Companies Winding-up Proceedings2005

RE ZHUANG PP HOLDINGS LTD

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54127-EN-2006-09-06

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HCCW 56/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 56 OF 2005

____________

	IN THE MATTER of ZHUANG PP HOLDINGS LIMITED
	and
	IN THE MATTER of the Companies Ordinance (Cap. 32)

____________

Before: Hon Kwan J in Chambers

Date of Hearing: 6 September 2006

Date of Decision: 6 September 2006

______________

D E C I S I O N

______________

1. This is a summons of Zhuang PP Holdings Limited (“the Company”) issued on 30 June 2006, for leave to file further affirmations in opposition to the petition within 35 days thereof.

2. In the affirmation in support, being the 4^th affirmation of Au Yeung Kai Wah, the Company explained what further affirmations it intended to file.

3. The Company would like to file in the winding-up proceedings all relevant materials regarding its claim against the petitioner in High Court Action No. 1589 of 2003. For the nature of the claim in the High Court Action, I refer to the judgment of the Court of Appeal in CACV No. 288 of 2005 on 15 June 2006, paragraph 4.

4. The deponent for the Company said if the Company is successful in the High Court Action, the whole of the petitioner’s debt or the petitioner’s counterclaim in the High Court Action would be extinguished as the result of a set-off, and the petitioner would have no interest to wind up the Company. Hence, the petitioner’s locus to present the petition and if it has interest in the winding up should be dealt with first, before the grounds of the petition are to be considered. To determine locus and the petitioner’s interest, it was contended that the Company’s claim against the petitioner in the High Court Action would have to be tried, and the Company’s claim should be dealt with “at length” in this petition. For this reason, the Company seeks leave to file all the relevant materials and evidence in the High Court Action and it would ask the court in the winding-up proceedings to examine such evidence.

5. I am given to understand that if all the materials, pleadings, affidavits, documents in the High Court Action are to be adduced in the further affirmations of the Company intended to be filed in these proceedings, the volume would be quite substantial.

6. This court was told in August 2005 that the solicitors for the Company anticipated the trial in the High Court Action might take place in 6 months’ time, subject to availability of dates from the court. This optimistic estimate proved to be woefully inadequate when the appeal came to be heard by the Court of Appeal 10 months later. Nevertheless, this court had been told on the previous occasion that the High Court Action has reached the stage when witness statements have been exchanged by the petitioner and the Company. No mention was made in the supporting affirmation for this application of what further progress, if any, has been made in the High Court Action, or in the bundle of documents placed before me at this hearing. I am not aware of any impediment for the Company to get on with the High Court Action.

7. The application to adduce further affirmations is opposed by the petitioner, and rightly so.

8. Mr Bartlett for the petitioner submitted this is an attempt to re-run an unsuccessful argument raised in the Court of Appeal to the effect that the petitioner could not establish it has locus to present the petition until the cross-claim by the Company in the High Court Action is determined (see paragraph 17 of the judgment of the Court of Appeal).

9. Having failed in persuading the Court of Appeal that the petition should be adjourned or stayed until after the determination of the High Court Action for the petitioner’s locus to be established, the Company now says, in effect, never mind the trial of the High Court Action, the Company’s claim in the High Court Action could and should be dealt with in this petition instead. I see little material difference in this stance from the stance taken previously.

10. The Court of Appeal has held that the petitioner does have a claim against the Company and that is sufficient to give it locus to present and prosecute the petition. The Court of Appeal considered there are special circumstances in this case which far remove it from a situation where there are simply cross-claims arising out of normal transactions, and the court did not think the determination of important matters raised by the petition should be delayed (paragraphs 19, 20 and 25 of the judgment). No leave has been sought to appeal the judgment of the Court of Appeal.

11. I agree with Mr Bartlett there is issue estoppel between the Company and the petitioner on the issue of the petitioner’s locus to present the petition (

Specialist Group International Ltd. v Deakin and Anr. [2001] EWCA Civ 777, 23 May 2001, paragraphs 22 to 23). As demonstrated by Mr Bartlett, the submissions of the Company before me today closely mirror the arguments advanced before the Court of Appeal.

12. The attempt to re-run the locus argument is misconceived.

13. Even if there were no issue estoppel, I would not have allowed the Company to file evidence for which leave is sought.

