Companies Winding-up Proceedings2006

RE DIYON DEVELOPMENT LTD

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54784-EN-2006-10-20

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HCCW 178/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 178 OF 2006

______________________

	IN THE MATTER of Diyon Development Limited (大潤發展有限公司)
	and
	IN THE MATTER of the Companies Ordinance (Cap. 32)

______________________

Before : Hon. Kwan J. in Court

Date of Hearing : 20 October 2006

Date of Decision : 20 October 2006

______________________

D E C I S I O N

______________________

1. On 22 September 2006, I made an order to wind up Diyon Development Limited (“the Company”) on the petition of Kong Yick Ming. It is a creditor’s petition.

2. On 25 September 2006, a summons was issued by the Company and its parent company Magician Investments (BVI) Limited (“Magician BVI”) to rescind the winding-up order, alternatively to stay the winding-up order pending an appeal against the same.

3. As the winding-up order has not been sealed, I do have jurisdiction to rescind it if I am satisfied that the Company is solvent and that the sums due to the petitioning creditor and all legitimate supporting creditors have been paid or are fully provided for, and that the affairs of the Company do not require investigation.

4. It is not necessary to consider the alternative relief sought in the summons seeking a stay of the winding-up order pending appeal.

5. The summons first came before me on 29 September 2006. It was adjourned to today for the Company to adduce further evidence to satisfy the court that the claims of two supporting creditors are unrelated to the Company and that the matters raised by the Official Receiver in his letter dated 28 September 2006 do not require investigation.

6. The Company’s solicitors have sent the petitioner’s solicitors two cheques in payment of the petitioner’s debt and the debt of a supporting creditor, Concept Developments Limited. The cheques have been presented for payment on a without prejudice basis.

7. The petitioner has taken the position that an order for rescission should not be made as the Company continues to dispute the petitioner’s debt notwithstanding it has paid the full sum of the petitioning debt with interest. The requirement is for the petitioner’s debt to be paid, not that the company should desist from disputing the debt. There is nothing in the authorities to suggest as a condition for the exercise of the power to rescind a winding-up order, it must be extracted from the company as a price that it acknowledges or admits the petitioner’s debt.

8. The petitioner has raised concerns about the source of the funds provided to discharge his debt, he contended that this may fall foul of section 182. A director of the Company has deposed that the funds being used to discharge the Company’s liabilities are derived from the ultimate parent company and associate companies. The petitioner then expressed concern that the funds being used to settle the Company’s debt to him may have been paid into the Company’s account before paying out to the Company’s solicitors, and as the other members in the Magician group owe the Company HK$36 million on the inter-company accounts, it was postulated that the funds from the Magician group to pay the petitioner would be set off against the inter-company accounts and this would constitute a disposition of the Company’s property, as a receivable due to the Company from the other members of the group would be reduced by this set-off. I consider the concerns of the petitioner to be quite unreal.

9. Regarding the claims of the other two supporting creditors, being a factory in the mainland called Wah Fai represented by Hau Sai Lam and Evertek Moulding Company, the Official Receiver has written to them on 3 October 2006 advising them of the application today and that they may apply to be substituted as petitioner. No response has been received from either. I am satisfied on the further evidence adduced by the Company the claims of these two creditors are not related to the Company but are liabilities incurred by other members in the group.

10. Up to the time the Official Receiver made his report to the court on 18 October 2006, the Official Receiver has not received any proof of debt or any enquiry from any other creditor.

11. On 18 October 2006, a notice to act was filed for Fook Cheong Ho International Limited (“Fook Cheong Ho”) and a company sharing the same address called PME International Company Limited (“PME”). On 19 October 2006, a notice to act was filed for Techable Industrial Limited (“Techable”). The solicitors acting for all three companies are the same solicitors acting for the petitioner. I am given to understand by counsel for the petitioner that on 17 October 2006, PME and Fook Cheong Ho filed notices of intention to appear as supporting creditors and on 18 October 2006, Techable has filed a notice of intention to appear as supporting creditor. There is no such notice on the court file. Nor has the Official Receiver received any of these notices. If these notices have been given, they would only have been given to the solicitors who also act for the petitioner and to nobody else.

12. The same counsel has appear for the petitioner and the three additional creditors at the hearing today. A number of points were made in his submissions regarding the claims of these additional creditors in support of his contention that the court should infer all the claims of these additional creditors are due and payable, that the Company did not keep proper records as the claims of these additional creditors have either been understated in the Company’s accounts or did not appear at all, and that the affairs of the Company would therefore require investigation.

13. It is entirely understandable that the Company cannot respond properly to the alleged claims of these three additional creditors, given the extreme lateness that these claims are put forward. Insofar as the claim of Fook Cheong Ho is concerned, I am told by Mr Fung, SC that the Company has paid HK$600 odd and that a cheque for HK$9,000 odd has been issued and that this is to be collected. So it would appear that the claim of Fook Cheong Ho is to be paid in full. The claim of Techable, which I understand is 40% owned by the Company, is HK$137,874.61 and the claim of PME is HK$185,124.63. According to the records of the Company, under “aged payables” for debts of over 90 days, there is included the claim of Techable for HK$59,316.01 and there is no mention of any claim of PME.

14. When I heard the application of the petitioner for appointment of provisional liquidators in June 2006, I have observed that there is a power struggle going on for the control of the Magician group between the petitioner and the present management. I note in the schedule annexed to the notices of intention to appear that the invoices of these additional creditors, Techable and PME, were issued in 2003 and 2004. That was during the time when the petitioner was the chairman and an executive director of the Company. I have no explanation from the petitioner regarding the non-payment of these debts. No explanation is given for the lateness of the appearance of the three additional creditors, represented by the same team of lawyers. There is no explanation from any of the additional creditors why they now seek full payment of their alleged debts which have been outstanding for 2 or 3 years.

