RE LUEN CHEONG TAI CONSTRUCTION CO LTD

HCCW 190/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 190 OF 2002

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REASONS FOR JUDGMENT

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1. On 10 October 2003, I made a validation order pursuant to s. 182 of the Companies Ordinance (Cap. 32) in respect of 6 payments received by the Applicant, Adrian Engineering Limited, from the company in liquidation, Luen Cheong Tai Construction Company Limited (the "Company") between March and June 2002, after the presentation of the petition to wind up on 18 February 2002, the winding-up order having been made subsequently on 15 July 2002. I made no order as to costs as between the Applicant and the Joint Liquidators, who through counsel maintained a neutral stance in the application. I said I would give my reasons later, which I now do.

2. The Company was a construction company. It was the main contractor of a certain government project. The Applicant was its sub-contractor and was basically responsible for undertaking the whole project. According to the sub-contract between the Company and the Applicant, the Applicant was entitled to receive 98% of the contract price (subject to the usual retention money provisions and so forth). According to the unchallenged evidence adduced on behalf of the Applicant, there was a past history of default and delay in making payment of interim payments and monies due and payable by the Company to the Applicant, resulting in litigation and government intervention, details of which I need not go into. Eventually, an agreement was reached between the Company and the Applicant in May 2001 for the setting up of a special account in the name of the Company but with both the Company and the Applicant as joint signatories with the Hang Seng Bank, into which the government was notified to pay the monies in respect of the project works. Under the arrangement, the Company would pay the Applicant out of the monies so deposited into the Hang Seng account by the government an agreed percentage as interim payments, pending the taking of the final account. Pursuant to the arrangement, some payments were received by the Applicant. The unchallenged evidence from the Applicant was that without these interim payments, the Applicant would not have continued working in the project (as it would have been quite entitled to do), thereby causing the Company to abandon the project together with a substantial exposure to damages payable to the government in that event.

3. As mentioned above, the winding-up petition was presented by another creditor of the Company in February 2002. In March 2002, the payment arrangement mentioned above was changed: contract monies received from the government were paid (directly or, in respect of the first payment in question, through the Hang Seng account) into another account of the Company maintained with DBS Kwong On Bank ("DBS") under the sole control of the Company. Cheques were then drawn on the DBS account by the Company in favour of a director of the Applicant, who would in turn draw cheques in favour of his own company as payment of the interim payments due to the Applicant. The director of the Applicant specifically opened a personal account with DBS, the purpose of which, according to his affirmation, was to enable him to verify with DBS immediately that the cheques issued by the Company from the DBS account were good for payment and could be credited to his account.

4. It was in those circumstances that altogether 6 payments totalling over $13 million were received by the Applicant from the Company through its DBS account between March and June 2002, after the presentation of the winding-up petition and before the making of the winding-up order in July 2002. It should be noted that all 6 payments were in respect of sub-contract works carried out by the Applicant, and certified by the government to be payable. A substantial amount of the total payment was in respect of works done after the presentation of the winding-up petition. The payments all came from monies received by the Company from the government in respect of the works in question. Out of the monies received by the Company in respect of the works, the Company had kept over $5 million (which was far in excess of the 2% gross profit that the Company should have been made out of this government project, being the difference between the main contract price and the sub-contract price).

5. By summons dated 11 August 2003, the Applicant applied for a retrospective validation order in respect of the 6 payments in question.

6. The principles governing an application under s. 182 of the Companies Ordinance are well established. Fox LJ summarized them in 8 propositions in Denney v John Hudson & Co. [1992] BCLC 901, 904d-905b as follows:

" The principles governing the exercise of the court's jurisdiction under s. 522 [the equivalent of our s. 182] were considered by the Court of Appeal Re Gary's Inn Construction Co. Ltd [1980] 1 All ER 814 at 819-821, [1980] 1 WLR 711 at 717-719. The leading judgment was given by Buckley LJ and was concurred in by Goff LJ and Sir David Cairns. I take the following propositions to be approved by that judgment:

