RE PHYSICAL BEAUTY & FITNESS HOLDINGS LTD

HCCW 627 & 629/2024

[2025] HKCFI 604

HCCW 627/2024

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 627 OF 2024

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AND

HCCW 629/2024

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO 629 OF 2024

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_______________

__________________________________

REASONS FOR JUDGMENT

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1.  At the hearing of (1) the petition presented by Tsui Wai Loong Leo (“627 Petitioner”) on 5 November 2024 against Physical Beauty & Fitness Holdings Limited (“Physical BVI”) in HCCW 627/2024 (“HCCW 627”) and (2) the petition presented by Au Ching Man, Wong Mei Chun, Lam Kei Yan, Choi Sau Lin, Louie Sze Wai, Tam Ching Long, and Yam Sheuk Ling (together “629 Petitioners”) on 6 November 2024 against Physical Health Centre Hong Kong Limited (“Physical HK”) in HCCW 629/2024 (“HCCW 629”), I made a usual winding-up order against each of Physical BVI and Physical HK (together “Companies”). These are the reasons for my judgment.

A.     Background

2.  Physical BVI was incorporated in the British Virgin Islands and is an unregistered company within the meaning of s.326(1) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (“CWUMPO”).  It is an investment holding company and holds 13 subsidiaries all of which are incorporated in Hong Kong (together “Group”).  Before its demise, the Group engaged in the business of providing beauty and fitness services under the brand name “Physical”.  The sole director of Physical BVI is Mr Luk Ngai Keung (“Mr Luk”).

3.  Physical BVI has 2 wholly owned subsidiaries, Physical HK and Physical Beauty Limited.  The other subsidiaries[1] are jointly owned by Physical BVI and Mr Luk as to 50% each, except Supreme Resources Limited whose shares are held by Physical BVI and Mr Luk as to 70% and 30% respectively.

4.  Physical HK was incorporated in Hong Kong on 2 March 1990.  Mr Luk and Ho Yuk Wah are its only directors. 

5.  In HCCW 627 (Physical BVI):

  (1)     The 627 Petitioner advanced a loan in the sum of HK$1,500,000 to Physical BVI pursuant to a loan agreement dated 14 May 2024.

  (2)     By a statutory demand served on 14 October 2024, Physical BVI was required to pay HK$1,528,479.45, being the unpaid principal and accrued interest under the loan agreement.

6.  In HCCW 629 (Physical HK):

  (1)     The 629 Petitioners are former employees of Physical HK.   

  (2)     By a statutory demand served on 10 October 2024, Physical HK was required to pay HK$947,129.90, being the outstanding sums and unpaid interest payable under their respective employment agreements.  

  (3)     There are 367 supporting creditors who are former employees of Physical HK (“Supporting Creditors”) and their claims amounted to HK$74,552,388.83 exclusive of interest[2].

7.  As the Companies failed to comply with the respective statutory demands, they are deemed insolvent by virtue of s.178(1)(a) of CWUMPO.

8.  The Companies do not dispute the petitioning debts or the fact that they are unable to pay their debts.  Although Physical BVI is a BVI company, it does not dispute that the 3 core requirements for the court to exercise its discretionary jurisdiction to wind it up are satisfied.[3]

B.     Appointment of PLs over Physical BVI

9.  By ex parte summons filed on 8 November 2024 in HCCW 627 (“PL Summons”), the 627 Petitioner applied for appointment of provisional liquidators over Physical BVI on the ground that the Group faces serious financial and management issues following the abrupt closure of its business on 6 September 2024.

10.  At the first hearing of the PL Summons on 7 November 2024, DHCJ Douglas Lam SC adjourned the application for substantive arguments as he considered the evidence then before the court did not show that the assets of Physical BVI were in jeopardy or that there was an urgent need to appoint provisional liquidators.

11.  At the adjourned hearing of the PL Summons on 15 January 2025 (“15 Jan Hearing”), Mr Jeffrey Tam, counsel for 627 Petitioner, submitted that there was an urgent need to protect the sale proceeds to be received under 2 sales and purchase agreements both dated 20 November 2024 entered into between Physical BVI and Mr Luk with (1) Fameglow Holdings Limited (“Fameglow”) and (2) Per Fit Limited (“Per Fit”) (“Fameglow SPA” and “Per Fit SPA” respectively, together “SPAs”).

12.  Under Fameglow SPA:

  (1)     Physical BVI and Mr Luk purportedly sold all the equipment of the beauty business owned by the subsidiaries listed in Schedule 1[4] to Fameglow (clause 3).

