RE FITZROYA FINANCE CO LTD

HCCW 253/2003

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES (WINDING-UP) NO. 253 OF 2003

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D E C I S I O N

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The application

1. This is an application by Zhukuan Wing Fai Construction Company Limited (in Liquidation) ("ZWF") to be substituted as the petitioner in a creditor's petition to wind up Fitzroya Finance Company Limited ("Fitzroya") under rule 33 of the Companies (Winding-up) Rules. The application arose in this way.

2. On 28 February 2003, Wai Shun Construction Company Limited (in Liquidation) ("Wai Shun") presented a petition to wind up Fitzroya on the basis of a demand for a debt served on Fitzroya by the liquidators of Wai Shun on 15 January 2003 in the sum of HK$2.9 million odd. The petition was resisted by Fitzroya. It was adjourned several times for evidence to be filed. By an escrow agreement dated 8 September 2003, the liquidators of Wai Shun agreed with Fitzroya that they would apply to dismiss the petition at the adjourned hearing on 3 November 2003, on the basis that the amount claimed in the petition was deposited with by Fitzroya with its solicitors Barlow Lyde & Gilbert ("BLG") and held by them for the period specified until the dispute of the petitioning debt has been determined in separate proceedings to be brought by Wai Shun or settled between the parties.

3. On 31 October 2003, the liquidators of ZWF issued the present summons to be substituted as the petitioner. A supporting affidavit was filed on behalf of ZWF on the same day alleging that Fitzroya is indebted to ZWF in the sum of HK$4,130,774.00 as at 28 March 2002 and that Fitzroya has failed and neglected to pay the same or any part thereof despite the demand of ZWF.

4. As the liquidators of ZWF had written to BLG on 21 October 2003 giving notice of inter alia their intention to apply for substitution as the petitioner, on the same day that the summons for substitution was issued, Fitzroya filed a substantial affirmation by one of its directors Kelly Cheng Kit Yin ("Kelly Cheng") disputing the debt of ZWF, even before Fitzroya had received that summons and the supporting evidence. At the adjourned hearing of the petition on 3 November 2003, Wai Shun applied for dismissal of the petition and ZWF applied to be substituted as the petitioner. I gave directions for the filing of evidence in ZWF's application for substitution and adjourned the application for argument. The petition was likewise adjourned, until after the determination of ZWF's application. This is the procedure endorsed by Yuen J (as she then was) in Re Hon Seng Engineering Limited [2001] 2 HKLRD 295 and Re Precast Piling and Engineering Co. Ltd. [2002] 327 HKCU 1, where the company has adduced evidence disputing the debt of the applicant for substitution when the application is made. As there is already evidence placed before the court whether the company has a bona dispute of the applicant's debt, that issue should be resolved first before a decision is made on the application for substitution, instead of allowing the applicant to be substituted and deferring the dispute of his debt to be resolved at a later stage.

The background

5. I have mentioned the liquidators of Wai Shun and ZWF without stating the connection between them. The joint and several liquidators of these companies and of a third company known as Wing Fai Construction Company Limited ("Wing Fai") are all from RSM Nelson Wheeler Corporate Advisory Services Limited ("RSM"). On 28 February 2003, David Kennedy and Cosimo Borrelli were appointed liquidators of Wing Fai. On 29 July 2003, Mr Kennedy and Stephen Briscoe were appointed liquidators of Wai Shun. On 6 August 2003, Mr Briscoe and Nicholas Hill were appointed liquidators of ZWF. In this application, it was Mr Kennedy who has made several affidavits on behalf of ZWF, even though he is not a liquidator of ZWF, as he has been assisting Mr Briscoe and Mr Hill in the performance of their duties.

6. There is also connection in the three companies and they were connected with Fitzroya at one time.

7. China Rich Holdings Limited ("China Rich") was formerly known as Wing Fai International Limited. It was incorporated in Bermuda and listed on the main board of the Hong Kong Stock Exchange. I shall refer to China Rich and its subsidiaries collectively as "the Group".