(1)	The discretion vested in the court by s. 522 is entirely at large, subject to the general principles which apply to any kind of discretion, and subject also to limitation that the discretion must be exercised in the context of the liquidation provisions of the statute.
(2)	The basic principle of law governing the liquidation of insolvent estates, whether in bankruptcy or under the companies' legislation, is that the assets of the insolvent at the time of the commencement of the liquidation will be distributed pari passu among the insolvent's unsecured creditors as at the date of the bankruptcy.
	...
(3)	There are occasions, however, when it may be beneficial not only for the company but also for the unsecured creditors, that the company should be able to dispose of some of its property during the period after the petition has been presented, but before the winding-up order has been made. Thus, it may sometimes be beneficial to the company and its creditors that the company should be able to continue the business in its ordinary course.
(4)	In considering whether to make a validating order, the court must always do its best to ensure that the interests of the unsecured creditors will not be prejudiced.
(5)	The desirability of the company being enabled to carry on its business was often speculative. In each case the court must carry out a balancing exercise.
(6)	The court should not validate any transaction or series of transactions which might result in one or more pre-liquidation creditors being paid in full at the expense of other creditors, who will only receive a dividend, in the absence of special circumstances making such a course desirable in the interest of the creditors generally. If, for example, it were in the interests of the creditors generally that the company's business should be carried on, and this could only be achieved by paying for goods already supplied to the company when the petition in presented (but not yet paid for) the court might exercise its discretion to validate payments for those goods.
(7)	A disposition carried out in good faith in the ordinary course of business at a time when the parties were unaware that a petition had been presented would usually be validated by the court unless there is ground for thinking that the transaction may involve an attempt to prefer the disponee - in which case the transaction would not be validated.
(8)	Despite the strength of the principle of securing pari passu distribution, the principle has no application to post-liquidation creditors; for example, the sale of an asset at full market value after the presentation of the petition. That is because such a transaction involves no dissipation of the company's assets for it does not reduce the value of its assets."

7. The Applicant through its director maintained in his affirmation that it had no knowledge of the presentation of the winding-up petition until after the making of the winding-up order in July. In other words, it had no knowledge of the petition when the 6 payments were paid and received. Mr Maurellet, counsel appearing for the Joint Liquidators, who as I said maintained a neutral stance in the application, drew my attention to the change of payment arrangement shortly after the presentation of the winding-up petition that has been alluded to above, as possibly suggesting knowledge on the part of the Applicant of the presentation of the petition. In answer, the Applicant through its counsel, Mr Merry, orally explained to the Court the reasons for the change of payment arrangement, which explanations were subsequently pursuant to an undertaking given by Mr Merry on behalf of his client confirmed in a supplemental affirmation from the director of the Applicant. I do not propose to go into the details of the explanations. Suffice it to say, first, I agree that the sudden change of payment arrangement shortly after the presentation of the winding-up petition did raise a question mark over the claimed ignorance of the Applicant of the petition; secondly, the latest explanations proffered by the Applicant regarding the change of payment arrangement did not entirely remove the suspicion raised.

8. However, in my view, it is not the law that knowledge of the presentation of a winding-up petition in a retrospective validation situation is by and of itself fatal to the validation application, although the absence of knowledge of the petition at the material time is a relevant and indeed a "very powerful factor" (per Oliver J in Re J Leslie Engineers Co. Ltd [1976] 1 WLR 292, 304B/C) to be considered in relation to the exercise of the court's discretion under s. 182. (Of course, knowledge of the petition is nonetheless an important factor to be borne in mind, particularly in considering whether the payment in question was made in good faith.) In my judgment, a fortiori, a mere suspicion of knowledge on the part of the Applicant of the presentation of the petition was not by and of itself fatal to the validation application.

9. In the present case, I proceeded on the basis that there was a reasonable suspicion of knowledge on the part of the Applicant of the presentation of the petition. As I said, that was an important factor in itself to be taken into account. On that basis, I would proceed to examine the other relevant factors in the present case.

10. In my judgment, on the facts of the present case, one important factor was that on the evidence there could be no doubt that the 6 payments were made in the ordinary course of business of the Company, and were received by the Applicant in its ordinary course of business. As I mentioned above, the 6 payments were in respect of works done by the Applicant pursuant to the sub-contract in question, which had been in being well before the presentation of the winding-up petition. There was a past history of payments for certified sub-contract works prior to the presentation of the petition. There was an established arrangement for the making of such payments. Although, as I emphasized above, the payment arrangement was for some reason changed after the presentation of petition, that did not, however, alter the nature of the 6 payments; they continued to be payments in respect of certified sub-contract works that had been done by the Applicant under the government project and they were funded by corresponding payments received from the government. There was no suggestion whatsoever that there were any set-off, counterclaim, deduction, defective work and so forth that would have entitled the Company to refuse or reduce payment to the Applicant.

11. Whilst the suspicion of knowledge of the presentation of petition had to be borne in mind in considering whether the payments were made by the Company and received by the Applicant in good faith, the fact that they were payments made in the ordinary course of business of both companies was also an important consideration to be taken into account.

