RE INTCO INTERNATIONAL (HK) CO LTD

HCCW 240/2014

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO 240 of 2014

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DECISION
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1.  I have before me an Amended Petition originally issued on 28 August 2014 seeking a winding up of the company on the grounds of insolvency. In order to prove the insolvency the Petitioner relies on a statutory demand that was served on the company on or about 12 May 2014. The debt relied on is in the sum of US$42,357.52.

2.  The debt arose in the following circumstances. The Company is incorporated in Hong Kong. It carries on a recycling business in the Mainland with a specialism in expanded polystyrene (“EPS”).  The  Company manufactures and sells compactors and desensifiers, recycling machines and systems. The Company purchases compressed EPS scrap and reuses it to make frame products. The Petitioner is an English company. It supplies EPS.

3.  On 13 September 2013 the Company prepared a purchase order for EPS.  The purchase order contains details of the quantities of EPS to be purchased, shipment and payment, which was on presentation of specified documents.   The purchase order does not deal with the quality of the EPS or provide any means for determining whether or not it was of an acceptable quality or how, in the event of dispute, the Parties would determine whether or not the quality was satisfactory.  The purchase order seems to envisage that the EPS, which was scrap material, might be of variable quality.  Clause 5 provides “The quality of material shipped to buyer must be as the same as the pre-loading photos of this shipment approved by buyer. If the quality is much worse after the material arrives at the factory, the seller has to pay penalty. Penalty percentage should be calculated in this way: unqualified material weight/total weight equals penalty amount/total amount.”  The purchase order was countersigned by the Petitioner on 13 September 2013.

4.  At roughly the same time the Petitioner prepared a sales contract reference MONO2729. It also contains terms dealing with quantity, shipment and payment, which are consistent with the purchase order. Like the purchase order it does not deal with the quality characteristics of the EPS.  However, it contains the following provision "we will not entertain claims for any quality reasons regarding the above containers loaded at our site. For your satisfaction you have the option to send a representative at the time of loading. Material is as per photos/as per previous supply." The Company signed the sales contract on 13 September 2013.  Neither Party has filed any evidence explaining whether any photographs were sent and the quality as revealed by them accepted by the Company.

5.  What is apparent from these 2 documents is that the material was low value: US$844 per metric ton.  Although there is no evidence about it, it seems reasonable to assume that it was not worth while the Parties spending significant sums testing the EPS.  The Company would appear to have envisaged that some batches of EPS would have quality issues and that this should be dealt with robustly by reducing the price by the proportion by weight of the batch which was sub‑standard.  As the dispute between the Parties demonstrates this was most likely to arise because the batches of EPS contained excessive amounts of foreign material like wood and paper.

6.  The EPS purchased pursuant to this order were not the first orders that had been placed by the Company with the Petitioner. On 14 October 2013 the company sent an e-mail to the Petitioner attaching photographs and recording that the quality of two particular consignments of EPS were bad and unusable by its factory.  This email was sent as a result of inspections carried out on the EPS by its technical department.  There ensued an exchange of emails discussing the issue, which lasted until 24 October 2013.  Towards the end of this period the Petitioner offered to take back the EPS if it was still in containers, but when it transpired it was not it withdrew the offer.  It would appear that there were telephone conversations around the same period but details of what was discussed is not explained in the evidence.  What is clear is that the Company did not pay two invoices, numbers 3049 and 3053, submitted by the Petitioner in respect of the EPS supplied pursuant to the purchase order and sales contract signed on 13 September 2013. In addition the company failed to pay a further invoice number 3038 which is for only US$90.

7.  There is no evidence of the Petitioner making any complaints about this between late October 2013 and April 2014.  On 23 April 2014 Serena Zhang of the Company sent an email asking if there was “any new available EPS loads?”.  There followed an exchange of emails that lasted the rest of the year in which Ms. Zhang asserted that as she had explained (it would appear in telephone conversations about which there is no evidence) that as far as the Company was concerned it owed nothing for EPS delivered in 2013, presumably on the basis that it has received defective material, and she was interested in starting afresh in 2014 with new orders. The Petitioner disputed the Company’s position and said it would not sell any more EPS until the outstanding invoices were settled.

