FUNG CHUEN v. SANDMARTIN INTERNATIONAL HOLDINGS LTD AND OTHERS

HCCW 207/2017

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) PROCEEDINGS NO. 207 OF 2017

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D E C I S I O N

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1.  This is the Company’s application for a validation order. Such application is normally required when a company is faced with a winding up Petition.

2.  The law is quite clear that in an application of this type the court is primarily concerned with the solvency of the company, and if it is solvent then it should normally be allowed to continue with its business operation pending the determination of the Petition.  This type of application is not to be treated as an adversarial one by the Petitioner.

3.  Regrettably, this is precisely what happened in this case.  There are 5 full size bundles of papers for this hearing, and the Petitioner’s skeleton arguments run to 25 pages taking every conceivable point.

4.  The burden which such an approach creates for the court is quite impossible and inappropriate.  This type of application is required to be dealt with speedily and is generally fixed for a 30 minute hearing at 9:30 am.

5.  Normally, the court will have another hearing at 10:00 am.  It is quite impossible to deal with 2 fully contested applications in a single day.  The court will be put in an invidious position in that adjourning a validation order application is highly damaging to a continuing business, and doing so will tend to play into the hands of the Petitioner. This kind of approach must be discouraged.  If there is no serious argument on the solvency of the company, the Petition should expect to be penalised on costs.

6.  I do not believe that the Company is insolvent notwithstanding the arguments advanced by the Petitioner.

7.  First and foremost, there is clear evidence from the management that the Company is solvent.  Plainly, the court is in no position to reject the evidence unless it can be demonstrated that the evidence is clearly wrong. This is not the present case.

8.  Secondly, the Petitioner’s arguments on the solvency of the Company are based primarily on the Financial Statements of the Company for the years 2015 and 2016.  They ignore the sum of HK$220 million (Funds) raised by the Company recently via an Open Offer.

9.  Thirdly, although the Petitioner is deeply unhappy about the Open Offer and has made various allegations in respect of the same in the Petition, these are not matters which the court can resolve at this stage.  However, I do not believe that it is sensible for the Funds to be ignored in the consideration of the Company’s solvency as argued by the Petitioner.  The fact of the matter is that the Open Offer was approved on 15 June 2017, and the filing of the Petition about two weeks later was clearly designed to disrupt or destroy the fund raising exercise.

10.  Further, much of the Funds had been used to repay bank loans to improve the balance sheet of the Company, and there is a balance of about HK$82 million kept in liquid form to fund the operation of the Company.

11.  It is common ground that the Funds were raised to ease the liquidity problem of the Company.  I am unable to see, at this stage, why the court should proceed on the basis that the share subscription transactions under the Open Offer will somehow be unwound after the hearing of the Petition.

12.  I am satisfied on the evidence that the Company is solvent.

13.  On the Petitioner’s argument that the continuation of business by the Company will only deplete its assets and therefore not beneficial to the people interested in its assets, I am unable to agree.

14.  Firstly, it is not for the court to second-guess the judgment of the management to the contrary.  I bear in mind in particular that the allegation that the management is seeking to line their own pockets whilst depleting the Company’s assets has been denied.

15.  Secondly, I agree with the Company that it is not entirely fair to judge the performance of the Company by looking at the losses made in recent years when it has been investing very substantially to change its business model due to variation in market requirements.  The business of the Company was profitable during 2003 to 2012 before such change.

16.  Thirdly, the significant loss suffered in recent years by reason of the investments would be thrown down the drain if the Company is not allowed to continue its operation.  I am unable to see how that can be beneficial to those interested in the Company’s assets.

17.  For these reasons, I allow the application.  I will hear the parties on the terms of relief and costs.