14. It would be an utter waste of costs for the evidence filed in the High Court Action to be duplicated wholesale or substantially in these proceedings, and for the evidence in the High Court Action to be examined critically in these proceedings as they would and should be tried in the High Court Action.

15. The Company should get on as expeditiously as it can with its prosecution of the High Court Action, if the High Court Action is already at an advanced stage of readiness to be set down for trial, as alleged by the Company.

16. The Court of Appeal has expressed the view that the Company has no intention to proceed with the High Court Action with “any degree of appropriate dispatch”. And having noted the seriousness of the allegations against the Company in the winding-up petition, the Court of Appeal said “there can be no doubt of the importance of determining the issues raised on petition with dispatch” (paragraph 22 of the judgment).

17. To allow the Company to duplicate the evidence and try issues raised in the High Court Action in the winding-up proceedings, quite apart from costs, is bound to delay the resolution of the winding-up petition.

18. Besides, as Mr Bartlett submitted, it is not so simple just for the Company to introduce wholesale or substantially the evidence in the High Court Action in the winding-up proceedings. There are other parties involved in the claim in the High Court Action. Former directors who were sued have dropped out of the picture without any admission of liability, leading the Court of Appeal to comment in paragraph 14 of the judgment if the Company could prove its case against the petitioner. The Company’s case against the petitioner is in dishonest assistance. It was alleged that the petitioner had made loans to the Company’s subsidiary when it knew or should have known that the property furnished as security was grossly over-valued by Vigers. Vigers is still a defendant in the High Court Action. Without establishing the allegation of over valuation against Vigers, I find it difficult to see how the court can come to any proper view or make proper finding on the allegation of dishonest assistance against the petitioner.

19. If the claim in the High Court Action is resolved in the Company’s favour, and if it then seeks leave to adduce evidence to inform the court seized with the winding-up petition of the outcome of the trial in the High Court Action, that may be a good reason for doing so. But that is a very different situation.

20. I have considered the submissions of Ms Liu on the Company’s behalf, I am not persuaded I should exercise my discretion in a different manner. The cases cited by her where there is dispute of the petitioning debt on substantial grounds are of no relevance. Her submission that somehow the court in the winding-up proceedings would have to make a determination of the claim of the Company in the High Court Action before the court is to consider the grounds of the petition, is just missing the point. I am unable to see how the proper administration of justice would have anything to do with the contentions she put forward.

21. I have not done anything to bar the Company from taking whatever action it sees fit to have its claim determined with expedition in the High Court Action.

22. In the exercise of my discretion of case management, I would also refuse leave to the Company to file further evidence for the purpose as stated in its supporting affirmation.

23. The summons of the Company issued on 30 June 2006 is dismissed. I order the Company to pay the petitioner’s costs of this application in any event.

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

Mr. Jeremy Bartlett, instructed by Messrs Clifford Chance, for the Petitioner

Ms Elaine Liu, instructed by Messrs Chan, Lau & Wai, for the Company

The Official Receiver, attendance excused

46851-EN-2005-11-03

RE ZHUANG PP HOLDINGS LTD

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HCCW 56/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 56 OF 2005

____________

	IN THE MATTER of ZHUANG PP HOLDINGS LIMITED
	and
	IN THE MATTER of the Companies Ordinance, Cap. 32

____________

Before: Hon Kwan J in Chambers

Date of Hearing: 3 November 2005

Date of Decision: 3 November 2005

_____________

D E C I S I O N

_____________

1. This is a summons for discovery taken out by the petitioner on 1 June 2005 under Order 24 rule 3 of the Rules of the High Court. For the background of this winding-up petition, I refer to my decision on 5 August 2005, paragraphs 4 to 28. In gist, the petitioner’s complaint is that the management of Zhuang PP Holdings Limited (“the Company”) had transferred principal assets out of the Company with the purpose of defeating its creditors and that it would be just and equitable to wind up the Company for an independent liquidator to investigate its affairs.

