RE RAD SOURCE TECHNOLOGIES ASIA LTD

HCCW 253/2017

[2018] HKCFI 610

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO 253 OF 2017

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D E C I S I O N

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1.  I have before me an amended petition originally issued on 24 August 2017 seeking the winding up of the Company of which the petitioner is a 60% shareholder on the grounds of insolvency relying on a statutory demand dated 19 July 2017. The debt is said to arise in the following circumstances.

2.  The petitioner is based in the USA and manufactures and supplies irradiators.  It has over recent years supplied irradiators to the Company on approximately 19 occasions.  The Company placed two purchase orders for irradiators with the petitioner in April and July 2016.  The debt relied on is in respect of payment of the purchase price for those two items.  For present purposes it is only necessary, in my view, to focus on the purchase order dated 6 May 2016 in respect of an irradiator model no “RS2000 pro-350 kv” which was to be delivered to the Mainland by 4 July 2016 for a total purchase price including crating of US$159,500.  The irradiator was delivered on 10 August 2016 and the petitioner submitted an invoice no 122861 dated 3 August 2016 for the irradiator.  Although partial payment has been made in respect of the other irradiator, the irradiator to which invoice no 122861 relates has not been paid and the full amount is said to be outstanding. 

3.  There is no dispute that the irradiator was delivered.  The reason the Company opposes the petition and says that the payment is not due is as follows.  The Company says that when a test was carried out on the irradiator on 13 April 2017, it showed that there was radiation leakage in excess of the national standard. However, at that time the irradiator was not installed in its final location as that had not been constructed.  The Company says that on 13 April 2017, an oral agreement was reached between Mr Zhao Xi, on behalf of the Company, and Mr William Hartman, on behalf of the petitioner, in a conversation with Dr Sun of the end-user, China Educational Instrument & Equipment Corporation (“CEIEC”), that payment for the irradiator would be deferred until it could be installed in its final location in early 2018.  The implication of that agreement seems to me to be that it was recognised that the irradiator would need further adjustment to ensure it met the required standards.  But there was no material reason at that time to think that it would not do so.  Indeed, this would appear to be consistent with the unchallenged evidence of Mr Hartman on behalf of the petitioner that given the nature of the devices, it was common for them to need adjustment after they had been shipped and installed.

4.  Section 37 of the Sale of Goods Ordinance, Cap 26, deals with acceptance of goods:

“(1) Subject to subsection (2), the buyer is deemed to have accepted the goods—

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(b) when the goods have been delivered to him and he does any act in relation to them which is inconsistent with the ownership of the seller.

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(4) The buyer is also deemed to have accepted the goods when after the lapse of a reasonable time he retains the goods without intimating to the seller that he has rejected them.

(5) The questions that are material in determining for the purposes of subsection (4) whether a reasonable time has elapsed include whether the buyer has had a reasonable opportunity of examining the goods for the purpose mentioned in subsection (2).”

5.  There is nothing from the Company, either in the form of contemporaneous emails or letters, or affirmation evidence, which indicates, and indeed I do not understand it to be the Company’s case, that it has rejected the irradiator.  It seems to me to be quite clear that the Company has had ample opportunity and time to decide whether or not such problems as may have been identified on 13 April 2017 were sufficiently serious to justify rejecting the irradiator, and having not done so, the Company must be treated as having accepted the irradiator and therefore is, on the face of the matter, liable to pay the contract price.

6.  The second ground for arguing that the debt is not payable is that the alleged oral agreement to which I have referred.  Mr Hartman in his affidavits denies that any such agreement was ever reached. There is no reference to it in anything written during the material periods by either the petitioner or the Company.  It seems to me to be inherently unlikely that the petitioner would have agreed simply to leave such an expensive device in the Mainland without requiring at least partial payment.  There is an additional matter which, it seems to me, calls into question both the likelihood of such an agreement ever having been reached and the bona fides of Mr Zhao’s evidence in this regard, namely, that it is the undisputed evidence of the petitioner that it has been told that CEIEC has paid 90% of the contract price.  Although the petitioner does not know when payment took place, it seems to me that this being the case is inconsistent with the suggested agreement advanced by the Company as a ground for deferring payment. 