8.  What the Company did not do is to provide the internal inspection reports its technical department had prepared in October 2013 following its tests on the EPS supplied by the Petitioner.  This has been exhibited by the Company to the affirmation of Shen Hong in opposition to the Petition.  Although these test reports are not signed it seems to me that on their face they were prepared in October 2013 and sent by the technical department to members of the Company’s other departments by email with on some occasions supporting photographs to illustrate the principal problem that appears to have been the presence of large pieces of wood and paper in the batches which made it difficult or impracticable to process them.  Although the Petitioner has taken various forensic points about the reports I can see no reason not to treat them as genuine and recording reasons why the technical department thought that the EPS was substandard.

9.  In its evidence filed in these proceedings the Company has also contended that it has other reasons for not paying these invoices. First, costs incurred as a result of the Petitioner's delay in obtaining China Certification and Inspection Certificates. Secondly, the cost of repairing damage done to one of its machines as a consequence of one of the batches of EPS containing a screw. Thirdly storage costs incurred in respect of substandard EPS which the Company asked the Petitioner to collect but which it refused to do. These various claims total in excess of the debt.

10.  It is not in dispute that in order successfully to oppose the Petition it is necessary for the Company to establish that it has a bona fide defence on substantial grounds to the Debt.  I explain more fully what this involves in my recent judgment in Yueshou Environmental Holdings Ltd [1]. In paragraph 8 I say this:

“8. It is well established that a winding-up Petition should only be issued if a creditor is clearly owed a liquidated sum and the debtor company does not have any valid ground for refusing payment. If the company has a bona fide defence on substantial grounds to the debt a petition should not be brought and if the court concludes either on the hearing of a strike out application or on the hearing of the petition that the company does have such a defence, the Petition will be dismissed. Many cases consider what constitutes a bona fide defence on substantial grounds and how the court should approach determining whether such a defence has been demonstrated. I will cite three commonly cited authorities which together explain the established principles.

(1) The onus is on the Company to show that it disputes the debt on substantial grounds:

‘Importantly for this case there is a distinction between a consideration of whether the company has established a defence on substantial grounds and a consideration of whether the evidence is believable. Taken to the ultimate, the difference is between whether there is evidence and whether that evidence is believable. It seems to me that the onus must be on the company against which a petition is presented to adduce sufficiently precise factual evidence to satisfy the court it has a bona fide dispute on substantial grounds.’

Re ICS Computer Distribution Ltd [1996] 3 HKC, 440 at 444B

(2) I have to be satisfied that the Company’s assertions are believable. The test

‘... is indeed as simple as whether the defendant’s assertions are believable. But it must be recognised – because failure to recognise it would create a debt‑dodgers’ charter – that whether the defendant’s assertions are believable is a question to be answered not by taking those assertions in isolation but rather by taking them in the context of so much of the background as is either undisputed or beyond reasonable dispute.’

Re Safe Rich Industries Ltd (Unreported) CA 81/94, 3 November 1994, Bokhary JA, §13

(3) The relevant principles were summarised as follows by Kwan J (as she then was) at paragraph 6 of her Ladyship’s judgment in Re Hong Kong Construction (Works) Limited (unreported) HCCW 670/2002, 7 January 2003:

‘(1) The burden is on the company to establish that there is a genuine dispute of the debt on substantial grounds. In this context, “substantial” means having substance and not frivolous. An honest belief in an insubstantial ground of defence is not sufficient to avoid a winding-up order.

(2) The court should look at the company’s evidence against so much of the background and evidence that is not disputed or not capable of being disputed in good faith; in other words, the evidence is not to be approached with a wholly uncritical eye.