2. The petitioner seeks an order in the summons that within 14 days the Company is to serve on the petitioner a list of documents specifying which of the following documents, which relate to the restructuring of the respondent Company and the respondent Company group (“China United Group”) and the transfer away of the Company’s principal assets, are or have been in the possession, custody or power of the Company:

(a) all internal memoranda/minutes of the Company/China United Group relating to:
(i) the background to the scheme of arrangement implemented in January 2003 whereby the Company was de-listed and replaced as the holding Company of China United Group by China United International Holdings Limited (“CUI”);
(ii) the decision to restructure the China United Group and the motivation for that decision;
(b) all documents, including internal memoranda and company minutes, relating to the matters mentioned in the extract in CUI’s interim report for the 6 months ended 30 June 2003 to the effect that CUI has undertaken a series of restructuring of shareholdings in subsidiaries held by the Company whereby the Company’s equity interests in certain major subsidiaries were transferred to the new group and to a third party and that after the restructuring, the Company and its subsidiaries became an insignificant part of the group’s net assets;
(c) all documents relating to :
(i) the deterioration of the Company’s net asset position between 31 December 2002 and 31 July 2003;
(ii) the dilution and transfer of the Company’s shareholding in (1) Hennabun Management Inc; and (2) China United Finance Limited;
(iii) the writing off of the debt of HK$111 million owed by Long Bloom Enterprises Limited to First Asia (China) Limited; and
(iv) the transfer of the Company’s 2 shares in New Star International Inc to Top Emerald Limited (re-named China United Financial Services Limited).

3. As stated by Le Pichon J (as she then was) in Re PlaymatesInvestment Limited [1996] 4 HKC 577 at 585I to 586B, Order 24 rule 3 is of particular relevance to winding-up proceedings, as unlike ordinary High Court actions, there is no general discovery and often lengthy affidavits are filed. Hence, a broad and flexible approach to Order 24 rule 3 is justified in this context.

4. I have no doubt that the documents sought in the summons clearly relate to the matters in question in this petition. This has not been suggested otherwise by the Company. They are clearly of relevance to the resolution of the issues in dispute.

5. There is nothing to suggest that the Company may not have in its possession, power or custody any of the documents sought. I have given directions for the Company to file evidence in opposition to this application, if so advised. No evidence has been filed by the Company.

6. The only ground of opposition advanced by the Company is that the discovery sought is onerous and oppressive and the precise scope of some of the documents sought is unclear.

7. I do not for a moment think that the discovery sought would not have imposed any burden on the Company, but any burden placed on the Company should be considered with regard to the apparent need for the documents in the interest of disposing fairly of the matters in issue in these proceedings and a balance should be struck. The Company should not be put through an onerous exercise of making discovery if the documents sought would only be of marginal significance or relevance to the issues in dispute. I do not think that is the position with regard to the documents sought in this application.

8. I turn to consider the objections raised as regards each of the paragraphs in the summons.

9. For paragraph 1(a), Ms Liu submitted that the precise scope of the “respondent Company group” as stated in the summons is unclear, as there was a corporate restructuring in 2003. I do not agree with this submission. Discovery is sought in respect of internal memoranda/minutes of the Company or the group of companies of which the Company was a member at the time the transaction or transactions took place. Whether the Company was the ultimate holding Company or just an intermediate holding Company as a result of the group restructuring in 2003 is not relevant. As for the submission that it would be oppressive to order discovery in respect of documents of subsidiaries that have ceased to be subsidiaries of the Company as a result of the group restructuring, it must be borne in mind that the discovery sought is as against the Company and it is for the Company to serve a list of documents in its possession, power or custody.

10. Ms Liu has also submitted that “all internal memoranda” in paragraph 1(a) is too wide, I do not think this is unjustified in these particular circumstances.

11. For paragraph 1(b), Ms Liu contended that the Company has no control over CUI when the interim report of CUI was issued, so it is onerous and oppressive to require the Company to produce documents relating to matters mentioned in that report concerned with the restructuring undertaken by CUI. The restructuring mentioned in CUI’s interim report was the restructuring of shareholdings in subsidiaries held by the Company. There is no reason to think that the Company would not have in its possession, power or custody the documents sought in paragraph 1(b). Further, as pointed out by Miss Sanger for the petitioner, at the material time, the management of CUI and the Company was the same. The annual report and the financial statements of the Company for the year ended December 2002 were presented by the directors of CUI.

