RE SWIFTWAY INTERNATIONAL LTD.

HCCW749/1999

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP PROCEEDINGS NO.749 OF 1999

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J U D G M E N T

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1. This is an application by the petitioner Yung Yuk Mui for a winding-up order against Swiftway International Limited ("the Company"). This application is based on a Statutory Demand dated 15 July 1999 under section 178(1)(a) of the Companies Ordinance requiring the company to pay to the petitioner a debt in the sum of $385,000. Upon the expiry of 21 days from 15 July 1999, when no payment of the debt demanded was made by the Company, this petition was issued on 13 August 1999.

2. It is not disputed by the Company that the petitioner had made a loan to the Company of $300,000 on 8 June 1993. Nor is it disputed that the Company had since that date paid to the petitioner $5,000 per month by way of agreed interest for the loan. This monthly payment of $5,000 agreed interest was made by the Company to the petitioner up till and including January 1998. Since 8 February 1998 onwards, no further interest was paid by the Company to the petitioner in respect of this loan of $300,000. The Statutory Demand for the sum of $385,000 is therefore made up of the $300,000 principal debt together with $85,000 outstanding interest since 8 February 1998, being $5,000 per month for 17 months.

3. The Company opposes the winding-up petition on the grounds that the debt underlying the Statutory Demand is genuinely disputed on substantial grounds and also that the Company is not insolvent.

4. The facts upon which the Company relies in saying that there is a genuine dispute in relation to the debt underlying the Statutory Demand is contained in the affirmation of Lam Chun Mow filed on 28 October 1999. They are as follows : the Company was at all material times made up of three shareholders, namely, one Mr Yeung Wai Kwong, Eben ("Eben Yeung"), secondly, a company by the name of JMA B.V., which was owned and represented by a Mr H.A.S. Janssen ("Janssen"), and thirdly, the affirmant himself, Mr Lam Chun Mow.

5. As a result of heavy losses suffered by the Company in 1997, the three shareholders agreed upon a reorganization plan. Pursuant to such reorganization, it was agreed between the three of them, namely, Eben Yeung, Janssen and Lam Chun Mow, that the then existing losses and loans owed by the Company would be split between the three of them. In particular, it was agreed that out of the loan of the $300,000 by the petitioner, Eben Yeung would be responsible to repay the petitioner the sum of $219,084 while the balance of $80,916 would be borne by the Company. It was also agreed by the three of them that all interest payments on loans from the shareholders or from their relatives would be stopped. As part and parcel of the agreement between the three shareholders, Eben Yeung had expressly stated that he had full authority from the petitioner to agree to such arrangements. Upon such facts, the Company now says that the petitioner, by clothing Mr Eben Yeung with the full authority to act for her in relation to the alleged loan, she is now estopped from denying that the responsibility to pay the sum of $219,084 has vested with Eben Yeung and not the Company. It is clear from these facts that the petitioner was herself not present at such meetings at which these matters were agreed between the three shareholders. Apart from what Eben Yeung had said at these meetings to the other shareholders, the Company does not rely on any other fact to show that the petitioner had held out Eben Yeung as being her agent, representing her and agreeing to such arrangements.

6. It should be noted that in purported discharge of its obligation under such arrangements, the Company had on about 8 November 1999, through its solicitors, paid to the petitioner's solicitors, after the petition was issued herein, the sum of $90,916 (sic), receipt whereof had been acknowledged by the petitioner's solicitors but only as part payment of the principal sum claimed by the petitioner to be due to her from the Company.

THE LAW

(a) Assignment of liabilities

7. Assignment by act of the parties may be an assignment either of rights or of liabilities under a contract. As a general rule, a party to a contract cannot transfer his liability under that contract without the consent of the other party. By consent of all parties, liability under a contract may be transferred so as to discharge the original contract. Such a transfer is not an assignment of a liability but a novation of the contract. (See Halsbury's Laws, 4th Ed., Vol.9(1), paragraph 757.)