(3) The court would caution itself against unsubstantiated and unparticularised assertions, especially where particulars and information have been sought by the other side. It is incumbent on the company to put forward “sufficiently precise factual evidence” to substantiate its allegations.

(4) The court does not try the dispute on affidavit but is to determine whether a substantial dispute exists. In so doing, the court necessarily has to take a view on the evidence, to see if the company is merely “raising a cloud of objections on affidavits” or whether there really is substance in the dispute raised by the company. Even where the company has obtained unconditional leave to defend in an application for summary judgment, the Companies Court is not precluded from examining the evidence and taking a view on whether the debt is disputed on substantial grounds.’ ”

11.  It seems to me clear from the evidence that has been filed by the Company that there is a substantial dispute on bona fide grounds concerning the quality of the EPS that was supplied by the Petitioner and the deductions that have to be made from the price to take into account such defects as can be established and any additional claims that the Company may have.  The Company raised its concerns promptly and documented them.  The Petitioner has raised various counter‑arguments in respect of the Company’s complaints, but it seems to me that they simply demonstrate that there is a dispute between the Parties that needs to be resolved in a writ action.  As I have explained most recently in paragraphs 4 to 7 Alpha Building Construction Limited [2] the winding up procedure should be used where any asserted defence is fairly obviously insubstantial and unmeritorious.  In my view it is readily apparent from reading the contemporaneous documents that the dispute about the quality of the EPS does not fall into this category.

12.  However, the matter does not end there.  The Petitioner argues, in addition to disputing the complaints about the quality of the EPS, that the Company is not entitled to make any claims in respect of the quality of the EPS because of the exclusion clause contained in the sales contract which I have quoted earlier.  In my view there are a number of difficulties with this argument, which make it unsuitable for determination on the hearing of a winding-up petition.

13.  Both the relevant purchase order and sales contract appear to have been signed by the Party accepting them on the 13 September 2013.  Both are of similar length and degree of formality.  Both contain all the essential terms of the order.  Both appear to be intended to record the terms of an agreement between the Petitioner and the Company for the sale and purchase of EPS scrap.

14.  The Petitioner’s case assumes that it was intended that the sales contract superseded the purchase order, although there is no evidence as to which was signed by the accepting party last.  The Petitioner’s basis for making that assumption is the inclusion on the top of the document prepared by the Petitioner in small script of the words “SALES CONTRACT”.  The Company’s case is that both agreements were intended to record the agreement between the parties and what appears to have happened is that neither of them gave any thought to the consequences of them signing 2 different documents.  It seems to me that this is a plausible explanation for what occurred.  It is common for businessman to sign documents without carefully considering their terms and effect: indeed it is a rich source of work for litigation lawyers.

15.  In order to determine whether the Parties’ agreement contained the exclusion clause (and I am assuming that it would cover the Company’s claims) it is necessary to consider the history of the dealings between the Parties to try and glean whether or not both Parties intended the document headed sales contract (previous sales contracts and purchase orders had been signed in respect of earlier orders) to supersede the purchase order and, if it did not, whether the lack of certainty as to the agreed terms results in the exclusion clause being ineffective to exclude liability.  There is not enough evidence before me to determine that issue.

16.  In my view the Company has shown a bona fide dispute on substantial grounds and I will dismiss the Petition.  As the inspection reports were not provided until late in the proceedings (the Company did not attempt to defend the Petition until it first came on before me) I will order that there be no order as to costs up to 15 December 2014 and that the costs thereafter are paid by the Petitioner.

17.  There is one final matter I would mention. Ignoring back sheets the affirmations filed by both Parties are only 23 pages in length.  As is apparent from my reasons various matters that should have been dealt with in evidence have not been dealt with.  However, counsel have between them filed 60 pages of skeleton arguments and 33 authorities.  This is not helpful.  What the court requires, apart from the necessary evidence, are submissions that identify the critical issues, address them succinctly and avoid over citation of authorities.