8. Benefit Holdings International Limited ("Benefit") was incorporated in Bermuda and is the intermediate holding company for the Group. Fitzroya is wholly owned by Benefit through an intermediary.

9. Until 22 April 2002, the Group also included three construction companies. They are Wing Fai (which was wholly owned by Benefit), Wai Shun (also wholly owned by Benefit) and ZWF (which was 51% owned by Wing Fai). I shall refer to these three companies collectively as "the Construction Group". On 22 April 2002, Benefit sold its entire interest in the Construction Group to Sino Glister International Investments Limited ("Sino Glister") under two agreements for sale and purchase ("the Sale and Purchase Agreement(s)") in circumstances that are material to the present dispute.

10. Benefit and Fitzroya carried out treasury functions for the Group. Fitzroya also lent money to the sub-contractors of the Construction Group. To facilitate these loans, funds were transferred by the Construction Group to Fitzroya and funds were also made available by Benefit.

11. Prior to the present application for substitution, there have been a number of proceedings between the Construction Group (through their liquidators) and other companies in the Group, arising out of a "Set Off Agreement" dated 23 November 2001 ("the Set Off Agreement") and the Sale and Purchase Agreements. These proceedings include: (1) the petition herein to wind up Fitzroya presented by Wai Shun (which has been compromised in the manner I have mentioned); (2) a writ action in HCA No. 2570 of 2003 brought by Wing Fai against Fitzroya claiming HK$151 million odd, alternatively HK$149 million odd and Wing Fai applied for summary judgment for the sum of HK$34 million odd, Master Woolley gave unconditional leave to defend on 16 January 2004; (3) a claim made by Wing Fai in HCCW No. 735 of 2002 against Benefit for unfair preference, in which Kelly Cheng filed an affirmation on 4 September 2003 (certain parts of this affirmation are relied on by ZWF's liquidators as constituting an admission of ZWF's debt in the present application, and this would be considered subsequently); and (4) proceedings brought by several companies in the Group, namely, Business Rootis Limited, China Rich Properties Limited and Evergreen Club Limited, against Wing Fai, in HCMP No. 4136 of 2003, seeking an injunction against the presentation of winding up petition (I am given to understand that the injunction application was successful).

ZWF's claim for a debt

12. The basis on which ZWF claims that Fitzroya is indebted to it and the evidence relied on by the liquidators in support of this claim may be simply stated.

13. In essence, the liquidators say that according to the accounts of ZWF and other available documents, it cannot be disputed that there is an amount due from Fitzroya to ZWF of HK$4,130,774.00 as at 28 March 2002 and there is no evidence or no credible evidence to establish that thereafter the debt has been set-off, extinguished or discharged in some way. The onus is on Fitzroya to adduce sufficiently precise factual evidence to show that it has a bona fide defence on substantial grounds. Mr Thomas Lee, who appeared for ZWF, has urged me to examine the evidence of Fitzroya with a critical eye; to resist the application, Fitzroya must not merely show it has a fair probability of a bona fide defence, as in resisting an application for summary judgment, here the threshold is higher as Fitzroya must show it has a bona fide defence. Mr Smith, SC, who appeared for Fitzroya, did not take any issue on the approach or the threshold he has to meet as submitted by Mr Lee.

14. Of critical importance to the case of both parties is a document headed "Management Accounts of Wing Fai Construction Company Limited, Wai Shun Construction Company Limited and Zhukuan Wing Fai Construction Company Limited with Benefit Holdings International Limited and Fitzroya Finance Company Limited from 1 February 2002 to 22 April 2002". I shall refer to this as "the Schedule". Both have relied on the Schedule with opposite results and criticized each other's interpretation.

15. Before I turn to the specific criticisms mounted by ZWF of the bona fides of Fitzroya's opposition and consider what each side had to say about the Schedule, it would be convenient to summarize Fitzroya's case for disputing the debt.