  (2)     The total consideration of HK$9,600,000 shall be paid by Fameglow on or before 30 November 2024, to be split equally between Physical BVI and Mr Luk (clause 4). 

  (3)     Completion shall take place within 3 months of the date of the agreement (clause 5(1)).

13.  Under Per Fit SPA:

  (1)     Physical BVI and Mr Luk purportedly sold all the equipment of the fitness business owned by the subsidiaries listed in Schedule 1[5] to Per Fit (clause 3).

  (2)     The total consideration of HK$19,400,000 shall be split equally between Physical BVI and Mr Luk.  A deposit of HK$5,400,000 shall be paid by Per Fit on or before 30 November 2024.  The remaining balance of HK$14,000,000 shall be paid on or before the date of completion (clause 4).

  (3)     Completion shall take place within 3 months of the date of the agreement (clause 5(1)).

14.  Mr Tam submitted that upon completion, Physical BVI will receive HK$14,500,000 (being HK$4,800,000 + HK$9,700,000) as its share of the sale proceeds under the SPAs.  Mr John Fong, counsel for Physical BVI, adopted a neutral stance to the application but submitted that Physical BVI would oppose the petition on the ground that upon receiving its share of the sale proceeds, it would be able pay its debts including the debt owed to the 627 Petitioner.

15.  At the 15 Jan Hearing, this Court observed that the equipment to be sold under the SPAs were not owned by Physical BVI or Mr Luk but by the subsidiaries listed in Schedule 1 to the respective SPAs (collectively “Subsidiaries”). However, the SPAs proceeded on the assumption that Physical BVI and Mr Luk were entitled to sell such equipment as owners when they are not.  It was a matter of grave concern that Mr Luk thought that he and Physical BVI could sell the equipment owned by the Subsidiaries and pocket the sale proceed to the exclusion of the Subsidiaries concerned. 

16.  However, taking into account the fact that (1) all the outlets operated by the Subsidiaries had already ceased business; (2) Mr Luk had allowed other persons or entities (whose identity had not been disclosed) to carry on business at some of the outlets using the equipment located therein; (3) it was uncertain if the Subsidiaries would be able to find other buyer to acquire the equipment at the considerations stated in the SPAs; (4) even if other buyer could be found, it was uncertain if the equipment located at the outlets could be delivered to the buyer, it appeared to this Court that the only way to protect Physical BVI and the Subsidiaries was to appoint provisional liquidators over Physical BVI to take charge of the sale process and to receive all the sale proceeds payable under the SPAs pending further investigations on the ownership of the equipment and allocation of the sale proceeds to the Subsidiaries.

17.  To ensure that the SPAs could proceed to completion, this Court invited Mr Luk (who is a director of each of the Subsidiaries) to give under an undertaking to procure the Subsidiaries to sign the respective SPAs and to authorise the execution of the SPAs which concern them within 14 days.  Upon taking instructions, Mr Fong confirmed to the court that he had instructions from Mr Luk to give such undertaking (“Luk’s Undertaking”). 

18.  Upon accepting Luk’s Undertaking, this Court ordered, inter alia, that:

  (1)     Mr Yuen Tsz Chun (“Mr Yuen”) and Ms Chan Hoi Yan, both of Frank Forensic and Corporate Recovery Limited, be appointed as joint and several provisional liquidators (“PLs”) of Physical BVI until further order of the court.

  (2)     The sale proceeds payable to the Subsidiaries under the SPAs shall be received by the PLs pending determination of the allocation of the sale proceeds between the Subsidiaries, Physical BVI and Mr Luk.

19.  The hearing of the petition in HCCW 627 originally fixed for 26 February 2025 before a Master was brought forward to be heard before this Court on 27 January 2025 at 9:30am (“27 Jan Hearing”). 

C.     Petition in HCCW 629 (Physical HK)

20.  At the first hearing of the petition in HCCW 629 on 20 January 2025:

(1)     The 629 Petitioners sought an immediate winding-up order.  Physical HK sought a 2-month adjournment on the ground that the debts owed to the 629 Petitioners can be repaid upon completion of the SPAs.

(2)     However, for the reasons explained in §§15-16 above, there was no evidence to suggest that Physical BVI was entitled to receive any sale proceeds payable under the SPAs.  Nor was there any evidence to suggest that Physical HK was entitled to receive any sale proceeds under the SPAs.  That being the position, there is no valid ground in opposition to the petition.