(b) Holding out

8. The essence of apparent authority is an appearance emanating from the principal. The representation must be made by the principal. A representation by the agent himself that he has authority cannot create apparent authority unless the principal can be regarded as having in someway instigated, or permitted, it or put the agent in a position where he appears to be authorized to make it. All ostensible authority involves a representation by the principal as to the extent of the agent's authority. No representation by the agent as to the extent of his authority can amount to a holding out by the principal. (See Bowstead & Reynalds on Agency, 16th Ed., paragraph 8/022)

(c) Bona fide dispute over debt

9. Palmer's Corporate Insolvency states at paragraph 1.807 :-

" To fall within the general principle the dispute must be bona fide in both a subjective and an objective sense. Thus the reason for not paying the debt must be honestly believed to exist and must be based on substantial or reasonable grounds. 'Substantial' means having substance and not frivolous, which disputes the court should ignore. There must be so much doubt and question about the liability to pay the debt that the court sees that there is a question to be decided. The onus is on the company 'to bring forward a prima facie case which satisfies the court that there is something which ought to be tried either before the court itself or in an action, or by some other proceedings.' ...

Where a debt is disputed on substantial grounds the court may -

(i) dismiss the action outright;

(ii) adjourn it conditionally or unconditionally;

(iii) grant an injunction to restrain the presentation and advertisement of the petition."

10. In Re Safe Rich Industries Limited, (unreported) Civil Appeal No.81 of 1994, Bokhary JA (as he then was) likened the question whether a debt was genuinely disputed on substantial grounds to the threshold burden of a defendant on hearing of an Order 14 application by stating :-

"So the debt was disputed .... The question was whether it was genuinely disputed on substantial grounds. To put it at its simplest, was the company's story of conditional delivery believable?"

WHETHER A SUBSTANTIALLY DISPUTED DEBT

11. Applying the above legal principles, I have to ask myself whether the Company has succeeded in demonstrating that there was a bona fide and substantial dispute that there were triable issues in respect of the alleged genuine debt. The answer to this question in my view is 'no' for the following reasons. It is for the Company to show that the petitioner was a party to and had consented to the new arrangements whereby $219,084 of the initial debt by the Company to the petitioner was taken over by Eben Yeung. The only evidence adduced by the Company in its attempt to show that the petitioner had consented to this arrangement was the representation by Eben Yeung when this new arrangement was agreed to between the three directors of the Company. That representation, however, comes only from the agent, Eben Yeung. No other representation emanating from the petitioner is relied on by the Company. In law, that is not sufficient to bind the petitioner. The petitioner has now affirmed by affidavit that she has never authorized Eben Yeung to agree to any such arrangements with the Company. Needless to say, the recourse of the Company would be against Eben Yeung, but I cannot see how, upon this evidence, the petitioner could be bound by the new arrangements agreed to between the three directors and/or the Company.

12. In my judgment, the Company has failed to demonstrate there exists a genuine substantially disputed debt.

SOLVENCY OF THE COMPANY

13. It was submitted that the Company is not insolvent. The basis for this submission was that the Company has already paid the petitioner the undisputed part of the debt in the sum of $90,916 and is prepared to let its solicitors stakehold the disputed balance, namely, $209,084 pending determination by the court of the petitioner's claim in a separate action.

14. No evidence however in the form of book of accounts or audited statements was put before the court to show what are the assets and/or liabilities of the Company and therefore its present financial position.

15. In the absence of any such evidence showing that the Company is indeed solvent, the court is entitled to infer that the Company is insolvent from the fact that a debt which is not or cannot be substantially disputed has remained unpaid. (See An Feng International Trading Ltd v. Honour Link International Development Ltd [1999] 3 HKC 116.)

CONCLUSION

16. For the reasons given above, I would have made a winding-up order against the Company. However, at the end of his submission, counsel for the Company specifically requested that should I decide the matter against the Company, not to immediately make a winding-up order but to allow the Company seven days to pay off the debt (or what remains of it) to the petitioner. Such proposal was not objected to and in fact supported by counsel for the petitioner. Under these circumstances, the court having a discretion in the matter, I shall make the following order :

1. Conditional upon the amount of the debt outstanding in the sum of $294,084 ($385,000 less $90,916 already paid) being paid by the Company to the petitioner through the petitioner's solicitors by 4 p.m. on 5 April 2000, the petition herein be dismissed.

2. Failure to comply with the above condition within the time above stipulated, a winding-up order be made against the Company.

3. This matter be restored before the companies judge at 10:00 a.m. on 10 April 2000 in any event, and the solicitors for the petitioner to notify the clerk of the companies judge by letter on or before 7 April 2000 whether or not the above condition has been met by the Company within the time stipulated.

COSTS ORDER NISI

17. In the absence of any reasons to depart from the general rule that costs to follow the event, I make a cost order nisi that the costs of the hearing of the petition be to the petitioner, to be taxed if not agreed.