circuit boards, to merge their companies into a group. The ultimate holding company was to be Grand Sky Holdings Ltd ("Grand Sky", the subject company in HCCW No. 1097 of 2002). The shareholding interest in the group was to be distributed among the parties with reference to the value of their interests in the companies they contributed to the group in the merger. Ratonal (in which Tung and Navis Wong held shares), Bondway Industrial Ltd ("Bondway", in which Tung and Navis Wong held shares) and Rockent Electronics Ltd ("Rockent"; in which Eros Chow held shares) were three of the companies to be merged with other companies to form the group.

7. The following transactions were carried out as part of the measures required to implement the merger agreement.

8. On 29 July 1999, Eros Chow and the other shareholders in Rockent transferred their shares to Grand Sky. On 30 September 1999, the directors of Ratonal passed a resolution to issue 3 million new shares, followed by a resolution of the shareholders of Ratonal on 5 October 1999 to the same effect. On 4 November 1999, an agreement was signed by Tung, Navis Wong, Eros Chow and others whereby it was agreed, inter alia, that Rockent was to merge with Ratonal and Bondway, and Eros Chow was to acquire 28.8% of the shares in the merger.

9. On 5 November 1999, the directors of Ratonal resolved that the proposal dated 4 November 1999 to acquire 50% of the shares in Rockent by approved and that the consideration for such acquisition is "to issue and allot 606,600 new ordinary shares of [Ratonal] at HK$1.00 each to [Ciba], the nominee of [Eros Chow] who is currently the 100% beneficial owner of [Rockent]". It was further noted in the minutes that after the completion of the allotment, the shareholding of Ciba in Ratonal would represent 28.8% of the paid up capital of Ratonal and that "the share capital of HK$606,600 allotted for cash will be considered to have been received by [Ratonal] by offsetting in full with the amount payable in the acquisition of the 50% share ownership of [Rockent] from [Eros Chow] or his nominee." The minutes of this meeting were signed by Tung as chairman.

10. On 6 November 1999, Ratonal filed a return of allotment with the Companies Registry stating that on 5 November 1999, 606,600 shares were allotted for cash to Ciba and that the price had been paid in respect of such shares. The Companies Registry was notified that with effect from 5 November 1999, Eros Chow was appointed a director of Ratonal.

11. It was subsequently alleged by Eros Chow and others that Tung and Navis Wong had made misrepresentations in that they had inflated the value and financial position of the companies they contributed to the group. As a result, the parties agreed to "de-merge" and split up the businesses in the group. According to the minutes of Grand Sky dated 19 October 2001, which were signed by Tung and Navis Wong, the directors of Grand Sky resolved that the group's business would be separated into two independent lines immediately under the name of "Grand Bond" and "Ratonal" and that the board of directors for each line would maintain independent operation and be responsible for the payments and liabilities of their separate line. It was further recorded that each line was to have "clear-cut financial status" within three months. Pursuant to the agreement to de-merge, Eros Chow resigned as a director of Ratonal on 12 November 2001.

12. The agreement to de-merge did not work out. Eros Chow and others alleged that Tung and Navis Wong had reneged on the agreement and refused to sign necessary documents to implement the de-merger. Tung and Navis Wong countered with allegations that there was fraud and misappropriation of funds of the other camp. As at present, seven proceedings have been brought in the High Court, four by Tung, Navis Wong and/or Ratonal (HCCW No. 727 of 2002, HCA No. 2455 of 2002, HCA No. 2456 of 2002 and HCA No. 3705 of 2002), one by the wife of Tung (HCCW No. 1138 of 2002) and two by Eros Chow and others in his camp (HCCW No. 1097 of 2002 and the present proceedings HCCW No. 1193 of 2002).

The allegations in the petition

13. The same matters are relied on in this petition to found relief for winding up on the just and equitable ground and under section 168A. The principal allegation in the petition is that Tung and Navis Wong had on 3 August 2002 wrongfully passed a resolution of the board of directors of Ratonal purporting to forfeit and cancel the 606,600 shares registered in the name of Ciba. The resolution stated that the shares of Ciba were "forfeited/cancelled for being fictitious issue and obtained by deceptive means". Ciba was informed about this by a letter of Ratonal dated 3 August 2002. No particulars were provided as to the allegation that the shares issued to Ciba were a fictitious issue or that the shares were obtained by deceptive means.