12. Another significant consideration here was the benefit to the Company and thus the unsecured creditors of the Company now that it is in liquidation, which had been obtained from the making of the 6 payments. As I said, the undisputed evidence was that but for these payments, the Applicant would have (quite legitimately) stopped work a long time ago. In other words, the 6 payments kept the government project afloat, and I have no doubt that the keeping of the government project afloat on the facts of the present case benefited the Company, given the mere conduit-pipe role played by the Company in the government project, and given the substantial amount of money actually retained by the Company out of the monies paid by the government in respect of the post-petition sub-contract works carried out by the Applicant. In Re J Leslie Engineers Co. Ltd, supra, at p. 304, Oliver J, in a passage cited with approval by the Court of Appeal in Denney (at p. 905g-i), said:

"Whilst obviously the absence of any actual knowledge in the recipient of a payment that a petition is in being is a factor - indeed a very powerful factor - to be considered in relation to the exercise of discretion, I do not think that, by itself, it can be conclusive and, indeed, Mr. Potts does not so contend. I think that in exercising discretion the court must keep in view the evident purpose of the section which, as Chitty J. said In re Civil Service and General Store Ltd., 58 L. T. 220, 221, is to ensure that the creditors are paid pari passu. Obviously there are circumstances where this cannot in fairness be the sole criterion in cases where, for instance, the creditor concerned has since the presentation of the petition helped to keep the company afloat, or has otherwise swollen the company's assets, salvage cases and that sort of thing."

13. In short, the 6 payments kept the Applicant in its job under the government project, which in turn kept the Company afloat in relation to the government project, and swell the Company's assets. As I mentioned above, the Company kept a total in excess of $5 million of contract monies from the certified sub-contract works underlying the 6 payments, which was far in excess of the Company's 2% gross profit. Rightly or wrongly, the entire sum (of over $5 million) is now available to the unsecured creditors for distribution pari passu, in some sense at the expense of the Applicant, which in relation to the over-retained contract monies would merely rank as an unsecured creditor along the other unsecured creditors of the Company.

14. The keeping of the Company afloat in relation to the government project also benefited the unsecured creditors in a negative sense in that it minimized the exposure of the Company to damages, common law or liquidated, for early wrongful termination of the main contract. As it happened, the 6 payments enabled the Applicant to carry on working under the government project, so much so that by the time the winding-up order was made and the Applicant eventually stopped work, the government project had been completed by the Applicant to a very substantial and significant extent. That obviously benefited the unsecured creditors in general.

15. Finally, I tend to agree with Mr Merry's submission that in fact the present case fell within proposition no. 8 mentioned by Fox LJ in Denney, insofar as the payments were in respect of sub-contract works that were carried out and certified after the presentation of petition. To that extent, the Applicant could be classified as a "post-liquidation creditor".

16. Of course, the proposition would be easiest to apply if one were only concerned with an one-off post-petition disposal of asset, in which event all that one would be concerned to ensure was that the company should receive sufficient and adequate consideration from the disposal.

17. The proposition would be less easy to apply in case of payments or intended payments of money to keep a contract of the company alive after the presentation of the petition. In that case, I would have thought one would need to enquire not only whether the company would receive sufficient and adequate, or full market value, goods or services from its opposite contracting party under the contract if it was continued and kept alive by the payments after the presentation of the petition. One would also be concerned to find out whether the continuation of the contract would lead to a net profit or some other benefit to the company, because otherwise the unsecured creditors of the company would be worse off by the continuation of the contract even though the company would receive goods or services of full market value from the contract if it was continued. For ultimately the question is whether continuation of payment under the contract post-liquidation would lead to a reduction and thus dissipation of the company's assets.

18. However, the present case was less complicated. The simple reason was that the Company, on the facts, only played a conduit-pipe role in the government project. Its gross profit was 2% of the contract price, being the difference between the main contract price and the sub-contract price. So far as the main contract price was concerned, there was no evidence to suggest that the main contract price fixed by agreement with the government was anything less than the full market value of the contract works. So far as the sub-contract price was concerned, one would have thought that a 2% margin was a significant margin given the main contract price, the minimal role played by the Company in the project and the usual overheads that one would expect the Company in this type of situations to be incurring.

19. But in any event, as Mr Merry rightly pointed out, the Company did not merely earn 2% from the continuation of the sub-contract works after the presentation of the petition, it earned "illegitimately" far beyond the 2% entitlement - it kept about $4.8 million out of the government payments in respect of the sub-contract works in question, on top of its 2% entitlement. As mentioned above, there was no suggestion of any defective work in respect of the post-petition sub-contract works carried out by the Applicant.