15. In any event, the aggregate amount of the claims of these creditors, of about HK$320,000 odd, is not a significant sum in the context of this case. I am satisfied the claims of these additional creditors have been fully provided for. I shall come to this in due course.

16. I decline to infer that the accounts of the Company are inaccurate or that the books are not properly kept, merely because the records produced by the Company gave a different figure for the claim of one creditor and did not show the claim of another creditor.

17. The rescission of the winding-up order would seem to be crucial to the Magician group as the Company is the main operating subsidiary of Magician Industries (Holdings) Limited (“Magician”). Magician is a listed company.

18. I have before me the latest management accounts of the Company as at 31 July 2006, showing total current assets of HK$42.7 million odd, of which HK$36.9 million are inter-company current accounts and HK$5.8 million are advances to suppliers. The net current assets amounted to HK$17.6 million odd. The Company has given an explanation that as the “procurement centre” of the group, the Company has placed orders and the amounts would be debited as accounts payable to suppliers in its accounts. At the same time the inter-company accounts between the Company and other subsidiaries will show a credit balance of an equivalent amount of the purchase price of the supplies as they will be sold by the Company to these subsidiaries at cost. Payment for the supplies will be settled directly by the subsidiaries. Relevant entries will then be made to the accounts payable and the inter-company current accounts, which would balance out each other.

19. The Company would appear to be solvent on a balance sheet test. It has produced the accounts for aged payables as at 31 July 2006. As at that date, the amount due and payable was HK$9.9 million odd. The Company has made arrangement with its suppliers to allow it further time to settle its debts. The suppliers have agreed not to demand immediate repayment of the outstanding trade debts as long as there is continuous trading.

20. The ultimate parent company, Magician, has given an undertaking dated 22 September 2006 that it would support the Company financially to pay off its liabilities. There are produced two loan agreements entered into by Magician recently to raise funds to enable it to support the Company. The first is a loan agreement dated 27 September 2006 between Big-Max Manufacturing Company Limited, which is a substantial shareholder of Magician, as lender, and Magician as borrower, for a one-year term loan of HK$10 million for the sole purpose of paying off the liabilities of the Company. The bank statement of Big-Max Manufacturing Company Limited as at 15 August 2006 is produced showing the availability of HK$10 million to be drawn down by Magician. The second loan agreement was entered into between Hong Kong Wingko Polymers Corporation Limited and a mainland entity (both companies are owned and controlled by Xu Jin, the chairman and substantial shareholder of Magician) as lenders, and Magician as borrower, for another one-year loan of HK$10 million, again for the sole purpose of paying off the liabilities of the Company. The bank statements of the lenders as at 28 September 2006 show that the funds are available to be drawn down.

21. I am satisfied on this evidence there is adequate provision for the claims alleged by the three additional creditors.

22. The petitioner has produced the audited accounts of the Magician group for the year ended 31 March 2006. It is stated in these accounts there was fundamental uncertainty regarding the going concern basis. That was before the present management has taken over control of the group. The financial position of the Company would appear to have improved somewhat since then, as the management accounts of the Company show that the volume of turnover had increased from HK$4.3 million in April 2006 to HK$13.7 million in July 2006. I am not primarily concerned with the financial position of the ultimate parent company or the financial position of the group. I am concerned with the solvency of the Company, which is a separate entity.

23. The Official Receiver has provided a report to the court, taking the view that there are no matters of the Company which would require investigation. I do not propose to set out the details. Nor do I propose to deal with the elaborate submissions made in this respect by counsel for the petitioner and the three additional creditors, save to say that I have considered them. I accept the Official Receiver’s assessment of the situation, which to me is a balanced, non-partisan and unbiased approach.

24. I make an order to rescind the winding-up order.

25. Techable has sought to be substituted as petitioner in the event that the winding-up order is rescinded. I decline to exercise my discretion to allow substitution. According to the records of the Company, of the amount of HK$137,000.00 odd claimed by Techable, HK$59,000.00 odd is not in dispute. As mentioned earlier, I am satisfied that adequate provision has been made by the Company for the claims of the additional creditors. No action has been taken by Techable to pursue its claim until the 11^th hour. I see no reason in the particular circumstances of this case why Techable should not pursue its claim in the usual way, first by serving a demand under section 178(1), and if the debt is not paid, it can present a petition if so advised.

26. I make an order to dismiss the petition presented by the petitioner.

27. I order the Company to pay the costs of the Official Receiver and of the petitioner in this application, to be taxed if not agreed. I make no order as regards the costs of the additional supporting creditors.

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

Mr Yang-Wahn Hew, instructed by Messrs Oldham, Nie & Li., for the (1) Petitioner, (2) Concept Investment Ltd., (3) PME International Co. Ltd., (4) Fook Cheong Ho International Ltd. & (5) Techable Industrial Ltd.

Mr Patrick Fung, SC & Mr William Wong, instructed by Messrs Michael Li & Co., for the Company

Ms P Mckenna, for the Official Receiver

54302-EN-2006-09-22

RE DIYON DEVELOPMENT LTD

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HCCW 178/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 178 OF 2006

____________

	IN THE MATTER of DIYON DEVELOPMENT LIMITED
	（大潤發展有限公司）
	and
	IN THE MATTER of the Companies Ordinance, Cap. 32

____________

Before: Hon Kwan J in Court

Date of Hearing: 22 September 2006

Date of Judgment: 22 September 2006

______________

J U D G M E N T

______________

1. This is a creditor’s petition presented by Kong Yick Ming to wind up Diyon Development Limited (“the Company”).

2. A petition was presented against the Company by another creditor on 10 April 2006. On 19 June 2006, I gave leave to the petitioner to withdraw and for Mr Kong to be substituted as petitioner. Mr Kong filed his amended petition the same day.