7.  In conclusion, it seems to me that a bona fide defence on substantial grounds, which is the criteria that needs to be satisfied by the Company in order to successfully oppose the petition, has not been demonstrated.  As a consequence, there is clearly more than the statutory minimum required to support the petition, and I will therefore make the normal winding-up order which will include an order that the Company pays the petitioner’s costs.  I understand that on 23 February 2018 the petitioner paid HK$250,000 into court by way of security for costs.  I order that that sum be paid to the petitioner.

HCCW 253/2017

[2018] HKCFI 542

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 253 OF 2017

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D E C I S I O N

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1.  There are two applications before the court, one by the company for security for costs of the petition, the other is an application by the company for leave to file and serve supplemental evidence in the form of the 3^rd affirmation of Zhao Xi.

Application for Security for Costs

2.  Right from the start, the petitioner has not disputed the liability to pay.  The question is only one of quantum and the identity of the person funding the costs for the company.  The petitioner has openly offered security in the sum of $150,000, later revised slightly upwards to $158,570.

3.  The background is such that the petition was filed by a creditor based on two unpaid invoices for a total sum of US$238,800 (HK$1.85 million). The goods involved were irradiators supplied by the petitioner which have been installed at the premises of the respondent’s customers.

4.  The respondent company complained that the irradiators were defective. The petitioner has replaced one but provided technical support on installation of the other.  The company said that despite these measures of the petitioner, the irradiator or replacement irradiator was still defective.

5.  The company also alleges that there was an oral tripartite agreement and supplemental agreement involving the parties for payment of the invoices to be deferred until “well installation and operation” of the two units of irradiators and further testing in 2018.

6.  The security sought by the company was $1,021,600 inclusive of costs of senior and junior counsel for the substantive hearing of the petition.  Taking out the costs of the application for security, the quantum claimed is still over $900,000.

7.  The mention of these figures for security speaks for itself.  It is quite disproportionate, being 50% of the underlying debt in respect of the two unpaid invoices, and if the petition is dismissed because of this bona fide dispute over the invoice amount, there will be further costs to be incurred if the petitioner were to sue for the invoiced sums.

8.  On the other hand, the figure suggested by the petitioner was, in my view, unrealistically low for the normal process up to substantive hearing of the petition.

9.  Mr Hudson for the petitioner submits that there is no evidence as to costs being incurred or billed.  I am not concerned about there being no billed amount because security can cover future costs.  But Mr Hudson does make a valid point: because of the petition against the company, actually the company’s funds could not be used for the present application.  There must have been a backer behind the company.  Despite the petitioner’s inquiries in correspondence, it is only today that the court is informed through counsel that the true backer for the company is Mr Zhao Xi, a director and substantial shareholder of the company.

10.  In my view, any order for security ought to be made naming the true backer of these proceedings.  Considering the circumstances of this petition, in my view, an appropriate amount for security should be in the region of $250,000.  At this stage I am not able to see the justification for engaging senior counsel.

11.  I therefore order that:

(1)  the petitioner do, within 14 days, pay into court the amount of $250,000 as security for Mr Zhao Xi’s costs as a backer of the company which costs should cover proceedings up to conclusion of the petition proceedings

(2)  until such security is given, all proceedings against the respondent company be stayed; and

(3)  there will be liberty to apply.

I will deal with costs in a moment.

Application to adduce 3^rd Affirmation of Zhao Xi

12.  The petitioner opposes on the ground that there had been a previous affirmation filed on behalf of the company as to there being a tripartite oral agreement to postpone payment.  There have been only two parties to the documents instead.  Mr Hudson submits that there is evidence to demonstrate the alleged oral agreement to be false.  Further, the previous affirmations filed on behalf of the company have already mentioned that the irradiators were defective.  There is no point for Mr Zhao Xi to put in yet another affirmation to repeat the evidence.

