XCHRX RE AN HSIN CONSTRUCTION CO. LTD.

HCCW-96/99

IN THE HIGH COURT OF THE

HONG KONG SPECIAL ADMINISTRATIVE REGION

COURT OF FIRST INSTANCE

COMPANIES WINDING UP PROCEEDINGS NO. 96 OF 1999

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D E C I S I O N

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1. This is an application by a company for a Validation Order.

2. The Petitioner alleges that the Company has suspended its business. In its application for a Validation Order the first affirmation filed on behalf of the Company deposes to the fact that the Company is presently engaged in a number of construction projects, of which a few principal ones has been listed.

3. The Petitioner's affirmation in opposition to the Validation Order has denied that, and said that the Company has, in fact, ceased business and relies on two documents exhibited, one being a letter of termination from the Company to the Petitioner and secondly, a resolution of the directors of the Company that certain matters be dealt with in a particular way.

4. The Company's second affirmation, which was filed yesterday, reiterates its earlier position that the Company is presently engaged in construction projects, and explains the Company's letter and resolution, and says that, indeed, the Company has submitted some 16 tenders, of which there is evidence that one tender has been recently awarded.

5. Mr. Burns, for the Petitioner, asked for leave to file further affidavits in opposition. This would render it an exception to the general rule, and if the court were to accede to that application, there should be sufficient justification. Mr. Burns says, that first of all, the Company had resolved in January 1999 that the directors reported to the Company certain on-going contracts and confirmed and ratified the validity of the contracts disclosed therein, and declared that the Company would henceforth treat as void all other contracts not disclosed then, and that the individual directors should be personally responsible for all other contracts or works not disclosed above. The second matter which Mr. Burns relies on is that he said there is evidence, or there is at least information, that one tender listed in those 16 tenders may not be genuine.

6. However, even if that is so, there is other evidence by the Company that it was still submitting tenders and that indeed, one has recently been awarded to the Company. In my view, what is new and important in the second affirmation of the Company is the explanation by the Company of its letter and resolution. The rest is, if I may say so, just icing on the cake. What is the more important consideration for the court today is that the Company is solvent and, whether to a greater or lesser extent, that the Company is still involved in construction projects. In my view, there is no justification for the Petitioner to file yet another affirmation in relation to these tenders. In my view, the matter should take its normal course and the application for validation order should be heard now.

7. This is an application for a section 182 Validation Order by a company which is involved in construction business. The Petition was filed on 29th January 1999 by a minority shareholder on the just and equitable ground, and it also seeks alternative relief under section 168A of the Companies Ordinance. There is no allegation that the Company is insolvent.

8. On 11th February 1999, the Company issued its present summons for validation until section 182 of the Companies Ordinance. Its evidence showed that a fairly large amount of some $9,000,000 has been frozen in its bank accounts, that the Company was and is involved in building projects requiring access to those bank accounts, and that the net current asset value of the Company, according to accounts staff for the year ending 31st December 1998, was about $12,000,000. In relation to the accounts for the year ended 31st December 1997, the audited accounts show that the net current asset value of the Company was about $9,000,000.

9. In such a situation, in my view, the burden was on the Petitioner opposing the application to satisfy the court why the Validation Order should not be made, because, generally speaking, such an order would be to the benefit of all persons interested in the value of the assets, because the Company would then be able to trade in the ordinary course of business and making a profit.

10. The Petitioner here says that firstly, the Company has in fact ceased business, and he refers to a letter of termination to himself and a resolution of the directors appropriating work to individual directors as sub-contractors. Secondly, the Petitioner has referred to certain aspects of the Company's work and said that the expenses should be limited to $1,800,000 only. He says that other money was not due because the sub-contractors' debts had either not been certified or that the company is not liable to pay the sub-contractors because the defects liability period has not expired. Thirdly, the Petitioner says that the company cannot carry on business in any event because there is no authorized signatory. In this respect, Mr. Burns for the Petitioner accepts that the previous references to "Authorized Person" were incorrect and he accepts that Petitioner is not himself an "Authorized Person". Fourthly, the Petitioner suggests that there should be a cap on the Validation Order of say $1,800,000 - $1,900,000 for, say, 4-6 months between now and the possible hearing date of the Petition, although there is little evidence to support why that would be sufficient.

11. The Company's answer is first, that the letter of termination and the resolution can be explained and are explained by a change in the company's mode of operation. The change was that the Company would carry on in business, but instead of carrying out substantial work, would sub-contract out the work to each individual director who had procured that business, for which the Company would earn a fee of 2-5%. However, the new evidence produced by the Company is that the Company has now reverted to its previous mode of operations as a substantive maincontractor.

12. Secondly, the Company denies that expenses could be limited to $1,800,000 or $1,900,000 as alleged by the Petitioner. That figure is not reliable because, for example, the Sha Po Road certified payment has not been included. For old projects, liability is not just limited to payment under the Practical Completion Certificate, because sub-contractors still have to be paid for alteration and additional works. Architects' certificates have not been produced but the Company by its director has said on affirmation that those debts are presently outstanding, and in any event, I would have thought that if the Company is not liable to pay these sub-contractors because the architect has not certified those works, any payments thereunder would not then be in the ordinary course of the Company's business and would not be covered by any Validation Order.

13. Apart from old projects, it must follow that if there are new projects, then there would be recurring expenses and payments to sub-contractors. The evidence is that the Company is still tendering for new projects and there is evidence that the Company has succeeded in at least two tenders recently.

14. Thirdly, the Company says that the Petitioner is still a director of the Company and therefore he owes the Company fiduciary duties to do all such acts as are proper and necessary in the best interests of the Company. So the fact that the Petitioner is the authorized signatory of the Company for purposes of applications to the Building Authority should not be a hindrance to continuing its business. In any event, the Company has been able to carry on its business, either by appointing another company with the consent of the client to make the necessary application to the Building Authority (as to which I say no more); and secondly by applying to include another director, Mr. Leung Kam Wing as a new authorized signatory in addition to the Petitioner. There is nothing to show the court why the Building Authority would reject that application because unlike an Authorized Person, it has not been shown to the court that any special qualifications are required for an "authorized signatory". I would add, of course, that the company could ratify any tenders or contracts entered into on its behalf by any officers than the Petitioner.

15. Fourthly, there is no evidence before the court why the company's debts could be restricted to $1,800,000 or 1,900,000 only and it is unfortunate that the diary of the Companies Court is such that it is not known when this petition will be finally resolved.

16. In the above circumstances, in the exercise of my discretion, I would grant the Validation Order taking all the matters set out above into consideration but in particular, the following factors:- that it has been admitted by the Petitioner that this company is solvent, that there is staff who has to be paid, and even if (contrary to the evidence that the Company has reverted to its old mode of business) the Company is only in the business of "farming out" work for which it receives commission, the Company has and still will have expenses for this, whether for old or new projects (although the amounts required may be disputed). Further, the Petitioner has not satisfied me what prejudice would be suffered by him should this Validation Order be granted. It should, of course, be noted that the terms of the order are restricted to payments of debts incurred in the ordinary course of business.

17. In the event, I would grant the Validation Order as drafted but in an abundance of caution, I would add that para (a) of para.1 should be subject to para (b) of para.1.