20. For all those reasons, as I said, I tend to agree with Mr Merry's submission that this was also a case falling within proposition no. 8 mentioned by Fox LJ in Denney.

21. Finally, I should also specifically mention that on the facts of the present case, it appears extremely fair and reasonable to me that the payments, which were effectively earned by the Applicant as the sub-contractor of the whole government project single-handedly, should be made to the Applicant and should be allowed to remain in the Applicant's hands notwithstanding the presentation of the winding-up petition.

22. Apart from the above specific matters, I have also borne in mind the general circumstances of the case, and the other matters mentioned in both counsel's very helpful oral as well as written submissions. Having borne all relevant circumstances in mind, in the exercise of my discretion, I came to the conclusion that a retrospective validation order should be made, and it was accordingly made.

23. As regards costs, I have taken into account the fact that the Joint Liquidators took a neutral stance in the application, and the submissions made on their behalf by counsel were extremely fair and helpful. In the exercise of my discretion, I made no order as to costs.

24. I would like to take this opportunity to thank counsel on both sides for their helpful assistance.

Representation:

Mr Malcolm Merry, instructed by Messrs Kitty So & Tong, for Adrian Engineering Limited (the Applicant)

Mr Jose-Antonio Maurellet, instructed by Messrs Clifford Chance, for the Joint and Several Liquidators of Luen Cheong Tai Construction Company Limited (in liquidation)

HCCW 190/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 190 OF 2002

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D E C I S I O N

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1. This is a hearing held pursuant to directions given by the court on 8 October 2002, on the application of the Official Receiver and provisional liquidator under r. 45(2) of the Companies (Winding-up) Rules, to consider the resolutions passed at the first meetings of the creditors and contributories of Luen Cheong Tai Construction Company Limited ("the Company") on 19 August 2002, and to make such orders as may be necessary for the appointment of liquidators and the members of the committee of inspection.

2. At the hearing today, apart from the Official Receiver, the petitioning creditor appeared by Mr Bartlett. Ms Linda Chan appeared for 33 trade creditors with an aggregate claim of about $67.5 million and 32 former employees with an aggregate claim of $5.8 million. The provisional liquidator of Luen Cheong Tai International Holdings Ltd ("International"), which is the parent company, is also represented today. In additional there is a trade creditor, China International Water and Electric Corporation, represented by a solicitor holding a watching brief.

3. In a hearing of this kind, it is well established that the court has a wide discretion in appointing liquidators and members of a committee of inspection. The court is not bound by the resolutions passed at the first meetings of creditors and contributories, notwithstanding they are valid and binding, although the court would naturally have regard to the determinations at those meetings. In deciding on the appointments, the court considers "what is in the best interests of all persons interested in the winding-up" (see Re Akai Holdings Ltd and Kong Wah Holidings Ltd [2001] 2 HKLRD 411 at 417-418).

4. The matter has come before me in this way.

5. On 15 July 2002, a winding-up order was made against the Company on the petition of a creditor, Hennabun Resources Ltd. The Official Receiver became the provisional liquidator. As mentioned earlier, the Company is the wholly owned subsidiary of International, the shares of which are listed on the Hong Kong Stock Exchange. A petition to wind-up International has also been presented by one of its creditors on 3 June 2002. This is HCCW No. 584 of 2002. On 5 September 2002, I made an order appointing provisional liquidators for International on the application of the Bank of China (Hong Kong) Ltd, which is the largest creditor of International. The reasons for appointing provisional liquidators were handed down on 13 September 2002 and I do not propose to repeat them here. The petition to wind up International has been adjourned for the provisional liquidators to identify and secure an investor to effect a restructuring of International or of the Luen Cheong Tai group of companies.

6. When the first meeting of the creditors was held on 19 August 2002, and this was before the appointment of provisional liquidators for International, the following resolutions were passed:

(1) it was passed by a majority in value of the creditors present and voting that Mr William Nicholas Giles and Mr Alan Hubert Day, both of H & G Services Ltd ("H&G"), be appointed joint and several liquidators of the Company;

(2) it was unanimously resolved that there should be a committee of inspection in this winding-up;

(3) it was resolved by a majority in value of the creditors present and voting that the petitioner, Nip Kin Keung, Ng Sau Po, Bank of America (Asia) Limited and Adrian Engineering Ltd would be the members of the committee of inspection; and

(4) it was resolved by a majority in value of the creditors present and voting that an application would be made to the court under s. 209A of the Companies Ordinance Cap. 32 for an order that the winding-up of the Company be conducted as if it were a creditors' voluntary winding-up.