Fitzroya's case for disputing the debt

16. Fitzroya's case may be stated as follows:

(1) As at 31 July 2001, the unaudited state of accounts as between the Construction Group on the one hand and Benefit and Fitzoya on the other hand was as follows:

	Due from the Construction Group	Due to the Construction Group
Wing Fai owed Benefit	HK$110,295,746.00
Fitzroya owed - Wing Fai		HK$175,385,697.96
- Wai Shun		HK$5,734,906.43
- ZWF		HK$808,141.94
Total:	HK$110,295,746.00	HK$181,928,746.33

(2) By the Set Off Agreement, which was entered into between China Rich and its subsidiaries as set out in the appendix thereto, including Benefit, Fitzroya and the Construction Group, each of the Group companies assigned to Fitzroya any amount due from another Group company as shown in the appendix and Fitzroya was given the right to set off the inter-company current account balances among the Group companies. Pursuant to the Set Off Agreement, Benefit had assigned to Fitzroya the indebtedness of HK$110,295,746.00 due from Wing Fai.

(3) As at 31 January 2002, the position of the inter-company accounts of the Construction Group was as follows:

	Due from the Construction Group	Due to the Construction Group
Wing Fai owed Fitzroya (as assigned from Benefit)	HK$110,295,746.00
Fitzroya owed - Wing Fai		HK$149,270,046.00
- Wai Shun		HK$4,104,268.00
- ZWF		HK$4,130,774.00
Total:	HK$110,295,746.00	HK$157,505,088.00
Balance:	- - -	HK$47,209,342.00

(4) On 28 March 2002, the set off exercise provided for by the Set Off Agreement was carried out. The position of the inter-company accounts of the Construction Group immediately before the setting off taking place was as follows:

	Due from the Construction Group	Due to the Construction Group
Wing Fai owed Fitzroya (as assigned from Benefit)	HK$110,295,746.00
Fitzroya owed - Wing Fai		HK$151,508,908.78
- Wai Shun		HK$3,340,268.04
- ZWF		HK$4,397,773.74
Sub-total:	HK$110,295,746.00	HK$159,246,950.56
Amount paid by the Group to Wing Fai between 1 Feb 2002 to 28 Mar 2002	HK$4,250,633.00
Balance:	- - -	HK$44,700,571.56

(5) All parties to the Sale and Purchase Agreements wished there to be a clean break between the Construction Group and the Group after the sale and the Construction Group was required to be cleared of all outstanding banking facilities. By a two-stage process, they arrived at a figure of HK$40 million which the Group would accept as the amount due to it after the sale. The calculations were set out in the Schedule which was attached to the Sale and Purchase Agreements. Firstly, the sum of HK$110,295,746.00.00 was set off in consequence of the implementation of the Set Off Agreement. Secondly, the sum of HK$104,763,078.00 was set off when the Group discharged the outstanding banking facilities of the Construction Group. Following that, the Group waived and wrote off an amount in excess, leaving HK$40 million as the amount due from Wing Fai and which Wing Fai and Sino Glister were obliged to pay to Benefit under the Sale and Purchase Agreement relating to the sale of the shares in Wing Fai. The figures of the above exercise, as presented in the Schedule (the payments eventually made to settle banking facilities and the amount written off by the Group were actually bigger, but that does not matter for present purpose) are as follows:

Amount due from Fitzroya as at 31 Jan 2002	HK$157,505,088. 00
Set off of current accounts of the Construction Group	(HK$110,295,746.00)
Payment to Wing Fai to clear outstanding banking facilities	(HK$104,763,078.00)
Payment to Wai Shun to clear outstanding banking facilities	(HK$1,136,000.00)
Transfer from ZWF bank accounts	HK$641,000.00
Amount due to Benefit and Fitzroya as at 22 April 2002	(HK$58,048,736.00)
Amount waived by Benefit and Fitzroya as agreed	HK$18,048,736.00
Amount due to Benefit by Wing Fai as stated in the Sale and Purchase Agreement	(HK$40,000,000.00)

17. On behalf of ZWF, Mr Lee submitted that the case of Fitzroya as stated above is merely a "wish list" or a statement of intention. This is but an attempt to give effect to transactions and does not in fact affect the position of Fitzroya's indebtedness to ZWF when the evidence is properly analysed.

