RE APP (HONG KONG) LTD

HCCW 1130/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 1130 OF 2003

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D E C I S I O N

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1. This is an application issued by APP (Hong Kong) Limited ("the Company") on 27 February 2004, seeking a validation order under section 182 of the Companies Ordinance, Cap. 32, to allow the Company to pay rent of its business premises for February and March 2004, the salaries to the employees for those two months, and professional fees to solicitors and accountants for resisting the winding-up petition and implementing a scheme of arrangement. The total payment sought is HK$1,672,615.76. The application is opposed by the petitioning creditor and the Official Receiver.

2. According to the supporting affirmation, the Company has an account with the HSBC with a balance of HK$1.2 million odd. The management accounts up to October 2003 indicated a cash balance of HK$1.3 million odd. Other major items of current assets of the Company consist of accounts receivable. If the application is allowed, the payment would swallow up the entire liquid assets of the Company; there is no evidence before the court of the recoverability of the accounts receivable.

3. It is admitted by the Company that it is unable to pay its debts as they fall due and that it is insolvent. It would appear from the management accounts as in October 2003 that the net current liability is in the region of HK$105 million.

4. The Company is part of the Asia Pulp & Paper group of companies ("the APP Group"). The APP Group has experienced massive liquidity problems since the Asian financial crisis and is in the process of restructuring its liabilities in Indonesia, China and elsewhere with some of its creditors. The Company's audited accounts as at 31 December 2002 were prepared on a going concern basis on the assumptions that the Company would continue to obtain financial support from the APP Group and other related companies, and that accounts receivable of HK$726 million were recoverable.

5. The petition to wind up the Company was presented by American Home Assurance Company on 8 October 2003, based on a demand on 28 August 2003 for JPY485 million odd, which was then equivalent to about HK$34 million. The status of the petitioner to present the petition is not in dispute, nor is the insolvency of the Company. The petition was adjourned several times. It was last adjourned to 30 March 2004 for the Company to satisfy the court that there is a viable scheme of arrangement that is likely to be approved by the statutory majority of creditors and would receive the sanction of the court. I have no information when the Company's bank accounts were frozen, they were probably frozen since December 2003 after the petition was advertised.

6. On 16 February 2004, the Company issued an Originating Summons in HCMP No. 458 of 2004 to convene a creditors meeting for the scheme. The Originating Summons has been adjourned sine die on the Company's application on 24 February 2004.

7. The matter in contention is in determining whether the scheme should be sanctioned, the court should have regard to the fact that a statutory majority of creditors can only be obtained as a result of votes being cast in favour of it by related companies which have a special interest.

8. The principles for the exercise of the court's discretion in making a validation order are well established by the authorities. I was referred by Mr Manzoni, who appeared on behalf of the Company, to Re Gray's Inn Construction Co Ltd [1980] 1 All ER 814 at 819 to 820. I bear in mind the principles involved.

9. I turn to each of the items for which a validation order is sought and evidence has been adduced in support.

10. First, there is the rent incurred for the business premises. The total amount of rent for two months is HK$66,000.00. There is some inconsistency on the evidence as to the identity of the landlord, but I am told by Mr Manzoni that the landlord is Lucky Rock Ltd. It is pertinent to note that Lucky Rock Ltd would appear to be a member or a related company of the APP Group, a matter which is not mentioned in the supporting affirmation. In this situation, it seems to me clearly material that the tenancy agreement should be disclosed, as well as whether there was any demand for arrears in rent. The court would also need to be told how the rent before February 2004 came to be paid, after the bank account was frozen.

11. I am not satisfied in the light of the above evidence that it is appropriate to make a validation order in respect of any liability to pay rent for February and March 2004.

12. Next, I turn to the salaries of the employees. There are eight of them. The amount involved is HK$169,677.00 a month for two months. It is said in the affirmation that these employees are "mostly engaged in the general management or account departments of the Company" and that they are expected to play an important role in the implementation of the proposed scheme. This is somewhat different from the position presented in the scheme documents in which it was stated that "the majority of employees that remained with the Company were seconded to related companies in the region in order to provide administrative and support services for such related companies". Accordingly to the supporting affirmation, a related company APP International Trading China Limited has discharged the liability to pay wages for the Company after the Company's accounts were frozen.

13. No employment contract has been produced in evidence. I have no information as to the amount of management fees alleged to be paid by the companies in the APP Group for the services provided by the staff of the Company seconded to those companies, save that the management fee was calculated on a "cost plus basis".

14. If the employees or the majority of them were seconded to related companies and are working for these companies, I am unable to see sufficient justification why a validation order should be made in respect of their salaries. Even though the accounts of the Company are frozen, the related companies could have paid the salaries out of the management fees due to the Company for the work done by the seconded staff.

15. The last and the largest item claimed is in respect of the professional fees. They are made up of fees to solicitors in the sum of HK$842,261.76, of which HK$642,261.76 had been incurred, and estimated fees to be paid to accountants for the proposed scheme up to HK$425,000.00. It is said that part of the legal fees incurred relates to costs in opposing the petition and part of it relates to costs incurred in connection with the proposed scheme. There is no fee breakdown so I do not know which part of the legal fees relates to what type of work.

16. In any event, I am not prepared to make a validation order for the professional fees. The Company is massively insolvent, and as mentioned earlier, there is no dispute on the locus of the petitioner to present the petition. The only ground of opposing the petition is to seek to introduce a scheme of arrangement that would have the support of the statutory majority of creditors and the sanction of the court. In this situation, I see no basis of any entitlement, as submitted on behalf of the Company, that it should be allowed to incur legal expenses in opposing the petition and thereby further depleting its assets to the prejudice of its unsecured creditors.

17. Further, it has been the Company's stance, as stated in the scheme documents and the affirmation in support of the application to convene a creditors meeting, that all costs, charges, expenses and disbursements incurred in connection with the preparation and negotiation of the scheme would be funded by the "Controlling Shareholders", as defined in the scheme documents. Insofar as it is now suggested that the Controlling Shareholders would bear such costs only in the event that the scheme is sanctioned by the court, this would be contrary to the scheme documents.

18. For the above reasons, I dismiss the application for a validation order. As for the costs of today's application, I would reserve this to the hearing on 30 March 2004.