RE CARRIAN HOLDINGS LTD

Headnote

Summons by Miramar Hotel & Investment Company Limited and others to commence proceedings against Carrian Holdings Limited notwithstanding an order to wind up - cross summons by the joint liquidators of Carrian Holdings Limited to disclaim the property of the company the subject matter of the action on the grounds that it is an unprofitable contract - indemnity offered by Miramar not accepted by the joint liquidators - in view of the indemnity offered and the likelihood of serious prejudice that may be caused to Miramar by depriving it of its right of action application for disclaimer refused and order made for leave to commence proceedings.

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JUDGMENT

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1. By a sale and purchase agreement dated the 4th August 1981 Beaux Estates Limited (Beaux) agreed to purchase from Miramar Hotel & Investment Company Limited (Miramar) a plot of land occupied by the old wing of the Miramar Hotel for the sum of HK$2,800 million. A deposit of 15% was paid on the 4th August 1981, and a further 18% on the 4th February 1982. The payments were made from monies advanced to Beaux by its holding company Armatys Estates Limited (Armatys) who in turn received advances from their shareholders, Snowbright Company Limited (S.C.L.), Gwynedd Investments Limited (G.W.I.L.), Miramar and Wise Maneon Investment Limited (Wise) in proportion to their beneficial shareholding. The balance of HK$1,876 million was due to be paid on completion which was to be on or before the 4th May 1983. However, by a subsequent agreement completion was deferred until the 4th May 1984. By the sale and purchase agreement it was provided that Miramar would arrange to finance payment of the balance under a mortgage over a period of three years.

2. On the 11th November 1982 a joint venture agreement was entered into between S.C.L., G.W.I.L., Chaintower Company Limited (Chaintower), Wise, The Hong Kong Land Company Limited (Hong Kong Land), Armatys and Beaux. S.C.L. is a wholly owned subsidiary of Carrian Investments Limited (C.I.L.) which in turn is a subsidiary of Carrian Holdings Limited (C.H.L.). G.W.I.L. is a wholly owned subsidiary of Hong Kong Land whilst Chaintower and Wise are wholly owned subsidiaries of Miramar.

3. By the joint venture agreement the shareholders in Armatys ratified and adopted their rights and obligations in respect of the sale and purchase agreement. The monies loaned by the shareholders were to be unsecured and repayment was to be deferred to all building costs and third party borrowings. On the same date as the joint venture agreement Hong Kong Land, C.I.L. and Miramar entered into a guarantee for their respective subsidiaries obligations under that agreement.

4. On about the 3rd September 1983 C.H.L. acquired 15,000 shares at Hk$1.00 each from G.W.I.L. in the capital of Armatys. The shares were registered on the 21st September 1983. By a Deed of Accession dated the 21st September 1983 C.H.L. entered into an agreement with the original parties to the joint venture agreement to be bound by the terms of the agreement. After the Deed of Accession had been executed the shareholders in Armatys and their respective proportions were as follows:-

5. A petition to wind up C.H.L. was presented on the 10th October 1983 and a winding up order was made on the 7th November 1983.

6. The validity of the transfer of the shares in Armatys from G.W.I.L. to C.H.L. was challenged in the High Court in an action by Miramar, Chaintower and Wise against C.H.L., S.C.L.,  Hong Kong Land, G.W.I.L. and Armatys, but it was held to be valid by Rhind J. in a judgment delivered on the 28th February 1984. C.H.L. took no part in these proceedings.

7. A second action was commenced by Miramar, and its two subsidiaries against the same parties on the 12th April 1984 claiming inter alia damages for breach of the joint venture agreement and specific performance. A defence has been filed by each of the defendants except C.H.L. The gist of the defence is that the joint venture agreement has been terminated and the guarantee discharged, or in the alternative has been frustrated. I am told that the action is likely to be heard in October 1985. A separate action has been instituted by Miramar against Beaux.