(3)     Upon the undertaking of the Company and Mr Luk through Mr Fong that they are willing to cooperate with the PLs and will give up control and management of all the subsidiaries of the Company if so requested by the PLs, this Court adjourned the petition in HCCW 629 to be heard together with the petition in HCCW 627. The PLs were directed to attend the 27 Jan Hearing to update the court about the financial position of the Companies, compliance with Luk’s Undertaking and the status of the SPAs.

D.     Hearing on 27 January 2025

21.  At the 27 Jan Hearing, the Companies did not oppose the petitions in HCCW 627 and HCCW 629.  As regards compliance with Luk’s Undertakings, Mr Fong reported that:

  (1)     The Subsidiaries had executed the relevant board resolutions authorising Mr Luk to execute the SPAs.

  (2)     Mr Luk had, on behalf of each of the Subsidiaries, executed a deed of undertaking stating that the Subsidiaries are willing to be joined as parties to the SPAs and they will cooperate with Physical BVI and Mr Luk in the execution of the SPAs (“Deed of Undertaking”).

22.  Mr Fong invited the court to release Mr Luk from his undertaking to procure the Subsidiaries to sign the respective SPAs on the grounds that:

  (1)     The purchasers (Fameglow and Per Fit) could not be reached, and execution of a supplemental agreement requires their cooperation. 

  (2)     Mr Luk already gave a further undertaking on 20 January 2025 to cooperate with the PLs and give up control and management of all subsidiaries of the Company if so requested by the PLs.  This, coupled with the Deed of Undertaking and the board resolutions executed (as summarised in §21 above), should be sufficient to ensure that the Subsidiaries would complete the sale under the SPAs. 

  (3)     Mr Luk had been cooperative with the PLs and has attended an interview with the PLs on 24 January 2025.

23.  I do not think that it is appropriate to release Mr Luk from his undertaking at this juncture.  While the court can discharge an undertaking if there are material changes of circumstances, such change must have been unforeseeable at the time when the undertaking was given and which makes compliance not feasible (Chan Wai Lung v Lee Shu Yen [2024] HKCFI 2664 at §§21-22, per DHCJ Le Pichon). 

24.  None of the grounds identified by Mr Fong amounts to  unforeseeable change of circumstances.  It is difficult to accept the assertion that Mr Luk was unable to reach the purchasers, who must have been well known to him or else he would not have caused the SPAs to be entered into and received the deposit from the purchasers.  In any event, any potential difficulties in reaching the purchasers must have been known to Mr Luk when he offered his undertaking on 15 January 2025.  His subsequent additional undertaking and cooperation with PLs are not circumstances which render compliance not feasible.

25.  Mr Yuen, one of the PLs, attended the 27 Jan Hearing as directed and provided information in relation to the financial affairs of Physical BVI and its subsidiaries.[6]

26.  In respect of the status of the SPAs, Mr Yuen reported that:

  (1)     The PLs had sent letters to the purchasers but have yet to receive any response. 

  (2)     At the first interview with Mr Luk on 24 January 2025, Mr Luk confirmed that he had received HK$15 million pursuant to the SPAs and he agreed to return the sum to the PLs, subject to deduction of some expenses the amount of which would be confirmed. 

  (3)     The PLs attended the locations mentioned in the SPAs, some of which had resumed operation albeit the identity of the operators was not known to the PLs.

27.  In respect of Physical HK, Mr Yuen considered that it is both cashflow and balance sheet insolvent.  According to the table complied by Mr Yuen:

  (1)     Physical HK’s statement of financial position as at 31 December 2023 shows that, after the adjustments made by the PLs, it has total assets of HK$2,162,815 and total liabilities of HK$61,879,239:

Non-current assets	(in HK$)
Property, plant and equipment	407,842
Right-of-use assets	7,354,319
Non-current portion of contract costs	1,809,540
Current assets
Inventories	77,000
Trade and other receivables	128,749,781
Current portion of contract costs	490,910
Bank balances and cash	1,230,228
Total assets	140,119,620
Adjusted Total Assets	2,162,815
Current liabilities
Trade and other payables	2,085,370
Bank overdrafts	13,403
Lease liabilities	4,431,198
Bank borrowings, secured	27,290,932
Current portion of contract liabilities	2,271,064
Provision for reinstatement costs	4,450,624
Non-current liabilities
Lease liabilities	3,258,019
Non-current portion of contract liabilities	17,460,739
Provision for reinstatement costs	617,890
Total liabilities	61,879,239
Adjusted Total Liabilities	61,879,239
Adjusted NAV	(59,716,424)

  (2)     The total assets were adjusted by the PLs from HK$140,119,620 to HK$2,162,815 to account for assets which could not be realised upon liquidation based on their discussion with the Group’s accountant.  As regards liabilities, the most substantial items are bank borrowings and contract liabilities, the latter are advance payments made by the customers.  Since the adjusted total liabilities greatly exceed the adjusted total assets, Physical HK is balance sheet insolvent.