The rival contentions

18. I leave aside for the time being the factual dispute if the Schedule was attached to the Sale and Purchase Agreements when they were executed, as it is more important to focus on the other points made by Mr Lee regarding this document, which are as follows:

(1) It is doubtful if the Schedule did form part of the Sale and Purchase Agreements. It was not referred to in the Sale and Purchase Agreements. In contrast, there were annexures to the agreements, they were specifically numbered and referred to in the body of the agreements.

(2) The Schedule referred to "the agreement dated 22 April 2002", this seems to be odd phraseology for a document supposedly prepared for attachment to another document yet to be executed.

(3) Neither Fitzroya nor ZWF was a party to, nor had they executed, any of the Sale and Purchase Agreements. They were not even mentioned in the body of the agreements. The agreements were only executed by the vendor (Benefit), the purchaser (Sino Glister), the company the shares of which were sold (Wing Fai or Wai Shun), and the parties that had assumed obligations to guarantee the performance of the agreement (in the case of the agreement for the sale of shares in Wing Fai). Wing Fai did not enter into or execute the agreements on behalf of any one else. There is no evidence that Wing Fai had or purported to have authority to enter into the agreements on behalf of ZWF. The assertion that Wing Fai had entered into the agreements on behalf of ZWF is incredible.

(4) The case advanced by Fitzroya of the set off arrangements at a Group level has failed to recognize that ZWF and Fitzroya are independent legal entities or that Wing Fai had only owned 51% of the shares in ZWF at the time.

19. I can see the force of Mr Lee's submissions, but I do not think Fitzroya's case is not capable of being considered from another angle and this is how Mr Smith submitted that the matter should be approached.

20. Although the body of the Sale and Purchase Agreements contained no reference to the Schedule, the amount of HK$40 million being a debt due from Wing Fai to Benefit as at 22 April 2002 was specifically mentioned in clause (4)(i) of the agreement relating to the shares of Wing Fai and the obligation of Wing Fai and Sino Glister to pay that sum to Benefit was provided for in clause (4)(ii). The Schedule set out the basis and gave the calculations of how the sum was arrived at and this demonstrated that it was not a figure plucked from the air. Thus, there is some basis for treating the Schedule as an integral part of the Sale and Purchase Agreements.

21. As for the fact that ZWF was not a party to the Sale and Purchase Agreements, it was asserted in the affirmations of Kelly Cheng and Yip Kwong Robert (the chairman of China Rich and a director of ZWF) that Wing Fai, as the parent company, had acted on behalf of ZWF in negotiating the set off arrangements that formed an integral part of the Sale and Purchase Agreements. And although the Sale and Purchase Agreements were only executed by Benefit as the vendor, China Rich and Fitzroya, together with Benefit, had collectively paid the amount required to settle Wing Fai's banking facilities.

22. Documentary evidence has been adduced to show that the Group had discharged the outstanding banking facilities of Wing Fai. This is in the affirmation of Kelly Cheng filed on 4 September 2003 in the unfair preference claim brought by the liquidators of Wing Fai.

23. The set off arrangements in the two-stage process would appear to accord with commercial sense or common sense. Without the underlying set off arrangements as contained in the Schedule, and if the inter-company debts were left as they were, immediately after the completion of the sale, the Construction Group under the new ownership could have claimed from Fitzroya the amounts outstanding just prior to the sale. The Group would have been exposed to an immediate liability to the Construction Group, notwithstanding that the Group had paid HK$104 million odd to discharge the outstanding banking facilities of the Construction Group. This was recognized by Master Woolley, that the whole picture has to be considered, when he gave unconditional leave to Fitzroya to defend in Wing Fai's application for summary judgment.