7. Identical resolutions were passed by the first meeting of contributories on the same day. The Company is wholly owned by International, so the votes were exercised as directed by International, still under the control of the management at that time.

8. It seems to me that the above resolutions passed at the creditors' meeting were due to the vote cast by International on account of inter-company loans to the Company. The value of International's claims against the Company represented 42.59% in value of the creditors' voting at the first meeting.

9. A group of creditors, including the petitioner, whose aggregate claims amounted to approximately 27.3% in value of the creditors' voting, had proposed to appoint Mr Yeo Boon Ann and Mr Stephen Liu Yiu Keung, both of Messrs Ernst and Young, as liquidators and several other candidates apart from the petitioner to serve on the committee of inspection. However, they were out voted on their proposed resolutions and on the resolution to convert the winding-up into a creditors' voluntary winding-up.

10. A number of reasons were put forward why the resolution passed by the majority in value of the creditors appointing Messrs Giles and Day as the liquidators should not be upheld.

11. The Official Receiver initially adopted a neutral attitude. However in the 2nd report to the court dated 8 November 2002, the Official Receiver stated that he cannot support the appointment of Messrs Giles and Day. It has since come to the notice of the Official Receiver that Messrs Horvath and Giles, the firm of solicitors operating H & G, had an agreement with RSM Nelson Wheeler Corporate Advisory Services Ltd ("Nelson Wheeler") that in the event Horvath and Giles were successful in their tenders to the Official Receivers to act as provisional liquidators for summary cases of winding-up under s.194(1A) of Cap. 32, Nelson Wheeler will undertake the bulk of the work in these cases. The Official Receiver is currently investigating whether in so doing Horvath & Giles are in breach of the terms of tender. The Official Receiver has expressed concern whether H & G have sufficient staff in their direct employment to conduct the scheme liquidations. I say no more about the possible breach of the terms of tender but it does seem to me that the concern of the Official Receiver as to the resources of H & G to undertake the work of liquidators is a legitimate one.

12. Also arising out of the above is the apparently close working relationship between H & G with Nelson Wheeler. Nelson Wheeler are the former auditors of the Company and they themselves would be conflicted out of acting as liquidators for the Company because of this (see Rules of the Hong Kong Society of Accountants, Supplement to Statement 1.203, paras. 6 and 8(a) and Re Mount Everest Investment Ltd, CWU No. 249 of 1987, 25 January 1988, Jones J). This too seems to me to be a valid reason why Messrs Giles and Day should not be appointed liquidators for the Company.

13. Further, on behalf of the petitioner, it was submitted by Mr Bartlett that I should take into account that provisional liquidators were appointed for International on 5 September 2002, so that if a fresh meeting were to be convened for creditors to vote on the appointment of liquidators, the provisional liquidators of International would have voted in favour of appointing Messrs Yeo and Liu. The results would be reversed with 75% voting in favour of these appointments and as the Company is insolvent, the interests of creditors should prevail over those of the contributories. Even if the vote of the provisional liquidators were to be discounted as it would be unseemly for them to vote in favour of their own appointment, it would appear that the proposed resolution appointing them as liquidators of the Company would still have been carried albeit by a smaller majority of the external creditors. I should also mention that the external creditors whose claims amounted to about 27.3% in value of the creditors' voting have lost faith in the integrity and ability of the management of the Luen Cheong Tai Group and that was one of the reasons why the largest creditor had applied for provisional liquidators to be appointed for International.

14. Quite apart from the wishes of the majority of creditors, it would seem to me there are advantages in appointing Messrs Yeo and Liu. Under the order of 5 September 2002, the provisional liquidators are empowered to investigate the affairs of International and its subsidiaries, including the Company, which was the main operating arm of the Group. The investigation would be carried out in a more efficient and cost effective way if the provisional liquidators are also the liquidators of the Company. Further, as the provisional liquidators are empowered to formulate and implement a restructuring of International and its subsidiaries, and to attempt to realize value from the listed status of International, the process of doing so may be rendered more efficient and cost effective if provisional liquidators are also the liquidators for the Company, especially where there are indications it may be more attractive to potential investor if the subsidiaries of the Group are to be included in a global restructuring.

15. I turn to consider the possible conflict of Messrs Yeo and Liu, raised by the former management of the Company and by the creditors represented by Ms Linda Chan. It was submitted that as Messrs Ernst and Young had done a limited scope financial review of the Group and had formulated draft restructuring proposals for International in 2001, they would be placed in a position of conflict. I have considered this when the same objections were raised by International in the appointment of Messrs Yeo and Liu as provisional liquidators, I did not think these objections are of substance, I still do not think so.