3. In the amended petition, it is alleged that the Company is indebted to Mr Kong of HK$1,077,220.67 and RMB1,751,319, being the amounts Mr Kong paid and arising under his personal guarantees dated 8 February 1999 and 10 March 1999 to DBS Bank Limited (formerly Dao Heng Bank Limited) and the Bank of Tokyo-Mitsubishi UFJ, Limited (“UFJ”; formerly The Sanwa Bank Limited) in support of the Company’s indebtedness to these banks and in exercise of his rights of subrogation and indemnity.

4. On 19 May 2006, he served 2 demand letters on the Company for the debts aforesaid. On the same day, he served a notice of intention to appear on the petition of the then petitioner as a supporting creditor. As mentioned earlier, Mr Kong was substituted as petitioner when the previous petitioner withdrew.

5. In the amended petition, 3 creditors have given notice of intention to appear as supporting creditors. Magician Investment (BVI) Limited gave notice of intention to appear as opposing contributory.

6. For the background of the Company and its ultimate parent company Magician Industries (Holdings) Limited (“Magician”), Mr Kong’s prior interest and involvement in the Magician group of companies, the restructuring of the group, the changes in the management of the group, I refer to the decision I gave on 21 June 2006, paragraphs 2 to 16. This was a decision given on Mr Kong’s application for the appointment of provisional liquidators to the Company, which I dismissed. I did rule on that occasion Mr Kong has made out a good prima facie case for a winding-up order on his amended petition, for the reasons given in paragraphs 26 to 32.

7. Further evidence has been filed by the Company and Mr Kong subsequent to that hearing. There is one further affirmation on each side. The Company continues to dispute liability to Mr Kong on the petitioning debt.

8. The principles are well established where a company seeks dismissal of a petition on the basis that there is a bona fide dispute of the petitioning debt on substantial grounds. The court hearing the petition has to consider if the company has established a bona fide defence, not whether it has a fair probability of establishing a bona fide defence unlike the situation of a summary judgment, as in a winding up the petitioner’s debt and all the matters previously raised by the company to dispute the debt can still be considered by the liquidator on the adjudication of the petitioner’s proof of debt. So the onus on the Company at this stage is to adduce sufficiently precise factual evidence to satisfy the court it has a bona fide dispute on substantial grounds (Re ICS Computer Distribution Limited [1996] 1HKLR 181 at 183F to J). It is not sufficient for the Company just to raise a cloud of circumstantial matters, if they fall short of contradicting documents that appear to be regular on the face. It is incumbent on the Company to show that the objections raised do make out a cogent and substantial case of a bona fide dispute on substantial grounds. I do not regard this as requiring the Company to prove a negative, as submitted by Mr Fung, SC for the Company. The test is not satisfied by arguing hypotheses of fact on which it is said that a bona fide dispute could exist.

9. According to Mr Kong, the debt owed to him by the Company arose in this way. When Mr Kong had a substantial interest in Magician and was serving as its chairman, he had executed personal guarantees to guarantee the liability of the Company to Dao Heng Bank in February 1999 and to Sanwa Bank in March 1999. Magician and its subsidiaries were in great financial difficulty in 1999, they were indebted to 18 bank creditors.

10. In 2000, the Magician group negotiated a debt restructuring scheme with the 18 bank creditors. A debt restructuring deed of the Magician group was executed on 10 November 2000.

11. The 18 banks were eventually paid off in accordance with the terms of the debt restructuring deed, with 16 banks agreeing to take a “haircut” of their original indebtedness. The two exceptions were Dao Heng Bank and Sanwa Bank. They held personal guarantees from Mr Kong and they preserved their rights to call on his personal guarantees as a pre-condition to their supporting the restructuring, so that any “haircut” these 2 banks took from the restructuring could be recouped from Mr Kong under his personal guarantees.

12. These matters are fully borne out by the following documents:

(1) 2 public announcements of Magician dated 30 September 2000 and 11 November 2000

In the 1^st announcement, under the paragraph “Security”, it was stated that:

“All existing guarantees previously granted to the Creditors by [Magician] in support of the Subsidiaries [this included the Company] or by the Chairman of the board of Directors, Mr Tony Kong, in support of the Group in respect of the Creditors Indebtedness will remain in full force and effect and, may be enforced in accordance with their terms.”

The 2^nd announcement contained this sentence under the heading “Security”:

“Until repayment in full of the Secured Indebtedness and all amounts owing under the Term Loan and the Secured Convertible Bonds, all existing guarantees previously granted to the Residual Creditors and the Secured Creditor by [Magician] in support of the Subsidiaries or by the Chairman of the Board, Mr Tony Kong, in support of the Group in respect of the Bank Indebtedness will remain in full force and effect, and may be enforced in accordance with their terms.”

(2) the debt restructuring deed

Under “Security”, in clause 7.1(c) it was provided that “nothing herein affects any guarantees or security granted to any Creditors by any third party”. “Creditors” included the 2 banks in question.
Further, by the provision in clause 2, it was expressly provided that the debt restructuring was conditional upon compliance with a number of conditions precedent including clause 2.1(n) (this provided creditors holding guarantees must obtain written agreement from the guarantor that his guarantee remains in full force notwithstanding the terms of the debt restructuring deed) and clause 2.1(o) (this provided that such guarantor must also provide the agent [ABN-AMRO Bank] with a written agreement not to exercise the right of subrogation or indemnity during the restructure period).

(3) a letter provided by Mr Kong to ABN-AMRO Bank dated 14 December 2000 pursuant to clause 2.1(o) of the debt restructuring deed

By this letter Mr Kong undertook that in the event that he discharged his obligations under the guarantees given to the Sanwa Bank and the Dao Heng Bank, he shall not during the restructure period seek to exercise any right of subrogation, contribution or indemnity or demand any payment from the Magician group.