28.  Ms Cheung, counsel for the 629 Petitioners, adds that the amount of adjusted total liabilities as at 31 December 2023 referred to in §27(1) above has not taken into account the sum HK$74,552,388.83 plus interest owed to the 629 Petitioners and 367 former employees.

29.  In respect of Physical BVI, Mr Yuen reported that:

(1)     Physical BVI’s only assets comprise loans due from subsidiaries and related parties.  The balance sheet of Physical BVI provided by the Group’s accountant shows the following:

	Period ended 5 September 2024 (in HK$)	Period ended 31 December 2023 (in HK$)
Interest in subsidiaries[7]
Amount due from Mr Luk	233,748,702.55	280,159,274.33
Amount due from related companies	132,182,498.57	125,998,996.16
Amount due from subsidiaries	368,853,963.84	375,032,897.25
	734,785,164.66	781,191,167.74
Current liabilities
Other payables	31,666,950.00	0.00
Amount due to subsidiaries	799,218,124.79	877,271,375.87
Net current assets	830,885,074.79	877,271,375.87
Net current assets (liabilities)	(96,099,910.13)	(96,080,208.13)
Shareholders’ equity
Share capital	7.74	7.74
Accumulated losses	(96,099,917,87)	(96,080,215.87)
	(96,099,910.13)	(96,080,208.13)

(2)     In addition, according to the profit and loss account provided by the Group’s accountant, Physical BVI’s accumulated losses carried forward amounted to HK$96,080,215.87 and HK$96,099,917.87 as at 31 December 2023 and 5 September 2024 respectively. 

30.  Likewise, each of Physical BVI’s subsidiaries is balance sheet insolvent, except Ever Growth Limited, which is a property-holding company:[8]

Subsidiary	Adjusted Total Assets (HK$)	Adjusted Total Liabilities (HK$)	Adjusted NAV (HK$)
Physical Health Centre (Tsuen Wan) Limited	402,049	125,692,668	(125,290,619)
Physical Health Centre (Shatin) Limited	5,282,878	205,573,394	(200,290,516)
Physical Beauty Centre (Central) Limited	8,248,682	303,885,784	(295,637,102)
Physical Health (TST) Limited	7,770,372	642,220,160	(634,449,788)
Physical Health Centre (Tuen Mun) Limited	541,824	128,821,519	(128,279,695)
Physical Health Centre (E House) Limited	1,377,198	244,798,723	(243,421,525)
Physical Beauty Centre (Yuen Long) Limited	1,529,750	132,399,978	(130,870,228)
Physical Health Centre (Kornhill) Limited	963,518	6,308,629	(5,345,112)
Supreme Resources Limited	73,148	123,663,819	(123,590,671)
Ever Growth Limited	3,251,189	5,000	3,246,189

31.  For the reasons set out above, the Companies are clearly insolvent.  The 627 Petitioner and the 629 Petitioners are entitled to seek a usual winding-up order against Physical BVI and Physical HK respectively.

E.     Regulating order

32.  At the 27 Jan Hearing, the OR indicated that she intended to apply for a regulating order under ss.227A and 227B of the CWUMPO to inter alia appoint the PLs as liquidators of Physical HK.  The 629 Petitioners and the Supporting Creditors confirmed that they are neutral to the OR’s intended application.  I directed that the OR to file the application as soon as practicable. 

33.  The OR duly took out an ex parte summons on 28 January 2025 (“OR’s Summons”) whereupon a regulating order was made on the same day for the following reasons:

(1) Since their appointment on 15 January 2025, the PLs have taken control over Physical BVI and some of its subsidiaries and made prompt investigation into their financial affairs.  It is both time and costs effective to appoint the PLs as liquidators of Physical HK forthwith so that they can continue with their investigation.

(2) The OR is satisfied that the PLs are fit and proper persons to act as liquidators of Physical HK.

(3) The OR has sought the view of inter alia the 629 Petitioners and the Supporting Creditors, who have no objection to the proposed appointment.

(4) It is unnecessary to seek the view of other creditors on the nomination of liquidators as the view of the 629 Petitioners and the Supporting Creditors will likely prevail at any creditors’ meeting given the size of their claims.