16. The other possible ground of conflict is the inter-company debts. At the first meeting, Mr Yeo on behalf of the petitioning creditor had raised objection to the acceptance of the claim of International for voting purposes. The explanation for that step being undertaken was that the financial creditors had no detailed knowledge at the time of the inter-company claims, and they were concerned to preserve their position, having regard to the clear intention of the former management of International to exercise the vote in a manner contrary to the wishes of the petitioner and other external creditors.

17. The reality of the situation is that Messrs Yeo and Liu would now assert and seek to exercise the rights of International as creditors of the Company on account of the inter-company loan. The court has taken a pragmatic approach in situations like this. It has been recognized there are advantages of having a single liquidator in a group liquidation scenario. If a real and actual conflict should arise when it comes to the adjudication of the proofs of debt, the liquidator could always apply to the court for directions. That has been the approach adopted by the English courts (see Re Arrows Ltd [1992] BCC 121and Re Maxwell Communications Corporation plc [1992] BCC 372). The English decisions have been followed in Hong Kong.

18. I would also endorse the statement of principle in the Australian decisions that Mr Bartlett has referred me to. They are Re Bruton Pty Ltd (1990) 2 ACSR 277 and Re Nida Pty Ltd (1993) 10 ACSR 195. In the latter decision, the court this has to say:

"It seems to me that in the ordinary course of things with a number of companies involved in the same group and in which, as I have been told it is the case here, the shareholding is much the same so that in each case the contributors will be much the same persons, other things being equal it is desirable from the point of view of ease of administration and expense that the liquidation of each of the companies should be undertaken by the same liquidator or liquidators. If, however, it is clear that there are serious conflicts bound to arise then it would be desirable that different liquidators should be appointed to wind up different companies."

19. One example of a serious conflict arising is where the companies are already engaged in litigation against one another, which is the position in Re Nickel Mines Ltd (1978) 3 ACLR 686.

20. In the present situation, I am satisfied that there is no such serious conflict of interest arising. For all the above reasons, I am of the view that it would be appropriate to appoint Messrs Yeo and Liu as the liquidators for the Company.

21. I turn to the question of the composition of the committee of inspection. It is not in dispute that there should be a committee and that it should be fairly representative of the general body of creditors.

22. The proposal of the petitioner is that Mr Nip Kin Keung, whose claim is only of HK$1,000.00 odd, should be removed from the committee, otherwise the four members voted to the committee by the majority at the first creditors' meeting should remain. In addition, it is proposed that two financial creditors should serve on the committee. There are the largest creditor, the Bank of China (Hong Kong) Ltd, and East Asia Credit Co. Ltd.

23. It seems to me that this is a sensible proposal and one that would achieve a balanced representation of the general body of creditors. I would therefore make an order to give effect to this.

24. Lastly, regarding the resolution passed to convert the compulsory winding-up into a creditors' voluntary winding-up, it does not seem to me necessary to deal with this at this stage. It would be up to the liquidators to decide if they want to apply to the court under s. 209A or to convene another meeting to ascertain again the wishes of the creditors and contributories.

25. The orders I make are as follows:

(1) Mr Yeo Boon Ann and Mr Stephen Liu Yiu Keung, both of Messrs Ernst and Young, be appointed joint and several liquidators of the Company;

(2) there be a committee of inspection in this winding-up comprising the following members:

i) a representative of Hennabun Resources Ltd;

ii) Ng Sau Po;

iii) a representative of Bank of America (Asia) Ltd;

iv) a representative of Adrian Engineering Ltd;

v) a representative of Bank of China (Hong Kong) Ltd; and

vi) a representative of East Asia Credit Co. Ltd.

(3) the liquidators shall receive such remuneration as may be determined by agreement with the committee of inspection, failing agreement such remuneration be determined by the court;

(4) the liquidators are to give security to the satisfaction of the Official Receiver under s. 195 of the Companies Ordinance within seven days hereof;

(5) the appointment of the liquidators be advertised in one issue of an English newspaper and in one issue of a Chinese newspaper and be gazetted by the Official Receiver; and

(6) the costs of the Official Receiver in this hearing and one set of costs for the petitioning creditor and the provisional liquidators of International are to be paid out of the assets of the Company.