(4) 2 deeds of undertaking both dated 15 December 2000 provided by Mr Kong to Dao Heng Bank and Sanwa Bank pursuant to clause 2.1(n) of the debt restructuring deed

The undertaking recited that it was given in consideration of the 2 banks agreeing to participate in the debt restructuring of the group. It was expressly stated that the guarantees provided by Mr Kong should remain in full force and effect. In respect of the undertaking to the Sanwa Bank, the principal amount for which Mr Kong was liable under the guarantee was given. It was stated that the guarantees and his liability thereunder should not be affected by the banks participating in the debt restructuring of the group. Lastly, he undertook to pay the banks forthwith upon their demand in accordance with the guarantees all the losses they may suffer in connection with or as a result of their participating in the debt restructuring.

13. Nothing raised by Mr Fung on behalf of the Company has cast doubt on the way that liability was assumed by Mr Kong on behalf of the Company. Mr Kong’s assertion is well borne out by the documents referred to above. I note that the current management of the group took over in March 2006, and they only have the records of the group to go by, whereas Mr Kong was in control of the group at the time and was closely involved in the restructuring.

14. The Company has criticized the wording in the 2 public announcements, saying that it did not contain sufficient information as no mention was made of any right of indemnity that Mr Kong might have against the group if his personal guarantee should be invoked by the banks, and there was no disclosure of the amount of the guaranteed liabilities and thus the potential liability of the group to indemnify Mr Kong. It was alleged by the Company that these announcements were not in compliance with the Listing Rules, Magician being a listed company. I do not think anything turns on this criticism. The announcements could certainly have been worded in a far more comprehensive way, nevertheless they were prepared on the advice and with the assistance of the professional advisers of the group, including solicitors.

15. Next, I turn to the assertion of payment of the liability assumed and the evidence adduced in support by Mr Kong.

16. According to him, Dao Heng Bank called on his personal guarantee and between 5 March 2002 and 29 April 2005, he paid a total of HK$460,933.67 to it. Sanwa Bank called on his personal guarantee and between 5 March 2002 and 29 April 2005 he paid a total of HK$616,287.00 to it. The total he paid to the 2 banks to discharge the liability of the Company guaranteed by him was HK$1,077,220.67.

17. On 3 April 2006, UFJ assigned all its rights under Mr Kong’s guarantee to Sze Shun Kin. On 17 May 2006, Mr Kong paid to Mr Sze, as the assignee of the right of the balance of his liability under his personal guarantee to the Sanwa Bank, the sum of RMB1,751,319.

18. The documents adduced by Mr Kong in support of his assertion that payment of HK$1,077,220.67 was made comprise the following:

(1) a covering letter of UFJ to Mr Kong dated 3 May 2006 enclosing a schedule giving a breakdown of his outstanding liabilities as at 31 October 2003

The schedule enclosed stated the outstanding principal as at 30 April 2000 and this was the same amount mentioned in the deed of undertaking given by Mr Kong to the Sanwa Bank dated 15 December 2000 referred to earlier. The outstanding liability of Mr Kong under the continuing guarantee dated 10 March 1999 according to the schedule was US$349,756.75 as at 31 October 2003, and this was in respect of the liabilities of the Company for an import bills facility in US dollars. The schedule also showed 2 repayments received by UFJ from Mr Kong towards discharge of this liability under the “Deed of Repayment” on 5 March 2002 for HK$184,864.00 and on 31 October 2002 for HK$188,160.00.

(2) a covering letter of UFJ to Mr Kong dated 20 April 2006 enclosing a schedule giving the breakdown of his outstanding liabilities as at 3 April 2006

The schedule enclosed stated that the outstanding principal and accrued interest under his guarantee aforesaid as at 3 April 2006 was US$218,914.87, and this was in respect of the liabilities of the Company for an import bills facility in US dollars. The schedule showed among other items 5 payments received by UFJ from Mr Kong after 31 October 2003 towards discharge of this liability under the “Deed of Repayment” and the “Second Deed of Repayment”. These payments were as follows:

on 31 December 2003, HK$56,249.65;

on 18 August 2004, HK$82,105.34;

on 29 October 2004, HK$33,179.71;

on 1 February 2005, HK$53,688.85;

on 29 April 2005, HK$18,039.45.

(3) an e-mail from DBS Bank to Mr Kong on 8 May 2006 enclosing a repayment record in respect of the Magician group

In the record, the indebtedness of the Company and another subsidiary called Jinda was set out in separate columns. The record gave the repayments made after the closing of the debt restructuring on 18 December 2000. The entries showed 7 payments made by Mr Kong for the discharge of the Company’s liabilities and they were as follows:

on 5 March 2002, HK$163,872.00;

on 1 November 2002, HK$166,805.10;

on 31 December 2003, HK$49,863.92;

on 17 August 2004, HK$35,293.32;

on 29 October 2004, HK$14,262.43;

on 31 January 2005, HK$23,082.57;

on 29 April 2005, HK$7,754.33.

The amounts stated as distribution from the HSBC in the repayment record were explained in a letter of Mr Kong to the HSBC dated 24 April 2006 which he produced.

19. These documents emanating from the two banks showed clearly the payments made by Mr Kong pursuant to his personal guarantees in discharge of the liabilities of the Company.

20. The documents produced by Mr Kong in support of his assertion payment of RMB1,751,319 was made comprise the following:

(1) an assignment agreement made on 3 April 2006 between UFJ and Mr Sze

The recitals of this agreement referred to the guarantee executed by Mr Kong in favour of the Sanwa Bank in March 1999. They recited the undertaking letters dated 24 August 2000 and 15 December 2000 by which Mr Kong confirmed to UFJ that his liability under the guarantee should not be affected by the participation of UFJ in the debt restructuring of the group and he undertook to pay UFJ all losses it may suffer in connection with the debt restructuring. They also recited that the debt restructuring was terminated in November 2003 when UFJ ceased to have any claims against the principal borrowers and their group companies and that under the personal guarantee Mr Kong had made “numerous repayments” to UFJ to compensate in part its loss from the debt restructuring. The amount assigned under this agreement by UFJ to Mr Sze was US$218,914.87, being the outstanding principal and interest under Mr Kong’s guarantee as at 3 April 2006. The consideration for the assignment was HK$20,000.00. Under clause 6.6 of the agreement, Mr Sze confirmed, represented and warranted to UFJ that he is a party independent to Mr Kong and the principal borrowers’ group and is not connected with the principal borrowers in any way, that he has adequate information concerning Mr Kong’s business and financial condition to make an informed decision regarding the entering into of the assignment, and that he has independently and without reliance on any party made his own analysis and decision to enter into the agreement. Clause 7.4 provided that the assignment constituted the entire understanding between the parties with respect to the subject matter.

