RE COSMOS MANOR DEVELOPMENT LTD

HCCW 894/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 894 OF 2003

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REASONS FOR JUDGMENT

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1. This is a creditor's petition presented against Cosmos Manor Development Limited ("the Company") by Friendo Incorporated, based on a judgment debt of HK$28,125.00. Of this amount, HK$500.00 are costs awarded against the Company in favour of the petitioner by an order made by Master Lung on 6 June 2003 in HCA No. 1661 of 2003. The remaining sum of HK$27,625.00 is the amount of costs awarded against the Company in favour of the petitioner by the order of Master J Wong made on 11 June 2003 in HCA No. 1524 of 2003. A demand for the debt of HK$28,125.00 was served by the petitioner on the Company on 19 June 2003. The petition herein was presented on 15 August 2003. There is one supporting creditor, Gold-Inc Limited ("Gold-Inc"). The debt owed by the Company to Gold-Inc is in the sum of HK$86,656.00. This debt was previously owed by the Company to the petitioner under an allocatur dated 17 October 2003 in DCDT No. 2506 of 2003 and it has been assigned by the petitioner in favour of Gold-Inc by a deed of assignment dated 27 October 2003 with notice of the same having been given to the Company.

2. At the first hearing of the petition before me on 3 November 2003, I adjourned the petition and gave directions for Gold-Inc, the Company and the petitioner to file evidence. It was alleged by the Company at that time that the petitioner's assignment of the debt to Gold-Inc on 27 October 2003 was for an ulterior purpose, namely, to forestall any argument that might be raised by the Company against the petitioner for a set-off or a cross-claim.

3. I do not think it necessary to consider whether the petitioner's assignment of the debt to Gold-Inc in the distraint proceedings was for the ulterior purpose as alleged by the Company or at all. For present purpose, I would assume in favour of the Company that notwithstanding the assignment, the Company could still raise a set-off or cross-claim against the petitioner to resist the petition, provided of course that the set-off or cross-claim is genuine and valid.

4. I turn to consider the alleged set-off or cross-claim. This is raised by the Company as a counterclaim in HCA No. 1661 of 2003. The writ therein was issued by the petitioner against the Company on 10 May 2003, claiming vacant possession of the property leased by the petitioner to the Company, outstanding rent for the period from 21 April 2003 to 20 May 2003 at the rate of HK$862,500.00 a month, mesne profit in respect of the property at the rate of HK$862,500.00 per month from 21 May 2003 until the delivery up of vacant possession, and damages to be assessed. A defence and counterclaim was filed by the Company on 20 June 2003.

5. In summary, it is alleged by the Company that it was not liable to pay rent at the rate of HK$862,500.00 a month after 20 November 2001, as the tenancy agreement had been varied or modified by subsequent agreements. It is contended that notwithstanding the Company would still have the obligation to pay rent at HK$862,500.00 per month payable in advance, it was agreed that for the period from 21 November 2001 to 20 November 2002 the petitioner should pay the Company monthly allowances of HK$277,500.00 before the expiry of each month. In respect of the period from 21 November 2002 to 20 November 2004, the rent should be subject to a monthly deduction calculated on the basis of the monthly gross income of the restaurant operated on the premises and that during this period the petitioner should refund to the Company every month "provisional deductions" of HK$277,500.00 per month from 21 November 2002 to 20 February 2003, HK$345,000.00 per month from 21 February 2003 to 20 November 2003, and HK$430,000.00 per month from 21 November 2003 to 20 November 2004. The provisional deductions would be adjusted upon receipt of the financial statements provided by the Company to the petitioner.

6. It is further alleged by the Company that in breach of the tenancy agreement as varied, the petitioner had failed to pay the Company the provisional deductions of HK$345,000.00 from 21 February 2003 to 20 March 2003. In the counterclaim, the Company claims specific performance of the tenancy agreement as varied. In the alternative, the Company counterclaims HK$4,015,000.00 as ascertained damages and further damages for loss of profits to be assessed for repudiatory breach of the tenancy agreement as varied. The amount of HK$4,015,000.00 is made up of HK$1.6 million (being the expenses incurred by the Company in decorating the property after an agreement was made to vary the tenancy agreement), the provisional deduction for February 2003 to March 2003 of HK$345,000.00, and HK$2,070,000.00 being rental deposit. Further, the Company claims loss and damages being the cost of furniture, appliances, utensils and linen in the sum of HK$1.3 million, alleging that the distress levied by the petitioner on 21 May 2003 for outstanding rent of HK$3,450,000.00 for the period from 21 December 2002 to 20 April 2003 was wrongful.

7. The petitioner applied for summary judgment against the Company. Master Scott made an order on 5 August 2003 (varied by his order on 11 August 2003) that vacant possession of the property is to be delivered up to the petitioner at the expiration of 28 days from the date of his order unless within the said period, the Company was to pay into court all of the rent in arrears in the sum of HK$3,450,000.00. The Company was given leave to defend the remainder of the petitioner's claim on condition that it was to pay into court HK$517,500.00 within 14 days of the order.

8. The Company lodged an appeal against the orders of Master Scott. The appeal was dismissed by Recorder J Leong, SC on 10 November 2003. In her judgment, the Recorder considered the case raised by the Company in its defence and counterclaim in some detail. She was clearly not satisfied with the genuineness of the Company's case. She did not accept there was any structured scheme for calculation of the allowances or deductions based on the Company's profits as alleged and was satisfied that the Company had failed to pay rent for the period from 21 December 2002 to 20 April 2003. In any event, there was no dispute that the Company had failed to pay rent for the period from 21 April 2003 to 20 May 2003. The Recorder had gone into the supporting documents produced by the petitioner to substantiate its case that rental payments were consistently tendered late. In contrast, the Company had merely responded with a bare assertion but had declined to adduce appropriate evidence in rebuttal on affirmation.

9. There is no appeal against the judgment of Recorder Leong, SC. Further, on 23 October 2003, Master K Wong made an order requiring the Company to furnish HK$48,000.00 as security for the petitioner's costs in the counterclaim in HCA No. 1661 of 2003 up to the stage of mutual discovery. No security for costs has been provided and the counterclaim in that action has since been stayed.

10. I should also mention that on 27 November 2003, default having been made in payment into court by the Company as ordered by Master Scott on 5 August 2003, the petitioner has entered judgment against the Company in HCA No. 1661 of 2003 for HK$862,500.00 and mesne profits at the rate of the same amount per month from 21 May 2003 until the delivery up of vacant possession. I understand that the debt of the Company under this judgment is in excess of HK$6 million and vacant possession has not been delivered to date.

11. The Company has also issued a writ against the petitioner in HCA No. 1524 of 2003 on 29 April 2003, claiming the same reliefs as in its counterclaim in HCA No. 1661 of 2003. The petitioner applied to strike out the Company's statement of claim in that action on the ground that it discloses no reasonable cause of action against the petitioner. In the course of the hearing on 11 June 2003, it was conceded by the Company that the statement of claim was defective and the Company sought leave to amend the pleading. A summons was issued by the Company on 12 June 2003 to amend the statement of claim. This was opposed by the petitioner so the summons was adjourned on 16 June 2003 to a date to be fixed for argument. However, the Company has not since proceeded with its application for amendment and the matter has been left in abeyance.

12. For the above reasons, I am satisfied that the Company does not have any valid or genuine set-off or counterclaim against the petitioner and that the Company is unable to pay its debts. I have therefore ordered the Company to be wound up and that the petitioner's costs and the supporting creditor's costs are to be paid out of the Company's assets.