XCHRX HWANG DA-LIN AND ANOTHER v. WONG CHUNG KEUNG AND OTHERS

HCCW 643/1996

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING-UP NO. 643 OF 1996

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DECISION

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Order of Le Pichon J dated 8 October 1998

1. This is the adjourned hearing of a summons issued by the Petitioners for orders for the purpose of implementing an Order made by Le Pichon J (as she then was) on 8 October 1998 ("the Order").

2. The Order was that the 1st and 2nd Respondents purchase the 600,000 shares of the Petitioners in the 3rd Respondent Company ("the Company"), and that in the event of the 1st and 2nd Respondents failing to do that, that the Company should purchase the Petitioners' shares. There was also an order that the Petitioners be paid interest on the sum to be paid for their shares at the rate of 10% p.a. from the date of the petition (1996).

3. The shares in the Company have been valued at $55.859 per share. That means that the purchase price of the Petitioner' shares is, in total, a sum of about $33.5m.

4. The 1st and 2nd Respondents have failed to purchase the shares. It is therefore the obligation of the Company, pursuant to the Order, to purchase the Petitioners' shares.

Issue

5. The question before me is how that purchase is to be effected. The Company has cash of about $4.5m but it has other assets. The assets however are charged and the Company has other creditors, secured and unsecured.

Assets and liabilities of the Company

6. As part of the same Order, receivers were appointed. KPMG, the receivers and managers, have prepared a statement of assets and liabilities of the Company as at 30 April 2001.

7. This shows that the assets of the Company stand at about $57.7m., comprising mainly of (i) 39 units in a commercial building in Central called Lap Fai Building, which units have been valued by professional valuers at $51.8m. and (ii) cash at bank of about $4.5m. The cash income of the Company is derived from rents from the Lap Fai units of about $340,000 monthly.

8. As for liabilities, loans from the Liu Chong Hing Bank and the Overseas Union Bank, for which the Lap Fai units stand as security, are between $18.7m and $21m. This discrepancy is due to a dispute over a sum of about $2.25m advanced by the Liu Chong Hing Bank to the Company, apparently without the benefit of a validation order after the petition was presented. This dispute has not been litigated yet, but the bank has recently served a demand on the Company for repayment of about $13.3m.

9. The Company's liabilities to unsecured creditors comprise:-

- rental deposits repayable to tenants of about $760,000;

- advances from Wong Tai Lap (deceased) of about $1.7m;

- advances from a company called Kin Hing of about $350,000;

- dividends declared and held by Le Pichon J to be payable to the Petitioners of $2.5m;

- costs of receivers and their legal advisers claimed at about $880,000;

and the liability to purchase the shares from the Petitioners for $33.5m together with interest pursuant to the Order, now said to be in the sum of about $14m.

10. It would thus be seen that the total liabilities of the Company add up to about $74.7m (assuming that the liabilities to the banks are at the higher figure of $21m), and its assets stand at about $57.7m. only. Unsecured liabilities stand at $53.7m. (of which the Petitioners are creditors in the sum of $50m.), against net assets of $36.7m. The Company is thus insolvent.

11. Counsel for the Petitioners has not disputed this situation, but he has indicated that his clients do not wish to petition for the winding-up of the Company. This is to avoid a forced sale of the Lap Fai units, which (according to the valuer) would decrease in value by as much as 40% if they were sold in those circumstances.

Petitioners' application

12. The Petitioners, having obtained an order from this court that 30,000 of their shares are to be paid for (i.e. at about $1.6m.) from the cash available to the Company, are asking for an order that the purchase of the Petitioners' shares by the Company be implemented by an assignment of the Lap Fai units to themselves.

Respondents' position

13. The Receivers are neutral in this respect. As far as the Respondents are concerned, the 2nd Respondent had disputed the valuation of the Lap Fai units at the first hearing of the summons in February 2001. He also opposed the proposed assignment of the Lap Fai units and claimed that funds could be raised by other means. He was given an adjournment to adduce evidence on these matters.

14. Despite the time given to him, the 2nd Respondent was unable to adduce any evidence which cast any doubt on the professional valuation of the Lap Fai units. As for the funds needed for the Company to pay for the Petitioners' shares, he was only able to propose that the Company be given another "few years" (apparently estimated at 10 years in his written submission handed up on 10 May 2001) to allow rental income to be accumulated in order to pay for the shares.

15. The 2nd Respondent's proposal is unrealistic. This petition was presented in 1996. Le Pichon J's order was made in 1998. It has been more than 2 1/2 years since that Order was made. The Petitioners, having succeeded in their petition, should not have to be further locked into the Company for any substantial period of time, and 10 years is out of the question.

Question of preference

16. Having discounted the 2nd Respondent's proposal, however, I was concerned with the order that the Petitioners were seeking because in effect, it was a charging order on the uncharged portion of the Lap Fai units with its simultaneous enforcement by way of sale of the units to the Petitioners. Since the Company is insolvent, it would give the Petitioners a priority over, or have the effect of preferring them to, other unsecured creditors who would be entitled to a pari passu distribution in the event of the Company's liquidation.

17. Counsel for the Petitioners suggested that the claim from Kin Hing is stale, and that the 1st and 2nd Respondents would be getting the lion's share of Wong Tai Lap's estate. I was not able to accept those submissions in the absence of evidence. There is no evidence that the claim from Kin Hing is stale. As for Wong Tai Lap's estate, whilst it is the case that the 1st Respondent was his widow and the 2nd Respondent one of his children, it does not necessarily follow that any liability from the Company to Wong Tai Lap's estate can be set-off against any liability from the 1st and 2nd Respondents to the Company.

18. Accordingly, counsel for the Petitioners has suggested that they would put $1.6m into an account in order to protect the interests of the other unsecured creditors. This sum is arrived at as follows (using rounded figures):-

Rental deposit	$0.7m
Receivers and legal costs	$0.8m
Liability to Wong Tai Lap	$1.7m
Liability to Kin Hing	$0.3m
Stamp duty for transfer of units	$1.0m.
		$4.5m.
Less: cash available after payment for 30,000 shares ($4.5m - $1.6m)		$2.9m
Balance:		$1.6m.

19. I am satisfied that in principle, the payment of such a sum into a special account of the Company to enable the Company to fully satisfy the claims of the other unsecured creditors would allay the Court's concerns. Whilst it is the case that this would have the effect of changing the type of assets at present available for the discharge of liabilities to other unsecured creditors (i.e. from investment properties to cash), unsecured creditors have no claim to any particular assets of the Company. What is important is that their right to a pari passu distribution in the event of a liquidation is provided for.

20. Having said that, I cannot make an order at this stage because the suggestion of payment into a special account was only made by counsel for the Petitioners at the hearing in the light of the Court's concerns, and there was no opportunity for any undertaking to that effect to be formulated by counsel or considered by the Court.

21. I would accordingly direct that the Petitioners do within 14 days prepare a draft order (incorporating a detailed undertaking along the lines proposed by the Petitioners' counsel) to be sent to the Court and to the other parties for consideration, and all parties are to be at liberty to restore the hearing thereafter.