(2) a letter dated 3 April 2006 from UFJ to Mr Sze acknowledging receipt of the cash payment of HK$20,000.00 being the consideration under the assignment agreement

(3) a notice of assignment dated 4 April 2006 from UFJ to Mr Kong giving notice of the assignment agreement

(4) a repayment proposal made on 4 April 2006 between Mr Kong and Mr Sze

By this proposal, Mr Kong was to make a 1^s^trepayment not later than 15 April 2006 of not less than RMB100,000 and that he was to repay an amount not less than RMB10,000 each month until the full settlement of the assigned amount. It was provided that in the event Mr Kong should fail to comply with the repayment schedule, the whole balance of the assigned amount should become immediately due and payable.

(5) a letter dated 17 May 2006 from Mr Sze to Mr Kong to confirm that Mr Sze had received the total amount of RMB1,751,319 repaid by Mr Kong between 27 April 2006 and 5 May 2006 being the full and final settlement of the assigned amount.

21. Mr Fung has raised a number of objections in a very comprehensive submission. I do not find it necessary to deal with each and every one of them. Much was made of the lateness of Mr Kong in making his claim. His claim was raised at a board meeting on 13 April 2006, followed by a demand letter on 19 May 2006. There was no mention of any amount owed to Mr Kong in the ledgers or audited accounts of the Company, during the period when he was involved in the management of the group. These are merely circumstantial matters. In any event, it would appear that the matter of his claim was raised with the Company before April 2006, as in 2004 Mr Kong’s solicitors had obtained a legal opinion from counsel on whether he had a right of indemnity against the Company and this was provided to Magician on 27 September 2004. Counsel in his opinion also referred to the letters of undertaking provided by Mr Kong to the 2 banks and the letter to ABN-AMRO Bank in December 2000 referred to earlier.

22. It was submitted that Mr Kong might have discharged his liability to the 2 banks not under the personal guarantees, but under the Deed of Repayment and 2^nd Deed of Repayment referred to in the payment schedules and the repayment records furnished by the banks. I think it is sufficiently clear from the schedules and the repayment record that the payments were made to discharge Mr Kong’s liabilities under the personal guarantees to guarantee the liability of the Company. That in addition to his personal guarantees he had also executed the Deed of Repayment and the 2^nd Deed of Repayment in favour of the banks, probably to provide better protection to these creditors, is in my view immaterial. It can also be seen from the statutory demand served by UFJ against Mr Kong on 24 November 2005 that the demand was made in respect of moneys owing under the guarantee in March 1999, the letters of August 2000, December 2000, June 2000 and the 2 Deeds of Repayment. Not all of the documents referred to in the statutory demand have been produced, but I do note from those documents produced that they all made reference to Mr Kong’s liabilities under the guarantee in March 1999, and that the guarantee has remained in full force and effect.

23. It was also submitted by Mr Fung that any payments made by Mr Kong to the banks after full performance of the restructuring agreement were made to discharge the liability of Magician, not of the Company, as Magician had assumed responsibility for repayment of all debts due from the subsidiaries under the debt restructuring deed by virtue of clause 3. I do not think this is a valid point, as stated earlier the liabilities of Mr Kong to the 2 banks under the personal guarantees were not affected by the debt restructuring deed. The letters of December 2000 and the provisions in the debt restructuring deed have shown this very clearly.

24. The point was made that it was not clear if the payments were made by Mr Kong to discharge the liabilities of the Company or of any other subsidiaries in the group. This is also a bad point. I have mentioned the items of repayments made in the schedules and the repayment record of the 2 banks in some detail. There can be no doubt that these payments were made in respect of the liabilities of the Company and not of any other entity.

25. I see nothing irregular on the face of the documents produced by Mr Kong showing the assignment of the balance of the liabilities under the guarantee from UFJ to Mr Sze. That UFJ and Mr Sze have not given affirmations in these proceedings did not matter.

26. As to the payment of RMB 1.7 million odd, Mr Kong has explained that his paying off the entire amount in May 2006 (notwithstanding Mr Sze had agreed to accept payment by instalments which may stretch over 13 years) was motivated by his desire to exercise his right of subrogation against the Company, and it would seem, to seek to be substituted as the petitioner in the winding-up petition if there should be failure to pay. The motives of Mr Kong in seeking to wind up the Company are not relevant.

27. That more documents could have been adduced, apart from the letter of Mr Sze in May 2006, to show that he had received full payment, is also not in my view material.

28. I hold that the Company has failed to establish a bona fide dispute of the petitioning debt on substantial grounds.

29. As there is in my view a debt which cannot be substantially disputed and it has remained unpaid notwithstanding that a demand was made, I am entitled to infer that the Company is unable to pay its debts as they fall due, whether it has the actual ability to do so is not relevant (Cornhill Insurance Plc v Improvement Services Limited [1986] 1 WLR 114; An Feng International Trading Limited v Honour Link International Development Limited [1999]3 HKC 116 at 123E).

30. For the above reasons, I make an order to wind up the Company. The petitioner’s costs are to be paid out of the assets of the Company. I would grant a certificate for 2 counsel.

