RE DIYON DEVELOPMENT LTD

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

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D E C I S I O N

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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.