12. As for paragraph 1(c), the petitioner does not accept that the Company has made full discovery of the documents sought in respect of the transactions listed therein. As for the contention of Ms Liu that the width of the discovery sought is onerous, as I have mentioned earlier, this must be looked at in context. In these particular circumstances, I do not think the scope of the discovery is unjustified.

13. For the above reasons, I will order the Company to serve on the petitioner a list of documents as sought in terms of paragraph 1 of the summons, save that the time within which the Company is to comply with this order is to be changed from 14 days to 28 days hereof.

14. The Company has been given adequate time and opportunity to consider their position with regard to this summons. The hearing today is necessitated by the Company’s opposition. I see no reason why the petitioner should not have their costs for the hearing today. I make the following order as regards costs. The costs of the application are to be in the cause of the petition, save that the Company is to pay the petitioner’s costs of today’s hearing in any event.

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

Miss Kathryn Sanger, of Messrs Clifford Chance, for the Petitioner

Ms Elaine Liu, instructed by Messrs Chan, Lau & Wai, for the Company

The Official Receiver, attendance excused

On appeal by Zhuang PP Holdings Ltd to Court of Appeal. appeal dismissed. Please refer to the appeal judgment of CACV387/2005

45983-EN-2005-08-05

RE ZHUANG PP HOLDINGS LTD

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HCCW 56/2005

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 56 OF 2005

____________

IN THE MATTER of ZHUANG PP HOLDINGS LIMITED

and

IN THE MATTER of the Companies Ordinance, Cap. 32

____________

Before: Hon Kwan J in Chambers

Date of Hearing: 5 August 2005

Date of Decision: 5 August 2005

_____________________

DECISION

_____________________

1. This is an application taken out by Zhuang PP Holdings Limited (“the Company”) on 3 June 2005 under the inherent jurisdiction of the court, Order 18 rule 19 of the Rules of the High Court, and section 180 of the Companies Ordinance, Cap. 32.

2. The Company seeks the following relief:

(1) the winding-up proceedings be stayed or adjourned pending conclusion of High Court Action No. 1589 of 2003 (“the High Court Action”) or further order;

(2) further or alternatively, the petition be struck out on the ground that it is frivolous, vexatious and/or an abuse of the process of the court.

3. There is no need to deal with the application for striking out, I see no basis for it. It was not dealt with by Mr Mok, who appeared for the Company, in his written or oral submissions. I would first set out the relevant background matters.

The background

4. The petition herein was presented by International Bank of Asia Limited, now known as Fubon Bank (Hong Kong) Limited. I shall refer to it as the petitioner.

5. In 1997, the petitioner made a five-year loan of $235 million (“the loan”) to East Champion Limited (“East Champion”), a subsidiary of the Company, to be used as 50% of the purchase price of commercial premises at Marble Road, North Point, Hong Kong (“the Property”).

6. The loan was secured by a guarantee from the Company and by an all monies first mortgage on the Property.

7. In March 2003, East Champion defaulted on the loan and in May 2003, the petitioner demanded repayment. Shortly thereafter, the petitioner also made a demand on the Company’s guarantee. The loan was not repaid by East Champion or the Company.

8. In the same month, the Company issued proceedings in the High Court Action against the petitioner and others, claiming that its former directors had conspired with the vendors of the Property to procure its purchase at a gross over value in breach of their fiduciary duties. It was alleged against the petitioner that it had “dishonestly assisted” in the breach of the former directors by making the loan to East Champion when it knew or should have known that the purchase price of the Property was a gross over-valuation. The claim against the petitioner was for damages or for equitable compensation.

9. In June 2003, the petitioner served a statutory demand on the Company in respect of the sums due on the loan, giving credit for the estimated value of the Property held as security at that time. The amount demanded was $3.5 million odd.

10. In July 2003, the Company began proceedings in High Court Action 2832 of 2003 seeking an injunction to restrain the petitioner from presenting a winding-up petition on the basis of the statutory demand, on the ground that if its claim against the petitioner in the High Court Action was successful, its indebtedness on the loan would be extinguished.

11. The Company was successful. On 15 August 2003, Waung J decided that the petitioner should obtain a judgment first before presenting a petition in reliance on the statutory demand. He granted an injunction that the Company be restrained from presenting or otherwise prosecuting or pursuing any petition or originating process in Hong Kong or Bermuda for the winding up of the Company or any similar proceedings, based on the statutory demand in June 2003, or on the outstanding loan set out in such statutory demand until trial of the action or further order.