14. It is alleged by Ciba that it was not given any opportunity to make representation to the board of directors of Ratonal prior to the purported forfeiture, that the unsubstantiated allegations of fictitious issue and obtaining by deceptive means were groundless, that the forfeiture was made in contravention of and outside the power given by the articles of association, and that after the wrongful purported forfeiture, Tung and Navis Wong have seized control and excluded Ciba from the management of Ratonal.

15. The other allegation in the petition relates to wrongful diversion of the business of Ratonal to Ratonal Electronics Ltd, which was under the control of Tung.

16. As a result of the aforesaid complaints, it is pleaded that Ciba has lost all trust and confidence in Tung and Navis Wong in the management of Ratonal.

The alleged forfeiture of shares

17. Mr Lo submitted that the petition for relief under section 168A should be struck out for want of locus on the part of Ciba, as Ciba's shares had been validly forfeited by Ratonal before the petition was presented. Mr Lo has taken me to various provisions in Table A of the 1984 edition of the Companies Ordinance, which were adopted in the articles of association, being regulations 34 to 40, and submitted that the forfeiture was substantially in compliance with the procedural requirements in that:

(1) A letter dated 27 March 2002 was sent by Ratonal by registered post to Ciba stating that no proper consideration has been received by Ratonal in respect of the 606,600 shares allotted to Ciba, coupled with a demand that Ciba should pay HK$606,600.00 to Ratonal being the price of the shares within 14 days from the date of the letter. It was stated that if no payment was made as demanded, the board of directors would forfeit the shares of Ciba without further notice. The letter constituted notice requiring payment of a call on the shares under regulation 34.

(2) The requirements of the notice of payment were not complied with in that no payment was made by Ciba within 14 days of 27 March 2002 or at all. Here, Mr Lo accepted that the notice issued was not a strict adherence with regulation 35 for reasons that I do not propose to go into.

(3) A resolution was passed by the board of directors on 3 August 2002 to forfeit the shares of Ciba when the notice of payment was not complied with, pursuant to regulation 36.

(4) By regulation 38, a person whose shares have been forfeited shall cease to be a member in respect of the forfeited shares.

(5) On 6 August 2002, Navis Wong, who was and is a director of Ratonal, made a statutory declaration that the shares of Ciba have been duly forfeited and cancelled by a resolution of the directors on 3 August 2002. Pursuant to regulation 39, such statutory declaration shall be "conclusive evidence of the facts therein stated as against all persons claiming to be entitled to the share".

18. There is evidence before me that as of today, Ciba's name still remains on the register of members of Ratonal. Mr Lo submitted that the fact that Ciba's name has not been removed from the register of members is immaterial where the shares have been validly forfeited, citing In re Tavistock Ironworks Company 6 Eq. 233.

19. Assuming for present purpose that all the procedural requirements for the forfeiture of shares have been duly complied with by Ratonal (this is disputed by Ciba), it does not necessarily mean that the forfeiture of Ciba's shares was valid. It is contended by Ciba that the directors of Ratonal have initiated the process for forfeiture of Ciba's shares in bad faith. Mr Reyes, SC submitted on behalf of Ciba that the effect of the conclusive evidence provision in regulation 39 does not preclude a challenge of the validity of the forfeiture of shares if this was done by the directors in bad faith. I agree with this submission.

20. There is evidence before me to support Ciba's contention that the forfeiture of Ciba's shares was not done by Tung and Navis Wong in good faith. There is no need to go into the details here, suffice it to say that this is an issue that cannot be resolved summarily. There is also a serious dispute as to whether any consideration was provided in respect of Ciba's shares. I note Mr Lo's submission that even if one were to accept that the 606,600 shares in Ratonal issued to Ciba was in consideration of Ratonal's acquisition of 50% ownership in Rockent, it would appear from the share transfer forms of Rockent dated 29 July 1999 that all the shares of Rockent had already been transferred to Grand Sky by that date, so that no consideration was provided by Eros Chow or Ciba for the allotment of shares in Ratonal.

21. The position is not quite so simple and there would appear to be some confusion as to the transfer of shares in Rockent. Mr Reyes has drawn my attention to the subsequent transfers of shares in Rockent. On 6 November 1999, all the shares in Rockent were transferred from Grand Sky to Ciba and the next transfer, on the available evidence, was the transfer of all Rockent's shares by Ratonal to a company known as Grand World Technology Ltd on 31 October 2001, which was after the agreement to de-merge. It is not apparent when before October 2001 Rockent's shares were transferred from Ciba to Ratonal. If such transfer had taken place, it could be said that consideration was provided by Ciba for Ratonal's shares in that Ratonal did acquire Ciba's shares in Rockent.