24. Further, subsequent to the Sale and Purchase Agreements, China Rich and other members of the Group have never sought repayment by Wing Fai or other members of the Construction Group of HK$104 million odd being the amount paid to discharge the banking facilities. China Rich and other members of the Group have not been shown as creditors of Wing Fai, Wai Shun or ZWF after 22 April 2002, apart from the sum of HK$1 million paid by Benefit. No evidence has been adduced by the liquidators of ZWF that Fitzroya was shown as being indebted to ZWF after 22 April 2002. Until the commencement of their liquidation, members of the Construction Group had never sought repayment for amounts due from Fitzroya prior to the Sale and Purchase Agreements. The way in which all parties had conducted themselves afterwards would appear to lend support to Fitzroya's case that there was in existence an agreement on the extinguishment of the inter-group debts.

25. Mr Lee did not appear to challenge the rationale for the underlying set off arrangements. His attack was that the documentation drawn up did not give effect to this intention, and there were no board minutes or resolutions and no detailed accounting records to show that effect was given to the intended arrangements. It may well be that things could have been done in a much better way with proper regard to the drawing up of documentation in respect of each of the companies affected by the arrangements. I am not prepared to say that Fitzroya would probably have failed in relying on a case of estoppel based on the above allegations, that ZWF is thereby estopped from enforcing the debt due to it by Fitzroya prior to the two-stage process of set off. It is at least arguable that there was representation to Fitzroya that the debt due to ZWF would be treated as extinguished and that Fitzroya had acted in reliance of the representation to its detriment in discharging the outstanding banking facilities of ZWF's parent company, Wing Fai.

26. There are several subsidiary matters in dispute, I propose to deal with them shortly.

27. It was suggested by ZWF that Fitzroya has changed its case advanced for disputing the debt, and that the Schedule was put forward after Fitzroya realized that the Set Off Agreement did not extinguish the debt owed by it to ZWF. I am inclined to agree with Mr Smith that on a fair reading of the letter dated 16 September 2002 of Fitzroya's former solicitors, Messrs Johnson Stokes & Master, the explanation given in that letter with express reference to the Schedule did not deviate substantially from the case now advanced by Fitzroya.

28. As for a particular passage in Kelly Cheng's affirmation filed on 4 September 2003 in the unfair preference proceedings now relied on by ZWF as an admission of its debt, it does not appear to me that she has made such an admission or at least an unequivocal admission there is still a debt due to ZWF.

29. I have considered the evidence adduced on both sides on the dispute if the Schedule was attached to the Sale and Purchase Agreements at the time of execution. I am inclined to think that this factual dispute cannot properly be resolved on the affirmations filed.

30. I do not propose to go into the evidence as to whether Fitzroya is insolvent. I do not think this is material to the present application, which is concerned with whether ZWF is entitled to present a creditor's petition, and whether Fitzroya has raised a bona fide dispute of ZWF's debt on substantial grounds.

Conclusion and orders

31. For the above reasons, I have come to the view that Fitzroya has succeeded in raising a bona fide dispute to the debt claimed by ZWF on substantial grounds. I therefore dismiss the application for substitution.

32. I propose to make the following order nisi as to costs. I am minded to award costs of the application to Fitzroya, including the costs reserved on 3 November 2003, on an indemnity basis. I have borne in mind the information made available to the liquidators of ZWF before they issued the summons for substitution and the correspondence exchanged between them and BLG. They have chosen to pursue a high risk strategy notwithstanding that they were well aware of Fitzroya's grounds of opposition in correspondence and in the related proceedings that I have mentioned. The summons for substitution is an abuse of process, justifying an order against ZWF to pay costs on a higher basis.

33. I vary the order I made on 3 November 2003 and direct that the petition is to be restored for hearing on 22 March 2004.