12. After the decision of Waung J was given, the petitioner added its claim on the loan as a counterclaim to the High Court Action and did not pursue the statutory demand.

13. On 27 October 2003, the petitioner applied for summary judgment on its counterclaim in the High Court Action. In January 2004, a Master gave the Company unconditional leave to defend the counterclaim.

14. On 21 January 2004, the petitioner issued a summons in the High Court Action to strike out the claim on the ground that it is scandalous, frivolous, vexatious or an abuse of the process of the court. The petitioner’s solicitors said it was not a “substantive” application, but merely a tactical move in connection with an application to seek security for costs against the Company which is a company incorporated abroad. That application was dismissed by a Master in April 2003. Security for costs was not ordered against the Company, but against two other plaintiffs, one being East Champion.

15. In March 2004, another creditor of the Company, Umbrella Finance Company Limited (“Umbrella”) commenced winding-up proceedings against the Company on the ground that it is unable to pay its debts and on the just and equitable ground, based on concerns about the asset stripping activities of the Company, which I shall come to. This is HCCW No. 321 of 2004.

16. Umbrella then applied for appointment of provisional liquidators. I heard that application and dismissed it on 21 April 2004. I should mention that it was never in dispute in that application that Umbrella had made out a good prima facie case for a winding-up order. The reason for dismissing the application was because I could not determine on affidavit evidence alone if the Company’s explanation that transfers of valuable assets were made in good faith and for adequate consideration should be believed. And in view of the fact that the transfers had already taken place some time ago, I was not persuaded there was a real need or urgency for provisional liquidators to be appointed to investigate right away the allegations of asset stripping to defeat the creditors of the Company.

17. It should also be noted that in considering the Company’s evidence on affidavit regarding the transfers impugned, I dealt with the quality of the Company’s evidence in a guarded way, such as: “I do not think the explanation given by the Company is seemingly unreliable”; “I am inclined to think that the explanation given by the Company is a plausible one”; “I do not think the explanation provided by the Company is apparently unacceptable”; “again, I do not think the above explanation is inherently unreliable”. These comments I made in my decision on 21 April 2004 should not be taken or construed to mean that no prima facie case was made out on the allegations of asset stripping or that the allegations were without merits. There is no basis for the suggestion that Umbrella had attempted to wind up the Company on just and equitable ground based on the allegations of asset stripping and had failed. All that happened was that I had dismissed its application to appoint provisional liquidators.

18. In January 2005, Umbrella sold its debt due from the Company, so an order was made by consent to dismiss the petition in HCCW No. 321 of 2004 on 10 January 2005.

19. The petitioner had supported the petition in HCCW No. 321 of 2004, but was not informed beforehand of Umbrella’s decision to withdraw its petition. Notwithstanding the same firm of solicitors had acted for Umbrella in the winding-up proceedings and for the petitioner in the High Court Action, there was no sharing of information. The petitioner had no opportunity to apply to be substituted as a petitioner in the place of Umbrella before the latter’s petition was dismissed. So the petitioner began its own petition to wind up the Company in these proceedings two weeks later on 21 January 2005.

20. It is important to note the grounds for winding up stated in the petition. This is not a petition to wind up the Company on the ground it is unable to pay its debts under section 327(3)(b), which applies to the winding up of unregistered companies.

21. The petition was founded on section 327(3)(a), that the Company had ceased to carry on business in Hong Kong, and on section 327(3)(c), the just and equitable ground. The matters relied on in support of the just and equitable ground are as follows and they are taken from the published financial information of the Company, as the shares of the Company were at one time listed on the Stock Exchange of Hong Kong Limited.

22. At 31 December 2002, the Company was the holding company of the China United Group (“the Group”) with 66 subsidiaries. The interests in the subsidiaries were valued at $557 million, and the Company had shareholders’ funds of $297 million.

23. In January 2003, the Group was re-orgainsed. A new company, China United International Holdings Limited (“China United International”) was made the ultimate holding company of the Group in place of the Company. The Company became a wholly owned subsidiary of China United International.