8. There are before me two summonses. The first issued by Miramar, Chaintower and wise is an application for an order to commence proceedings against C.H.L. in the second action notwithstanding the order to wind up, The second issued by the joint liquidators of C.H.L. seeks leave pursuant to Section 268 of the Companies Ordinance to disclaim the following property of the company:-

"(1)	15,000 shares of HK$1,00 each in ARMATYS ESTATES LIMITED, which shares were registered in the name of he Company on the 21st September 1983; and
(2)	The Deed of Accession dated the 21st September 1983 whereby the Company covenanted and undertook to be bound by the terms of an Agreement dated the 11th November 1982 ("the Joint Venture Agreement"); and
(3)	The Joint Venture Agreement;"

9. The relevant parts of Section 268 read as follows:-

"(1) Where any part of the property of a company which is being wound up consists of land of any tenure burdened with onerous covenants, of shares or stock in companies, of unprofitable contracts, or of any other property that is unsaleable, or not readily saleable, by reason of its binding the possessor thereof to the performance of any onerous act, or to the payment of any sum of money, the liquidator of the company notwithstanding that he has endeavoured to sell or has taken possession of the property, or exercised any act of ownership in relation thereto, may, with the leave of the court and subject to the provisions of this section, by writing signed by him, at any time within 12 months after the commencement of the winding up or such extended period as may be allowed by the court, disclaim the property:

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(2) The disclaimer shall operate to determine, as from the date of disclaimer, the rights, interest,and liabilities of the company, and the property of the company, in or in respect of the property disclaimed, but shall not, except so far as is necessary for the purpose of releasing the company and the property of the company from liability, affect the rights or liabilities of any other person

(3) The court, before or on granting leave to disclaim, may require such notices to be given to persons interested, and impose such terms as a condition of granting leave, and make such other order in the matter as the court thinks just.

(4) .....................................................................

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(5) ...................................................................

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(6) The court may, on an application by any person who either claims any interest in any disclaimed property or is under any liability not discharged by this Ordinance in respect of any disclaimed property and on hearing any such persons as it thinks fit, make an order for the vesting of the property in or the delivery of the property to any persons entitled thereto, or to whom it may seem just that the property should be delivered by way of compensation for such liability as aforesaid, or a trustee for him, and on such terms as the court thinks just, and on any such vesting order being made, the property comprised therein shall vest accordingly in the person therein named in that behalf without any conveyance or assignment for the purpose:

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(7) Any person injured by the operation of a disclaimer under this section shall be deemed to be a creditor of the company to the amount of the injury, and may accordingly prove the amount as a debt in the winding up.".

10. Pursuant to directions given by Mayo J. at preliminary hearings the other parties to the second action and Beaux were given notice of the hearing of the summons by the joint liquidators and were invited to file evidence. They were represented at the hearing before me, but took a neutral stance. No evidence was filed on their behalf.

11. I am principally concerned with the summons of the joint liquidators. If it succeeds Miramar's summons must necessarily be dismissed. Miramar can then if they succeed in the action prove in the liquidation under Section 268(7) as a debt for any damages awarded. On the other hand if an order is refused leave should be given to Miramar to commence proceedings

12. Two valuations of the site with vacant possession were made on the 27th March 1984. An estimate of HK$431 million was submitted by Jones Lang Wootton and HK$450 million by Richard Ellis. Accordingly the joint liquidators are of the opinion that the balance of 15% to be contributed by C.H.L. viz. HK$281 million greatly outweighs any long term benefit that may result from participating in the joint venture agreement. Lack of security and postponement to third party borrowing lead the joint liquidators to believe that it is unlikely that any profit will accrue to C.H.L. Miramar and their two subsidiaries oppose the joint liquidators application principally on the ground that they are willing to give a written deed of guarantee.

13. It is contended by the joint liquidators that as Miramar is not a party to the joint venture agreement it is only indirectly concerned with the result that it is not an interested party within the meaning of section 268. Accordingly C.H.L. could not be held liable to Miramar for breach of the joint venture agreement. Further Miramar is not a shareholder in Armatys.

14. However, In re Katherine Et Cie Limited (1932) 1 Ch. 70 it was held that in exercising its discretion the court should take into consideration the injury of persons not directly interested. Maugham J. in his judgment at page 78 had this to say:-

".......... sub-s. 2, of s. 267, tends to show that disclaimer is not intended to affect the rights and liabilities of third persons. In my opinion the Court may properly balance the advantages and disadvantages of a disclaimer to be gained by the liquidator in the liquidation of the assets and by persons affected by the disclaimer.".

I would respectfully follow this authority. Although Miramar is not directly involved as it is not a party to the joint venture agreement it is indirectly involved by virtue of the guarantee. Therefore in my opinion the interests of Miramar should be taken into consideration when exercising my discretion.

15. A further matter in issue is the effect of Clause 5(8) of the joint venture agreement which relates to the consequences that may arise if C.H.L. becomes a defaulting party. Miramar contends that in such event C.H.L. could benefit by receiving the par value of the shares, but the joint liquidators do not share this view. The joint liquidators also consider that a heavy contingent liability could be imposed on C.H.L. under this clause. However, Miramar respond by saying that any potential liability will be covered by the indemnity that has been offered. It was also submitted by Mr. Rattee who appeared for Miramar that if the application to disclaim is granted the disclaimer could be relied upon by Hong Kong Land and G.W.I.L. to support their defence of frustration. This issue and other matters of legal complexity cannot be decided at this stage, but must await determination at the trial.