22. For the above reasons, I have come to the view that there is a serious issue to be tried as to the validity of the forfeiture of the shares of Ciba in Ratonal.

Discretion on determination of Ciba's locus

23. It is common ground that the court has a discretion whether to require a petitioner to establish his locus to petition for relief under section 168A in proceedings outside the petition, or to determine the question of locus in the context of the petition (Alipour v. Ary [1997] 1 WLR 534; Re Kenly (HK) Ltd [2003] 6 HKCU 1).

24. Mr Reyes submitted that the discretion should be exercised against striking out the petition under section 168A and requiring Ciba to establish its locus in other proceedings first. I agree with his submissions. The same matters are relied on to seek winding up and relief under section 168A. The locus of Ciba to petition for winding up is not challenged. The principal complaint made by Ciba in support of its case for the reliefs sought is the forfeiture of its shares, and how this is to be determined would resolve the issue of Ciba's locus. Even if the petition under section 168A is struck out, the winding up petition will proceed. It would only lead to delay and unnecessary costs being incurred if I should require Ciba to establish its locus to petition for relief under section 168A in other proceedings.

Alleged ulterior motive in bringing the petition

25. Mr Lo submitted that from the conduct of Ciba in persistently resisting Ratonal's application for a validation order after the presentation of the petition, it could be inferred that Ciba had brought the petition to injure Ratonal in its business and it has not come to court with clean hands. Whether this is so, and whether the conduct of a petitioner after the presentation of the petition is relevant, are matters that should be determined at the hearing of the petition and do not provide support for striking out or dismissing the petition.

Orders

26. For the above reasons, I have dismissed the application to strike out the petition or to stay these proceedings. I have further ordered that the costs of the application are to the petitioner in any event, including the costs reserved at an earlier hearing for directions on 11 November 2002.

Representation:

Mr Anselmo Reyes, SC, instructed by Messrs Or, Ng & Chan, for the Petitioner

Mr Tommy Lo, instructed by Messrs Keith Ho & Co., for the 1st and 2nd Respondents

The Official Receiver, attendance excused

HCCW 1193/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO. 1193 OF 2002

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R U L I N G

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1. This is a contributory's petition for winding-up and the matters relied upon by the Petitioner as set out in the Petition revolved around disputes between shareholders. Apart from winding-up of the Company, there is an alternative prayer asking for an order that the 1st and the 2nd Respondents do purchase the shares of the Petitioner in the company. This kind of winding-up petition is different from a creditor's petition. Usually, the existence of shareholder's dispute should not prevent a company from continuing to carry on with its business. Hence, soon after the presentation of petition, the Respondents took out a summons asking for validation order to enable the company to continue with its business pursuant to Section 182 of the Company Ordinance.

2. The application first came before Woolley DJ on 28 November 2002. It was adjourned with direction for filing of evidence. Leave was granted to all parties to file further evidence within 14 days. That was coupled with the direction that earliest possible date be given for the hearing of the validation order application. Although Counsel for the Petitioner suggested that there was no explicit order to bar the filing of further evidence, I am of the view that it must be implicit in that direction that further leave is required for evidence to be filed after that time limit. Both parties filed further evidence within that time limit.

3. On 21 January 2003, without leave from the court, the Petitioner filed 3 affirmations/affidavits. Those were substantial evidence, the affirmations together with exhibits were contained in a supplementary bundle placed before me. That bundle was up to 65 pages.

4. This prompted the Respondent to file a 4th affirmation of Tung Ka Hung on 23 January 2003. This morning, when I was just about to enter into the courtroom, the Petitioner handed up through my clerk a 7th affirmation of Chow Chung Man. Counsel for the Respondent informed me that he also only received a copy of that affirmation when he arrived at court.

5. Ms Liu, who appeared on behalf of the Petitioner, was unable to explain about such late filing of evidence. However, she insisted that the court must have regard to all the evidence placed before it, including the 7th affirmation of Chow Chung Man. She rejected the offer by Mr Lo (Counsel for the Respondent) that the matter be proceeded on the basis that only the 7th affirmation is to be excluded. Mr Lo therefore asked for an opportunity to respond to this affirmation, and for that purpose the matter has to be adjourned.

6. I have checked with the Listing Clerk and secured an early date for the resumed hearing on 4 March 2003.

7. In the meantime, Mr Lo asked for interim relief. He submitted that the Company needed to have fund to pay its ordinary expenses in terms of salaries, mortgage repayment, utilities etc. Since the advertisement of the petition, the Company has been unable to make those payments.