24. China United International had not commenced operation and had no significant assets. It had subsidiaries which were not the subsidiaries of the Company (“the New Group”). The Company’s listing on the Stock Exchange was withdrawn on 3 January 2003 and dealings in the shares of China United International on the Stock Exchange commenced on 6 January 2003. By a series of restructuring of shareholdings in subsidiaries, the Company’s equitable interests in certain major subsidiaries were transferred or sold to the New Group and to a third party. The Company thereafter became an insignificant part of the Group’s net assets. The Company’s net asset position deteriorated by $523 million in seven months from January to July 2003, completely writing off the shareholders’ funds. These transfers took place at the time when the Company was heavily indebted and loans of $369 million had become repayable on demand. In June 2003, the Company had received a writ demanding payment of $206 million. In the interim report of the Company for the six months ended June 2003, the auditors qualified their opinion because of fundamental uncertainty as to the going concern basis and because of reservations whether the transfers of the Company assets to the New Group were lawful. In October or November 2003, the Company, stripped of valuable assets, was sold to a company wholly owned by the brother of the chairman of China United International for $10 million.

25. The petitioner alleges that the purpose of the transfers to the New Group was to put the assets of the Company beyond the reach of its creditors whilst keeping them in the same control and ownership. It asserts that the affairs of the Company had been conducted with such lack of probity as to make it necessary for the court to intervene. On that basis, it would be just and equitable to wind up the Company for an independent liquidator and the court to investigate its affairs. Further, the Company had filed with the Companies Registry on 9 March 2004 a notice of cessation of place of business in Hong Kong with effect from 10 February 2004, so the Company should also be wound up on the ground in section 327(3)(a).

26. The petition first came before a judge on 29 March 2005. Directions were given for the Company to file evidence in opposition. The directions were not complied with. At the adjourned hearing of the petition before me on 9 May 2005, the Company submitted that the petition should be dismissed, relying on the injunction granted by Waung J in High Court Action No. 2832 of 2003. I declined to dismiss the petition which was presented on a different basis and was not, in my view, covered by the injunction. Directions were given for the Company to file evidence in opposition. Again, the directions were not complied with.

27. At the adjourned hearing of the petition before Barma J on 6 June 2005, there was before him the petitioner’s summons for the Company to file and serve a list of documents under Order 24 rule 3 and the Company’s summons for striking out, alternatively for a stay or an adjournment, of the proceedings.

28. Both summonses are before me today. I should mention that on 3 June 2005, the Company applied to Waung J seeking a “clarification” of the injunction granted in High Court Action No. 2832 of 2003 that the order on 15 August 2003 was intended to cover all petitions or originating process in Hong Kong or Bermuda for the winding up of the Company and all similar proceedings based on the statutory demand in June 2003 or on the outstanding loan set out in such demand, including the petition herein. This application was dismissed by Waung J, without prejudice to the Company’s application to the Judge hearing the petition to stay or adjourn the petition.

The Company’s case for stay or adjournment of the petition

29. As I understand from the evidence filed by the Company in support of its application, the grounds for asking the court to exercise its discretion to stay or adjourn the petition are as follows.

30. The Company and other plaintiffs have discontinued the High Court Action against various parties. The only defendants left in the High Court Action are the petitioner and the surveyors. The High Court Action has reached a stage that witness statements have been exchange by the petitioner and the Company, although I understand the surveyors have not yet filed witness statements.

31. Security for the petitioner’s costs has been paid. Solicitors acting for the Company in the High Court Action anticipated that a trial may take place in six months’ time, subject to the availability of dates from the court. The Company has alleged that from the history of the High Court Action (that the petitioner had unsuccessfully applied for summary judgment on the counterclaim and to strike out the claim), and from the service of the statutory demand and the injunction granted in High Court Action No. 2832 of 2003, that the petitioner has attempted to “stifle” the High Court Action.

32. If the petition is not stayed, the Company would be “irreversibly” prejudiced by having to divert time and efforts in dealing with the petition. If the Company is successful in the High Court Action, it is claimed that all the steps taken in this petition would have been wasted. Even if the High Court Action were unsuccessful, the petitioner would be largely protected as it holds security over the Property. The debt demanded in the statutory demand in June 2003 was only for $3.5 million.