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

Mr Clifford Smith, SC & Mr Jose Maurellet, instructed by Messrs Oldham, Li & Nie, for the Petitioner

Mr Patrick Fung, SC & Mr William Wong, instructed by Messrs Michael Li & Co., for the Company

The Official Receiver, attendance excused

53066-EN-2006-06-21

RE DIYON DEVELOPMENT LTD

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HCCW 178/2006

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 178 OF 2006

____________

	IN THE MATTER of DIYON DEVELOPMENT LIMITED
	（大潤發展有限公司）
	and
	IN THE MATTER of the Companies Ordinance, Cap. 32

____________

Before: Hon Kwan J in Chambers (not open to public)

Date of Hearing: 21 June 2006

Date of Decision: 21 June 2006

______________

D E C I S I O N

______________

1. This is a summons for the appointment of provisional liquidators to Diyon Development Limited (“the Company”) issued by Kong Yick Ming (“Mr Kong”) on 29 May 2006. I will first set out the background matters giving rise to the application.

The Company and its ultimate parent

2. The Company was incorporated in Hong Kong on 14 September 1990. Only 3 shares in the Company were issued. According to the annual return made up to 14 September 2005, 2 shares were held by Magician Investment (BVI) Limited (“Magician BVI”), and 1 share was held by Mr Kong, and that the 2 directors of the Company were Mr Kong and his daughter Kong Suk Ching.

3. It is not in dispute that Mr Kong held his 1 share on trust for Magician BVI. What is in dispute is whether the transfer of Mr Kong's share back to Magician BVI in 2006 was valid and whether the appointment by Magician BVI of 3 additional directors to the board of the Company in May 2006 was valid. I will come back to these matters later, and continue with an account of the background matters.

4. Magician BVI is the immediate parent company of the Company and the ultimate parent company is Magician Industries (Holdings) Limited (“Magician”). Magician was incorporated in Bermuda and its shares are listed on the main board of the Hong Kong Stock Exchange. It was founded by Mr Kong's father in the early 1970s and it holds interest in subsidiaries mainly through Magician BVI. There are approximately 20 companies in the group.

5. The main business of the group is the manufacture and sale of plastic and metal products, in particular general household products, through the subsidiaries.

6. The main function of the Company is the sourcing and purchasing of supplies of raw materials for other subsidiaries.

7. The manufacturing arm of the group is Jinda Plastic Metal Products (Shenzhen) Company Limited (“Jinda”), with a factory in Shenzhen. Products manufactured by Jinda are sold to Magician and other subsidiaries and they in turn sell to distributors worldwide.

Mr Kong's interest and involvement

8. Mr Kong used to hold 33% of the shares in Magician through his company Concept Developments Limited until 2005. He had been the chairman and executive director of Magician since it was first listed in 1995. Except for short periods, he remained as chairman and executive director of Magician for 10 years, until October 2005, when he was removed and re-designated a non-executive director. He was also the Chief Executive Officer of Magician up to December 2004. He also acted as a director of a number of subsidiaries including the Company, and he holds shares in a number of subsidiaries on trust for Magician BVI.

9. In September 2005, Mr Kong's shareholding was reduced from 33% to 16.5% and then to nil in November 2005. I understand his shares were sold by banks or financial institutions by forced sale when realizing the securities put up by him for securing loans made to him for his personal businesses.

10. Because Mr Kong has ceased to hold shares in Magician and was removed as chairman and executive director, he was asked to and did sign an instrument of transfer for his 1 share in the Company to be transferred back to Magician BVI.

11. The current management of Magician only took over the group in late March 2006.

Restructuring of the group

12. The group ran into financial difficulties in 1999. As a substantial shareholder and executive director of Magician, Mr Kong executed personal guarantees in favour of Dao Heng Bank Limited and The Sanwa Bank Limited to guarantee the liabilities of the Company and other companies in the group to these 2 banks. In 2000, there was a massive debt restructuring with 18 banks including Dao Heng Bank and Sanwa Bank. The banks that took part in the debt restructuring became convertible note holders of Magician.

13. In 2003, Jinda procured a loan of HK$100 million and other credit facilities from the Bank of China, Shenzhen Baoan branch, to pay off the banks in the debt restructuring. The loan was transmitted by Jinda to the Company for onward lending to Magician, and Magician paid off all of the convertible notes held by the 18 banks.

14. Notwithstanding the debt restructuring, the guarantees executed by Mr Kong to Dao Heng Bank and Sanwa Bank remained in full force and effect, so the 2 banks were entitled to call on his guarantees to pay up the shortfall after the restructuring.

Changes in top management

15. In 2004 and 2005, there were unsettling changes in the top level of management of the group.

16. Mr Kong claimed that after the annual general meeting of Magician in September 2004, he was precluded from taking any decisions on behalf of Magician, the Company and other subsidiaries. The control fell to the nominees of other substantial shareholders, even though Mr Kong was re-appointed chairman and executive director of Magician for the first 10 months in 2005. He alleged that he was made a scapegoat for the poor performance of the group which led to a significant write off for the year 2005.

The winding-up petition presented by Man Tat Manufactory Company

17. On 10 April 2006, a winding-up petition was presented against the Company by Li Yat Ming trading as Man Tat Manufactory Company (“Man Tat”). This was based on a debt to Man Tat of HK$2.3 million odd, being the outstanding price of goods sold and delivered by Man Tat to the Company between August 2004 and November 2005. On 13 March 2006, Man Tat served a statutory demand on the Company for the debt.

18. A board meeting of Magician was held on 13 April 2006 to discuss the winding-up petition against the Company. At that meeting, Mr Kong requested a full set of the books and records of the Company as he was a director. He also raised with the board of Magician his personal guarantees given on the behalf of the Company in 1999. He informed the board he had paid on behalf of the Company HK$6 million under these guarantees and he intended to recover the sum from the Company. He would send all supporting documents to the Company for consideration.