Representation:

Ms P McKenna for the Official Receiver

Mr Jeremy Bartlett, instructed by Messrs Andrew Lam & Co, for thePetitioner

Miss Linda Chan, instructed by Messrs Tang & Tang, for 33 trade creditors and 32 employees

Mr Korff of Messrs Clifford Chance, for the Provisional Liquidators of  Luen Cheong Tai International Holdings Ltd

HCCW 190/2002

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 190 OF 2002

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REASONS FOR JUDGMENT

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1. This petition to wind up Luen Cheong Tai Construction Company Limited ("the Company") is presented by Hennabun Resources Limited on the ground that the Company is unable to pay its debts. The debt allegedly owed to the petitioner is in the sum of HK$12,250,000.00, being a debt due from the Company to Mr Young Pui York and assigned by Mr Young to the petitioner under a deed of assignment made on 17 January 2002 ("the Deed of Assignment"). On 23 January 2002, the petitioner served a statutory demand for the debt by leaving this at the registered office of the Company. On 18 February 2002, this petition was presented by the petitioner.

2. When the petition first came before me on 10 June 2002, I adjourned the hearing with directions for the petitioner and the Company to file evidence. At the adjourned hearing on 15 July 2002, Mr James Collins, who appeared for the Company, sought a further adjournment for the Company to file evidence to deal with the antecedent transaction relating to the debt being the subject of the assignment. I refused leave to do so. I am satisfied that the Company had had sufficient opportunity to file evidence on this as I had given directions earlier for evidence to be filed and the Company had in fact, by the first affirmation of one of its directors, Mr Chan Man Chuen, deposed to the alleged antecedent transaction. After hearing submissions, as I am satisfied that the Company does not have a substantial dispute of the debt on bona fide grounds, I made a winding-up order and these are the reasons for my judgment.

3. I will first go to the antecedent transaction as this really is the crux of the matter. It was contended by Mr Collins that although money had passed between certain companies or parties, the upshot of this was that Mr Young was not a creditor of the Company and hence Mr Young had no debt to assign to the petitioner. For this reason and for other reasons, it was contended that the petitioner does not have the required locus standi to bring a creditor's petition against the Company.

4. It is not in dispute that in late June or early July 1999, Mr Chan Man Chuen had a discussion with Mr Young, as a result of that three cheques totalling HK$11,000,000.00 were sent to the Company, the details of which are as follows:

5. New Luck was and is owned by Mr Young and his wife and they are the only directors. It is not in dispute that Mr Young was effectively in control of New Luck at all times.

6. It was contended by Mr Collins that in respect of the first and second cheques, as the drawer of these cheques was New Luck, the money advanced by these two cheques was advanced by New Luck, not by Mr Young, to the Company. In respect of the third cheque, although the drawer was Mr Young, the cheque was payable to Well Joint, not to the Company. Hence, the money advanced by the third cheque was not advanced to the Company, but to Well Joint. Mr Collins submitted that when it came to assigning the debt in the Deed of Assignment, as there was no debt due and owing from the Company to Mr Young, Mr Young had no debt to assign to the petitioner.

7. One has to go back to the evidence filed by the parties to see whether the first two cheques were indeed advances made by New Luck to the Company or that the third cheque was an advance by Mr Young to Well Joint, as submitted by Mr Collins.

8. Mr Chan dealt with this in paragraph 3 of his first affirmation. He stated that he had a discussion with Mr Young, who is his old friend, regarding "certain loans totalling $11,000,000.00 to be made available to the sub-contractors of the Company for the purposes of financing a building project in Tsim Sha Tsui, Kowloon". He said that he was expecting "a personal cheque from Mr Young" made payable to Mr Chan himself instead of to the Company because "it was simply more convenient for [Mr Chan] to distribute the loan money to the Company's sub-contractors directly". For reasons not known to him, the three cheques as stated above totalling HK$11,000,000.00 were sent to the Company. Mr Chan added in his affirmation that he doubted whether Mr Young could be said to have lent HK$11,000,000.00 to the Company. Mr Chan went on to say that after the cheques were cleared, the money was paid out to the Company's various sub-contractors on various dates.

9. On Mr Chan's affirmation alone, it is clear that Mr Chan had approached Mr Young, not Mr Young's company New Luck, for a loan not for the personal purpose of Mr Chan, but for the purpose of the Company. The purpose given to Mr Young for requiring the loan was to enable the Company to pay its sub-contractors and that indeed was how the money was actually spent, as admitted by Mr Chan. Whether the money lent was provided by a personal cheque of Mr Young or by a cheque he had caused to be issued by a company controlled by him is entirely immaterial. Whether the cheque was made payable to the Company or to another entity as directed by Mr Chan on behalf of the Company is equally immaterial, as there is no dispute that the monies advanced were for the benefit of the Company in that the proceeds of the cheques were used to pay off the Company's various sub-contractors. There is no merit at all in Mr Collins' submission that there was no debt of HK$11,000,000.00 due and owing from the Company to Mr Young before the Deed of Assignment.