33. None of these are good grounds for a stay or an adjournment of the petition until the conclusion of the High Court Action. It is understandable that the petitioner should try to enforce repayment of its debt in an expeditious and cost-effective way. This explains why the petitioner had resisted the Company’s application to restrain it from presenting a winding-up petition on the basis of the unpaid debt in the statutory demand, and the petitioner’s attempts at seeking summary judgment on its counterclaim and to strike out the High Court Action. I decline to find any improper or ulterior motive of the petitioner in prosecuting this petition.

34. Proceeding with the petition at the same time as the High Court Action may well cause difficulty to the resources of the Company, but there is nothing special about this to justify a stay or an adjournment or why one proceeding should be stayed until the conclusion of the other. There is no reason why the petition and the High Court Action should not both continue. There is no basis for the suggestion that the petition may interfere with the speedy resolution of the High Court Action. Even if the petition were to be resolved before the High Court Action, and if the petitioner were successful in winding up the Company, the High Court Action may still be pursued by the liquidator, if he thinks the claim is meritorious and he has funding from creditors for the litigation, particularly as a number of creditors have appeared today to give their support for the Company in proceeding with the High Court Action.

35. I fail to see why all the steps taken in the petition would have been wasted if the Company were successful in the High Court Action. This is due to the failure to recognise the basis on which the petition was presented, namely, that the affairs of the Company were conducted with such a lack of probity as to make it necessary that the court should intervene, for the protection of creditors and the public.

36. As for the assertion that a large part of the petitioner’s debts is secured and so the petitioner would be “protected”, this does not seem to be correct factually, as according to a valuation report made by the court appointed expert, the current market value of the Property in April 2005 was only $40.5 million, just about 50% of the debt due to the petitioner. In any event, I fail to see any relevance of this.

37. So on the facts, I see no good reason at all to exercise my discretion to stay or adjourn the petition. I will deal with the contention of the supporting creditors separately.

38. Mr Mok cited a number of cases to support his contention that a stay or an adjournment should be granted where a cross-claim is made by the company. I have considered his authorities, I do not mention them as I think they are irrelevant and the dicta set out in his submissions are taken wholly out of context.

39. There is no question about the locus of the petitioner to present a winding-up petition. The petitioner had lent money to East Champion guaranteed by the Company, East Champion had defaulted, and the petitioner had made a demand on the Company’s guarantee for repayment. As stated succinctly in Butterworths Hong Kong CompanyLaw Handbook, 6^th ed, at paragraph [178.03]:

“ The existence of a counterclaim does not deprive the petitioner of the status of creditor, but where the counterclaim prima facie has substance, it will provide a reasonable cause for not complying with the demand.”

40. As a creditor, the petitioner is entitled to petition for winding up of the Company on any of the grounds in section 327(3), including the just and equitable ground.

41. Mr Mok has not cited a single decision in which the court has stayed or adjourned a petition presented by a creditor on the just and equitable ground merely because the company has brought a cross-claim against the petitioner.

42. All the “cross-claim cases” in which the court exercised its discretion to stay or adjourn a winding-up petition were situations in which the petitioning creditor had petitioned for winding up on the basis that the company is unable to pay its debts. One can readily see in this situation why the discretion should be exercised in that way. Where there appears to be a genuine and serious cross-claim and this overtops the petitioning debt, even though the petitioning debt may be undisputed, if the cross-claim is successfully established in separate litigation, this would extinguish the entire petitioning debt and therefore, remove the basis for the petition.

43. Where a petition is presented by a creditor on the just and equitable ground, the above consideration does not apply. A winding-up petition is not a lis just between the petitioner and the company. The court always has regard to the interest of others who have been or may be affected by the dealings and affairs of the company in deciding whether a winding-up order should be made.

44. What is to be resolved in another forum in the High Court Action related to a particular property transaction, it has no bearing on the issues to be resolved in this petition.

45. For the above reasons, the Company simply has not made out any case for an adjournment or stay of this petition, on the facts or on the law.

The support of creditors

46. Four creditors have given notice of intention to appear at this hearing and to support the Company’s application. They are Biocity Limited (with a claim of $31 million odd), Super Sharp Investments Limited (with a claim of $41 million odd), Zhuang BH Holdings Limited (with a claim of $123 million odd) and Sunderland Properties Limited (with a claim of $14 million odd). I understand the debts owed to these four creditors would amount to about 64% of the total liabilities of the Company as at 30 June 2005.