8. On the other hand, Ms Liu opposed that application. She argued that it would be against the spirit of Section 182 to grant interim relief. She submitted that there is an allegation of insolvency and to authorize interim payment before coming to a final conclusion as to whether the Company is insolvent is wrong in principle. She said there is a risk of preference to a particular creditor if payment is authorized at this stage. She also submitted that there is a risk of depletion of assets of the Company and the Petitioner had been kept in the dark as to the running of the Company. She reminded the court that there is an allegation of diversion of business.

9. I accept that at this stage I cannot reach a final conclusion on the solvency of the Company. On the other hand, I must say that from my reading of the papers, it is by no means a foregone conclusion that the Company is insolvent. On the one hand, the Respondents have produced a management account of the Company and argued that it is solvent. I also note that the audited account of the Company for 2001 produced by the Petitioner showed that the Company had a net asset of $10,492,775.00 as at 31 March 2001.

10. On the other hand, the Petitioner relied on some observations of a Mr Daniel Wan to assert that on proper accounting basis, the Company should be regarded as insolvent. I, however, note that Mr Wan was involved in litigation with the Company in a High Court action. I have expressed my misgivings as to reliance being placed on his opinions in these proceedings.

11. With regard to the affairs of the Company, allegations and cross-allegations were being raised by the parties against each other. The Respondents are suggesting that the Petitioner is using this Petition for ulterior motive. There is a pending application to strike out the Petition.

12. Ms Liu also referred to the fact that 2 supporting creditors have given notice of intention to appear. However, they have not appeared before me today and I do not know whether they would oppose this application. Ms Liu even suggested that if a validation order is made to enable the Company to pay off the debts of these creditors, it would be wrong. That seems to me to be an unmeritorious position to take. On the one hand the Petitioner is using this Petition to prevent the Company from paying its creditors, on the other hand the Petitioner is relying on the fact that these creditors supported its Petition.

13. On the whole, based on the material before me, within the proper ambit which I could have regard to those material at this stage, I am of the view that in the exercise of my discretion as to interim relief, I should not place too much weight on the allegation of insolvency at this stage.

14. In the circumstances, I do not attach much relevance to the principles applicable in the context of an insolvent company. I think the guiding principles for considering a validation order application in the context of a shareholder dispute situation are those set out in Re Parnip Investment Ltd [1991] 2 HKC 272 and Re a Company [1987] BCLC 200.

15. Although the matter is subject to dispute, the Respondents have filed evidence showing that the Company is still a going concern and it is still conducting business. Ms Liu submitted that the Company should not be allowed to carry on business pending the resolution of the disputes between the parties. That cannot be right.

16. Bearing in mind the history of the proceedings and the fact that it was due to the Petitioner's unexplained late filing of evidence that the application cannot be dealt with today, and taking into account of the circumstances of the case, I am of the view that subject to the argument as to jurisdiction, the court should grant interim relief with conditions attached to safeguard the legitimate interest of the Petitioner. The Company should be allowed to continue with its ordinary business activities during this interim period.

17. Ms Liu suggested that Section 182 does not give this court any power to grant interim relief. She cited no authority for that proposition. I reject that submission. By its very nature, Section 182 is very much an interlocutory measure. It deals with the disposition of the property of a company after the presentation of petition but very often before the hearing of the petition. The court has to exercise that power from time to time before final resolution or findings as to the rights and wrongs between the parties. I see no reason why the power of the court in that section should be curtailed so that such power could not be exercised until a final conclusion is reached as to the solvency of the Company.

18. For these reasons, I would grant interim relief as follows: -

(1) Order in terms of para. 1 of summons of 13 November 2002 with a cap in the sum of $400,000.00. This is intended to be an interim relief up to 4 March 2003.

(2) The Respondents shall furnish a bi-weekly list of all the payments made pursuant to para. 1 above to Petitioner. The first of such list is to be furnished on or before 7 February 2003.

19. The above order is made against the undertaking from the 1st and 2nd Respondents that they would defer payments of their shareholder loans to the interests of unsecured creditors in the event that a winding-up order is made against the Company.

Costs

20. Petitioner to pay half of the costs of today of 1st and 2nd Respondents.

21. As to the other half, costs in the cause of summons for validation order.

Representation:

Ms Elaine Liu, instructed by Messrs Or, Ng & Chan, for the Petitioner

Mr Tommy Lo, instructed by Messrs Keith Ho & Co., for 1st, 2nd & 3rd Respondents

Official Receiver - absent

Remarks:
Appeal by Petitioner to Court of Appeal. Appeal dismissed. Please refer to Appeal Judgment of HCMP000377/2003.