10. I have come to the views stated above without regard to the evidence filed by the petitioner, being the first affirmation of Mr Young. Mr Young dealt with the circumstances in which the loan was made in paragraph 2 of his affirmation. He stated that Mr Chan and another director of the Company, Mr Vong Pak Cheong are his good friends and they requested him to make a loan of HK$11,000,000.00 to the Company as the Company had a temporary cash flow problem and they promised that the loan would be repaid within a short time. It was agreed that in consideration of Mr Young advancing this sum to the Company, the Company would pay a fixed interest of HK$1,250,000.00. Mr Young further stated that he issued the three cheques to the Company and Well Joint on the instructions of Mr Chan. I have no doubt that Mr Young's version is to be preferred. However, as I have indicated earlier, there is no need to resolve any dispute as to fact between the affirmation of Mr Chan and the affirmation of Mr Young on this, as I am satisfied on Mr Chan's affirmation alone that Mr Young had advanced HK$11,000,000.00 to the Company.

11. Subsequent to the oral agreement in June or July 1999 and the advances by the three cheques as stated above, in December 2000, there was executed a deed between Mr Young and the Company ("the Loan Deed") whereby the Company confirmed and acknowledged receipt of the loan of HK$11,000,000.00. It was further provided in the Loan Deed that the Company should pay a fixed interest of HK$1,250,000.00 to Mr Young and that the Company was to repay the loan and interest by five instalments in the amounts as stipulated between 15 December 2000 and 15 April 2001. The Company also agreed to deliver to Mr Young five post-dated cheques for the five instalment payments upon the execution of the Loan Deed for repayment of the loan and interest. Lastly, it was provided that in the event that the Company should make default in payment of any instalment, the entire balance of the loan and interest then outstanding should immediately become due and payable.

12. The Loan Deed was executed by Mr Chan on behalf of the Company. It was submitted by Mr Collins that the Loan Deed was not validly executed and was not enforceable for two reasons. Firstly, according to the minutes of a meeting of the board of directors of the Company, it was resolved that the Company was to execute a loan agreement for the amount of HK$11,000,000.00 advanced by Mr Young and the board of directors authorised "any two directors" to execute and sign the agreement for and on behalf of the Company. As the Loan Deed was executed only by Mr Chan instead of by two directors, the Loan Deed was not executed with the proper authorisation of the board of directors. Secondly, the Loan Deed was expressly stated to be executed as a deed. According to the Articles of Association of the Company, the company seal should be affixed to any instrument in the presence of two directors who shall sign such instrument. As the Loan Deed was executed by Mr Chan alone, it was not in compliance with the Articles of Association.

13. It is not necessary for the petitioner or Mr Young to rely on the Loan Deed as I am satisfied on the evidence that Mr Young had advanced HK$11,000,000.00 to the Company and the debt was outstanding. It is therefore unnecessary for me to deal with Mr Collins' submissions here or the cases he cited on due execution of a deed by a Company.

14. I turn to the Deed of Assignment. The only point taken by Mr Collins on this is that it was asserted by Mr Chan in paragraph 6 of his first affirmation that he did not know Mr Young had executed the Deed of Assignment in favour of the petitioner and that the Company "did not have any notice of the assignment until after the petitioner presented its petition on 18 February 2002". In reply, Mr Young exhibited a letter dated 22 January 2002 from the petitioner's solicitors to the Company enclosing a "Notice of Assignment" dated 17 January 2002. The Notice of Assignment was signed by Mr Young and addressed to the Company, notifying the Company that by the Deed of Assignment, Mr Young had assigned and transferred the loan in the amount of HK$12,250,000.00 to the petitioner and the Company was requested to direct any further correspondence and payments to the petitioner at the address as stated. The letter of the petitioner's solicitors was sent by fax and by post to the Company. The address of the Company as stated is correct. There is no suggestion that the fax number is incorrect. I am satisfied that notice of the Assignment in writing was given to the Company.

15. For the above reasons, I am of the view that there is no substantial dispute of the debt in the petition on bona fide grounds. I made a winding-up order against the Company and I ordered that the petitioner's costs are to be paid out of the Company's assets.

Representation:

Ms Kathy Kukreja, instructed by Messrs C L Chow and Lam, for the petitioner

Mr James Collins, instructed by Messrs Lousich, Lau and Ngan, for the Company

Ms S Chung, for the Official Receiver