19. According to the payment details provided by the banks, which I will come to, various payments were made to Dao Heng Bank between March 2002 and November 2005 and to the Sanwa Bank from March 2002 to December 2005 by Mr Kong and his company Concept Developments Limited, but Mr Kong did not demand repayment from the Company until this board meeting.

20. On 19 May 2006, Mr Kong took a number of steps:

(1) He and Concept Developments Limited each filed a notice of intention to appear on the petition presented by Man Tat and to support the petition to wind up the Company. In the notice of Mr Kong, it was stated that he is a creditor for HK$1,077,220.67 and RMB1,751,319.00. In the notice of Concept Developments Limited, it was stated that it is a creditor for HK$549,123.27.

(2) Mr Kong and Concept Developments Limited sent demand letters to the Company, demanding payment of the amounts aforesaid within 7 days.

(3) Mr Kong sent a letter on behalf of the Company to Magician, stating that owing to the presentation of the petition by Man Tat, he felt that an amount of HK$39.6 million being the money owed to the Company through inter-company accounts should be settled, and required a partial payment of HK$30 million within 5 days.

21. On 29 May 2006, Mr Kong issued the present summons for the appointment of provisional liquidators, on the ground that the assets of the Company are in jeopardy and independent professionals should be appointed to take control of the Company so as to investigate wrongdoings and recover assets. The application first came before Barma J on 2 June 2006, he adjourned it to today and gave directions for filing of evidence.

22. On 19 June 2006, which was the first hearing of the winding-up petition of Man Tat in this court, I was told that the Company had fully paid up Man Tat's claim and that Man Tat would withdraw the petition. At the same hearing, Mr Kong applied to be substituted as petitioner. As the application for substitution was not opposed by the Company, I granted the application and directed Mr Kong to file and serve an amended petition on 20 June 2006.

23. I should also mention that another supporting creditor Wing Ko Paper Products Industrial Company Limited has reached a settlement with the Company, and has received payment in full of HK$2.5 million odd on 20 June 2006.

The amended petition of Mr Kong

24. In the amended petition, Mr Kong claimed that the Company is indebted to him of HK$1,077,220.67 and RMB1,751,319.00, being the amounts he paid and arising under his personal guarantees dated 8 February 1999 and 10 March 1999 to DBS Bank Limited (formerly Dao Heng Bank Limited) and the Bank of Tokyo-Mitsubishi UFJ Limited (formerly The Sanwa Bank Limited), in support of the Company's indebtedness to these banks and in exercise of the rights of subrogation and indemnity. On 19 May 2006, he served 2 demand letters on the Company for the aforesaid amounts and the Company has not repaid the debts owing.

25. With the above background, I turn to consider the appointment of provisional liquidators to the Company. I bear in mind the legal principles, which are well established.

If there is a good prima facie case for a winding-up order

26. The first requirement Mr Kong must satisfy to obtain an order for appointment of provisional liquidators is to show a good prima facie case for a winding-up order on his amended petition.

27. Mr Patrick Fung, SC submitted that this requirement is not made out. I am not able to agree with him.

28. The onus of an applicant to make out a good prima facie case is not an onerous one. The court is not trying the petition at this stage and any view formed on the merits of the petitioner's case is provisional. If Mr Kong can show, by believable evidence, facts which if eventually proved will entitle him to a winding-up order and if the contrary is not proved at this time, he would have made out a prima facie case.

29. I am not going to take into account the fact that Mr Kong has only produced supporting documents from the banks and an assignee of one of the banks showing that he had made payment under the guarantees at a very late stage, when he made his 2^nd affidavit in reply to the Company's evidence in opposition on 17 June 2006. It is not necessary to go into this for present purpose.

30. The fact remains there are now documents from the 2 banks in question, showing that a total sum of HK$1 million odd was paid by Mr Kong under the guarantees to discharge the liabilities of the Company and other subsidiaries in the group between March 2002 and April 2005. There is nothing to indicate any irregularity about these documents coming from the banks or any other reason why the documents should not be accepted at face value.

31. As for the amount of RMB1.7 million odd paid by Mr Kong to an assignee of the remaining balance of the claim from Bank of Tokyo-Mitsubishi UFJ Limited, it may be that at a later stage enquiry would need to be made about the assignment made by the bank in April 2006 (by which a debt of US$218,000.00 odd was assigned by the bank to an assignee for only HK$20,000.00), the alleged repayment proposal between the assignee Sze Shun Kin and Mr Kong on 4 April 2006 (by which Mr Kong was to repay the debt assigned by instalments which would take 13 years), and how it came about that Mr Kong was able to pay off RMB1.7 million odd (equivalent to about US$218,000.00) in full to Mr Sze on 6 May 2006. The documents produced by Mr Kong at this stage do show, on the face of it, the remaining balance of the debt had been assigned and that the assignee has been paid in full by him.

32. I hold that Mr Kong has made out a good prima facie case for a winding-up order on the amended petition.

If it is right to appoint provisional liquidator in all the circumstances

33. The other question I need to consider is whether is would be right to appoint provisional liquidators in all the circumstances of this case.

34. I would first mention the matters I regard as irrelevant and do not propose to take into account, as a lot of evidence has been filed on both sides.

35. I have mentioned earlier there is dispute if Mr Kong's 1 share in the Company has been validly transferred back to Magician BVI and whether the 3 additional directors were validly appointed by Magician BVI to the board of the Company in May 2006. Mr Kong has alleged that this was an attempt to oust him and his daughter from the board of the Company, so they would not be able to demand payment on behalf of the Company from its parent company of the substantial inter-company debts. I do not think these disputes on the validity of the share transfer and the appointment of additional directors are relevant for present purpose. It seems to me there is a power struggle going on between Mr Kong and the current management of the group, and that steps taken by Mr Kong since April and May 2006 are for some tactical purpose, including his demand of the debts owed to him and his company, and his demand on behalf of the Company of the inter-company debts owed to the Company. But power struggle aside, if I am satisfied the circumstances are appropriate for provisional liquidators to be appointed, an order will be made.