47. The petitioner has expressed scepticism of the bona fides of these supporting creditors, and alleged that they do not seem to be independent. Two of them, Super Sharp Investments Limited and Zhuang BH Holdings Limited, took their assignments of debt from Umbrella, and the assignees from Umbrella are connected to the Company. The address of Super Sharp Investments Limited is also the address that had been used by the directors of the Company on their affirmations. Other than these creditors which, according to the petitioner, would appear to be connected parties, there are only two independent creditors, being the petitioner and another bank. That other bank has written to the petitioner on 5 August 2005 stating that they have no objection to the petition.

48. Each of the four creditors mentioned above has filed evidence in support of the Company’s application. They say that they have been advised by legal advisers that the Company has a “good arguable case” against the petitioner in the High Court Action. It is not clear if these are the Company’s legal advisers.

49. The petitioner has appointed receivers over the Property in exercise of its powers under the mortgage in May 2005. In response, East Champion issued a writ against the petitioner on 8 June 2005 claiming a declaration that it is the legal and beneficial owner of the Property and claiming all sums paid by it to the petitioner in partial repayment of the loan.

50. The supporting creditors say if the Company should succeed in the High Court Action or if East Champion should succeed in the new action, the petitioner would be liable to pay damages to the Company and the Property would revert back to East Champion and could then be used to satisfy the claims of all creditors of the Company. So they support the Company’s application to stay or adjourn the petition until after the conclusion of the High Court Action.

51. These grounds put forward by the supporting creditors simply do not bear scrutiny. Mr Mok reminded the court that in matters of winding up, the court should have regard to the wishes of the creditors under section 287(1) and that there is a substantial proportion of the creditors in favour of a stay or an adjournment.

52. The court should always look at the bases or reasons for the position taken by creditors. If there is no justification or merit for the position taken by creditors, the court would not give weight to their wishes.

53. I therefore dismiss the Company’s application for a stay or an adjournment of the petition.

54. I order that the petitioner’s costs in this application are to be paid by the Company in any event.

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

Mr J E Jamison of Messrs Clifford Chance, for the Petitioner

Mr Johnny Mok, instructed by Messrs Chan, Lau & Wai, for the Company

Mr J Yau Man Fai of Messrs Y S Lau & Partners, for Biocity Limited

Mr Cheung Yick Hung of Messrs Jackie Leung & Co, for Super Sharp Investments Limited

Miss Tse Mun Har Mandy of Messrs Kenneth C C Man & Co, for Zhuang BH Holdings Limited & Sunderland Properties Limited.

The Official Receiver, attendance excused

Appeal by the company to Court of Appeal dismissed. Please refer to CACV288/2005 dated 15 June 2006

(a)	all internal memoranda/minutes of the Company/China United Group relating to:
	(i)	the background to the scheme of arrangement implemented in January 2003 whereby the Company was de-listed and replaced as the holding Company of China United Group by China United International Holdings Limited (“CUI”);
	(ii)	the decision to restructure the China United Group and the motivation for that decision;
(b)	all documents, including internal memoranda and company minutes, relating to the matters mentioned in the extract in CUI’s interim report for the 6 months ended 30 June 2003 to the effect that CUI has undertaken a series of restructuring of shareholdings in subsidiaries held by the Company whereby the Company’s equity interests in certain major subsidiaries were transferred to the new group and to a third party and that after the restructuring, the Company and its subsidiaries became an insignificant part of the group’s net assets;
(c)	all documents relating to :
	(i)	the deterioration of the Company’s net asset position between 31 December 2002 and 31 July 2003;
	(ii)	the dilution and transfer of the Company’s shareholding in (1) Hennabun Management Inc; and (2) China United Finance Limited;
	(iii)	the writing off of the debt of HK$111 million owed by Long Bloom Enterprises Limited to First Asia (China) Limited; and
	(iv)	the transfer of the Company’s 2 shares in New Star International Inc to Top Emerald Limited (re-named China United Financial Services Limited).

(1)	the winding-up proceedings be stayed or adjourned pending conclusion of High Court Action No. 1589 of 2003 (“the High Court Action”) or further order;

(2)	further or alternatively, the petition be struck out on the ground that it is frivolous, vexatious and/or an abuse of the process of the court.