13.  With respect to Mr Hudson, this is not the occasion for the court to make findings on the credibility of a deponent’s evidence.  The further affirmation of Mr Zhao is also not just to repeat evidence previously mentioned.  The contents of this affirmation is to inform the court of events after the last round of affirmation on the part of the company in November 2017.  This new affirmation purports to show that the alleged defects had remained and the customer had complained about those defects, and these may support the company’s defence to the petition.

14.  Accordingly, despite the order of Mr Justice Harris that no further affirmation is to be filed, in the circumstances of this case, the evidence appearing to be relevant, I give leave for the 3^rd affirmation of Mr Zhao Xi to be filed.

(Discussion on costs)

15.  So, in that situation, I think I will order costs of the security application to be paid by the petitioner to Mr Zhao Xi subject to proof of the bill of the solicitors.  The bill will not be shown to you because it is privileged, but it can be shown to me.

(Discussion on quantum)

16.  Leave to the petitioner to file and serve evidence in reply to the 3^rd affirmation of Zhao Xi by 27 February 2018.  No further affirmation is to be filed.

(Further discussion on costs)

17.  Costs of and occasioned by the summons to adduce further affirmation be in the cause of the amended petition.  Costs of the security application, I am going to summarily assess it and allow it to Mr Zhao.  In my view, Mr Hudson was correct; an applicant for security ought to discuss the appropriate quantum in order to save court hearings.  In the present case, in my view, the million-dollar security sought is excessive for the petition.  I therefore allow a sum of $40,000 to be paid by the petitioner to Mr Zhao Xi for the security application.  This is subject to the production of the bill of costs issued by the solicitors to the company or Mr Zhao Xi as regards the security application to the court within 7 days.

HCCW 253/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING‑UP PROCEEDINGS NO 253 OF 2017

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D E C I S I O N

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1.  This is the first hearing of a petition to wind up the company on the grounds of insolvency. On Friday 3 November 2017 (the Friday before the present hearing) the Company filed an affirmation in opposition to the petition. This was the first evidence in opposition that the Company had filed.

2.  Rule 32(1) of the Companies (Winding Up) Rules, Cap 32H, (“Winding Up Rules”) provides that:

“Affidavits in opposition to a petition that a company may be wound up by the court shall be filed within 7 days, or such longer time as the court may direct, of the date on which the affidavit verifying the petition is filed and notice of the filing of every affidavit in opposition to such a petition shall be given to the petitioner or his solicitor on the day on which the affidavit is filed.”

3.  Mr Leung, who appeared today on behalf of the petitioner, argued that the Company’s delay in filing evidence in opposition justifies the court imposing a condition on granting leave to file the affirmation of Mr Zhao out of time, namely, a payment into court of the debt or a proportion of the debt relied on by the petitioner in its petition: see generally Re Grand China Shipping (Hong Kong) Co Ltd [2013] 4 HKLRD 1.

4.  I think that there is force in the argument that just as it has become a common practice of the Companies Court to order a company who at the first hearing of the petition before the Companies Court seeks leave to file evidence in opposition to be required as a condition of so doing to make a payment into court, if evidence in opposition is filed only very shortly before the hearing, then it may be appropriate for the same or a similar condition to be imposed.

5.  The procedural complication in the present case is that the petition was amended on 24 August 2017 to correct some infelicitous language in para 3 of the petition which describes the capital of the Company and the affidavit verifying the amended petition was not filed until 30 October 2017. 

6.  Although the language of rule 32(1) of the Winding Up Rules does not directly apply to the situation where before evidence in opposition is filed an amended petition and further verifying affidavit is filed, it seems to me that although not entirely clear, for the purposes of rule 32(1), the relevant time is the filing of the most recent verifying affidavit. That means that although it is entirely fortuitous the Company has filed evidence in opposition within the time period specified in the Winding Up Rules and, therefore, does not require leave to rely on Mr Zhao’s affirmation, the consequence, it seems to me, of this is that it would not be appropriate to impose a condition on the Company being allowed to defend the petition even if that might have been what would have happened if the petition had not been amended. 

7.  I will therefore make the directions for the further conduct of the petition which I have already indicated to the parties.