36. Likewise, the alleged attempt to remove Mr Kong and his daughter as directors of the Company by calling a board meeting on 29 May 2006 and the alleged exclusion of Mr Kong from the management of the Company are not relevant. I bear in mind Mr Kong's position and involvement in the affairs of the group until he lost his share in Magician in late 2005. He may well feel aggrieved but that is neither here nor there.

37. I turn to the grounds advanced for appointment of provisional liquidators. As I have mentioned, this was put on the basis that assets are in jeopardy and that provisional liquidators should be appointed to investigate wrongdoings and recover assets without delay.

38. It was said in Mr Kong's 1^st affidavit that Magician has started to put assets of the Company out of reach of creditors by physically removing and attempting to dispose of them secretly in China. He said that the Company owns plant and machinery at cost of HK$24 million as shown in the audited accounts as at March 2005, and that Jinda has tried to sell 68 of the injection moulding machines in China, 9 days after the winding-up petition was presented by Man Tat.

39. This assertion seems to me to be misleading, to say the least. It is unacceptable to say that the value of these machines at cost was HK$24 million as shown in the audited accounts, without mentioning that it was clearly shown in the audited accounts that the net book value of these machines is nil, due to the complete writing off of accumulated depreciation, as these machines are very old and were acquired between 1987 to 1994.

40. The machines are now kept in the factory of Jinda, it is unclear on the evidence if the machines belong to the Company or to Jinda. There is no documentary evidence to establish that they do belong to the Company, except for Mr Kong's assertion. As pointed out by Mr Fung, according to Mr Kong, he recalled that his brother had written out the cheques for the Company when these machines were purchased. The machines were purchased between 1987 and 1994, the Company was only incorporated in 1990, it is doubtful if Mr Kong's brother had indeed written out cheques for the Company as alleged. There is evidence before me that 51 of the 68 machines are currently registered under the ownership of Jinda, and according to the Company, the remaining 17 machines had been written off.

41. More importantly, the memorandum of the factory manager of Jinda to the management of the group on 19 April 2006 set out the reasons why the machines should be disposed of. I am not satisfied that the attempted disposition was to keep the assets of the Company, if they are indeed the assets of the Company, out of reach of creditors in the event of a winding up. It would appear from the memorandum there are good reasons for disposal. The machines are old, they are little or no use, there is not enough space to house them, and expenses are incurred for utilities supplies if they should continue to be used. I agree with Mr Fung the attempted disposition seems to be a genuine and normal operational exercise to replace old machines to improve production efficiency. I do not see anything sinister in the attempt to dispose of them.

42. Mr Jonathan Chang for Mr Kong drew my attention to the latest affirmation filed by Mr Kong in which he exhibited a letter from a Chinese lawyer showing that the creditors of Jinda in Shenzhen are seeking to levy execution on the assets of Jinda and that this may lead to a forced sale of its assets. Mr Chang submitted that there is urgency which calls for the intervention of provisional liquidators. If the machines are indeed the assets of the Company and not of Jinda, I have no reason to think that the Company would not take necessary steps to avoid a wrongful attachment of its assets. If these assets are Jinda's assets and not that of the Company, it does not seem to me there is anything much that provisional liquidators of the Company can do in this situation.

43. Next, it is alleged that the management of Magician had tried to manipulate the inter-company debts owed to the Company, so the inter-company debts of HK$151 million (before netting off; the net sum due to the Company on inter-company debts according to management accounts in January 2006 is HK$39.6 million) due to the Company from Magician, a listed company, are now due from Magician BVI, which is not listed.

44. According to the Company's evidence, this was due to a consolidation of inter-company accounts in January 2006. This exercise was carried out by the management at that time and the persons involved had all since left the group. The current management took over in late March 2006. They could not find any record in the minutes reflecting such consolidation, so the current management does not know the precise reason for consolidation.

45. The current management takes the view that there are good reasons for this exercise resulting in liabilities to subsidiaries being assumed by Magician BVI, which is the immediate parent company of the subsidiaries, rather than by Magician. They also explained how the inter-company debts of HK$151 million owed to the Company had come about. This was due to the consolidation of inter-company debts in January 2003, when Mr Kong was a chairman and executive director of Magician, and the loan of HK$100 million obtained by Jinda which was transmitted to the Company and on-lent to Magician to pay off the bank creditors in the restructuring, as mentioned earlier.

46. All along, it was not anticipated that this inter-company debt of HK$151 million due to the Company would be paid off within any specific period. There is evidence from the audited accounts of the Company for the years ended March 2004 and March 2005. Both were signed by Mr Kong as chairman.

47. It seems to me that Mr Kong's present concern that with the winding-up petition this substantial inter-company debt due to the Company might be manipulated or might be at risk somehow is somewhat unreal and opportunistic. This matter may need further investigation if the Company is in liquidation. But I do not think an immediate investigation is required to be carried out by provisional liquidators.

48. Lastly, it is alleged that the disposal of the Company's car parking space in 2005 may be questionable. I see nothing improper about this on the evidence before me.

49. I am not satisfied there is a real risk that assets are in jeopardy to justify the appointment of provisional liquidators.

50. There is nothing but a bare allegation that the records and books of the Company might be destroyed or concealed by the current management. I do not attach weight to this.

51. In short, I do not think it is right in these circumstances to appoint provisional liquidators to the Company. I would dismiss the application. I order Mr Kong to pay the costs of the Company and of the Official Receiver in any event. For the Company's costs, I grant a certificate for two counsel.

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

Mr Jonathan T Y Chang, instructed by Messrs Oldham, Li & Nie, for the Petitioner

Mr Patrick Fung, SC & Mr T M Lee, instructed by Messrs Michael Li & Co., for the Company & Magician Investments (BVI) Ltd., a contributory

Ms P. Mckenna for the Official Receiver