16. It appears that Miramar is not entitled to a vesting order under section 268(6) for the shares that C.H.L. holds in Armatys as a transfer might be in breach of Article 33 of the Memorandum and Articles of Association and Clause 10 of the joint venture agreement which set out the requirements for the transfer of shares.

17. Miramar has offered an indemnity to the joint liquidators in wide terms the relevant parts of which read as follows:-

"1. In consideration of the provisions of Clause 2 hereof Miramar HEREBY COVENANTS with each of Snowbright CIL and CHL that it Miramar will indemnify each of Snowbright CIL and CHL and the liquidator of each of them from and against all liability which it or he might otherwise be under to any party to the Joint Venture Agreement or the Deed of Accession or the CIL Guarantee or any of them (a) to lend or procure to be lent moneys to Armatys as provided by the Joint Venture Agreement or (b) to indemnify any party to the Joint Venture Agreement for any loss caused by its or his failure to make or procure to be made any such loan to Armatys.

2. In consideration of the provisions of Clause 1 hereof each of Snowbright CIL and CHL acting by such liquidator as aforesaid HEREBY DECLARES that it does and will henceforth hold on trust for Miramar absolutely (a) Subject to the effect (if any) on this declaration of Article 33 of the Articles of Association of Armatys and Clause 10 of the Joint Venture Agreement ALL THOSE shares in Armatys and all interests or rights of any nature in shares in Armatys which it holds or to which it is entitled or which it may hereafter hold or to which it may hereafter become entitled (b) ALL THOSE the indebtedness of Armatys to it and interests or rights of any nature in indebtedness of Armatys to which it now is or may hereafter become entitled (c) ALL THOSE (if any) other rights or interests of any nature against or in Armatys or the assets of Armatys to which it is now or may hereafter become entitled and (d) ALL THOSE (if any) other rights of whatsoever nature to which it may be or become entitled by virtue of the Joint Venture Agreement or the Deed of Accession or the Articles of Association of Armatys or the Miramar Guarantee or the HKL Guarantee.

3. It is hereby expressly declared for the avoidance of doubt that the full force and effect of the provisions of Clause 1 hereof shall not be prejudiced or in any way affected by the effect (if any) of Article 33 of the Articles of Association of Armatys or Clause 10 of the Joint Venture Agreement on the declaration of trust in Clause 2(a) hereof.''

Although the draft deed has been drawn in favour of S.C.L., C.I.L. and C.H.L. Mr. Rattee said that it can be drawn in favour of C.H.L. alone if necessary.

18. The decision that I have to make in this case is the exercise of a discretionary power. There is no doubt upon the evidence before me that the joint liquidators have established that the joint venture agreement has become an unprofitable contract and in ordinary circumstances they would be entitled to an order to disclaim. However, they were offered an indemnity in correspondence on the 12th June 1984 by Miramar's solicitors. No reply was made to this offer nor to subsequent correspondence. In fact in his affidavit of the 28th November 1984 Mr. Stevenson one of the joint liquidators merely says that the offer does not represent a satisfactory alternative to disclaimer, but neither he nor Mr. Sussex in his submission was able to put forward any reason why it is not acceptable. In my opinion it affords adequate protection to the joint liquidators.

19. Whilst it is highly desirable that steps should be taken to proceed as expeditiously as possible with the winding up, the liquidation of C.H.L. is wholly exceptional for it is the biggest and one of the most complex liquidations that Hong Kong has ever experienced. It is most probable that several years will elapse before the liquidation is completed. The action will most likely be concluded before that time. Mr. Sussex commented that C.H.L. will incur heavy legal costs in defending the action if an order of disclaimer is not made. But he gave no reason why C.H.L. could not adopt the same course that was taken in the previous proceedings by agreeing to be bound by the result. Indeed it would not seem to be practical to order specific performance against a company in liquidation.

20. Having regard to the indemnity that has been offered and to the likelihood of serious prejudice that may be caused to Miramar by depriving it of its right of action, and to the fact that the joint liquidators cannot be prejudiced if they await the trial, I am of the opinion that the application for a disclaimer should be refused. There will be an order in the terms of the summons for leave to commence proceedings against C.H.L. in the action.